SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934.
Date of Report (Date of earliest event reported) February 4, 1994
Lincoln Telecommunications Company
(Exact name of registrant as specified in its charter)
Nebraska 2-70020 47-0632436
(State or other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification No.)
1440 M Street, Lincoln, Nebraska 68508
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 474-2211
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
Included herewith are the Consolidated Financial Statements of
Lincoln Telecommunications Company for the years ended December 31, 1993,
1992 and 1991, along with the Independent Auditor's Report thereon of KPMG
Peat Marwick. Attached hereto as Exhibit 24 is the consent of KPMG Peat
Marwick with respect to such financial statements.
<PAGE>
LINCOLN TELECOMMUNICATIONS COMPANY
Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Lincoln Telecommunications Company:
We have audited the accompanying consolidated balance sheets of Lincoln
Telecommunications Company and Subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income, common stock
investment and preferred stock and cash flows for each of the years in the
three-year period ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Lincoln Telecommunications Company and Subsidiaries at December 31, 1993
and 1992, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in note 7 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. As
discussed in note 9 to the consolidated financial statements, the Company
also adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other than Pensions in 1993.
February 4, 1994 KPMG PEAT MARWICK
<PAGE>
LINCOLN TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1993 and 1992
<TABLE>
<CAPTION>
Assets 1993 1992
(Dollars in thousands)
<S> <C> <C>
Property and equipment (note 2) $ 449,540 435,226
Less accumulated depreciation and amortization 203,436 185,661
------- -------
Net property and equipment 246,104 249,565
------- -------
Investments and other assets (note 3) 47,163 44,880
------- -------
Current assets:
Cash and cash equivalents 15,341 9,585
Temporary investments, at cost, which
approximates market 34,451 29,064
Receivables, less allowance for doubtful
receivables of $382,000 in 1993 and $419,000
in 1992 25,429 23,630
Materials, supplies and other assets 6,530 6,380
------ ------
Total current assets 81,751 68,659
------ ------
Deferred charges (note 7) 20,261 6,012
------ ------
$395,279 369,116
======= =======
Capitalization and Liabilities
Capitalization:
Common stock investment (notes 5 and 6) 184,032 189,435
Preferred stock, 5%, redeemable 4,499 4,499
Long-term debt, excluding current installments
(notes 2 and 6) 44,000 73,550
------- -------
Total capitalization 232,531 267,484
------- -------
Current liabilities:
Current installments of long-term debt (note 6) - 5,325
Notes payable to banks (note 6) 41,500 14,000
Accounts payable and accrued expenses 19,989 21,801
Income taxes payable (note 7) 2,493 3,203
Dividends payable 4,345 3,685
Advance billings and customer deposits 6,058 5,746
------ ------
Total current liabilities 74,385 53,760
------ ------
Deferred credits:
Unamortized investment tax credits 4,892 6,252
Deferred income taxes (note 7) 22,974 34,725
Other (notes 7 and 9) 60,497 6,895
------ ------
Total deferred credits 88,363 47,872
Commitments (notes 8 and 9)
$395,279 369,116
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LINCOLN TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 1991
(Dollars in thousands except per share data)
<S> <C> <C> <C>
Telephone operating revenues:
Local network services (note 11) $ 70,833 66,022 55,972
Long distance and access services (note 11) 62,775 60,491 64,293
Directory advertising, billing and other services 16,355 16,229 15,744
Other operating revenues 13,951 14,018 13,303
------- ------- -------
Total telephone operating revenues 163,914 156,760 149,312
------- ------- -------
Diversified operations revenues and sales:
Long distance services 19,622 18,933 18,884
Product sales 8,089 7,469 7,669
Other revenues 343 349 349
------- ------- -------
Total diversified operations revenues
and sales 28,054 26,751 26,902
------- ------- -------
Intercompany revenues (7,618) (8,143) (8,121)
------- ------- -------
Total operating revenues 184,350 175,368 168,093
------- ------- -------
Operating expenses:
Depreciation 28,596 29,626 28,628
Cost of goods and services (note 11) 17,709 18,103 18,806
Other operating expenses 85,915 80,219 78,773
Taxes, other than payroll and income (note 15) 2,923 4,135 446
Intercompany expenses (7,618) (8,143) (8,121)
------- ------- -------
Total operating expenses 127,525 123,940 118,532
------- ------- -------
Operating income 56,825 51,428 49,561
------- ------- -------
Non-operating income and expense:
Income from interest and other investments 4,540 3,660 4,529
Interest expense and other deductions 8,556 9,378 9,433
------ ------- -------
Net non-operating expense 4,016 5,718 4,904
------ ------- -------
Income before income taxes and cumulative
effect of change in accounting principle 52,809 45,710 44,657
Income taxes (notes 7 and 15) 19,618 16,101 16,837
------- ------- ------
Income before cumulative effect of change
in accounting principle 33,191 29,609 27,820
Cumulative effect of change in accounting
principle (note 9) 23,166 -
-
------- -------- -------
Net income 10,025 29,609 27,820
Preferred dividends 225 -338 469
------- -------- -------
Earnings available for common shares $ 9,800 29,271 27,351
======= ======== =======
Earnings per common share:
Earnings before cumulative effect of change in
accounting principle 1.01 .90 .83
Cumulative effect of change in accounting
principle ( .71) - -
------ ------- -------
Earnings per common share $ .30 .90 .83
====== ======= =======
Weighted average common shares outstanding
(in thousands) 32,548 32,672 32,878
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LINCOLN TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Common Stock
Investment and Preferred Stock
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Common stock investment:
Common stock of $.25 par value per share.
