<PAGE>
UNITED STATES
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) March 20, 1998
--------------
Aliant Communications Inc.
-----------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 0-10516 47-0632436
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1440 M Street, Lincoln, Nebraska 68508
--------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (402) 436-5289
--------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
- ------ ------------
Included herewith are the Consolidated Financial Statements of Aliant
Communications Inc. for the years ended December 31, 1997, 1996 and 1995,
along with the Independent Auditor's Report thereon of KPMG Peat Marwick.
Also included is the 1997 Management's Discussion and Analysis of Financial
Condition and Results of Operations for Aliant Communications Inc.
Attached hereto as Exhibit 23 is the consent of KPMG Peat Marwick with
respect to such financial statements.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document may contain "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995. All statements, other than
historical facts, that address activities, events, or developments that the
Company expects or anticipates will or may occur in the future, including
such things as expansion and growth of the Company's business, acquisitions,
capital expenditures and the Company's business strategy are forward-looking
statements. These statements contain potential risks and uncertainties;
therefore, actual results may differ materially. The Company undertakes no
obligation to update publicly any forward-looking statements whether as a
result of new information, future events or otherwise.
Important assumptions and other important factors that could cause actual
results to differ from those set forth in the forward-looking information
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 customers, penetration rates,
churn rates and the mix of products and services offered in the Company's
markets.
<PAGE>
ALIANT COMMUNICATIONS INC.
Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
KPMG Peat Marwick LLP
233 South 13th Street, Suite 1600
Lincoln, NE 68508-2041
Two Central Park Plaza
Suite 1501
Omaha, NE 68102
Independent Auditors' Report
The Stockholders and Board of Directors
Aliant Communications Inc.:
We have audited the accompanying consolidated balance sheets of Aliant
Communications Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the years in the three-year period ended December
31, 1997. 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 Aliant
Communications Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the
Company discontinued applying the provisions of Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," in 1995.
/s/ KPMG Peat Marwick LLP
February 6, 1998
1
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<TABLE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
Assets 1997 1996
(Dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,867 25,290
Temporary investments, at cost 3,693 6,687
Receivables, net of allowance for doubtful receivables
of $627,000 in 1997 and $1,014,000 in 1996 50,374 39,927
Materials, supplies and other assets 10,661 9,314
------- -------
Total current assets 92,595 81,218
------- -------
Property and equipment 589,314 547,499
Less accumulated depreciation and amortization 330,359 292,479
------- -------
Net property and equipment 258,955 255,020
------- -------
Investments and other assets 57,765 50,057
Deferred charges 20,040 13,480
Goodwill, net of amortization 118,287 121,627
------- -------
Total assets $ 547,642 521,402
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 11,000 -
Current installments of long-term debt 8,000 7,282
Accounts payable and accrued expenses 48,829 48,087
Income taxes payable 89 3,522
Dividends payable 6,208 5,883
Advance billings and customer deposits 10,656 8,820
------- -------
Total current liabilities 84,782 73,594
------- -------
Deferred credits:
Unamortized investment tax credits 1,209 1,929
Deferred income taxes 6,110 7,056
Other 54,044 52,677
------- -------
Total deferred credits 61,363 61,662
------- -------
Long-term debt 94,000 103,080
Preferred stock, 5%, redeemable 4,499 4,499
Stockholders' equity 302,998 278,567
------- -------
Total liabilities and stockholders' equity $ 547,642 521,402
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
2
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<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
(Dollars in thousands except per share data)
<S> <C> <C> <C>
Operating revenues:
Telephone:
Local network services $ 80,918 74,878 71,491
Access services 57,621 56,746 53,653
Long distance services 31,375 32,241 31,086
Other wireline communications services 29,959 25,561 23,686
------- ------- -------
Total telephone 199,873 189,426 179,916
Wireless communications services 76,710 63,696 34,121
Equipment sales and services 19,176 18,930 18,768
Intercompany (9,431) (7,827) (7,113)
------- ------- -------
Total operating revenues 286,328 264,225 225,692
------- ------- -------
Operating expenses:
Depreciation and amortization 49,525 46,404 37,422
Other operating 152,580 143,646 120,627
Restructuring charges - - 21,611
Taxes, other than payroll and income 4,282 4,200 3,184
Intercompany (9,431) (7,827) (7,113)
------- ------- -------
Total operating expenses 196,956 186,423 175,731
------- ------- -------
Operating income 89,372 77,802 49,961
------- ------- -------
Nonoperating income and expense:
Income from interest and other investments 8,297 6,428 8,033
Interest expense and other deductions 10,313 9,776 10,518
------- ------- -------
Net nonoperating expense 2,016 3,348 2,485
------- ------- -------
Income before income taxes and
extraordinary item 87,356 74,454 47,476
Income taxes 34,317 29,500 18,447
------- ------- -------
Income before extraordinary item 53,039 44,954 29,029
Extraordinary item - - (16,516)
------- ------- -------
Net income 53,039 44,954 12,513
Preferred dividends 225 225 225
------- ------- -------
Earnings available for common shares $ 52,814 44,729 12,288
======= ======= =======
(Continued)
3
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
(Dollars in thousands except per share data)
Basic and diluted earnings per common share:
Income before extraordinary item $ 1.46 1.22 .84
Extraordinary item - - (.48)
---- --- ----
Basic and diluted earnings
per common share $ 1.46 1.22 .36
==== === ====
Weighted average common shares outstanding
(in thousands) 36,260 36,602 34,360
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity:
Common stock of $.25 par value per share.
Authorized 100,000,000 shares:
Beginning of year, issued 36,958,122
shares in 1997; 37,247,522 shares in
1996; and 32,980,376 shares in 1995 $ 9,240 9,312 8,245
Issuance of 4,267,146 shares in 1995 - - 1,067
Purchase of 383,155 shares in 1997 and
289,400 shares in 1996 (96) (72) -
------- ------- -------
End of year, issued 36,574,967 shares in
1997, 36,958,122 shares in 1996; and
37,247,522 shares in 1995 9,144 9,240 9,312
------- ------- -------
Premium on common stock:
Beginning of year 102,257 106,822 37,481
Issuance of common stock - - 69,341
Purchase of common stock (6,509) (4,565) -
------- ------- -------
End of year 95,748 102,257 106,822
------- ------- -------
Retained earnings:
Beginning of year 174,172 151,754 159,143
Net income 53,039 44,954 12,513
Dividends declared:
5% cumulative preferred - $5.00 per share (225) (225) (225)
Common - $.66 per share in 1997; $.61 per
share in 1996; and $.57 per share in 1995 (23,922) (22,311) (19,677)
------- ------- -------
End of year 203,064 174,172 151,754
------- ------- -------
Treasury stock, at cost:
Beginning of year, 543,382 shares in 1997;
625,088 shares in 1996; and 631,636 shares
in 1995 (7,102) (8,343) (8,434)
Sales of 154,995 shares in 1997; 81,706 shares
in 1996; and 61,548 shares in 1995 2,144 1,241 948
Purchase of 55,000 shares in 1995 - - (857)
------- ------- -------
End of year, 388,387 shares in 1997; 543,382
shares in 1996; and 625,088 shares in 1995 (4,958) (7,102) (8,343)
------- ------- -------
Preferred stock, $.50 par value per share.
