-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T6Jt30RbyCxPPVbb2ni1xYiHY3OpJGaZeFWBdMqzG8eUqNTSGeN5AqHu/bcxKEu3 U6Ul+7oa3VmuaT4BnVSDlg== 0001003959-97-000029.txt : 19971111 0001003959-97-000029.hdr.sgml : 19971111 ACCESSION NUMBER: 0001003959-97-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971110 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 360 COMMUNICATIONS CO CENTRAL INDEX KEY: 0001003959 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 470649117 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14108 FILM NUMBER: 97711351 BUSINESS ADDRESS: STREET 1: 8725 W HIGGINS RD CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 3123992500 MAIL ADDRESS: STREET 1: 8725 W HIGGINS ROAD CITY: CHICAGO STATE: IL ZIP: 60631 FORMER COMPANY: FORMER CONFORMED NAME: SPRINT CELLULAR CO DATE OF NAME CHANGE: 19951124 10-Q 1 THIRD QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 1-14108 360 COMMUNICATIONS COMPANY (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation) 47-0649117 (I.R.S. Employer Identification No.) 8725 W. Higgins Road Chicago, Illinois 60631-2702 (773) 399-2500 (Address and telephone number of principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No On November 4, 1997, 121,819,249 shares of the registrant's Common Stock were outstanding. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements................................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................6 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................* Item 2. Changes in Securities ..............................................* Item 3. Defaults Upon Senior Securities.....................................* Item 4. Submission of Matters to a Vote of Security Holders.................* Item 5. Other Information...................................................* Item 6. Exhibits and Reports on Form 8-K...................................12 - --------------- * No reportable information under this item. When used in this Report, the words "intends," "expects," "plans," "estimates," "anticipates," "projects," "believes," and similar expressions are intended to identify forward-looking statements. Specifically, statements included in this Report that are not historical facts, including statements about the Company's beliefs and expectations about continued market and industry growth, and ability to maintain existing churn, customer growth and increased penetration rates, are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially. Such risks and uncertainties include, but are not limited to, the degree to which the Company is leveraged and the restrictions imposed on the Company under its existing debt instruments that may adversely affect the Company's ability to finance its future operations, to compete effectively against better capitalized competitors and to withstand downturns in its business or the economy generally; the continued downward pressure on the prices charged for cellular equipment and services resulting from increased competition in the Company's markets; the lack of assurance that the Company's ongoing network improvements and scheduled implementation of digital technology in its markets will be sufficient to meet or exceed the capabilities and quality of competing networks; the effect on the Company's operations and financial performance of changes in the regulation of cellular activities; the degree to which the Company incurs significant costs as a result of cellular fraud; the impact on the Company's operations that may arise from concerns suggesting cellular telephones may be linked to cancer; and the other factors discussed in the Company's filings with the Securities and Exchange Commission, including the factors discussed under the heading "Certain Risk Factors" in the Information Statement set forth as Exhibit 99 to the Company's Form 10 (File No. 1-14108), which section is hereby incorporated by reference herein. Forward-looking statements included in this Report speak only as of the date hereof and the Company undertakes no obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. i PART I. FINANCIAL INFORMATION Item 1. Financial Statements. 360 COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) September 30, December 31, ASSETS 1997 1996 ------ -------------- ------------ Current Assets (Unaudited) Cash and cash equivalents $ 5,772 $ 2,554 Accounts receivable, less allowances of $7,300 and $5,730, respectively 99,002 102,483 Other receivables 36,153 27,090 Unbilled revenue 33,000 35,712 Inventory 32,314 35,908 Prepaid expenses and other 20,986 25,096 -------------- ------------ Total current assets 227,227 228,843 -------------- ------------ Property, plant and equipment 1,627,781 1,499,407 Less: accumulated depreciation 521,466 415,981 -------------- ------------ Property, plant and equipment, net 1,106,315 1,083,426 -------------- ------------ Investments in unconsolidated entities 461,385 349,231 Intangibles, net 1,150,661 1,136,587 Other assets 17,349 13,982 -------------- ------------ Total assets $ 2,962,937 $ 2,812,069 ============== ============ LIABILITIES AND SHAREOWNERS' EQUITY ----------------------------------- Current Liabilities Trade accounts and other payables $ 172,862 $ 227,654 Short-term borrowings 29,175 43,750 Advance