Authorized 100,000,000 shares; issued
32,980,376 shares in 1993 and 16,490,188
in 1992 and 1991 (note 5)
Beginning of year $ 4,123 4,123 4,123
100% stock dividend 4,122 - -
------ ------ ------
End of year 8,245 4,123 4,123
------- ------ ------
Premium on common stock:
Beginning of year 41,603 41,603 41,603
100% stock dividend (4,122) - -
------- ------ ------
End of year 37,481 41,603 41,603
------- ------ ------
Retained earnings (note 6):
Beginning of year 149,008 133,878 119,681
Net income 10,025 29,609 27,820
Premium on redemption of preferred stock - (84) -
Dividends declared:
5% cumulative preferred - $5.00 per share (225) (225) (225)
7.64% cumulative preferred - $7.64 per share - (113) (244)
Common - $.49 per share in 1993, $.43 per
share in 1992 and $.40 per share in 1991 (15,949) (14,057) (13,154)
------- ------- -------
End of year 142,859 149,008 133,878
------- -------- -------
Treasury stock, at cost:
Beginning of year (5,299) (1,693) (592)
Sales of 65,350 shares (note 10) 804 - -
Purchase of 4,376 shares in 1993; 310,000 shares
in 1992; 90,000 shares in 1991 (58) (3,606) (1,101)
------- -------- --------
End of year (4,553) (5,299) (1,693)
------- -------- --------
Total common stock investment $184,032 189,435 177,911
======= ======= =======
Preferred stock:
Parent company, $.50 par value per share.
Authorized 20,000,000 shares; none issued $ - - -
Subsidiary, $100 par value per share.
Authorized 250,000 shares (note 4):
5% cumulative redeemable solely at
subsidiary's option for $105 per share
plus accrued dividends, 44,991 shares
outstanding $ 4,499 4,499 4,499
======= ======= =======
7.64% cumulative redeemable with sinking fund
requirement, 29,600 shares outstanding in 1991:
Beginning of year - 2,960 3,440
Shares redeemed at par, 4,800 shares and
24,800 shares at $103 in 1992 and at par,
4,800 shares in 1991 - 2,960 480
------- ------- ------
End of year - - 2,960
Less current requirement to be redeemed
at par within one year (2,400 shares) - - 240
------- ------- ------
$ - - 2,720
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LINCOLN TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,025 29,609 27,820
------- ------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 28,698 29,694 28,726
Cumulative effect of change in accounting principle 23,166 - -
Equity in undistributed earnings of joint venture and
general partnership 1,518 1,806 (103)
Provision for losses on receivables 474 251 300
Deferred income taxes (14,308) 2,261 236
Increase in note receivable from general partnership (3,286) (2,927) -
Changes in assets and liabilities resulting from
operating activities:
Receivables (2,273) (2,333) 308
Materials, supplies and other assets (150) (695) (640)
Deferred charges (11,788) (1,023) (438)
Accounts payable and accrued expenses (1,812) 6,492 (3,560)
Income taxes payable (710) (1,204) 3,378
Advance billings and customer deposits 312 88 580
Unamortized investment tax credits (1,360) (1,553) (1,821)
Other deferred credits 30,436 1,996 (1,466)
------- ------- -------
Total adjustments 48,917 32,853 25,500
------- ------- -------
Net cash provided by operating activities 58,942 62,462 53,320
------- ------- -------
Cash flows from investing activities:
Expenditures for property and equipment (24,995) (27,340) (33,394)
Net salvage on retirements (2) 1,610 1,631
------- ------- -------
Net capital additions (24,997) (25,730) (31,763)
Proceeds from sale of investments and other assets 85 192 276
Investment in and note receivable from general
partnership - - (35,700)
Purchases of investments and other assets (744) (4,945) (894)
Purchases of temporary investments (38,292) (60,764) (186,783)
Maturities and sales of temporary investments 32,905 61,235 207,813
-------- -------- --------
Net cash used for investing activities (31,043) (30,012) (47,051)
-------- -------- -------
Carried forward $ 27,899 32,450 6,269
-------- -------- -------
Cash flows from financing activities:
Dividends to stockholders (15,514) (14,124) (13,386)
Proceeds from issuance of notes payable 35,000 - 16,000
Retirement of notes payable (7,500) (2,000) -
Debt issuance costs - - (9)
Purchase of treasury stock (58) (3,606) (1,101)
Sales of treasury stock 804 - -
Retirement and conversion of long-term debt and
redemption of preferred stock (34,875) (9,735) (13,799)
Premium paid on redemption of preferred stock - (84) -
------
Net cash used in financing activities (22,143) (29,549) (12,295)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,756 2,901 (6,026)
Cash and cash equivalents at beginning of year 9,585 6,684 12,710
------- ------- -------
Cash and cash equivalents at end of year $ 15,341 9,585 6,684
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LINCOLN TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(1) Summary of Significant Accounting Policies
Principles of Consolidation and Organization
The consolidated financial statements reflect the accounts of Lincoln
Telecommunications Company (the Company) and its wholly-owned
subsidiaries, The Lincoln Telephone and Telegraph Company (LT&T), LinTel
Systems Inc. (LinTel) and Prairie Communications, Inc. (Prairie).
