<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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 No. 0-10516
---------------------------------------
Aliant Communications Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0632436
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 M Street, Lincoln, Nebraska 68508
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 402-436-3737
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
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at October 31, 1998
$.25 par Value 35,635,910
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INTRODUCTION 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 6
CONDENSED NOTES TO FINANCIAL STATEMENTS 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of
Security Holders *
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
- --------------------
* Denotes none or not applicable.
SIGNATURES 22
<PAGE>
INTRODUCTION
The unaudited interim financial statements presented herein include the
consolidated statements of Aliant Communications Inc. and its subsidiaries
(the Company). The unaudited statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. The Company believes, however, that the disclosures are
adequate to make the information presented not misleading. The Company's
condensed consolidated balance sheet at December 31, 1997 was derived from
the Company's audited consolidated balance sheet as of that date. The
Company's financial statements should be read in conjunction with the
financial statements and notes thereto in the Annual Report on Form 10-K of
the Company for the year ended December 31, 1997, and the current year's
previously issued Forms 10-Q, which are incorporated by reference.
-1-
<PAGE>
<TABLE>
Item 1 - Financial Statements
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
September 30,
1998 December 31,
(Unaudited) 1997
------------- ------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 21,802 $ 27,867
Temporary investments 3,577 3,693
Accounts receivable and other 68,227 61,035
-------- --------
Total current assets 93,606 92,595
Property and equipment less accumulated
depreciation and amortization 308,242 258,955
Investments and other assets 187,843 176,052
Deferred charges 20,039 20,040
-------- --------
Total assets $609,730 $547,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable to banks $ 16,000 $ 11,000
Current installment of long-term debt 9,000 8,000
Accounts payable and accrued liabilities $ 74,283 65,782
-------- --------
Total current liabilities 99,283 84,782
Deferred credits and other long-term liabilities 64,605 61,363
Long-term debt, excluding current installment 131,000 94,000
Minority interest 5,197 -
(Continued on next page)
-2-
<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS (Cont'd)
September 30,
1998 December 31,
(Unaudited) 1997
------------- ------------
(Dollars in Thousands)
<S> <C> <C>
Preferred stock, 5%, redeemable $ - $ 4,499
Stockholders' equity 309,645 302,998
-------- --------
Total liabilities and stockholders' equity $609,730 $547,642
======== ========
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Operating revenues:
Telephone revenues:
Local network services $22,903 $20,682 $66,163 $59,865
Access and wholesale services 14,599 14,430 43,929 44,200
Long distance services 8,187 7,973 24,493 23,697
Other wireline communications services 8,934 7,850 24,492 21,100
------- ------- ------- -------
Total telephone revenues 54,623 50,935 159,077 148,862
Wireless communications services 32,813 19,969 87,012 56,346
Telephone equipment sales and services 5,422 4,985 14,869 13,718
Intercompany revenues (3,752) (2,323) (10,698) (6,536)
------- ------- ------- -------
Total operating revenues 89,106 73,566 250,260 212,390
------- ------- ------- -------
Operating expenses:
Depreciation and amortization 14,642 12,902 41,478 37,502
Other operating expenses 48,729 38,276 137,828 111,776
Taxes, other than payroll and income 1,211 1,170 3,481 3,271
Intercompany expenses (3,752) (2,323) (10,698) (6,536)
------- ------- ------- -------
Total operating expenses 60,830 50,025 172,089 146,013
------- ------- ------- -------
Operating income 28,276 23,541 78,171 66,377
------- ------- ------- -------
Non-operating income and expense:
Income from interest and other investments 849 2,054 3,618 6,002
Minority interest 551 - 1,522 -
Other deductions 461 128 1,087 626
Interest expense 2,651 2,157 7,842 6,559
------- ------- ------- -------
Net non-operating expense 2,814 231 6,833 1,183
------- ------- ------- -------
Income before income taxes and
extraordinary item 25,462 23,310 71,338 65,194
Income taxes 10,377 9,315 28,759 26,033
------- ------- ------- -------
Income before extraordinary item 15,085 13,995 42,579 39,191
(Continued on next page)
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<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS (Cont'd)
(UNAUDITED)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands Except Per Share Data)
Extraordinary item, net of income tax $ - $ - $(2,097) $ -
------- ------- ------- -------
Net income 15,085 13,995 40,482 39,161
Preferred dividends - 57 310 169
------- ------- ------- -------
Earnings available
for common shares $15,085 $13,938 $40,172 $38,992
======= ======= ======= =======
Basic and diluted earnings per common share:
Earnings before extraordinary item $ .43 $ .39 $ 1.18 $ 1.08
Extraordinary item - - (.06) -
------- ------- ------- -------
Earnings per common share $ .43 $ .39 $ 1.12 $ 1.08
======= ======= ======= =======
Weighted average common shares
outstanding (in thousands) 35,637 36,178 35,961 36,286
======= ======= ======= =======
Dividends declared per common share $ .18 $ .17 $ .54 $ .49
======= ======= ======= =======
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
-----------------
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 40,482 $ 39,161
-------- --------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 42,282 37,597