billings 31,045 28,314 Accrued taxes 22,082 17,951 Other 37,608 33,179 -------------- ------------ Total current liabilities 292,772 350,848 -------------- ------------ Long-term debt 1,849,643 1,699,778 -------------- ------------ Deferred Credits and Other Liabilities Deferred income taxes 144,065 113,005 Postretirement and other benefit obligations 6,133 5,855 -------------- ------------ Total deferred credits and other liabilities 150,198 118,860 -------------- ------------ Minority interests in consolidated entities 170,238 180,083 -------------- ------------ Shareowners' Equity Common stock ($.01 par value; 1,000,000 shares authorized; 121,811,980 shares issued 1,233 1,233 and outstanding) Additional paid-in capital 774,901 773,472 Accumulated deficit (250,801) (310,932) Treasury stock, at cost (1,552,168 shares in 1997 and 55,227 shares in 1996) (25,247) (1,273) --------------- ------------ Total shareowners' equity 500,086 462,500 --------------- ------------ Total liabilities and shareowners' equity $ 2,962,937 $ 2,812,069 =============== ============ The accompanying Notes are an integral part of the Consolidated Financial Statements. 1
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------- --------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Operating Revenues Service revenues $ 335,245 $ 271,819 $ 958,049 $ 766,133 Equipment sales 12,264 9,857 36,568 29,411 ---------- ---------- ---------- ---------- Total operating revenues 347,509 281,676 994,617 795,544 ---------- ---------- ---------- ---------- Operating Expenses Cost of service 37,127 24,148 118,899 68,492 Cost of equipment sales 28,486 25,046 81,329 71,010 Other operations expense 19,177 15,498 51,182 39,824 Sales, marketing and advertising expenses 54,438 48,527 170,692 143,146 General, administrative and other expenses 77,399 68,030 230,698 190,287 Depreciation and amortization 45,376 36,833 137,738 104,987 ---------- ---------- ---------- ---------- Total operating expenses 262,003 218,082 790,538 617,746 ---------- ---------- ---------- ---------- Operating Income 85,506 63,594 204,079 177,798 Interest expense (33,570) (24,752) (97,603) (78,854) Minority interests in net income of consolidated entities (13,534) (13,843) (39,451) (38,168) Equity in net income of unconsolidated entities 16,536 16,339 44,454 40,359 Other income, net (1) 73 101 3,060 423 ---------- ---------- ---------- ---------- Income before income taxes 55,011 41,439 114,539 101,558 Income tax expense 26,132 18,552 54,408 47,407 ---------- ---------- ---------- ---------- Net income $ 28,879 $ 22,887 $ 60,131 $ 54,151 ========== ========== ========== ========== Earnings per share $ 0.24 $ 0.20 $ 0.49 $ 0.46 ========== ========== ========== ========== Weighted average shares outstanding 121,875 117,086 122,626 117,060 ========== ========== ========== ========== (1) In January 1997, the Company recognized a gain of $3 million ($2 million, net of tax) in connection with the divestiture of its ownership interests in two of its unconsolidated entities
The accompanying Notes are an integral part of the Consolidated Financial Statements. 2 360 COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) For the Nine Months Ended September 30, ------------------------- 1997 1996 ------------ ------------ Operating Activities Net income $ 60,131 $ 54,151 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 137,738 104,987 Deferred income taxes 27,822 19,119 Gain on sale of cellular investments (3,029) ---- Equity in net income of unconsolidated entities, net of distributions (24,639) (25,104) Minority interests in net income of consolidated entities 39,451 38,168 Changes in operating assets and liabilities, excluding acquisitions Receivables, net 4,115 (16,009) Other current assets 2,551 (1,410) Trade accounts and other payables (48,771) 1,825 Accrued expenses and other current liabilities 9,353 10,267 Noncurrent assets and liabilities, net (3,985) (868) Other, net 2,453 5,266 ------------ ------------ Net Cash Provided by Operating Activities 203,190 190,392 ------------ ------------ Investing Activities Capital expenditures (154,234) (193,543) Acquisitions and divestitures (57,797) (109,613) Investments in unconsolidated entities and other (80,735) (14,709) ------------ ------------ Net Cash Used for Investing Activities (292,766) (317,865) ------------ ------------ Financing Activities Net (payments) borrowings under bank revolving credit facility (50,000) 465,000 Proceeds from long-term debt 200,000 900,000 Debt issuance costs (1,609) (15,229) Net short-term (payments) borrowings (14,575) 45,650 Purchases of common stock for treasury (24,152) ---- Increase in advances from affiliates ---- 135,892 Contributions from minority investors 100 4,881 Distributions to minority investors (17,878) (9,275) Repayment of advances from affiliates ---- (1,400,000) Other, net 908 (8,600) ------------ ------------ Net Cash Provided by Financing Activities 92,794 118,319 ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents 3,218 (9,154) Cash and Cash Equivalents at Beginning of Period 2,554 19,023 ------------ ------------ Cash and Cash Equivalents at End of Period $ 5,772 $ 9,869 ============ ============ The accompanying Notes are an integral part of the Consolidated Financial Statements. 