LT&T provides local and long distance telephone service in 22
southeastern counties of Nebraska and cellular telephone service in the
Lincoln, Nebraska MSA. LinTel provides telephone answering services,
sales of non-regulated telecommunication products and services and toll
services beyond LT&T's local service territory. Prairie has a 50%
investment in a general partnership which operates a limited partnership
providing cellular telecommunications services in the Omaha, Nebraska MSA.
The investment in the partnership is accounted for using the equity method
of accounting (see note 3).
Net earnings applicable to intercompany transactions between
companies of different groups of operations have been eliminated.
The Company and its subsidiaries maintain their records in accordance
with generally accepted accounting principles. LT&T maintains its
telephone accounting records in accordance with the rules and regulations
of the Nebraska Public Service Commission (NPSC) which substantially
adheres to rules and regulations of the Federal Communications Commission
(FCC).
Property and Equipment
Property and equipment is stated at cost. Replacements and renewals
of items considered to be units of property are charged to the property
and equipment accounts. Maintenance and repairs of units of property and
replacements and renewals of items determined to be less than units of
property are charged to expense. Telephone property and equipment retired
or otherwise disposed of in the ordinary course of business, together with
the cost of removal, less salvage, is charged to accumulated depreciation.
When non-telephone property and equipment is sold or otherwise disposed
of, the gain or loss is recognized in operations. LT&T capitalizes
estimated costs, during periods of construction of more than one year, of
debt and equity funds used for construction purposes. No significant
costs were capitalized during the three years ended December 31, 1993.
Depreciation on property and equipment is determined by using the
straight-line method based on estimated service and remaining lives.
Income Taxes
The Company files a consolidated income tax return with its
subsidiaries.
Deferred income taxes arise primarily from reporting differences for
book and tax purposes related to depreciation and postretirement benefits.
Investment tax credits applicable to telephone property and equipment
were deferred and taken into income over the estimated useful lives of
such property and equipment.
Retirement Benefits
The Company has a qualified defined benefit pension plan which covers
substantially all employees. The Company also has a qualified defined
contribution profit-sharing plan which covers nonunion eligible employees.
Costs of the pension and profit-sharing plans are funded as accrued.
The Company adopted Statement of Financial Accounting Standards No.
106, Employers' Accounting for Postretirement Benefits Other than
Pensions, as of January 1, 1993. This establishes a new accounting
principle for the cost of retiree health care and other postretirement
benefits (see note 9). Prior to 1993, the Company recognized these
benefits on a cash basis.
Local Network Services
LT&T's local network service rates are filed with and, in certain
circumstances, are subject to review and approval by the NPSC. Billings
for local network service are rendered monthly in advance on a cyclical
basis. Advance billings are recorded as a liability and subsequently
taken into income in the appropriate periods.
Long Distance and Access Services Revenues
Long distance and access services revenues are derived from long
distance calls within the Company's service territory, carrier charges for
access to LT&T's local exchange network, subscriber line charges and
contractual arrangements with carriers for other services. Certain of
these revenues are realized under pooling arrangements with other
telephone companies and are divided among the companies based on
respective costs and investments to provide the services. Revenues
realized through the various pooling processes are initially based on
estimates. Adjustments are recorded in subsequent years as participating
companies finalize their respective costs and investments. The Company
elected to be subject to price cap regulation by the FCC effective July 2,
1993, pursuant to which limits are imposed on the Company's interstate
service rates. Prior to July 2, 1993, the Company operated under
rate-of-return regulation, which offered less pricing and earnings
flexibility than under price cap regulation.
Diversified Operations - Long Distance Services
Long distance service revenues included in Diversified Operations are
derived from toll services beyond LT&T's local service territory. These
revenues are recognized when earned regardless of the period in which they
are billed to the customer. Billing and access costs related to long
distance services are included as a cost of Diversified Operations and as
revenues of the telephone operations, and are eliminated in consolidation.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the
Company considers all temporary investments with an original maturity of
three months or less when purchased to be cash equivalents. Cash
equivalents of approximately $11,581,000 and $1,540,000 at December 31,
1993 and 1992, respectively, consist of short-term fixed income
securities.
Common Stock and Earnings Per Common Share
Effective January 6, 1994, the Company paid a 100% stock dividend to
stockholders of record on December 27, 1993, which has been treated as a
stock split for financial reporting purposes. All per share information
has been retroactively adjusted to give effect to the stock dividend.