Net change in investments and other assets 264 (3,759)
Deferred income taxes 968 (986)
Changes in assets and liabilities resulting
from operating activities:
Receivables 1,506 (5,182)
Other assets (1,778) (4,265)
Accounts payable and accrued expenses 436 (770)
Minority interest (468) -
Other liabilities 1,500 (603)
-------- --------
Total adjustments 44,710 22,032
-------- --------
Net cash provided by operating activities 85,192 61,193
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (59,689) (31,905)
Net salvage on retirements 8,515 350
-------- --------
Net capital additions (51,174) (31,555)
Proceeds from sale of investments and other assets 1,693 312
Purchases of investments and other assets (4,252) (4,466)
Purchases of temporary investments (949) (1,338)
Maturities and sales of temporary investments 1,065 2,225
Acquisitions, net of cash acquired (23,105) -
-------- --------
Net cash used for investing activities (76,722) (34,822)
-------- --------
Cash flows from financing activities:
Dividends to stockholders and premium on redemption
of preferred stock (19,460) (17,619)
Proceeds from issuance of long-term debt 130,000 11,000
Proceeds from issuance of notes payable 5,000 -
Retirement of preferred stock (4,499) -
Debt issuance cost (909) -
(Continued on next page)
-6-
<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(UNAUDITED)
Nine Months Ended
September 30
-----------------
1998 1997
---- ----
(Dollars in Thousands)
Payments of long-term debt $(110,500) $ (16,362)
Net purchases and sales of common and treasury stock (14,167) (4,471)
-------- --------
Net cash used in financing activities (14,535) (27,452)
-------- --------
Net decrease in cash and cash equivalents (6,065) (1,081)
Cash and cash equivalents at beginning of year 27,867 25,290
-------- --------
Cash and cash equivalents at end of quarter $ 21,802 $ 24,209
========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 2,882 $ 5,582
========= =========
Taxes paid $ 26,225 $ 29,589
========= =========
</TABLE>
-7-
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited interim financial statements include the consolidated
statements of the Company. The Company has the following wholly-owned
subsidiaries: Aliant Communications Co. (Telco); Aliant Cellular Inc.
(Cellular); Aliant Systems Inc. (Systems); Prairie Communications, Inc.
(Prairie); Aliant Midwest Inc. (Midwest); and Aliant Network Services Inc.
(Network). As of February 27, 1998, Cellular and Prairie combined own 100%
of Omaha Cellular General Partnership (OCGP), which has a controlling
interest in Omaha Cellular Limited Partnership (OCLP). In the opinion of
management of the Company, its respective financial statements reflect all
adjustments necessary for a fair presentation of results of operations,
financial position, and cash flows. All such adjustments made are of a
normal recurring nature except when noted as extraordinary or nonrecurring.
Certain prior period items have been reclassified to conform to the 1998
format. Most significantly, the Company reclassified wholesale services
from Other wireline communications services revenue to Access and wholesale
services revenue.
(2) CHANGE IN LONG-TERM DEBT STRUCTURE
The Company sold $100 million of senior unsecured 6 3/4% notes in a public
debt offering. The bonds are dated April 1, 1998, and will mature on April
1, 2028. Interest is payable every six months on April 1 and October 1.
Further information about the new long-term debt structure is presented
under the section entitled "Liquidity and Capital Resources" in
Management's Discussion and Analysis below.
(3) INVESTMENT IN OMAHA CELLULAR MARKET
Effective February 27, 1998, the Company completed the acquisition of the
remaining 50% of OCGP, which at March 31, 1998, owned 55.82% of OCLP and
manages that operation. The purchase price was approximately $15 million,
and the transaction was accounted for as a purchase. Beginning March 1,
1998, OCLP's operating revenues and expenses are consolidated with those of
the Company's other activities. OCLP, doing business as Aliant Cellular-
Omaha, provides cellular communications services in the Omaha Metropolitan
Statistical Area (MSA). On April 28, 1998, OCGP purchased an additional
25.93% of OCLP from other limited partners for approximately $24 million,
bringing the Company's ownership of OCLP to 81.75%. This transaction was
also accounted for as a purchase. OCLP has a definitive agreement to
purchase the remaining 18.25% of the partnership between January 1 and June
30, 1999 from the other remaining limited partner. Upon completion of this
purchase, the Company will be the sole owner of OCLP. Further information
about the Company's acquisition is presented under the section entitled
"Managed Cellular Markets" in Management's Discussion and Analysis below.
(4) SUPPLEMENTAL CASH FLOW DISCLOSURES
In connection with the February 27, 1998 OCGP purchase and the April 28,
1998 purchase of other limited partners, the following assets were
acquired, liabilities assumed, and long-term debt issued:
-8-
<PAGE>
4/28/98
2/27/98 Limited
OCGP Partner
(Dollars in thousands) Purchase Purchase
- ---------------------- -------- --------
Property plant & equipment $(35,919) $ --
Price in excess of cost of net assets acquired (30,507) (16,464)
Notes payable 3,500 --
Prior investment in OCGP 1,420 --
Minority interest 13,590 (7,925)
Retirement of PIK debt 48,678 --
Other assets and liabilities - OCGP (17,623) --
Other assets and liabilities - OCLP 3,145 --
Issuance of note payable 15,000 --
-------- --------
Increase (Decrease) in cash $ 1,284 $(24,389)
======== ========
(5) RETIREMENT OF TELCO FIRST MORTGAGE BONDS
Effective May 1, 1998, the Company redeemed approximately $47.5 million of
Telco first mortgage bonds at an interest rate of 9.91 percent, including a
premium of approximately $3.5 million. This premium resulted in a $2.1
million extraordinary after-tax charge to earnings in second quarter 1998.