3 360 COMMUNICATIONS COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Consolidation and Presentation 360 Communications Company and Subsidiaries (the "Company") provide wireless voice and data telecommunications services. The Company also currently markets residential long distance service and resells paging service in the states in which the Company provides wireless service. The Company operates as a general and limited partner and majority owner of cellular systems in various metropolitan and rural service areas and as a limited minority partner or manager in other cellular systems. The Company operates in four regions in the United States: Mid-Atlantic, Midwest, Southeast and West. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. The assets, liabilities and results of operations of entities (both corporations and partnerships) in which the Company has a controlling interest have been consolidated. The ownership interests of noncontrolling owners in such entities are reflected as minority interests. The Company accounts for all other investees using the equity method of accounting. All significant intercompany accounts and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles and are presented in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial information. In the Company's opinion, the unaudited consolidated financial statements include all adjustments necessary to present fairly the financial position and results of operations for each interim period presented. All such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the consolidated financial statements, including the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. Certain 1996 amounts have been reclassified to conform to the presentation used for the three and nine months ended September 30, 1997. 2. Earnings Per Share Earnings per share was computed using weighted average shares outstanding, including common stock equivalents, totaling 121,874,813 and 117,086,280 for the three months ended September 30, 1997 and 1996, respectively, and 122,626,401 and 117,059,755 for the nine months ended September 30, 1997 and 1996, respectively. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 requires companies to disclose basic and diluted earnings per share. Basic earnings per share will be calculated based on the weighted average common shares outstanding and will exclude common stock equivalents from the calculation. Due to the relative insignificance of the Company's common stock equivalents and other potentially dilutive instruments, the requirements of SFAS No. 128, based on current circumstances, will not have a significant effect on the Company's earnings per share calculations. 4 3. Acquisitions and Divestitures During the first and second quarters of 1997, the Company divested ownership interests in certain unconsolidated entities, as well as in one of its controlled markets. During the second quarter of 1997, the Company and BellSouth Corporation ("BellSouth") combined their interests in two partnerships that own and control cellular licenses and operations in Virginia and Florida. The resulting partnership is owned approximately 75% by BellSouth and 25% by the Company, with the Company taking over as manager of the cellular operations in Virginia. During the nine months ended September 30, 1997, the Company acquired minority interests in 15 of its controlled markets, which increased its ownership interest to 100% in 10 of those markets. 4. Income Taxes The estimated annual effective tax rate was 47.5% for the three and nine months ended September 30, 1997, differing from the statutory rate due to nondeductible amortization of goodwill and state income tax expense. 5 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations. General The following is a discussion and analysis of the historical results of operations and financial condition of 360 Communications Company and Subsidiaries (the "Company") and factors affecting the Company's financial resources. This discussion should be read in conjunction with the consolidated financial statements, including the notes thereto, set forth herein under "Financial Statements" and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. This discussion contains forward-looking statements which are qualified by reference to, and should be read in conjunction with, the Company's discussion regarding forward-looking statements as set forth herein under "Forward-Looking Statements." Results of Operations Customer Growth Rate The number of cellular customers increased to 2,450,000 at September 30, 1997, from 1,851,000 at September 30, 1996, resulting in a 32.4% increase. The increase in cellular customers was impacted by 138,000 customers acquired during the fourth quarter of 1996. For the three months ended September 30, 1997 and 1996, the Company added 87,000 and 100,000 customers, respectively, through internal growth. For the nine months ended September 30, 1997, the Company added 310,000 customers through internal growth, while in the corresponding 1996 period, customer growth through acquisitions added 46,600 customers and internal growth added 302,000 new customers. The Company's penetration rate, which is the number of customers divided by the total population in its licensed service areas, reached 10.11% at