(2) Property and Equipment
The following table summarizes the property and equipment at December
31, 1993 and 1992 used in the operations:
<TABLE>
<CAPTION>
1993 1992
Accumulated Accumulated
depreciation and depreciation and
Classifications Cost amortization Cost amortization
(Dollars in thousands)
<S> <C> <C> <C> <C>
Used in telephone operations:
Land $ 2,772 - 2,746 -
Buildings 25,716 10,334 24,860 9,824
Equipment 407,477 187,953 392,153 171,090
Motor vehicles and other work
equipment 10,116 4,012 9,651 3,823
------- ------- ------- -------
Total in service 446,081 202,299 429,410 184,737
Under construction 1,608 - 4,376 -
------- ------- ------- -------
Total used in telephone
operations 447,689 202,299 433,786 184,737
Used in diversified operations 1,851 1,137 1,440 924
------- ------- ------- -------
$449,540 203,436 435,226 185,661
======= ======= ======= =======
</TABLE>
The composite depreciation rate for telephone property was 6.5% in
1993, 6.9% in 1992 and 6.7% in 1991.
Construction expenditures for 1994 are expected to approximate
$33,434,000. The Company anticipates funding construction through
operations.
Substantially all telephone property and equipment, with the
exception of motor vehicles, is mortgaged or pledged to secure LT&T's
first mortgage bonds. Under certain circumstances, as defined in the bond
indenture, all assets become subject to the lien of the indenture.
(3) Equity Investments
The Company has a 50% interest in Anixter-Lincoln, a general
partnership and joint venture with Anixter Bros., Inc. of Skokie,
Illinois. Anixter-Lincoln is a distributor of telecommunications
equipment. The Company uses the equity method of accounting for this
investment.
On December 31, 1991, Prairie acquired a 50% interest in Omaha
Cellular General Partnership (OCGP). The remaining 50% interest in OCGP
is owned by Centel Nebraska, Inc. (Centel-Neb). OCGP is the general
partner of and holds approximately 55% of the partnership interests in
Omaha Cellular Limited Partnership, which provides cellular
telecommunications services in Douglas and Sarpy Counties in Nebraska and
Pottawattamie County, Iowa. Omaha Cellular Limited Partnership conducts
business under the trade name First Cellular Omaha. Prairie is the
managing partner of OCGP.
Prairie purchased its 50% interest in OCGP from Centel Cellular
Company (Centel) for $11.9 million. The carrying value of the investment
at equity in net assets was approximately $8.1 million at December 31,
1993. Also, Prairie purchased and holds a discounted note from OCGP in
the face amount of approximately $54 million, for which the purchase price
was $23.8 million. The note has a carrying value of approximately $30
million at December 31, 1993. Such note has a stated interest rate of
11.94% and is due December 31, 1998. The proceeds of the note were
distributed by OCGP in equal parts to Centel and Centel-Neb.
Commencing on December 31, 1996, and for the two-year period
thereafter, Prairie has the option to purchase from Centel-Neb the
remaining 50% interest in OCGP.
(4) Redeemable Preferred Stock
LT&T's 7.64% preferred stock required an annual sinking fund payment
to redeem 2,400 shares annually with an additional 2,400 shares subject to
redemption at par value. In June 1992, the Board of Directors authorized
the redemption of all outstanding shares of the 7.64% preferred stock.
This consisted of 4,800 shares at par value and 24,800 shares at $103 per
share. The redemption was completed on July 10, 1992 with a total payment
of $3,034,400.
(5) Dividend Reinvestment and Stock Purchase Plan
Stock for the Company's Employee and Stockholder Dividend
Reinvestment and Stock Purchase Plan (Plan) is purchased on the open
market by the Plan's Administrator. The basis for the purchase price of
the stock allocated to the Plan participants is the average price paid by
the Administrator during the 5-day trading period preceding and including
the dividend payment date. Employee purchases are at 95% of such price
while purchases by non-employee participants are at 100% of such price.
Participants in the Plan may use cash dividends declared on stock
owned and optional cash contributions to purchase additional stock. Any
contributions received by approximately eight days before the end of each
calendar quarter will be used to purchase shares of stock as of the next
dividend date.
Shares purchased in the open market for the Plan aggregated 57,604,
60,636 and 51,171 during 1993, 1992 and 1991, respectively. Expenses, net
of gains, incurred related to the Plan were approximately $22,500, $2,700
and $74,000 in 1993, 1992 and 1991, respectively. There are no shares
reserved for issuance under the Plan.
(6) Long-Term Debt and Notes Payable
Long-term debt at December 31, 1993 and 1992 is shown below:
First mortgage bonds:
Interest Date final 1993 1992
rate payment due (Dollars in thousands)
9.910% June 1, 2000 $ 44,000 44,000
8.250 Paid in 1993 - 9,750
9.350 Paid in 1993 - 13,250
8.150 Paid in 1993 - 12,000
------
Total long-term debt 44,000 79,000
Less current installments of long-term debt
- 5,450
------
Long-term debt, excluding
current installments and
reacquired debt $ 44,000 73,550
======= =======
The long-term debt agreements contain various restrictions, including
those relating to payment of dividends by LT&T to its stockholder (the
Company). Notes payable to banks also contain various restrictions. At
December 31, 1993, approximately $22,050,000 of LT&T's retained earnings
were available for payment of cash dividends under the most restrictive
provisions of such agreements.