Authorized 20,000,000 shares; none issued - - -
------- ------- -------
Total stockholders' equity $ 302,998 278,567 259,545
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 53,039 44,954 12,513
------ ------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 49,860 46,435 37,454
Extraordinary item - - 16,516
Restructuring charges - - 21,611
Net change in investments and other assets (5,352) (3,638) (1,641)
Deferred income taxes (946) (1,056) (5,028)
Changes in assets and liabilities resulting
from operating activities:
Receivables (10,447) (2,498) (5,826)
Other assets (7,935) (672) (6,815)
Accounts payable and accrued expenses 742 (547) (1,283)
Other liabilities (951) 3,517 (716)
------ ------ ------
Total adjustments 24,971 41,541 54,272
------ ------ ------
Net cash provided by operating
activities 78,010 86,495 66,785
------ ------ ------
Cash flows from investing activities:
Expenditures for property and equipment (49,733) (43,692) (45,163)
Net salvage on retirements (334) 988 2,141
------ ------ ------
Net capital additions (50,067) (42,704) (43,022)
Proceeds from sale of investments and other
assets 344 646 390
Purchases of investments and other assets (3,059) (906) (3,110)
Acquisition of Aliant Cellular, net - - (297)
Purchases of temporary investments (1,331) (10,469) (4,515)
Maturities and sales of temporary investments 4,325 16,863 16,069
------ ------ ------
Net cash used for investing activities (49,788) (36,570) (34,485)
------ ------ ------
Cash flows from financing activities:
Dividends to stockholders (23,822) (22,203) (18,937)
Proceeds from issuance of note payable 11,000 - 3,350
Proceeds from long-term debt 11,000 - -
Retirement of notes payable - (10,000) (16,350)
Net purchases and sales of common and
treasury stock (4,461) (3,396) 91
Payments of long-term debt (19,362) (10,187) (1,341)
------ ------ ------
Net cash used in financing activities (25,645) (45,786) (33,187)
------ ------ ------
(Continued)
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
(Dollars in thousands)
Net increase (decrease) in cash and cash
equivalents 2,577 4,139 (887)
Cash and cash equivalents at beginning of year 25,290 21,151 22,038
------ ------ ------
Cash and cash equivalents at end of year $ 27,867 25,290 21,151
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Organization
--------------------------------------------
The consolidated financial statements reflect the accounts of Aliant
Communications Inc. (the Company), a holding company, and its wholly-owned
subsidiaries: Aliant Communications Co. (Telco), Aliant Cellular Inc.
(Aliant Cellular), Aliant Systems Inc. (Aliant Systems), Prairie
Communications, Inc. (Prairie), Aliant Midwest Inc. (Aliant Midwest) and
Aliant Network Services Inc. (Aliant Network).
Telco, the Company's principal subsidiary, provides local and long
distance telephone service in 22 southeastern counties of Nebraska and
cellular telecommunications services in the Lincoln, Nebraska Metropolitan
Statistical Area (MSA). Aliant Cellular provides cellular
telecommunications services in 89 of the 93 counties in Nebraska (see note
3). Aliant Systems sells nonregulated telecommunications products and
services, long distance telephone services in and beyond Telco's local
service territory and provides telephone answering services. Prairie has a
50% investment in a general partnership which manages a limited partnership
providing cellular telecommunications services in the Omaha, Nebraska MSA.
The limited partnership is conducting business as Aliant Cellular - Omaha.
The investment in the partnership is accounted for using the equity method
of accounting (see note 6). Aliant Midwest operates as a competitive local
exchange carrier (CLEC). Aliant Midwest began limited operations outside
Telco's traditional service area in June 1997 and is providing service to
certain residential and business customers in the Omaha metropolitan area
and in Grand Island, Nebraska. Aliant Network was incorporated in February
1997 to build and operate fiber optic transmission facilities outside of
Telco's traditional service area whereby capacity on the network will be
leased to long distance and wireless carriers.
Net earnings applicable to intercompany transactions between companies
have been eliminated.
Effective December 31, 1995, Telco discontinued accounting for its
operations under the provisions of Statement of Financial Accounting
Standards (FAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation" (see note 2).
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 other property and equipment is sold or otherwise disposed of, the
8
<PAGE>
gain or loss is recognized in operations. Telco capitalizes estimated
costs of debt and equity funds used for construction purposes. No
significant costs were capitalized during the three years ended December
31, 1997. 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 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 and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Investment tax credits related to telephone property and equipment
were deferred and are being taken into income over the estimated useful
lives of such property and equipment.
Retirement Benefits
-------------------
Telco has a noncontributory qualified defined benefit pension plan
which covers substantially all employees of the Company. The Company also
has a qualified defined contribution profit-sharing plan which covers
substantially all employees. Costs of the pension and profit-sharing plans
are funded as accrued.
Revenue Recognition
-------------------
Telephone and wireless revenues are recognized when earned and are
primarily derived from usage of the Company's network and facilities. For
all other operations, revenue is recognized when products are delivered or
services are rendered to customers.
Earnings Per Common Share
-------------------------
The Company adopted FAS No. 128, "Earnings Per Share," effective
December 31, 1997, which specifies the computation, presentation, and
disclosure requirements for earnings per share. Basic earnings per common
share are computed by dividing the net income less preferred dividends by
the weighted average common shares outstanding during the periods. The
dilutive effect of the Company's potential common shares outstanding, which
are shares issuable under the Company's stock option program, is
insignificant. Therefore, the diluted earnings per common share are the
same as the basic earnings per common share in 1997, 1996 and 1995.
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
9
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months or less when purchased to be cash equivalents. Cash equivalents of
approximately $23.5 million and $17.5 million at December 31, 1997 and
1996, respectively, consist of short-term fixed income securities.
Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(2) EXTRAORDINARY ITEM - DISCONTINUANCE OF REGULATORY ACCOUNTING
PRINCIPLES
FAS No. 71 generally applies to regulated companies that meet certain
requirements, including a requirement that a company be able to recover its
costs by charging its customers rates prescribed by regulators and that
competition will not threaten the recovery of those costs. Having achieved
price regulation and recognizing potential increased competition, the
Company concluded, in the fourth quarter of 1995, that the principles
prescribed by FAS No. 71 were no longer applicable.