Further information about the retirement is presented under the section
entitled "Liquidity and Capital Resources" in Management's Discussion and
Analysis below.
(6) REDEMPTION OF TELCO PREFERRED STOCK
Effective May 15, 1998, the Company began redeeming Telco's 5% preferred
stock ($100 par value) at a redemption price of $105 per share, plus an
accrued dividend of $0.63. Further information about the redemption is
presented under the section entitled "Liquidity and Capital Resources" in
Management's Discussion and Analysis below.
(7) ACCOUNTING PRONOUNCEMENT
FAS 130, Reporting Comprehensive Income, establishes standards for the
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The standard also requires
disclosure of the total of comprehensive income in interim financial
statements. The Company adopted the provisions of FAS 130 effective
January 1, 1998. For the period ended September 30, 1998, the Company does
not have any elements of comprehensive income other than the elements
currently recognized in the consolidated statement of earnings.
(8) SUBSEQUENT EVENT
Effective October 1, 1998, the Company entered into a settlement agreement
related to a federal trademark infringement lawsuit which will result in
other non-operating income of approximately $3.4 million, net of legal fees
and related expenses, in the fourth quarter of 1998.
-9-
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following tables summarize information from the Company's statements of
earnings.
<TABLE>
<CAPTION>
Revenues
- --------
Three Months Ended Sept 30 Nine Months Ended Sept 30
----------------------------- ----------------------------
(Dollars in 000s) 1998 1997 Change % 1998 1997 Change %
- ----------------- ---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Telephone revenues:
Local network $22,903 $20,682 $ 2,221 10.7 $ 66,163 $ 59,865 $ 6,298 10.5
Access & wholesale 14,599 14,430 169 1.2 43,929 44,200 (271) (0.6)
Long distance 8,187 7,973 214 2.7 24,493 23,697 796 3.4
Other wireline 8,934 7,850 1,084 13.8 24,492 21,100 3,392 16.1
------- ------- ------- ---- -------- -------- ------- ----
Total telephone
revenues 54,623 50,935 3,688 7.2 159,077 148,862 10,215 6.9
Wireless 32,813 19,969 12,844 64.3 87,012 56,346 30,666 54.4
Equipment sales
and service 5,422 4,985 437 8.8 14,869 13,718 1,151 8.4
Intercompany (3,752) (2,323) (1,429) (61.5) (10,698) (6,536) (4,162) (63.7)
------- ------- ------- ---- -------- -------- ------- ----
Total operating
revenues $89,106 $73,566 $15,540 21.1 $250,260 $212,390 $37,870 17.8
</TABLE>
All comparisons made in the following section are of the third quarter and
nine-month periods of 1998, respectively, with the same periods in 1997.
Local network services revenue increased $2,221,000 (10.7%) and $6,298,000
(10.5%). Basic local services revenue constituted $1,360,000 and
$3,837,000 of the increases. The basic local revenue increase was due to
several factors. First, residential revenue grew due to an increase in
residential basic local service rates effective May 16, 1998. This was
offset by a comparable decrease in business basic local service rates.
Second, additional installations of second phone lines contributed to the
rise in residential revenues, with a 21.8% increase in second lines.
Third, expanded area service revenue grew by $88,000 (3.9%) and $851,000
(13.6%), resulting from a July 1997 rate increase. Fourth, basic
residential rates were increased approximately 10%, effective March 23,
1997. Telco access lines in service increased to 280,900, up 9,616 lines
(3.5%) from September 30, 1997.
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<PAGE>
The local network services revenue increase was also affected by private
line revenue increasing $305,000 (48.6%) and $782,000 (45.4%), due to new
Integrated Services Digital Network (ISDN) revenue and to growth. Enhanced
services revenue, consisting of custom calling features, Custom Local Area
Signaling Services (CLASS) and voice mail, continued its growth with
increases of $242,000 (16.0%) and $997,000 (24.7%).
Access and wholesale services revenue increased $169,000 (1.2%) and
decreased $271,000 (0.6%). The third quarter decrease in access revenue of
$220,000 was offset by a $389,000 increase in wholesale services revenue,
which represents Network's revenue. The nine-month decrease was made up of
a $1,318,000 decrease in access revenue and a $1,047,000 increase in
wholesale services revenues. The access revenue decreases were due to
several rate reductions, beginning with a decrease in intrastate access
charges which occurred concurrently with the previously mentioned March 23,
1997 residential basic local service rate increase. Intrastate access
rates were further reduced on May 16, 1998, coinciding with local service
rate increases. Also, interstate switched access rates were reduced in
July 1997, January 1998, and July 1998. Access minutes of use reached a
total of 814.9 million minutes in the first nine months of 1998, compared
to 760.5 minutes for the same period in 1997, a 4.8% increase for the
comparative quarter and a 7.2% year-to-date increase.