September 30, 1997 compared to 8.84% at September 30, 1996. The average monthly rate of customer disconnects, customer churn, was 1.90% and 1.86%, during the three months ended September 30, 1997 and 1996, respectively, and l.82% and 1.80% during the nine months ended September 30, 1997 and 1996, respectively. Service Revenues Service revenues consist primarily of charges for airtime, access fees, roaming fees and other services. Service revenues increased 23.3% and 25% in the three and nine months ended September 30, 1997, respectively, when compared to the corresponding 1996 periods, principally from growth in the number of cellular customers. Expanded distribution, increased promotional activity, and improved consumer awareness of wireless communications are key factors contributing to the Company's customer growth. In addition, acquisitions completed in 1996 contributed to an increase of approximately $23.9 million and $69.3 million in service revenues for the three and nine months ended September 30, 1997, respectively. Consistent with the rest of the cellular industry, the Company has experienced increased penetration in the consumer market, a trend attributable to declining cellular telephone equipment prices, increased promotional activities (i.e., packaging, special rate plans), an increased awareness of the benefits of cellular communications, widespread distribution channels in consumer-oriented retail locations and expanded network coverage and capacity. The Company expects this trend to continue. Service revenue per average customer per month was $46.12 and $50.34 during the three months ended September 30, 1997 and 1996, respectively, and $45.69 and $50.54 during the nine months ended September 30, 1997 and 1996, respectively. New customers generally use less airtime than existing customers, causing the average service revenue per customer per month to decline. As a result, service revenue growth has not kept pace with the level of growth in the number of customers. Also impacting the decline in the average service revenue per customer per month was an increase in promotional activities in 1997. Promotional activities, which includes free minutes and free access, increased to 4.9% and 4.2% of service revenues for the three and nine months ended September 30, 1997, respectively from 1.8% and 2% of service revenues for the three and nine months ended September 30, 1996, respectively. The Company expects that service revenue per average customer per month will continue to decline as penetration rates continue to increase. Roaming airtime minutes increased during the three and nine months ended September 30, 1997, while roaming revenues as a percentage of service revenues have declined. The Company expects that roaming rates between carriers will continue to be reduced which reduces revenues derived from cellular service users who roam into the Company's systems. The Company expects roaming airtime to increase as reduced roaming rates between carriers are ultimately passed on to customers. 6 Future revenue growth will be impacted by the Company's success in maintaining customer growth in existing markets, generating additional revenue from the increasing availability of a variety of enhanced services and products, and acquiring additional cellular communications systems to further strengthen its existing regional clusters. The growth rate of new customers is expected to decline as the Company's customer base grows. Revenue growth will also be impacted by the Company's long distance and paging businesses. The Company currently markets residential long distance service and resells paging service in the states in which the Company provides wireless service. An improved competitive position, reduced cellular churn and increased brand awareness are expected as the long distance and paging services businesses mature. Cost of Service Excluding the impact of roaming activities and expenses associated with the long distance business, cost of service as a percentage of service revenues was 6.5% and 8.1% for the three months ended September 30, 1997 and 1996, respectively, and 7.3% and 8.1% for the nine months ended September 30, 1997 and 1996, respectively. The effects of renegotiated long distance contracts (effective May 1997 and March 1996) and reduced interconnection rates paid to local telephone companies are key factors favorably impacting the declining trend in cost of service as a percentage of service revenues. Roaming margins associated with the Company's customers roaming into other carriers' markets declined in the three and nine months ended September 30, 1997 when compared to the same periods last year, resulting in an increase in cost of service as a percentage of service revenues. The decline in margins for the nine months ended September 30, 1997 is attributable to an increase in unbillable fraudulent roaming activities. Also contributing to the decline in margins for the three and nine months ended September 30, 1997 was increased competitive pressures to reduce rates for such roaming traffic. As part of a pricing simplification effort, the Company implemented new roaming rate plans in early 1997 that continue to reduce margins in the third quarter of 1997. The Company expects that the industry-wide trend to