As a result of the Company's conclusion, a noncash, extraordinary
charge of approximately $16.5 million, net of an income tax benefit of
approximately $9.4 million, was recorded by Telco in December 1995. The
following table summarizes the extraordinary charge.
Pre-tax After-tax
(Dollars in thousands)
Increase to accumulated depreciation $22,069 13,305
Elimination of net regulatory assets 3,799 3,211
------ ------
Total extraordinary charge $25,868 16,516
====== ======
The increase to accumulated depreciation of approximately $13.3
million after tax was necessary as the estimated useful lives prescribed by
regulators were not appropriate considering the rapid rate of technological
change in the telecommunications industry. The increase to accumulated
depreciation was determined by performing a study which identified
inadequate accumulated depreciation levels by individual asset categories.
The estimated useful lives of these individual asset categories were
shortened to more closely reflect economically realistic lives.
On adoption of FAS No. 109, "Accounting for Income Taxes," in 1993,
adjustments were required to adjust excess deferred tax levels to the
currently enacted statutory rates as regulatory liabilities and regulatory
assets were recognized on the cumulative amount of tax benefits previously
flowed through to ratepayers. These tax-related regulatory assets and
liabilities were grossed up for the tax effect anticipated when collected
at future rates. At the time the application of FAS No. 71 was
discontinued, the tax-related regulatory assets and regulatory liabilities
10
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were eliminated and the related deferred taxes were adjusted to reflect
application of FAS No. 109 consistent with unregulated entities.
(3) ACQUISITION OF ALIANT CELLULAR
In 1995, the Company consummated a merger with Aliant Cellular,
formerly known as Nebraska Cellular Telephone Corporation. The Company
issued a total of 4,267,146 shares of its common stock and paid cash of
approximately $61.6 million to acquire the remaining approximately 84% of
Aliant Cellular's common stock not previously owned by the Company. The
value of the common stock issued was approximately $70.4 million at date of
acquisition. Aliant Cellular provides cellular telecommunications services
outside the Lincoln and Omaha metropolitan areas in Nebraska.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Aliant Cellular have been included in the
Company's consolidated financial statements from July 1, 1995. The excess
of the purchase price over the fair value of the net identifiable assets
acquired, of approximately $125 million, has been recorded as goodwill and
is being amortized on a straight-line basis over forty years. Acquisition
costs were approximately $983,000 and are being amortized on a straight-
line basis over ten years. The Company recognized approximately $3.3
million, $3.2 million and $1.6 million of goodwill amortization in 1997,
1996 and 1995, respectively.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Aliant Cellular as if the
acquisition had occurred on January 1, 1995, after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense
on debt related to the acquisition, and related income tax effects. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and Aliant Cellular
constituted a single entity during such period.
Year ended
December 31, 1995
-----------------
(Dollars in thousands, except per share data)
Total operating revenues $ 248,602
=======
Income before extraordinary item $ 29,814
=======
Net income $ 13,298
=======
Basic and diluted earnings per common share $ .36
=======
11
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(4) PROPERTY AND EQUIPMENT
The following table summarizes the property and equipment at December
31, 1997 and 1996.
1997 1996
---------------------- ---------------------
Accumulated Accumulated
depreciation and depreciation and
Classifications Cost amortization Cost amortization
(Dollars in thousands)
Land $ 3,050 - 2,968 -
Buildings 37,831 15,064 36,435 13,610
Equipment 524,050 309,129 489,386 273,514
Motor vehicles and
other work equipment 13,531 6,166 12,431 5,355
------- ------- ------- -------
Total in service 578,462 330,359 541,220 292,479
Under construction 10,852 - 6,279 -
------- ------- ------- -------
Total property
and equipment $ 589,314 330,359 547,499 292,479
======= ======= ======= =======
The composite depreciation rate for property and equipment was 8.0% in
1997, 8.3% in 1996 and 7.5% in 1995. The rate does not include the
extraordinary charge recognized in 1995.
Construction expenditures for 1998 are expected to approximate $80
million. The Company anticipates funding construction from operating
activities, existing temporary investments, and debt financings.
Substantially all telephone property and equipment, with the exception
of motor vehicles, is mortgaged or pledged to secure Telco's first mortgage
bonds. Under certain circumstances, as defined in the bond indenture, all
assets become subject to the lien of the indenture.
(5) TEMPORARY INVESTMENTS
All of the Company's investments in debt and equity securities are
classified as available for sale. The Company does not invest in
securities classified as held to maturity or trading securities. The
following sets forth certain fair value information.
12
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Gross unrealized Estimated
Amortized ---------------- market
1997 cost Gains Losses value
(Dollars in thousands)
U. S. government obligations $ 800 13 - 813
U. S. government agency
obligations 2,467 36 (31) 2,472
Corporate debt securities 426 2 (19) 409
----- -- --- -----
$ 3,693 51 (50) 3,694
===== == === =====
1996
U. S. government obligations 2,663 14 (12) 2,665
U. S. government agency
obligations 3,400 32 (60) 3,372
Corporate debt securities 624 15 (32) 607
------ --- --- ------
$ 6,687 61 (104) 6,644
====== === === ======
The net unrealized gain (loss) on investments available for sale is
not reported separately as a component of stockholders' equity due to its
insignificance to the consolidated balance sheets at December 31, 1997 and
1996.
The amortized cost and estimated market value of debt securities at
December 31, 1997 and 1996, by contractual maturity, are shown below.
Expected maturities will differ from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
1997 1996
-------------------- -------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
(Dollars in thousands)
Due after three months
through five years $ 1,356 1,379 1,182 1,192
Due after five years
through ten years 1,827 1,792 3,801 3,725
Thereafter 510 523 1,704 1,727
----- ----- ------ ------
$ 3,693 3,694 6,687 6,644
===== ===== ====== ======
The gross realized gains and losses on the sale of securities were
insignificant to the consolidated financial statements for the years ended
December 31, 1997, 1996 and 1995.
13
<PAGE>
(6) EQUITY INVESTMENTS
Prairie owns a 50% interest in Omaha Cellular General Partnership
(OCGP). The remaining 50% interest in OCGP is owned by 360 Communications
Company of Nebraska, Inc. (360 Nebraska). OCGP is the general partner of
and holds approximately 56% 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
Aliant Cellular - Omaha. Prairie is the managing partner of OCGP.
Prairie purchased its 50% interest in OCGP from 360 Communications
Company (360) f/k/a Centel Cellular Company in 1991 for $11.9 million.
The carrying value of the investment was approximately $1.8 million at
December 31, 1997. 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 $47.7 million at December 31, 1997. This note has an
effective interest rate of 11.94% and is due December 31, 1998.