The long-term debt is due June 1, 2000 with interest payable
semi-annually.
The Company has notes payable to banks which have variable interest
rates ranging from 3.3% to 3.8% at December 31, 1993, which are due by
December 31, 1994.
(7) Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Statement 109 requires a change in the method of accounting for
deferred income taxes. Under the assets and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the accounting period in
which the enactment date occurs.
Generally accepted accounting principles for regulated enterprises
adopting Statement 109 required the recognition of deferred tax assets and
liabilities. The Company recognized deferred regulatory assets and
liabilities of approximately $17,096,000 and $14,743,000, respectively, as
a result of adopting Statement 109. The net effect of these deferred
regulatory assets and liabilities of approximately $2,353,000 was recorded
on the financial statements as of January 1, 1993 as an increase to
deferred income tax liabilities and will be amortized into income tax
expense on the financial statements over a ten-year period. The December
31, 1992 financial statements have not been restated to apply the
provisions of Statement 109.
Shown below are the components of income taxes from continuing
operations before cumulative effect of change in accounting principle.
1993 1992 1991
(Dollars in thousands)
Current:
Federal $ 16,400 13,115 13,598
-------- -------- -------
State 3,628 2,278 4,824
-------- -------- -------
20,028 15,393 18,422
-------- -------- -------
Investment tax credits (1,360) (1,553) (1,821)
------- ------- ------
Deferred:
Federal 490 1,831 172
State 460 430
64
------- ------- ------
950 2,261 236
------- ------- ------
Total income tax expense $ 19,618 16,101 16,837
======= ======= =======
Total income tax expense attributable to income from continuing
operations in each year was less than that computed by applying U.S.
Federal income tax rates (35% in 1993 and 34% in 1992 and 1991) to income
before income taxes. The reasons for the differences are shown on the
following page.
<TABLE>
<CAPTION>
1993 1992 1991
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
income tax expense $ 18,483 35.0% $ 15,542 34.0% $ 15,184 34.0%
State income tax expense,
net of Federal income
tax benefit 2,658 5.0 1,787 3.9 3,226 7.2
Tax effect of items capitalized
for financial statement purposes
but expensed for tax purposes
on which deferred income taxes
were not provided - - 390 .9 418 .9
Nontaxable interest income (75) (.1) (25) (.1) (365) (.8)
Amortization of regulatory
deferred charge 1,914 3.6 - - - -
Amortization of regulatory
deferred liability (2,006) (3.8) - - - -
Amortization of investment
tax credits (1,360) (2.6) (1,553) (3.4) (1,821) (4.0)
Effect of FASB No. 109
adoption on non-
regulated income (236) (.4) - - - -
Other 240 .4% (40) (.1) 195 .4
------- ----- -------- ------ ------ ------
Actual income
tax expense $ 19,618 37.1% $ 16,101 35.2% $ 16,837 37.7%
------- ----- ------- ------ ------- -----
</TABLE>
The significant components of deferred income tax expense
attributable to income from continuing operations for the year ended
December 31, 1993 were as follows (dollars in thousands):
Deferred tax expense (exclusive of the
effects of amortization below) $ 1,042
Amortization of regulatory deferred charges 1,914
Amortization of regulatory deferred liability (2,006)
-------
$ 950
=======
For the years ended December 31, 1992 and 1991, deferred tax expense
was provided on certain timing differences in the recognition of revenue
and expense for tax and financial statement purposes. The sources of
these differences and the tax effect of each are shown on the following
page.
1992 1991
(Dollars in thousands)
Tax over financial statement depreciation $ 855 682
----- ----
Other taxes 1,200 -
----- ----
Other 206 (446)
------ ----
$ 2,261 236
====== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1993 are presented below (dollars in thousands):
Deferred tax assets:
Accumulated postretirement benefit cost $ 15,946
Regulatory deferred credits 5,884
Other 2,438
-------
Total gross deferred tax assets 24,268
Less valuation allowance -
Net deferred tax assets 24,268
-------
Deferred tax liabilities:
Plant and equipment, principally due to
depreciation differences 40,720
Regulatory deferred charges 4,036
Other 2,486
-------
Total gross deferred tax liabilities 47,242
-------
Net deferred tax liability $ 22,974
=======
As a result of the nature and amount of the temporary differences
which give rise to the gross deferred tax liabilities and the Company's
expected taxable income in future years, no valuation allowance for
deferred tax assets as of December 31, 1993 was necessary.
Prior to 1987, LT&T followed the practice of deducting for income tax
purposes, interest, sales taxes and certain payroll related costs, which
were capitalized in the financial statements. As the NPSC did not permit
deferred income taxes relating to such costs to be allowed for rate-making
purposes, deferred income taxes were not provided for these timing
differences. The cumulative net amount of income tax timing differences
for which deferred income taxes were not provided was approximately
$16,800,000 at December 31, 1992. The liability for the income tax timing
differences was recorded in the previously described adoption of Statement
109 in 1993.
(8) Benefit Plans
The Company has a defined benefit pension plan covering substantially
all employees with at least one year of service. Annual contributions to
the plan are designed to fund current and past service costs as determined
by independent actuarial valuations. There is no prior service liability
associated with the basic benefits provided by the plan.