Long distance services revenue increased $214,000 (2.7%) and $796,000
(3.4%), even though intraLATA rates were reduced on March 23, 1997, and
again on May 16, 1998. The increases are due to an ongoing marketing
effort to gain market share from larger business and residential long
distance users.
Other wireline communications services revenue includes directory
advertising and sales, carrier billing and collections, data
communications, public paystations, and miscellaneous items. This revenue
category increased $1,084,000 (13.8%) and $3,392,000 (16.1%). Data
communications growth is up $771,000 (46.5%) and $1,951,000 (41.8%),
primarily due to the growth of Navix, the Company's Internet access
service. Directory advertising revenue also increased by $339,000 and
$1,107,000, substantially due to a rate increase for directory advertising
in the Company's latest directory editions.
Wireless communications services revenue increased $12,844,000 (64.3%) and
$30,666,000 (54.4%). As a result of increased ownership in the Omaha
market mentioned previously, operating revenues from the Omaha MSA are
included in the Company's operating revenues beginning March 1, 1998.
Prior to that time, the Company's portion of the net results from OCLP were
reported in non-operating income from investments. The inclusion of OCLP
contributed $9,230,000 and $21,044,000 of the total wireless revenue
increases. Customer lines in the total cellular market increased by 45,098
(18.4%) since September 30, 1997.
Telephone equipment sales and services revenue increased $437,000 (8.8%)
and $1,151,000 (8.4%). The increase is mainly due to a July 1997 rate
increase for inside wire maintenance.
Overall, Company operating revenues increased $15,540,000 (21.1%) and
$37,870,000 (17.8%).
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<PAGE>
<TABLE>
<CAPTION>
Operating Expenses
- ------------------
Three Months Ended Sept 30 Nine Months Ended Sept 30
------------------------------ ------------------------------
(Dollars in 000s) 1998 1997 Change % 1998 1997 Change %
- ----------------- ---- ---- -------------- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and
amortization $14,642 $12,902 $ 1,740 13.5 $ 41,478 $ 37,502 $ 3,976 10.6
Other operating 48,729 38,276 10,453 27.3 137,828 111,776 26,052 23.3
Other taxes 1,211 1,170 41 3.5 3,481 3,271 210 6.4
Intercompany (3,752) (2,323) (1,429) (61.5) (10,698) (6,536) (4,162) (63.7)
------- ------- ------- ---- -------- -------- ------- ----
Total $60,830 $50,025 $10,805 21.6 $172,089 $146,013 $26,076 17.9
</TABLE>
Depreciation and amortization expense increased $1,740,000 (13.5%) and
$3,976,000 (10.6%). The inclusion of OCLP in consolidated results
contributed $1,498,000 and $3,350,000 of the increase in depreciation. The
addition of depreciable assets primarily in Cellular, Midwest and Network
contributed to the remaining increase.
Other operating expenses increased by $10,453,000 (27.3%) and $26,052,000
(23.3%). The increase is largely a result of the growth of cellular
operations expenses, due to significant growth in cellular services and to
the inclusion of OCLP in consolidated results. Total cellular operations
expenses increased by $6,236,000 and $14,945,000, and $4,677,000 and
$10,470,000 of those increases were attributable to the inclusion of OCLP.
Navix expenses grew $630,000 and $1,871,000 due to the continued growth of
Navix Internet service. Midwest contributed $997,000 and $3,046,000 of
operating expenses as a result of start-up costs and ongoing expenses.
Overall, Company operating expenses increased $10,805,000 (21.6%) and
$26,076,000 (17.9%).
<TABLE>
<CAPTION>
Non-Operating Income and Expense
- --------------------------------
Three Months Ended Sept 30 Nine Months Ended Sept 30
------------------------------ ------------------------------
(Dollars in 000s) 1998 1997 Change % 1998 1997 Change %
- ----------------- ---- ---- -------------- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from
interest and
other investments $ 849 $ 2,054 $(1,205) (58.7) $ 3,618 $ 6,002 $(2,384) (39.7)
Minority interest 551 0 551 - 1,522 0 1,522 -
Other deductions 461 128 333 260.2 1,087 626 461 73.6
Interest expense 2,651 2,157 494 22.9 7,842 6,559 1,283 19.6
------- ------- ------- ------ ------- ------- ------- -----
Total $ 2,814 $ 231 $ 2,583 - $ 6,833 $ 1,183 $ 5,650 477.6
</TABLE>
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<PAGE>
Income from interest and other investments decreased by $1,205,000 (58.7%)
and $2,384,000 (39.7%). Prior to March 1998, this category included the
Company's portion of the net results of OCLP. Since March 1, 1998, OCLP
has been consolidated into operations.
Minority interest represents the portion of the net results of OCLP that is
not owned by the Company, which was 44.2% beginning March 1, 1998, and
18.25% effective April 1, 1998.
Interest expense increased by $494,000 (22.9%) and $1,283,000 (19.6%). The
increases resulted from additional debt for (1) the redemption of Telco
preferred stock; (2) the retirement of Telco first mortgage bonds,
including a $3.5 million redemption premium; and (3) the Omaha Cellular
acquisitions. The interest expense increase was offset by the reduction
from the replacement of 9.91% Telco first mortgage bond debt with 6.75%
senior unsecured notes.