On December 17, 1997, the Company obtained board approval for Prairie
to assign and transfer to Aliant Cellular its option to purchase from 360
Nebraska the remaining 50% interest in OCGP and the discounted note
receivable from OCGP. Aliant Cellular subsequently entered into a
definitive agreement with 360 to acquire its 50% interest in OCGP for
approximately $15 million and released 360 from its obligation pursuant to
the discounted note receivable from OCGP. The acquisition is expected to
be consummated in March 1998.
(7) REDEEMABLE PREFERRED STOCK
Telco has 5% preferred stock with $100 par value per share. The
preferred stock is cumulative, nonvoting, nonconvertible and redeemable
solely at Telco's option at $105 per share, for a liquidating amount of
$4,724,000, plus accrued dividends. There were 44,991 shares outstanding
for each of the years ended December 31, 1997, 1996 and 1995.
(8) 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 nonemployee 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.
Shares purchased in the open market for the Plan aggregated 86,250
shares, 100,494 shares and 115,385 shares during 1997, 1996 and 1995,
respectively. Expenses incurred related to the Plan were approximately
$28,100, $32,300 and $31,600 in 1997, 1996 and 1995, respectively. There
are no shares reserved for issuance under the Plan.
14
<PAGE>
(9) LONG-TERM DEBT AND NOTE PAYABLE
Long-term debt consists of the following at December 31:
1997 1996
(Dollars in thousands)
9.91% First Mortgage Bonds due June 1, 2000
with interest payable semiannually $ 44,000 44,000
Variable rate term loan due in quarterly
installments until July 6, 2000. Interest
accrues on a LIBOR-based pricing formula
(6.41% at December 31, 1997) and is paid
periodically, but at least semiannually 26,000 30,000
Variable rate revolving loan with principal due
July 6, 1999 and interest due monthly. Interest
accrues on a LIBOR-based pricing formula (6.30% at
December 31, 1997) and is paid periodically, but
at least semiannually. The maximum borrowing limit
is $40,000,000 32,000 23,000
Variable rate Rural Telephone Finance
Cooperative (RTFC) loan agreements paid in 1997 - 13,362
------- -------
Total long-term debt 102,000 110,362
Less current installments of long-term debt 8,000 7,282
------- -------
Long-term debt, excluding current
installments $ 94,000 103,080
======= =======
The approximate annual aggregate debt maturities for the three years
subsequent to December 31, 1997 are as follows: 1998, $8,000,000; 1999,
$42,000,000; and 2000, $52,000,000.
The Company uses interest rate swap agreements and an interest rate
collar arrangement to manage the potential impact of changes in interest
rates on a portion of its variable rate long-term debt.
As to the $26 million variable rate five-year amortizing term loan,
the Company has used an interest rate swap agreement, with a notional
amount of $26 million, to effectively convert its variable interest rate
exposure to a fixed rate of 6.37%. At December 31, 1997, the current
interest rate payable to the Company was 6.24% under the swap agreement.
The swap agreement expires at the time the loan matures.
As to the $40 million variable rate three-year nonamortizing revolving
credit facility, against which $32 million was drawn as of December 31,
1997, the Company has used a combination of an interest rate swap
agreement, with a notional amount of $15 million, and an interest rate
collar arrangement, with a notional amount of $15 million, to effectively
convert a portion of its variable interest rate exposure to a fixed rate of
6.24%. At December 31, 1997, the current interest rate payable to the
15
<PAGE>
Company under the swap agreement was 6.21%. The interest rate collar
arrangement enables the Company to establish a predetermined interest rate
range for a portion of the loan. This range is contractually established
with a floor rate of 4.67% and a ceiling rate of 8.50%. The arrangement
enables the Company to receive from the counterparty (a major bank), on a
monthly basis, the amounts, if any, by which the Company's interest rate on
the loan exceeds 8.50%. Conversely, the arrangement requires the Company
to pay to the counterparty the amounts, if any, by which the Company's
interest rate on the loan falls below 4.67%. For the years ended
December 31, 1997 and 1996, no amounts were received or paid by the Company
related to this interest rate collar arrangement. The interest rate swap
agreement and the interest rate collar arrangement both expire on July 6,
1998. No net fees were paid or incurred by the Company for the swap
agreements or the collar arrangement.
The Company is exposed to credit losses in the event of nonperformance
by the counterparties to its interest rate swap agreements and its interest
rate collar arrangement. The Company anticipates, however, that the
counterparties will be able to fully satisfy their obligations under the
contracts.
During 1997, the Company negotiated two revolving credit agreements
providing for unrestricted and unsecured borrowings aggregating up to $75
million expiring July 6, 1998. Borrowings bear interest computed on a
LIBOR-based pricing formula. The Company has $64 million of unused
borrowings at December 31, 1997. Aliant Cellular has a variable rate line
of credit agreement with the RTFC for up to $2.5 million.
The First Mortgage Bonds contain various restrictions, including those
relating to payment of dividends by Telco to the Company. In management's
opinion, Telco has complied with all such requirements. At December 31,
1997, approximately $34.4 million of Telco's retained earnings were
available for payment of cash dividends under the most restrictive
provisions of such bond agreement.
The term and revolving loans also contain various restrictions,
including those relating to payment of dividends by the Company. In
management's opinion, the Company has complied with all such requirements.
Quarterly dividends are limited to $15 million plus 65% of consolidated net
income for each respective quarter.
16
<PAGE>
(10) INCOME TAXES
The components of income taxes from operations before the
extraordinary item follow:
1997 1996 1995
(Dollars in thousands)
Current:
Federal $ 30,395 26,425 23,128
State 5,588 4,898 2,496
------ ------ ------
Total current income tax expense 35,983 31,323 25,624
------ ------ ------
Investment tax credits (720) (767) (1,136)
------ ------ ------
Deferred:
Federal (774) (895) (5,529)
State (172) (161) (512)
------ ------ ------
Total deferred income tax expense
(benefit) (946) (1,056) (6,041)
------ ------ ------
Total income tax expense $ 34,317 29,500 18,447
====== ====== ======
Below is a reconciliation between the statutory federal income tax
rate and the Company's effective tax rate for each of the years in the
three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- ---------------
% 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 $ 30,575 35.0% $ 26,061 35.0% $ 16,617 35.0%
State income tax expense,
net of federal income
tax benefit 3,521 4.0 3,079 4.1 2,329 4.9
Amortization of goodwill 1,085 1.2 1,109 1.5 549 1.2
Nontaxable interest income (146) (.2) (65) (.1) (110) (.2)
Amortization of regulatory
deferred charges - - - - 1,914 4.0
Amortization of regulatory
deferred liabilities - - - - (1,790) (3.8)
Amortization of investment
tax credits (720) (.8) (767) (1.0) (1,136) (2.4)
Other 2 - 83 .1 74 .2
------ ---- ------ ---- ------ ----
Actual income tax
expense $ 34,317 39.2% $ 29,500 39.6% $ 18,447 38.9%
====== ==== ====== ==== ====== ====
</TABLE>
17
<PAGE>
The significant components of deferred income tax benefit attributable
to income from operations for the years ended December 31, 1997, 1996 and
1995 are shown on the following page.