reduce rates will continue, thus stimulating an increase in cellular telephone usage, resulting in an increase in roaming airtime. To the extent reduced retail rates stimulate increased usage and the Company is able to negotiate reduced wholesale roaming rates with other carriers, the effects of discounted rates will be somewhat mitigated. Unauthorized usage of customers' telephone numbers resulted in unbillable fraudulent roaming activities that approximated 0.5% and 1.2% of service revenues for the three months ended September 30, 1997 and 1996, respectively, and 1.7% and 1.1% of service revenues for the nine months ended September 30, 1997 and 1996, respectively. The increase in unbillable fraudulent roaming activity for the nine months ended September 30, 1997 was the result of a significant increase in the level of fraud activity in several markets during the fourth quarter of 1996 and the first quarter of 1997. The Company believes it will continue to be impacted by fraudulent roaming activities on a going-forward basis and continues to proactively invest in new systems and technologies to reduce the incidence of fraud. Cost to Acquire New Customers Cost to acquire a new cellular customer was $301 and $312 for the three months ended September 30, 1997 and 1996, respectively, and $298 and $317 for the nine months ended September 30, 1997 and 1996, respectively. The decline in the cost to acquire a new cellular customer is principally the result of the higher 1996 amounts due to additional costs associated with the introduction of the Company's new brand name, as well as, a continued reduction in the wholesale prices for cellular phones and a transition of new customer sales from national dealers to Company owned retail outlets. 7 To improve sales and reduce costs associated with acquiring new customers, the Company continues to depend more upon its own sales force working out of Company retail outlets and kiosks located in shopping malls and other non-company owned retail locations. Incremental sales costs at a Company retail store or kiosk are significantly lower than commissions paid to national dealers. Although the Company intends to continue to support its large dealer network, continued increases in its own retail distribution channels are planned. The Company has experienced little change in churn levels, a factor further contributing to the Company's ability to manage the costs of maintaining and growing its customer base. The Company is unable to anticipate the impact of the cost to add new customers as savings associated with the transition to the use of internal sales distribution channels levels off, the growth rate of new customers declines and competition for local and national dealers intensifies. Sales, marketing and advertising expenses associated with the Company's long distance business accounted for an increase of $1.4 million and $6.8 million during the three and nine months ended September 30, 1997, respectively, when compared to the corresponding periods in 1996. Other Operations Expense and General Administrative and Other Expenses Other operations expense and general, administrative and other expenses increased due principally to growth in the cellular customer base. During the three months ended September 30, 1997 and 1996, these expenses as a percentage of service revenues were 28.8% and 30.7%, respectively, and 29.4% and 30% during the nine months ended September 30, 1997 and 1996, respectively. The decrease in the respective periods is attributable to economies of scale realized as a result of customer growth. Depreciation and Amortization Acquisitions of cellular communications systems generate intangible assets such as Federal Communications Commission license costs and goodwill which are amortized over 40 years. During the three and nine months ended September 30, 1997, amortization expense increased 48.9% and 53.5% when compared to the corresponding periods in 1996 due principally to acquisitions completed during the fourth quarter of 1996. The Company periodically assesses the ongoing value of these intangible assets and expects the carrying amounts to be fully recoverable. During the three and nine months ended September 30, 1997, depreciation expense increased 18.8% and 27.2% when compared to the corresponding periods in 1996. The increase in depreciation expense is due primarily to the acquisition of depreciable assets and additional capital investment in the Company's network. Interest Expense Interest expense increased in the three and nine months ended September 30, 1997 when compared to the corresponding prior year periods due to the increase in borrowing levels. The annualized average interest rate for the three months ended September 30, 1997 and 1996 was 7.2% and 7.0% respectively, and 7.2% for the nine months ended September 30, 1997 and 1996. Current borrowings consist of $450 million of 7 1/8% Senior Notes due 2003, $450 million of 7 1/2% Senior Notes due 2006, $200 million of 7.6% Senior Notes due 2009, 9% subordinated promissory notes and borrowings under a revolving credit facility ("Credit Facility") with interest rates based on the London Interbank Offered Rate plus 50 basis points. The Company also utilizes short-term borrowings based on market interest rates. 