Income Taxes
- ------------
Income taxes increased $1,062,000 (11.4%) and $2,726,000 (10.5%). The
increases are proportionate to the increases in taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as its ability to generate resources to
finance business expansion, construct capital assets, pay its current
obligations, and pay dividends. Telco's operations have historically
provided a stable source of cash flow which has helped the Company make
capital improvements. In order to provide cash for various needs described
below, the Company recently issued $100 million in long-term debt effective
April 1, 1998, from its $250 million debt shelf registration. The Company
can also obtain external financing through existing committed bank lines of
credit. Consequently, no funding difficulties are anticipated.
Net cash provided by Company operating activities was $85,192,000 for the
first nine months of 1998 compared to $61,193,000 for the first nine months
of 1997. The principal factors involved in the increase were an increase
in operating income before depreciation and amortization, and a decrease in
accounts receivable. Cash from operating activities is the Company's
primary source of liquidity, and primarily funds capital expenditures and
dividends. During the nine-month period ended September 30, 1998 cash
provided by operating activities, less dividends paid, exceeded capital
expenditures.
Net cash used for Company investing activities was $76,722,000 and
$34,822,000 for the nine months ended September 30, 1998 and 1997,
respectively. The increase was largely due to the previously mentioned
cellular acquisitions.
Capital expenditures for the first nine months of 1998 were $59,689,000, an
increase of $27,784,000 compared to 1997. Total Company capital additions
for both new and updated networks and communications facilities for 1998
are projected to be $80,000,000.
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<PAGE>
Net cash used in Company financing activities was $14,535,000 and
$27,452,000 for the nine months ended September 30, 1998 and 1997,
respectively. The decrease was largely due to the issuance of new long-
term debt, part of the proceeds of which were used to retire other long-
term debt in the manner explained below.
The Company's consolidated debt to cash flow ratio was .99 to 1.00, its
consolidated debt to capital ratio was 1.00 to 2.82, and its EBITDA to
interest expense ratio was 25.74 to 1.00.
At September 30, 1998, the Company had $131.0 million of long-term debt,
consisting of the following:
- $100.0 million senior unsecured 6 3/4% notes due April 1, 2028.
- A $20.0 million variable rate term loan due July 6, 2000, with 13
consecutive quarterly installments commencing on September 15, 1997.
- A $20.0 million revolving loan due July 1, 1999. This loan was
arranged in accordance with the credit agreement described below.
- Excludes current installments of long-term debt of $9.0 million.
The Company filed a debt shelf registration statement with the Securities
and Exchange Commission on February 23, 1998 to enable the Company to offer
and sell from time to time, up to an aggregate of $250 million in
debentures, notes, and/or other unsecured evidences of indebtedness.
As part of the $250 million debt shelf registration, the Company sold $100
million of senior unsecured 6 3/4% notes in a public debt offering. The
bonds are dated April 1, 1998 and will mature on April 1, 2028. Interest
is payable every six months on April 1 and October 1. The proceeds were
used as follows in second quarter 1998: (a) to repay the $15 million
revolving loan that was incurred in order to acquire the remaining 50%
interest in OCGP; (b) to redeem approximately $47.5 million of Telco first
mortgage bonds at an interest rate of 9.91 percent, including a premium of
approximately $3.5 million; (c) to redeem all of the outstanding Telco 5%
preferred stock, including a redemption premium of approximately $225,000,
for a total of approximately $4.7 million; and (d) to repay approximately
$31 million of other bank debt. The debt issue is rated AA+ by Standard
and Poor's and A2 by Moody's.
As of July 6, 1998, the Company and its subsidiaries renewed previously
existing credit facilities aggregating $75.0 million of borrowing capacity
with two banks. The maturity date for all such facilities is July 1, 1999.
At October 31, 1998, the Company had utilized $36 million of said borrowing
capacity. Interest on all such borrowings accrues on a LIBOR-based pricing
formula.
The Company will require cash for Network to build and operate fiber optic
transmission facilities outside of Telco's traditional service area.
Capacity on the network is leased to long distance and wireless carriers.
The Company expects to finance these planned expenditures primarily through
internally provided sources.
The Board of Directors has authorized the Company to purchase 1,500,000
shares of its common stock since April 24, 1991, and the shares are
purchased from time to time as market conditions warrant. During third
quarter 1998, 2,000 shares were purchased. As of September 30, 1998, a
total of 173,000 shares remain available for purchase under authority of
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<PAGE>
the most recent Board of Directors resolution, dated May 28, 1997. These
purchases are in addition to the purchases which the Company has been
making for purposes of satisfying participant requirements under the
Employee and Stockholder Dividend Reinvestment and Stock Purchase Plan,
satisfying Employer Matching and Stock Bonus Contributions under the
Company's 401(k) Savings and Stock Ownership Plan, and satisfying
participant requirements under the Company's 1989 Stock and Incentive Plan.
A three-year labor contract with the Communications Workers of America
(CWA) was signed in October 1998 affecting approximately 650 Telco
bargaining unit employees. Also, a four-year contract with the CWA was
signed in May 1998 affecting approximately 60 Systems bargaining unit
employees. Key elements of the Telco agreement include: (1) an 11.5
percent wage increase spread over the next three years with annual
increases of 4 percent the first two years and 3.5 percent the final year;
(2) increased pension benefits for employees retiring after January 1,
1999; and (3) a Company match to bargaining unit employees who contribute
to the 401(k) Savings Plan. The Systems agreement included a 15 percent
wage increase spread over the next four years with annual increases of 4.5
percent the first two years and 3 percent the final two years. Other
provisions of the Systems agreement are similar to the Telco agreement.