1997 1996 1995
(Dollars in thousands)
Deferred tax expense (benefit)
(exclusive of the effects of
amortization below) $ (946) (1,056) (6,165)
Amortization of regulatory deferred
charges - - 1,914
Amortization of regulatory deferred
liabilities - - (1,790)
----- ----- -----
Deferred income tax expense
(benefit) $ (946) (1,056) (6,041)
=== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
1997 1996
(Dollars in thousands)
Deferred tax assets:
Accumulated postretirement benefit cost $ 18,802 18,251
Voluntary early retirement liability 5,928 6,337
Other 2,308 3,071
------ ------
Total gross deferred tax assets 27,038 27,659
Less valuation allowance - -
------ ------
Net deferred tax assets 27,038 27,659
------ ------
Deferred tax liabilities:
Property and equipment, principally due to
depreciation differences 29,649 32,007
Other 3,499 2,708
------ ------
Total gross deferred tax liabilities 33,148 34,715
------ ------
Net deferred tax liabilities $ 6,110 7,056
====== ======
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, 1997 and 1996 was necessary.
18
<PAGE>
(11) BENEFIT PLANS
Telco has a noncontributory defined benefit pension plan covering
substantially all employees of the Company 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.
The net periodic pension credit for 1997, 1996 and 1995 amounted to
$1,029,000, $608,000 and $1,389,000, respectively. The net periodic
pension credit is comprised of the following components as shown on the
following page.
1997 1996 1995
(Dollars in thousands)
Service cost - benefits earned during
the period $ 3,758 3,538 3,628
Interest cost on projected benefit
obligations 11,729 11,338 9,286
Actual return on plan assets (36,657) (19,287) (37,696)
Amortization and deferrals, net 20,141 3,803 23,393
------ ------ ------
Net periodic pension credit $ (1,029) (608) (1,389)
====== ====== ======
The table below summarizes the funded status of the pension plan at
December 31, 1997 and 1996.
1997 1996
(Dollars in thousands)
Actuarial present value of pension benefit
obligation:
Vested $ 136,571 134,110
Nonvested 17,674 18,357
------- -------
Accumulated pension benefit obligation $ 154,245 152,467
======= =======
Projected pension benefit obligation $ 174,077 169,759
Less, plan assets at market value 243,685 218,507
------- -------
Excess of plan assets over projected
pension benefit obligation 69,608 48,748
Unrecognized prior service cost 6,486 7,065
Unrecognized net gain (84,233) (63,548)
Unrecognized net asset being recognized
over 15.74 years (6,790) (8,223)
------- -------
Accrued pension cost $ (14,929) (15,958)
======= =======
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 were as follows:
19
<PAGE>
1997 and
1996 1995
Discount rate 7.1% 7.1%
Rate of salary progression 5.5 6.0
Expected long-term rate of return on assets 8.0 8.0
The Company has a defined contribution profit-sharing plan which
covers its employees who have completed one year of service. Union-
eligible employees became eligible to participate in the plan beginning
January 1, 1997. Through December 31, 1996, Aliant Cellular also had a
separate defined contribution plan for its eligible employees, however, the
board of directors approved the participation of eligible employees of
Aliant Cellular to become participants of the Company's plan effective
January 1, 1997. The assets and liabilities of Aliant Cellular's plan were
merged into the Company's plan in 1997. Under the Company plan,
participants may elect to deposit a maximum of 15% of their wages up to
certain limits. The Company matches 25% of the nonunion-eligible
participants' contributions up to 5% of their wages. The Company's 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 nonunion-
eligible participant's wage. The Company's matching contributions and
employee stock ownership fund contributions are used to acquire common
stock of the Company. The combined contributions to these plans totaled
$931,000, $851,000 and $745,000 for 1997, 1996 and 1995, respectively.
In July 1995, the Company announced its decision to reduce its
operator services work force from 140 to approximately 50 employees by the
end of 1995. The remaining work force handles the Company's long distance
operator service needs. The Company offered retirement and separation
incentives along with out-placement services to those employees affected by
the work force adjustment. As a result, the Company recognized a
restructuring charge of $1.5 million in 1995. The charge reduced the
Company's pension asset by $1.1 million for pension enhancements. The
charge included severance payments of approximately $400,000.
In addition, in November 1995, the Company announced its plans to
reduce its existing work force by offering a voluntary early retirement
program to eligible employees. The eligible employees were both management
and nonmanagement employees who were employed by the Company, Telco and
Aliant Systems. The Company implemented an enhancement to Telco's pension
plan by adding five years to both the age and net credited service for
eligible employees. The program also provided for the employees to receive
a lump-sum payment and a supplemental monthly income payment in addition to
their normal pension. As a result of 330 employees accepting this
voluntary early retirement offer, a reduction to Telco's pension asset was
recorded and the Company recognized a restructuring charge of $20.1 million
at December 31, 1995. The charge included pension enhancements of $23.4
million and curtailment gains of $3.3 million.
(12) POSTRETIREMENT BENEFITS
The Company sponsors a health care plan that provides postretirement
medical benefits and other benefits to employees who meet minimum age and
20
<PAGE>
service requirements upon retirement. Currently, substantially all of the
Company's employees may become eligible for those benefits if they have
fifteen years of service with normal or early retirement. The Company
accounts for these benefits during the active employment of the
participants.
The table on the following page presents the plan's status reconciled
with amounts recognized in the Company's consolidated balance sheet at
December 31, 1997 and 1996.
1997 1996
(Dollars in thousands)
Accumulated postretirement benefit obligation:
Retirees $ 40,903 33,212
Fully eligible active plan participants 14,626 12,227
Other active plan participants 6,783 7,026
------ ------
62,312 52,465
Unrecognized prior service cost (1,628) (1,597)
Unrecognized net loss (13,334) (4,919)
------ ------
Accrued postretirement benefit cost $ 47,350 45,949
====== ======
Net periodic postretirement benefit costs for the years ended December
31, 1997, 1996 and 1995 include the following components:
1997 1996 1995
(Dollars in thousands)
Service cost $ 553 497 386
Interest cost 4,069 4,038 3,929
Net deferral and amortization 98 145 206
----- ----- -----
Net periodic postretirement benefit
costs $ 4,720 4,680 4,521
===== ===== =====
For purposes of measuring the benefit obligation, the following
assumptions were used:
1997 1996
Discount rate 8.0% 8.0%
Health care cost trend rate 10.3 10.8
For purposes of measuring the benefit cost, the following assumptions
were used:
1997 1996 1995
Discount rate 8.0% 8.0% 8.0%
Health care cost trend rate 10.7 11.3 11.7
The health care cost trend rate of increase is assumed to decrease
gradually to 5.5% by the year 2004. The health care cost trend rate
assumptions have a significant effect on the amounts reported. For
21
<PAGE>
example, a one percentage point increase in the assumed health care cost
trend rate would increase the aggregate service and interest cost by
approximately $177,000 and increase the accumulated postretirement benefit
obligation by approximately $2.2 million.