The net periodic pension credit for 1993, 1992 and 1991 amounted to
$690,000, $971,000 and $477,000, respectively. The net periodic pension
credit is comprised of the following components (dollars in thousands).
1993 1992 1991
(Dollars in thousands)
Service cost - benefits earned
during the period $ 3,408 3,160 3,099
------- ------- -------
Interest cost on projected benefit
obligations 8,441 7,744 7,446
------- ------- -------
Actual return on plan assets (25,849) (9,309) (22,507)
------- ------- -------
Amortization and deferrals, net 13,310 (2,566) 11,485
------- ------- -------
Net periodic pension credit $ (690) (971) (477)
======= ====== ======
The following table summarizes the funded status of the pension plan
at December 31, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Actuarial present value of pension benefit
obligation:
Vested $ 97,040 89,485 86,701
-------- ------ -------
Nonvested 14,108 12,174 11,453
-------- ------ -------
Accumulated pension benefit
obligation $111,148 101,659 98,154
======= ======= =======
Projected pension benefit
obligation 127,884 117,510 113,147
Less, plan assets at market value 185,197 165,563 155,398
------- ------- -------
Excess of plan assets over
projected pension benefit
obligation 57,313 48,053 42,251
Unrecognized prior service cost 5,924 2,705 2,901
Unrecognized net gain (49,088) (35,866) (29,799)
Unrecognized net asset being recognized
over 15.74 years (12,520) (13,953) (15,385)
-------- -------- --------
Prepaid (accrued) pension cost
recognized in the consolidated
balance sheets $ 1,629 939 (32)
======= ====== =======
</TABLE>
The assets of the pension plan are invested primarily in marketable
equity and fixed income securities and U.S. Government obligations.
The assumptions used in determining the funded status information and
pension expense for the three years were as follows:
1993 1992 1991
Discount rate 7.10% 7.10 7.10
---- ---- ----
Rate of salary progression 6.00 6.25 6.25
---- ---- ----
Expected long-term rate of return
on assets 8.00 8.00 8.00
==== ==== ====
In addition to the defined benefit pension plan, the Company has a
defined contribution profit-sharing plan which covers nonunion eligible
employees who have completed one year of service. Participants may elect
to deposit a maximum of 15% of their wages up to certain limits. The
Company matches 25% of the participants' contributions up to 5% of their
wages. The profit-sharing plan also has a provision for an employee stock
ownership fund, to which the Company has contributed an additional 1.75%
of each eligible participant's wage. The Company's matching contributions
and employee stock ownership fund contributions are used to acquire common
stock of the Company purchased on the open market. The Company's combined
contributions totaled $640,000, $601,000 and $561,000 for 1993, 1992 and
1991, respectively.
(9) Postretirement Benefits
The Company sponsors a health care plan that provides postretirement
medical benefits and other benefits to employees who meet minimum age and
service requirements upon retirement. Currently, substantially all of the
Company's employees may become eligible for those benefits if they have 15
years of service with normal or early retirement. The cost of retiree
health care, dental and life insurance benefits was recognized as an
expense as premiums were paid in 1992 and 1991. For 1992 and 1991, such
expense totaled $2,290,000 and $2,131,000, respectively.
The Company adopted Statement of Financial Accounting Standards No.
106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, as of January 1, 1993. The new standard requires accounting for
these benefits during the active employment of the participants. The
Company elected to record the accumulated benefit obligation upon adoption
in the first quarter. After taxes, this one-time charge amounted to
$23,166,000, net of income tax benefit of $15,258,000. Pursuant to
Statement of Financial Accounting Standards No. 71, Accounting for the
Effects of Certain Types of Regulation, a regulatory asset associated with
the recognition of the transition obligation was not recorded because of
uncertainties as to the timing and extent of recovery given the Company's
assessment of its long-term competitive environment.
The following table presents the plan's status reconciled with amounts
recognized in the Company's consolidated balance sheet at December 31,
1993 (dollars in thousands):
Accumulated postretirement benefit obligation:
Retirees $ 29,851
Fully eligible active plan participants 10,202
Other active plan participants 7,328
------
47,381
Plan assets at fair value -
Unrecognized net loss (7,054)
------
Accrued postretirement benefit cost
recognized in consolidated balance
sheets $40,327
======
Net periodic postretirement benefit costs for the year ended December
31, 1993 include the following components (dollars in thousands):
Service cost $ 300
Interest cost 3,632
-----
Net periodic postretirement benefit costs $ 3,932
=====
For purposes of measuring the benefit obligation, a discount rate of
8.0% and an 11.7% annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) was assumed for 1993.
This rate of increase was assumed to decrease gradually to 5.5% by the
year 2004.
For purposes of measuring the benefit cost, a discount rate of 9.5%
and a 12% annual rate of increase in the health care cost trend rate was
assumed for 1993. This rate of increase was assumed to decrease gradually
to 6.5% by the year 2002. The health care cost trend rate assumptions
have a significant effect on the amounts reported. For example, a one
percentage point increase in the assumed health care cost trend rate would
increase the aggregate service and interest cost by approximately $350,000
and increase the accumulated postretirement benefit obligation by
approximately $4,200,000.