COMPETITION AND REGULATORY ENVIRONMENT
Telco is taking measures to prepare for competition in its traditional
service territory. Upon passage of the Telecommunications Act of 1996 (the
Act), it became clear that Incumbent Local Exchange Carriers (ILECs) would
need to adjust local exchange service rates to better reflect the actual
cost of providing service. Traditionally, residential local exchange
service has been priced below cost, and has been subsidized through rates
charged to businesses, rates charged on toll calls and rates charged on
other enhanced services. Competition will largely eliminate the ability to
cross-subsidize customers and services in this manner.
Telco received a bona fide request on January 9, 1998, from US West
Communications, Inc. (US West) to negotiate an interconnection agreement.
After interconnection terms and conditions have been negotiated pursuant to
the Act, and the Nebraska Public Service Commission (NPSC) approves such
interconnection agreements, it is expected that US West will be in a
position to offer competitive local exchange services within the Company's
traditional ILEC market. On June 23, 1998, US West filed a petition with
the NPSC seeking permission to offer interLATA long distance service in
Nebraska. The NPSC is in the process of determining whether US West meets
Federal Communications Commission (FCC) requirements for offering long
distance service. On August 3, 1998, Telco received a second bona fide
request for interconnection. This request came from Nebraska
Telecommunications and Technology (NTT), which is a consortium of small
Nebraska local exchange carriers. This request will be handled on a
similar time frame as that received from US West. Other carriers may make
such requests to seek to establish Competitive Local Exchange Carrier
(CLEC) operations in Telco's operating area in the future.
Since 1986, Nebraska law has provided that ILECs may raise basic local
exchange service rates by as much as 10% per year without regulatory review
unless a sufficient number of subscriber petitions are filed with the NPSC.
Telco invoked this statute in 1997, raising residential local exchange
service rates by 10%. In 1997, legislation was passed which allowed ILECs
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<PAGE>
to raise residential service rates more than 10% in a twelve-month period
provided that rates for other services are lowered so that the overall rate
changes do not increase total company revenues by more than 1%.
On March 10, 1998, Telco received approval of its application with the NPSC
to increase Telco's residential basic local service rates to $16.35 per
month (previous residential rates ranged from $11.00 to $13.75 per month).
This increase was implemented on May 16, 1998. Approval of this rate
increase is important to Telco's efforts to respond to the competitive
environment required by the Act. Competitive market forces require Telco
to bring prices for residential basic local exchange service closer to
actual cost, and to lower rates for business customers who are especially
attractive to potential competitors. The additional revenue generated by
such increase was offset by (a) reductions in Telco's business basic local
service rates to $31.40 per month (previous business rates ranged from
$33.00 to $39.00 per month); (b) the elimination of a separate touch tone
charge ($.50 and $1.50 per month for residential and business customers,
respectively); (c) the reduction of day time intraLATA toll rates from $.18
per minute to $.13 per minute; and (d) the reduction of intraLATA access
charges by approximately $900,000 per year. Telco has estimated that the
net impact of all these changes will be immaterial to revenues. Revenue
neutrality is required by Nebraska Statute 86-803(9), under which Telco
filed its rate application.
Other regulatory issues continue to evolve at the state and federal levels.
The Act adopted regulations requiring that universal service funding
subsidies from low-cost customers to high-cost (mostly rural) customers
must be made explicit and competitively neutral. Also, the FCC has ruled
that 75% of the responsibility for funding universal service must be borne
by the states. Telco and other ILECs in sparsely populated rural states
have expressed concern about this policy decision to the FCC and to members
of Congress. The FCC released a Public Notice on April 15, 1998, to examine
this and other issues regarding universal service support.
Access reform is a major policy initiative affecting Telco. Access rates
are the fees that ILECs charge long distance carriers for use of their
network. The FCC issued an order in May 1997 that reduces access rates
over a period of time on interstate calls by basing such rates on forward-
looking incremental costs. For some time, a movement has been underway to
enable the NPSC to establish a similar rate structure for access charges on
intrastate calls. AT&T launched a ballot initiative to attempt to drive
Nebraska's intrastate access charges to actual cost. Telco, as well as all
other local exchange carriers in Nebraska, opposed the initiative because
it proposed to strip all subsidies out of intrastate access charges without
creating an alternative mechanism for subsidizing local service in rural
areas. On November 3, 1998, AT&T's ballot initiative failed, gathering 42%
of the vote compared with 58% against. While Telco still supports access
reform at the state level, the defeat of the ballot initiative was critical
in that it allows the issue to be handled by the NPSC in conjunction with
the creation of a state universal service fund.
The NPSC has determined that the issues of access reform and universal
service should be handled concurrently in a single "super docket". After
receiving comments from interested parties, on October 2, 1998, the NPSC
issued its Preliminary Findings and Conclusions (the Order) in the "super
docket" which had been assigned Application No. C-1628. The Order
contained eight questions on which the NPSC requested responses by
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<PAGE>
interested parties by October 20. Also, on October 20, pre-filed testimony
was required to be submitted to the NPSC in connection with the public
hearings on Applications No. C-1628 which were held on October 27-29, 1998.