(13) 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, $12.75 for the 1992 options, $16.50 for the 1995 options, $16.75
for the 1996 options and $19.75 for the 1997 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:
1997 1996 1995
Outstanding at January 1 195,337 146,412 100,150
Granted 46,750 58,400 53,450
Exercised (90,237) (9,475) (3,100)
Canceled (3,763) - (4,088)
------- ------- -------
Outstanding at December 31 148,087 195,337 146,412
======= ======= =======
Exercisable at December 31 12,682 92,237 98,412
======= ======= =======
Prior to January 1, 1996, the Company accounted for the stock options
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted FAS
No. 123, "Accounting for Stock-Based Compensation," which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, FAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in FAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of FAS No. 123.
22
<PAGE>
The per share weighted-average fair value of stock options granted
during 1997, 1996 and 1995 was $14.24, $4.44 and $7.45, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
1997 1996 1995
Expected dividend yield 2.17% 3.59% 2.70%
Risk-free interest rate 5.70% 6.41% 5.36%
Expected volatility factor 28.30% 27.00% 27.50%
Expected life in years 4.90 5.75 5.45
Since the Company applies APB Opinion No. 25 in accounting for its
plan, no compensation cost has been recognized for its stock options in the
financial statements. Had the Company recorded compensation cost based on
the fair value at the grant date for its stock options under FAS No. 123,
the Company's net income for 1997, 1996 and 1995 would have been reduced by
approximately $145,000, $72,000 and $40,000, respectively.
Pro forma net income reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under FAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected over
the options' vesting period of 4 years for the 1997, 1996 and 1995 options.
Compensation cost for options granted prior to January 1, 1995 is not
considered.
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, 7,974 shares, 8,867 shares and 10,836 shares of
restricted stock were awarded by the Company during 1997, 1996 and 1995,
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 1997, 1996 and 1995 net income for cash and
restricted stock awards were approximately $431,900, $277,100 and $392,700,
respectively. Pursuant to the plan, 2,000,000 shares of common stock are
reserved for issuance under this plan.
(14) TELEPHONE REVENUES
Telephone revenues include revenues received by Telco for billing and
access services provided to Aliant Systems, which were approximately
$4,393,000 for 1997, $4,209,000 for 1996 and $4,342,000 for 1995, and are
deducted as intercompany revenues and expenses.
23
<PAGE>
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
1997 quarter quarter quarter quarter Total
(Dollars in thousands, except per share data)
Operating revenues:
Telephone $ 48,855 49,072 50,935 51,011 199,873
Wireless communications 16,746 19,631 19,969 20,364 76,710
Equipment sales and
services 4,540 4,193 4,985 5,458 19,176
Intercompany (1,953) (2,260) (2,323) (2,895) (9,431)
------ ------ ------ ------ ------
Total operating
revenues $ 68,188 70,636 73,566 73,938 286,328
====== ====== ====== ====== =======
Net income $ 11,978 13,188 13,995 13,878 53,039
====== ====== ====== ====== =======
Basic and diluted earnings
per common share $ .33 .36 .39 .38 1.46
====== ====== ====== ====== =======
First Second Third Fourth
1996 quarter quarter quarter quarter Total
Operating revenues:
Telephone $ 47,184 47,319 46,676 48,247 189,426
Wireless communications 13,158 15,850 17,387 17,301 63,696
Equipment sales and
services 4,998 4,496 4,426 5,010 18,930
Intercompany (2,057) (2,071) (1,914) (1,785) (7,827)
------ ------ ------ ------ -------
Total operating
revenues $ 63,283 65,594 66,575 68,773 264,225
====== ====== ====== ====== =======
Net income $ 9,818 11,617 12,165 11,354 44,954
====== ====== ====== ====== =======
Basic and diluted earnings
per common share $ .27 .32 .33 .31 1.22
====== ====== ====== ====== =======
(16) 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, 1997,
38,574,967 shares of common stock were reserved for issuance in connection
with these stock purchase rights.
24
<PAGE>
(17) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Receivables, Accounts Payable and Note Payable
-------------------------------------------------------------------------
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. See note 5 for the estimated fair value of
temporary investments.
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 the Company's long-term debt instruments are based
on the amount of future cash flows associated with the instruments
discounted using the Company's current borrowing rate on similar debt
instruments of comparable maturity.
Interest Rate Swap and Collar Agreements
----------------------------------------
The fair values are the estimated amounts the Company would have to
pay or receive to terminate the swap and collar agreements as of December
31, 1997 and 1996, respectively, taking into account current interest rates
and the credit worthiness of the counterparty.
Estimated Fair Value
--------------------
The estimated fair value of the Company's financial instruments are
summarized as follows:
At December 31, 1997 At December 31, 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
(Dollars in thousands)
Note receivable from OCGP $ 47,728 50,463 42,502 47,550
======= ======= ======= =======
Long-term debt $ 102,000 106,127 110,362 114,986
======= ======= ======= =======
Interest rate swap and
collar agreements
gain (loss) $ - (82) - (90)
======= ======= ======= =======
25
<PAGE>
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.
(18) SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $8.8 million, $9.1 million and $8.2
million during 1997, 1996 and 1995, respectively. Income taxes paid were
$39.4 million in 1997, $25.3 million in 1996 and $27.0 million in 1995.
The Company consummated the acquisition of Aliant Cellular during 1995. In
connection with the acquisition, the following assets were acquired,
liabilities assumed and long-term debt and common stock issued.
(Dollars in thousands)
Property and equipment $ 28,101
Excess cost of net assets acquired 124,609
Long-term debt assumed (17,890)
Other assets and liabilities, excluding cash
and cash equivalents 2,167
Prior investment in Aliant Cellular (6,282)
Issuance of long-term debt (60,000)
Common stock issued (70,408)
-------
Decrease in cash $ 297
=======
(19) COMMITMENTS
The Company has entered into two separate agreements during 1997 for
the purchase of new landline and cellular equipment over the next five
years commencing the first quarter of 1998. The aggregate cash payments
for each of the five years subsequent to December 31, 1997 approximate
$18.4 million; $7.7 million; $2 million; $3.9 million; and $3 million,
respectively. The Company anticipates funding these purchase commitments
from operations and debt financings.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Aliant Communications Inc. (the Company) is a holding company with
subsidiaries operating primarily in the telecommunications industry. The
Company's wholly-owned subsidiaries include Aliant Communications Co.