(10) Stock and Incentive Plan
The Company has a stock and incentive plan which provides for the
award of short-term incentives (payable in cash or restricted stock),
stock options, stock appreciation rights or restricted stock to certain
officers and key employees conditioned upon the Company's attaining
certain performance goals.
Under the plan, options may be granted for a term not to exceed ten
years from date of grant. The option price is the fair market value of
the shares on the date of grant. Such exercise price was $11.50 for the
1990 options and $12.75 for the 1992 options. The exercise price of a
stock option may be paid in cash, shares of Company common stock or a
combination of cash and shares.
Stock option activity under the Plan is summarized as follows:
1993 1992 1991
Outstanding at January 1 176,000 88,000 88,000
Granted - 88,000 -
Exercised (65,350) - -
Cancelled -
- -
Outstanding at December 31 110,650 176,000 88,000
Exercisable at December 31 42,650 - -
All of the above information has been retroactively adjusted to give
effect to the 100% stock dividend.
The Plan also provides for the granting of stock appreciation rights
(SARs) to holders of options, in lieu of stock options, upon lapse of
stock options or independent of stock options. Such rights offer
optionees the alternative of electing not to exercise the related stock
option, but to receive instead an amount in cash, stock or a combination
of cash and stock equivalent to the difference between the option price
and the fair market value of shares of Company stock on the date the SAR
is exercised. No SARs have been issued under the plan.
In addition, 16,002 shares, 15,224 shares and 13,464 shares of
restricted stock were awarded from stock purchased on the open market by
the Company during 1993, 1992 and 1991, respectively. Recipients of the
restricted stock are entitled to cash dividends and to vote their
respective shares. Restrictions limit the sale or transfer of the shares
for two years subsequent to issuance unless employment is terminated
earlier due to death, disability or retirement.
Amounts charged against 1993, 1992 and 1991 net income for cash and
restricted stock awards were approximately $460,500, $388,500 and
$277,500, respectively. Pursuant to the Plan, 2,000,000 shares of common
stock are reserved for issuance under this Plan.
(11) Network Service Revenues
On May 28, 1991, the Nebraska Public Service Commission (NPSC)
ordered LT&T to implement several rate and service changes which became
effective August 16, 1991. Increased rates for basic local service,
together with reduced rates for long distance calls and other changes
included in the order, were intended to be revenue-neutral. Results were
monitored monthly and were reviewed with the NPSC after a full year of
operation. By its order dated February 16, 1993, the NPSC determined that
a one-time refund of $1 for each residential line and $2 for each business
line would be needed to achieve revenue neutrality. The refunds were
provided as credits on customers' March 1993 billing. In addition, the
NPSC ordered further reductions in rates for touch call service and long
distance service, estimated to total $1,589,000 annually. These rate
reductions were effective March 1, 1993.
(11) Network Service Revenues, Continued
Network service revenues include revenues received by LT&T for
billing and access services provided to LinTel, which were approximately
$6,746,000 for 1993, $7,214,000 for 1992 and $7,397,000 for 1991, and are
deducted as intercompany revenues and expenses.
(12) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
1993 quarter quarter quarter quarter Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues and sales from
continuing operations:
Telephone $ 40,170 40,406 41,713 41,625 163,914
Diversified 6,463 6,828 7,224 7,539 28,054
Intercompany revenues (1,896) (1,955) (1,909) (1,858) (7,618)
-------- ------- ------- ------- -------
Total $ 44,737 45,279 47,028 47,306 184,350
======== ======= ======= ======= =======
Income before cumulative
effect of change in
accounting principle 8,072 7,970 8,276 8,873 33,191
Cumulative effect of change
in accounting principle (23,534) - 368 - (23,166)
------- ------ ----- ----- -------
Net income (loss) $ (15,462) 7,970 8,644 8,873 10,025
======= ====== ====== ====== =======
Earnings per common share
before cumulative effect of
change in accounting principle .25 .24 .25 .27 1.01
Cumulative effect of change in
accounting principle (.72) - .01 - (.71)
------ ------ ---- ----- -----
Earnings (loss) per common
share $ (.47) .24 .26 .27 .30
======= ===== ===== ====== ======
<CAPTION>
First Second Third Fourth
1992 quarter quarter quarter quarter Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues and sales from
continuing operations:
Telephone $ 38,452 38,916 38,986 40,406 156,760
Diversified 6,157 6,353 7,321 6,920 26,751
Intercompany revenues (1,947) (2,062) (2,116) (2,018) (8,143)
-------- ------- -------- -------- --------
Total $ 42,662 43,207 44,191 45,308 175,368
======== ======= ======= ======= ========
Net income $ 6,145 6,992 8,529 7,943 29,609
======== ======= ======= ======= ========
Earnings per common share $ .19 .21 .26 .24 .90
======= ====== ====== ====== =======
</TABLE>
(13) Supplemental Disclosures to Statements of Cash Flows
Cash paid for interest and income taxes for each of the years in the
three-year period ended December 31, 1993 are as shown below (dollars in
thousands):
1993 1992 1991
Interest $ 7,495 8,766 8,776
------- ------ ------
Income taxes $ 20,631 16,597 15,044
======= ====== ======
(14) Common Stock Purchase Rights
The Board of Directors declared a dividend of one common stock
purchase right for each common share outstanding as of June 30, 1989.