8 Equity in Net Income of Unconsolidated Entities Equity in net income of unconsolidated entities represents the Company's share of operating results of cellular systems in which the Company does not have a controlling interest. Equity earnings increased for the three and nine months ended September 30, 1997, when compared to the prior year periods, primarily as a result of increased income generated by minority cellular investments in markets that continue to mature. Income generated by minority cellular investments may not continue to grow at the pace experienced in prior years due to increased competition in the higher populated urban markets and the Company's strategy to exchange its minority cellular investments for increased ownership interests in its controlled markets or other markets in which it could obtain control. Income Taxes The Company's income tax expense increased 40.9% and 14.8% for the three and nine months ended September 30, 1997, respectively, when compared to the corresponding periods in 1996 due primarily to an increase in the levels of pre-tax income in 1997. Competition Cellular carriers compete primarily against the other facilities-based cellular carrier in each market. However, companies with Personal Communications Services ("PCS") licenses also offer their products and services in several of the Company's service areas. The Company has prepared for this new competitive environment by enhancing its networks, expanding its service territory, offering new features, products and services to its customers and simplifying its pricing of services. During the third quarter of 1997, the Company introduced a new service offering called the Bundled Value Packs, whereby customers may choose any combination of cellular, long distance and paging and receive the selected services all on one bill. The Company believes it will benefit from its position as an incumbent in the cellular field with a high quality network, extensive geographic footprint that is not capacity constrained, strong distribution channels, superior customer service and an experienced management team. However, there can be no assurance that these measures will completely mitigate the pressures associated with the expected increase in the level of PCS competition. Liquidity and Capital Resources Cash Flows - Operating Activities The increase in net cash provided by operating activities for the nine months ended September 30, 1997 was due primarily to improved operating results. Net cash inflows have been somewhat mitigated by payments made in 1997 for 1996 accruals and a decrease in accrued expenses related to construction activity for the nine months ended September 30, 1997. Cash Flows - Investing Activities Capital expenditures were $154.2 million and $193.5 million for the nine months ended September 30, 1997 and 1996, respectively. The decrease in capital expenditures is the result of various timing issues affecting construction activities. Projected capital expenditures for the calendar year 1997 have been reduced from $300 million to $280 million due to efficiencies created through network design and implementation, as well as improved pricing and concessions from vendors. Also contributing to the reduction in capital spending is the postponement of the construction of certain cell sites until 1998 because of zoning issues. On a limited basis, the Company has increased its ownership interests in certain of its controlled markets. To the extent feasible, the Company intends to exchange some or all of its minority investments in cellular communications systems for increased ownership interests in its controlled markets or for ownership interests in new markets in which it could obtain control. In the first quarter of 1996, the Company acquired cellular properties in South Carolina, North Carolina and Ohio and acquired additional partnership interests in Florida. The aggregate purchase price of these acquisitions totaled $110 million. In the first quarter of 1997, the Company divested its ownership interests in two of its unconsolidated entities. In connection with this transaction, the Company recognized a gain of $3 million in other income ($2 million, net of tax). 9 In the second quarter of 1997, the Company and BellSouth Corporation ("BellSouth") combined their interests in two partnerships that own and control cellular licenses and operations in Virginia and Florida. The resulting partnership is owned approximately 75% by BellSouth and 25% by the Company, with the Company taking over as manager of the cellular operations in Virginia. The Company divested its ownership interests in one of its unconsolidated entities, as well as in one of its controlled markets, during the second quarter of 1997. During the nine months ended September 30, 1997, the Company acquired minority interests in 15 of its controlled markets, which increased its ownership interest to 100 percent in 10 of those markets. Cash Flows - Financing Activities As part of its cash management program, the Company utilizes short-term borrowings based on market interest rates to support its daily cash requirements. The aggregate amount of these borrowings is limited to $50 million under certain debt covenants. In the first quarter of 1997, the Company issued $200 million in aggregate