(Telco); Aliant Cellular Inc. (Aliant Cellular); Aliant Systems Inc.
(Aliant Systems); Prairie Communications, Inc. (Prairie); Aliant Midwest
Inc. (Aliant Midwest) and Aliant Network Services Inc. (Aliant Network).
Effective September 3, 1996, the Company changed its name to Aliant
Communications Inc. from Lincoln Telecommunications Company. The name
change allowed the Company to offer services under the single brand, Aliant
Communications, and replaced eight different names previously used.
RESULTS OF OPERATIONS
Net Earnings
- ------------
Net income was $53,039,000 in 1997, compared to $44,954,000 in 1996 and
$12,513,000 after non-recurring charges in 1995. Excluding non-recurring
charges for strategic initiatives relating to the discontinuance of the
application of FAS 71 and two work force restructuring programs, net income
in 1995 was $42,059,000.
Earnings per common share were $1.46 in 1997, $1.22 in 1996 and $.36 in
1995. Before the one-time charges, earnings per common share were $1.22 in
1995.
Operating Revenues
- ------------------
Total operating revenues grew by $22,103,000 in 1997, an increase of 8.4%
over 1996, to a total of $286,328,000. In 1995, total operating revenues
were $225,692,000. Leading the growth in both 1997 and 1996 was revenues
from wireless communications services.
Telephone Revenues
- ------------------
Telephone operating revenues increased by $10,447,000 or 5.5% over 1996, to
a total of $199,873,000. Growth in 1996 was $9,510,000 or 5.3% over 1995,
to a total of $189,426,000.
Local network service revenues in 1997 were $80,918,000, an increase of
$6,040,000 or 8.1% over the 1996 total of $74,878,000. In 1996, local
network service revenues increased $3,387,000 or 4.7% over the 1995 total
of $71,491,000. These revenues reflect amounts billed to customers for
local exchange services, including enhanced services such as Call Waiting
and Caller ID. The 1997 increase was due, in part, to a 10% increase to
residential basic local exchange rates which became effective near the end
of the first quarter. The balance of the 1997 increase along with the 1996
increase resulted primarily from growth in telephone access lines and
continued demand for enhanced services. There were 273,008 telephone
access lines in service on December 31, 1997, an increase of 3.7% over the
prior year. The 1996 growth in access lines was 3.6%. In each year,
business and Centrex line growth led the increase.
27
<PAGE>
Access service revenues received primarily from interexchange carriers for
their use of local exchange facilities in providing long distance services
were $57,621,000 in 1997, an increase of $875,000 or 1.5% over the 1996
total of $56,746,000. In 1996, access service revenues increased
$3,093,000 or 5.8% from the 1995 total of $53,653,000. These increases
were due primarily to increased volume of access minutes reaching a total
of 1,024.8 million minutes in 1997. Minutes of use increased by 5.8% in
1997 and by 7.6% in 1996. In each of these two years, increased volumes
were offset in part by reduced incremental access rates.
Long distance service revenues in 1997 were $31,375,000, a decrease of
$866,000 or 2.7% from the 1996 total of $32,241,000. In 1996, long
distance revenues increased $1,155,000 or 3.7% from the 1995 total of
$31,086,000. Long distance revenues are received from providing services
both within and beyond Telco's traditional service area, and are primarily
message toll, private line services, and operator services. The 1997
decrease was due, in part, to a first quarter reduction in long distance
rates of 8% to 10% for calls within the Company's service area in southeast
Nebraska. The 1996 increase was primarily due to customer growth which
resulted from increased marketing of long distance services.
On November 18, 1997, the Company filed a rate rebalancing application with
the Nebraska Public Service Commission (NPSC) in order to bring rates
closer to the costs of providing various services. This action is further
described under "Competition and Regulatory Environment," and is intended
to be revenue-neutral.
Other wireline communications service revenues, which includes directory
advertising and sales, carrier billing and collection service revenues,
data communications revenues, public paystations and miscellaneous items,
were $29,959,000 in 1997, an increase of $4,398,000 or 17.2% from the 1996
total of $25,561,000. The increase was attributable to greater directory
advertising and sales revenues of $1,073,000, greater data communications
revenue mainly due to the growth of Navix, the Company's Internet access
service, of $1,191,000, as well as increased public paystation revenue of
$1,740,000. The paystation revenue increase was due, in part, to a rate
increase with the remainder resulting from the FCC's deregulation of
paystation business. In 1996, other wireline communications services
increased $1,875,000 or 7.9% from the 1995 total of $23,686,000. The 1996
growth was attributable to greater directory advertising and sales revenues
as well as increased data communications revenues.
Wireless Communications Services
- --------------------------------
Wireless communications service revenues in 1997 were $76,710,000, an
increase of $13,014,000 from the 1996 total of $63,696,000. The 1997
increase was primarily due to the steady addition of subscribers and
resulting revenue generated from the larger subscriber base. This increase
was offset by a June 1, 1997 reduction in service rates offered to a
majority of our subscribers, approximating $2,500,000. In 1996, wireless
communications service revenues increased $29,575,000 from the 1995 total
of $34,121,000. The 1996 increase was primarily due to the inclusion of a
full year's revenue from Aliant Cellular compared to six months of revenue
following the acquisition of Aliant Cellular in July 1995. Cellular
subscriber lines in the Company's wholly-owned markets grew by 36,285, or
24.7%, to a total of 182,987 at December 31, 1997. In May 1997, Aliant
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Cellular acquired approximately 10,000 customer service agreements from
Telebeep, Inc. These customers had previously received Aliant Cellular
services on a resold basis. See "Acquisition and Investment." In 1996,
subscriber lines grew by nearly 37,000. Further information on this
subject is provided under the heading of "Managed Cellular Markets."
Telephone Equipment Sales and Services
- --------------------------------------
Telephone equipment sales and service revenues in 1997 were $19,176,000, an
increase of $246,000 or 1.3% from the $18,930,000 recorded in 1996. The
1996 amount of such revenues reflected an increase of $162,000 or 0.9% from
the $18,768,000 recorded in 1995.
Operating Expenses
- ------------------
Total operating expenses were $196,956,000 in 1997, an increase of
$10,533,000 or 5.7% from 1996. Total operating expenses increased
$10,692,000 in 1996 to a total of $186,423,000.
Depreciation and amortization expense was $49,525,000 in 1997, a 6.7%
increase over the $46,404,000 recorded in 1996. Both of these years
reflect depreciation rates effective after discontinuance of FAS 71 as
described later under the heading "Extraordinary Item (net of income
tax) - FAS 71." The 1997 increase over 1996 is attributable to gross
additions to depreciable plant resulting from the Company's strategic
objective to remain a forerunner in the implementation of new technology.