While the Order is only a proposal and is non-binding, as written, the
Order would require Telco to lower intrastate access charges to actual cost
over a two-year transition period, and would create a Nebraska Universal
Service Fund (NUSF) as a revenue replacement mechanism. In order to
participate in NUSF, Telco would need to raise its basic local service rate
from $16.35 to $18.00 per month. The Order contemplates funding NUSF
through a surcharge on interstate and intrastate telecommunications service
billings to customers in Nebraska. While this surcharge would apply to
many wireless, data communications, and other telecommunications services
provided by Telco, the surcharge would be competitively neutral and should
not adversely impact Telco's market share or the demand for such services.
The NPSC has allowed interested parties until November 20 to submit written
briefs setting forth final recommendations concerning existing provisions
or proposed modifications in the Order. Thereafter, a final order will be
issued by the NPSC, perhaps in December 1998 or January 1999.
Wireless telecommunications service continues to be an increasingly
important sector of the Company's business. The FCC has taken steps to
increase the number of wireless competitors by auctioning radio spectrum
for Personal Communications Services (PCS). As many as seven new wireless
competitors are allowed in each market.
The FCC has also imposed new requirements for the Company to separate
wireless operations from Telco. Currently, the cellular license for the
Lincoln MSA is held by Telco; however, the Company is working toward moving
the license to Cellular.
MANAGED CELLULAR MARKETS
The Company owns and manages cellular markets providing service in the
Lincoln MSA and 89 of the other 92 counties in Nebraska. These markets
contain approximately 231,000 and 848,000 POPs (potential customers),
respectively. OCLP, a limited partnership doing business as Aliant
Cellular-Omaha, provides service in the Omaha MSA containing approximately
634,000 POPs. The Company has an interest (50% prior to February 27, 1998
and 100% thereafter) in OCGP which owned 55.82% of OCLP at March 31, 1998,
and manages that operation. On April 28, 1998, OCGP completed the purchase
of the interests of several of the limited partners for approximately $24
million, increasing its interest in OCLP from 55.82% to 81.75%. Beginning
in March 1998, Omaha's operating revenues and expenses are consolidated
with those of the Company's other activities, and the net results from
Omaha attributable to other partners are separately reported as minority
interest. Prior to March 1998, the Company's portion of Omaha's net
results was included with income from investments.
As of September 30, 1998, there were 289,782 customer lines in service in
these three markets, compared to 244,684 a year earlier. Penetration rates
(subscribers compared to POPs) achieved were 24.0% in Lincoln, 17.2% in the
rural areas of Nebraska, and 13.9% in Omaha.
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<PAGE>
Earnings before interest, income taxes, depreciation and amortization
(EBITDA) totaled $16,302,000 and $45,649,000 for the third quarter and nine
months of 1998, respectively, compared to $13,872,000 and $39,653,000 in
the same periods in 1997. Net operating income was $13,133,000 and
$34,604,000, an increase of $2,756,000 (26.6%) and $4,965,000 (16.8%).
In addition, the Company at September 30, 1998 had a 23.1% interest in, and
manages, cellular operations in Iowa Rural Service Area 1 (RSA 1), which is
contiguous to Omaha and to the Company's telephone operating area in
Nebraska. The ownership is held in part by OCLP, and that part will be
sold during the fourth quarter of 1998 to the other Iowa RSA 1 partners as
a result of first rights of refusal relating to the Company's purchase of
OCGP in February 1998. After the sale the Company will have a 9.2%
interest remaining in RSA 1.
ACCOUNTING PRONOUNCEMENTS
FAS 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997. FAS 131 establishes standards for
the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in annual financial
reports issued to shareholders. It also established standards for related
disclosures about products and services, geographic areas, and major
customers. FAS 131 is effective for periods beginning after December 15,
1997. The Company anticipates adopting this accounting pronouncement in
the fourth quarter of 1998; however, management believes it will not have a
significant impact on the Company's segment reporting.
FAS 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, was issued in February 1998. FAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does
not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits
to the extent practicable and requires additional information on changes in
the benefit obligations and fair values of plan assets that will facilitate
financial analysis. FAS 132 is effective for periods beginning after
December 15, 1997. Management believes that adopting this accounting
pronouncement in 1998 will not have a significant effect on the level of
disclosures in its consolidated financial statements.
FAS 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998. FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. FAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company anticipates
adopting this accounting pronouncement in 2000; however, management
believes it will not have a significant impact on the Company's annual
consolidated financial statements.
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<PAGE>
YEAR 2000
The Company uses software and related technologies throughout its business
that could be affected by the date change in the year 2000 (Y2K). An
inventory of resources of both Information Technology (IT) and non-
Information Technology (non-IT) systems was initially made during 1997.
This inventory is maintained and updated as resources are found that may
have date functionality that could be affected by dates after December 31,
1999. Included in the IT category would be mainframe, mini/micro,
workstation, data exchange, and telephone switch platforms. Non-IT systems
include items such as environmental, security, motor vehicle, and
elevators.