principal amount of its 7.6% Senior Notes due 2009. The net proceeds received by the Company from the sale of these debt securities were used to repay a portion of the Company's long-term indebtedness outstanding under the Credit Facility. The Company's Board of Directors authorized the repurchase of up to 3 million shares of the Company's Common Stock through May 1, 1998. The shares may be purchased from time to time on the open market at prevailing prices, subject to market conditions. As of September 30, 1997, the Company had purchased approximately 1.5 million shares of the Company's Common Stock at an average price of $16 per share. Liquidity and Capital Requirements Substantial capital is required to expand and operate the Company's existing cellular systems and to acquire interests in additional cellular systems. The Company has increased borrowings to the extent its existing cash needs have not been met through existing cash resources and cash flows from operations. Existing cash resources, internally generated funds and borrowings have been used to meet the Company's capital requirements. The Company expects to make capital expenditures, excluding acquisitions, of approximately $280 million in 1997. Funding for these expenditures is expected to be substantially derived from cash flows from operations. In addition, the Company utilizes existing cash resources, borrowings under the Credit Facility and the issuance of debt securities to meet these funding requirements. These expenditures will be made to expand and enhance existing cellular systems, install digital technology in the Company's greater Raleigh, North Carolina, service area and replace equipment in recently acquired markets. In 1998, the Company expects cash flows from operations to substantially fund its capital expenditure program. The Company expects that it will need to raise additional funds to finance acquisition activities. Such acquisition activities may include acquisitions of new cellular communications systems or additional investments in cellular communications systems in which the Company already holds an ownership interest. An agreement, which was designed to preserve the tax-free status of the Company's spinoff from Sprint Corporation, imposes certain limitations associated with equity transactions. Accordingly, the Company is prohibited from issuing preferred stock and is limited as to the aggregate amount of additional common stock that it can issue, unless an unqualified opinion of counsel or ruling from the Internal Revenue Service states that such action would not cause the spinoff to be taxable. At September 30, 1997, the Company was limited to issuing up to an additional 16 million common shares. This limitation expires on March 7, 1998. The Company believes that it will have the needed access to the capital markets on suitable terms and that, together with borrowings under the Credit Facility, the issuance of unsecured debt securities and/or warrants to purchase debt securities under a shelf registration statement filed with the Securities and Exchange Commission and net cash provided by operations, it will have adequate capital to satisfy its projected funding requirements for operations in 1997 and thereafter. The Company currently does not intend to seek funding from other sources during 1997. There can be no assurance that access to the capital markets can be obtained in amounts and on terms adequate to meet its objectives or that the borrowings or net cash from operations will be adequate to meet the Company's projected funding requirements. 10 At September 30, 1997, the Company had $630 million of borrowings outstanding under the Credit Facility and additional borrowing capacity under the terms of the Credit Facility of $236 million. Forward-Looking Statements When used in this Report, the words "intends," "expects," "plans," "estimates," "projects," "believes," "anticipates," and similar expressions are intended to identify forward-looking statements. Specifically, statements included in this Report that are not historical facts, including statements about the Company's beliefs and expectations about continued market and industry growth, and ability to maintain existing churn, customer growth and increased penetration rates, are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially. Such risks and uncertainties include, but are not limited to, the degree to which the Company is leveraged and the restrictions imposed on the Company under its existing debt instruments that may adversely affect the Company's ability to finance its future operations, to compete effectively against better capitalized competitors and to withstand downturns in its business or the economy generally; the continued downward pressure on the prices charged for cellular equipment and services resulting from increased competition in the Company's markets; the lack of assurance that the Company's ongoing network improvements and scheduled implementation of digital technology in its markets will be sufficient to meet or exceed the capabilities and quality of competing networks; the effect on the Company's operations and financial performance of changes in the regulation of cellular activities; the degree to which the Company incurs significant costs as a result of