Under certain conditions, each right may be exercised to purchase for
$21.875 an amount of the Company's common stock, or an acquiring company's
common stock, having a market value of $43.75. The rights may only be
exercised after a person or group (except for certain stockholders)
acquires ownership of 10% or more of the Company's common shares or
announces a tender or exchange offer upon which consummation would result
in ownership of 10% or more of the common shares. The rights expire on
June 30, 1999 and may be redeemed by the Company at a price of $.0025 per
right, at any time until ten days after a public announcement of the
acquisition of 10% of the Company's common stock. At December 31, 1993,
34,980,376 shares of common stock were reserved for issuance in connection
with these stock purchase rights.
(15) Property and State Income Taxes
In separate decisions during 1991, the Nebraska Supreme Court (the
Court) decided that the personal property tax system of the State as
applied in 1989 and in 1990 was unconstitutional. On January 22, 1993,
the Court affirmed a determination by the Nebraska State Board of
Equalization and Assessment whereby 18.81% of the taxes paid for 1990
should be refunded to the Company and certain other taxpayers. In
mid-1993, LT&T and LinTel entered into agreements with the Nebraska Tax
Commissioner pursuant to which LT&T and LinTel agreed to accept a refund
of 18.81% of the property taxes paid for the 1989 and 1990 tax years.
Such agreements were subsequently approved by the NPSC. As a result of
these actions, the Company recorded refunds or credits of approximately
$1,359,000 and $1,494,000 in 1993 and 1992, respectively.
Also in 1991, the Nebraska Legislature responded to the 1991 Court
decisions by eliminating personal property taxes for 1991 only,
substituting increased rates for state corporate income taxes and creating
a 4% surcharge on depreciation deductions. In July 1992, the Court
declared this legislative action to be unconstitutional. Subsequently,
the Nebraska Legislature enacted new tax legislation for 1992, similar to
the 1991 legislation but with a 2% surcharge on depreciation deductions.
The combination of these two actions lowered the Company's state income
taxes by approximately $575,000 for 1992.
In view of a constitutional amendment approved by the voters in 1992,
the constitutional issues concerning Nebraska property taxes appear to
have been resolved.
(16) Disclosures About the Fair Value of Financial Instruments
Cash and Cash Equivalents, Receivables, Accounts
Payable and Notes Payable to Banks
The carrying amount approximates fair value because of the short
maturity of these instruments.
Temporary Investments
The fair values of the Company's marketable investment securities are
based on quoted market prices.
Investments and Other Assets
The fair value of the Company's note receivable from OCGP is based on
the amount of future cash flow associated with the instrument discounted
using the Company's current borrowing rate on similar instruments of
comparable maturity.
Long-Term Debt
The fair values of each of the Company's long-term debt instruments
are based on the amount of future cash flows associated with each
instrument discounted using the Company's current borrowing rate on
similar debt instruments of comparable maturity.
Estimated Fair Value
The estimated fair value of the Company's financial instruments are
summarized as follows:
At December 31, 1993 At December 31, 1992
Carrying Estimated Carrying Estimated
amount fair value amount fair value
Temporary investments $ 29,451 30,693 29,064 29,596
====== ====== ====== ======
Note receivable from OCGP $ 30,013 35,644 26,727 31,958
====== ====== ====== ======
Long-term debt $ 44,000 54,021 79,000 93,609
====== ====== ====== ======
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
(17) Reclassifications
Certain of the 1992 and 1991 financial statement amounts have been
reclassified to conform with the 1993 presentation.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Not applicable
(b) Not applicable
(c) Exhibits
Designation Description
24 Consent of KPMG Peat Marwick
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
LINCOLN TELECOMMUNICATIONS COMPANY
By: FRANK H. HILSABECK
Frank H. Hilsabeck
President and Chief Executive Officer
Dated: February 14, 1994
<PAGE>
Exhibit Index
Exhibit Page
24 Consent of KPMG Peat Marwick
EXHIBIT 24
ACCOUNTANTS' CONSENT
To Board of Directors
Lincoln Telecommunications Company:
We consent to the incorporation in Forms S-3 (Registration No. 33-47428),
S-3 (Registration No. 33-52117) and S-8 (Registration No. 33-39551)
relating to the Lincoln Telecommunications Company's Employee and
Stockholder Dividend Reinvestment and Stock Purchase Plan, the proposed
secondary offering of Company common stock by a selling stockholder of the
Company and the 1989 Stock and Incentive Plan, respectively for Lincoln
Telecommunications Company of our report dated February 5, 1994, relating
to the consolidated balance sheets of Lincoln Telecommunications Company
and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, common stock investment and preferred
stock and cash flows for each of the years in the three-year period ended
December 31, 1993, included in Form 8-K, dated February 14, 1994.
February 14, 1994 KPMG PEAT MARWICK
Lincoln, Nebraska