Awareness and assessment phases have been completed for all significant IT
issues. Renovation of all application coding updates and changes is
scheduled to be completed by March 31, 1999. Currently, there are no known
exceptions to meeting the targeted completion date. All mainframe
applications are in the process of being modified and tested. A Y2K ready
replacement system for Telco's plant tracking and assignment system is
being developed and tested and is scheduled to be fully installed during
1999. As an added measure, the current plant assignment system is also
being adapted to a Y2K ready format. All workstation platforms are being
replaced with hardware and software that is Y2K compliant before June 1999.
All telephone switches are being upgraded or replaced before year-end 1999,
with the last switch upgrade scheduled for November 1, 1999.
Most of the effort has been completed for non-IT systems. A review of
these items disclosed few items with date rollover issues. The target date
to resolve non-IT issues is December 31, 1998. All identified non-IT items
have a contingency plan in place in the event a resolution is not reached
prior to January 1, 2000.
All major service providers have been solicited concerning their progress
in compliance with Y2K date issues. Service providers include utilities
and manufacturers of IT and non-IT equipment. Correspondence has been sent
to all customers who have Aliant telecommunication systems, along with
manufacturer information on the equipment's ability to handle date issues.
The Company has responded to customer and regulatory inquiries on the
status of its ability to handle Y2K issues.
The current estimate of total Y2K compliance costs is approximately 26,000
person hours at an approximate cost of $1.4 million with 19,600 hours of
labor (at a cost of $1.0 million) completed to date. Virtually all of the
Y2K compliance costs are due to reprogramming, since all switching
equipment will be Y2K compliant without additional significant cost to the
Company. The estimated costs are not expected to significantly affect
operating results or the financial condition of the Company in 1998 or
1999.
The Company bears a significant risk if programming changes are either
overlooked or not completed by January 1, 2000. A significant risk is
random embedded chip failures throughout the Company's network, which may
be hard to find, troubleshoot, and replace. Additional test equipment,
replacement parts, and labor hours may be required to address this risk.
Another concern is short-term power interruptions. Existing and enhanced
alternative power generation and battery backup should minimize power
concerns.
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<PAGE>
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This filing may contain "forward-looking" statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as amended.
These statements contain potential risks and uncertainties that may cause
the actual results, performance, achievements, plans, and objectives of the
Company to be materially different from any future results, performance,
achievements, plans, and objectives expressed or implied by such forward-
looking statements.
Important assumptions and other important factors that could cause actual
results to differ from those set forth in the forward-looking information
are discussed in this report and in other reports filed by the Company with
the Securities and Exchange Commission and include, but are not limited to:
changes in the national and local economic and market conditions;
demographic changes; the size and growth of the overall telecommunications
market; changes in competition in markets in which the Company operates;
advances in telecommunications technology; changes in the
telecommunications regulatory environment; the need for regulatory approval
to make acquisitions or undertake certain other activities, including rate
re-balancing; changes in business strategy or development plans; pending
and future litigation; availability of future financing; start-up of
Personal Communications Services operations; new product and service
development and introductions; changes in consumer preferences; and
unanticipated changes in growth in cellular customer, penetration rates,
churn rates, and the mix of products and services offered in the Company's
markets. The Company undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future
events or otherwise.
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<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
Effective October 1, 1998, the Company settled a federal trademark
infringement lawsuit it filed against a Wisconsin company, known as
Interstate Energy Corporation, which intended to change its name to Alliant
Corp. Under the terms of the settlement agreement, Interstate has agreed
to change its name to Alliant Energy Corporation. Interstate has also
agreed to certain restrictions respecting the future use of its Alliant
Energy marks. The Company will recognize other non-operating income of
approximately $3.4 million, net of legal fees and related expenses, in the
fourth quarter of 1998.
Item 2 - Changes in Securities
- ------------------------------
Effective May 15, 1998, the 5% preferred stock ($100 par value per share)
of Telco was redeemed in its entirety. The redemption price was $105.63
per share (par plus a redemption premium of $5.00 per share plus the
accrued dividend).
Item 5 - Other Information
- --------------------------
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended (Rule 14a-8), for
inclusion in the Company's proxy statement for its 1999 Annual Meeting of
Shareholders is November 20, 1998. Notice to the Company of a shareholder
proposal submitted otherwise than pursuant to Rule 14a-8 will be considered
untimely if received by the Company before January 18, 1999 or after
February 12, 1999, and the persons named in the proxies solicited by the
Board of Directors of the Company for its 1999 Annual Meeting of
Shareholders may exercise discretionary voting power with respect to any
such proposal as to which the Company does not receive timely notice.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
27. Financial Data Schedule (filed electronically with the SEC)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, Aliant Communications Inc., has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Aliant Communications Inc.
--------------------------
(Registrant)
November 16, 1998 /s/ Robert L. Tyler
Date..................... ......................................
(Signature)
Robert L. Tyler, Senior Vice President-
Chief Financial Officer
November 16, 1998 /s/ Michael J. Tavlin
Date..................... ......................................
(Signature)
Michael J. Tavlin, Vice President-
Treasurer
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<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
EXHIBIT INDEX TO FORM 10-Q
Exhibit No. Title Page No.
- ----------- ----- --------
27 Financial Data Schedule *
Aliant Communications Inc.
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