cellular fraud; the impact on the Company's operations that may arise from concerns suggesting cellular telephones may be linked to cancer; and the other factors discussed in the Company's filings with the Securities and Exchange Commission, including the factors discussed under the heading "Certain Risk Factors" in the Information Statement set forth as Exhibit 99 to the Company's Form 10 (File No. 1-14108), which section is hereby incorporated by reference herein. Forward-looking statements included in this Report speak only as of the date hereof and the Company undertakes no obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 11 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibits are listed in the Exhibit Index. (b) Reports on Form 8-K: On Current Report on Form 8-K, dated July 16, 1997, under "Item 5. Other Events," the Company filed a press release announcing its consolidated results for the second quarter of 1997. 12 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 360 COMMUNICATIONS COMPANY By: /s/ Jeffery R. Gardner Jeffery R. Gardner Senior Vice President - Finance (Principal Accounting Officer) Date: November 10, 1997 13 EXHIBIT INDEX Exhibit Number Description of Exhibits - ------ ----------------------- 2.1 Distribution Agreement dated as of March 7, 1996, by and among Sprint Corporation, 360 Communications Company (formerly Sprint Cellular Company) and Centel Corporation. (Filed as Exhibit 2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-14108, and incorporated herein by reference.) 2.2 Exchange and Merger Agreement, dated as of May 31, 1996, by and among Independent Cellular Network Partners, James A. Dwyer, Jr., David Winstel, CC Industries, Inc., Ohio Cellular RSA, L.P., Ohio RSA Corporation, Quality Cellular Communications of Ohio, Inc., Cellular Plus, L.P., C-Plus, Inc., Quality Cellular Plus Communications, Inc., Henry Crown and Company (Not Incorporated) and 360 Communications Company. (Filed as Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, File No. 1-14108, and incorporated herein by reference.) 2.3 First Amendment to Exchange and Merger Agreement, dated as of November 1, 1996, by and among Independent Cellular Network Partners, James A. Dwyer, Jr., David Winstel, CC Industries, Inc., Ohio Cellular RSA, L.P., Ohio RSA Corporation, Quality Cellular Communications of Ohio, Inc., Cellular Plus, L.P., C-Plus, Inc., Quality Cellular Plus Communications, Inc., Henry Crown and Company (Not Incorporated) and 360 Communications Company. (Filed as Exhibit 2.3 to the Company's Current Report on Form 8-K dated November 1, 1996, File No. 1-14108, and incorporated herein by reference.) 3.1 Amended and Restated Certificate of Incorporation of 360 Communications Company, as amended as of March 4, 1996. (Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-14108, and incorporated herein by reference). 3.2 Amended and Restated Bylaws of 360 Communications Company. (Filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-14108, and incorporated herein by reference). 3.3 Certificate of Designation of First Series Junior Participating Preferred Stock of 360 Communications Company. (Filed as Exhibit 3.3 to Amendment No. 4 to Registration Statement on Form S-1 (No. 33-99756), and incorporated herein by reference.) 4.1 360 Communications Company's 7 1/8% Senior Note Due 2003 and 7 1/2% Senior Note Due 2006. (Filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-14108, and incorporated herein by reference). 4.2 Indenture dated as of March 7, 1996 between 360 Communications Company and Citibank, N.A., as Trustee. (Filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-14108, and incorporated herein by reference). 4.3 Form of 360 Communications Company Common Stock, $0.01 par value, certificate. (Filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-14108, and incorporated herein by reference). 4.4 Rights Agreement dated as of March 5, 1996 between 360 Communications Company and Chemical Bank. (Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-14108, and incorporated herein by reference). 14 4.5 Form of 360 Communications Company's Subordinated Non-Negotiable Promissory Note (included in Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, File No. 1-14108, and incorporated herein by reference). 4.6 Indenture dated as of March 1, 1997 from 360 Communications Company to Citibank, N.A., as Trustee. (Filed as Exhibit 4.6 to the Company's Current Report on Form 8-K dated March 17, 1997, File No. 1-14108, and incorporated herein by reference.) 4.7 360 Communications Company's 7.60% Senior Note Due 2009. (Filed as Exhibit 4.7 to the Company's Current Report on Form 8-K dated March 17, 1997, File No. 1-14108, and incorporated herein by reference.) 27 Financial Data Schedule. 15 EX-27 2 FDS -- THIRD QUARTER 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA FROM THE FINANCIAL STATEMENTS INCLUDED AS PART OF 360 COMMUNICATIONS' THIRD QUARTER 10Q. 0001003959 360 COMMUNICATIONS COMPANY 1000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 5,772 0 106,302 7,300 32,314 227,227 1,627,781 521,466 2,962,937 292,772 1,849,643 0 0 1,233 498,853 2,962,937 36,568 994,617 81,329 118,899 188,920 22,797 97,603 114,539 54,408 60,131 0 0 0 60,131 0.49 0.49
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