The 1995 depreciation and amortization amount of $37,422,000 was recorded
following the FAS 71 guidelines. Using Generally Accepted Accounting
Principles, (GAAP), depreciation rates for Telco represents approximately
$2.7 million of the increase in 1996. The 1995 depreciation and
amortization amount reflects only six months of amortization of goodwill
related to the July 1995 acquisition of Aliant Cellular while 1996 and 1997
reflect full year amounts.
Other operating expenses, which include the cost of telephone equipment
sales and services and the net loss on sales of cellular equipment along
with other operating expenses, were $152,580,000 in 1997, $143,646,000 in
1996 and $120,627,000 in 1995. The increases amounted to 6.2% in 1997 and
19.1% in 1996. The 1997 increase was due in part to expenses incurred,
approximately $1,600,000, for repairing the damages resulting from a severe
October snowstorm. Expenses for 1996 include 12 months of Aliant Cellular
operating expenses while the 1995 amount contained only six months of such
expenses. Costs of goods and services sold increased in both 1997 and 1996
resulting from increased product sales and discounts. Sales commissions
and other costs of acquiring wireless customers, including the net loss on
equipment sales, also increased each year.
The Company continues to streamline operations and manage its work force
requirements to improve productivity. Consistent with this objective, the
Company recorded the results of two separate work force reduction programs
in 1995. In 1995, Telco reduced its operator services work force from 140
employees to approximately 50 employees. Directory assistance operations
were outsourced and operator service contracts with AT&T were terminated.
The remaining operator work force handles the Company's long distance
operator service needs. Retirement and separation incentives along with
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<PAGE>
out-placement services were offered to those employees affected by the
force adjustment. These actions resulted in a pre-tax non-recurring charge
of $1,555,000 ($937,000 net of tax) in 1995, reducing earnings per share by
$0.03.
Separately, in an effort to position the Company for the long-term, in late
1995 the Company determined that it could maintain productivity while
reducing its work force by nearly 200 employees. Accordingly, it offered
an opportunity to approximately 750 eligible employees to enroll in the
Voluntary Enhanced Retirement Program. Of those receiving the offer, 330
employees accepted. The cost of this retirement program, recorded in 1995,
was approximately $20.1 million (an after-tax earnings impact of $12.1
million) reducing earnings per share by $0.35. This program was funded
from the Company's pension fund, requiring no additional funding from
operations. At December 31, 1997 all of the employees who elected early
retirement had left the Company's employ, with a large portion leaving in
the fourth quarter 1997. The Company has begun to recapture the cost of
this retirement program and will continue to benefit in the future from the
streamlined work processes which facilitated this work force reduction.
Due to the greater than anticipated number of employees opting for early
retirement, the Company has, and will continue to hire new employees in
order to continue its ability to provide high-quality service and maintain
its aggressiveness in the marketplace. At the end of the year, there were
1,537 employees compared to 1,686 at the end of 1996. The number of
employees in the Company's wireless operations is continuing to expand to
meet the needs of additional subscribers. There is also employment growth
in the Company's data communications area where Navix requires support.
Non-Operating Income and Expenses
- ---------------------------------
Non-operating income includes interest and net results from the Company's
ownership interest in the Omaha cellular market. The increase in income of
$1,869,000 in 1997 to $8,297,000 is partially the result of greater
interest income. Investments were reduced in 1996 due to using those funds
to reduce outstanding debt, primarily related to the acquisition of Aliant
Cellular. The remainder of the increase resulted from greater profits in
the Omaha cellular market. The Company anticipates acquisition of an
additional interest in the partnership operating in the Omaha Cellular
market in first quarter 1998. After the acquisition, the Company's share
of net results from the Omaha market will no longer be recognized as non-
operating income. The related interest income will also no longer be
recognized. In 1997, non-operating income from these two items
approximated $5 million.
Interest expense and other deductions were $10,313,000 in 1997 compared to
$9,776,000 in 1996 and $10,518,000 in 1995. The 1997 increase was
primarily the result of an increase in average outstanding debt. The 1996
decline was the result of lower debt compared to 1995, during which the
debt level was higher as a result of using outside sources of capital to
fund the acquisition of Aliant Cellular, thus causing additional long-term
and short-term debt and related interest expense.
30
<PAGE>
Income Taxes
- ------------
Income tax expenses in 1997 were $34,317,000 compared to $29,500,000 in
1996 and $18,447,000 in 1995. The federal income tax rate has remained at
35% since 1993. Income tax expense has remained proportionate to taxable
income over the three-year period.
Extraordinary Item (net of income tax) - FAS 71
- -----------------------------------------------
As described in Note 2 to the consolidated financial statements, the
Company discontinued applying Statement of Financial Accounting Standards
No. 71 (FAS 71), "Accounting for the Effects of Certain Types of
Regulation" in the fourth quarter of 1995. The Company determined that
Telco no longer met the criteria for following FAS 71 due to changes in the
manner in which the Company is regulated and increased competition in the
telecommunications industry. The accounting impact to the Company was an
extraordinary non-cash after-tax charge of $16,516,000. The following
table is a summary of the extraordinary charge.
Dollars (in thousands) Pre-tax After-tax
- ---------------------------------------------------------------------------
Increase to the accumulated depreciation balance $ 22,069 13,305
Elimination of regulatory assets and liabilities 3,799 3,211
------ ------
Total extraordinary charge $ 25,868 16,516
- ---------------------------------------------------------------------------
The pre-tax adjustment of $22,069,000 to net telecommunications plant was
necessary since estimated useful lives and depreciation methods
historically prescribed by regulators did not reflect the rapid pace of
technological changes in the industry and differed significantly from
methods used by nonregulated companies. Net plant balances were adjusted
by increasing the accumulated depreciation balance. A study was performed
that identified inadequate accumulated depreciation levels by individual
asset categories. When adjusting its net plant, the Company gave effect to
shorter, more economically realistic lives.
The discontinuance of FAS 71 also required the Company to eliminate from
its consolidated balance sheet the effects of any actions of regulators
that had been recognized as assets and liabilities pursuant to FAS 71, but
would not have been recognized as assets and liabilities by nonregulated
companies. The regulatory assets and liabilities eliminated were related
to the consequences of regulation on deferred income taxes.
The Company believes that the discontinuation of accounting rules
prescribed in FAS 71 will not have an impact on the Company's customers,
nor its ability to pay dividends.
Inflation
- ---------
Management believes that inflation affects the Company's business to no
greater extent than the general economy.
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LIQUIDITY AND CAPITAL RESOURCES
Capitalization
- --------------
At December 31, 1997, the Company had consolidated long-term debt of
$102,000,000 compared to $110,362,000 at December 31, 1996, including
current installments due. In 1995, the Company incurred $60,000,000 of
long-term debt to finance the acquisition of Aliant Cellular and assumed
Aliant Cellular's outstanding long-term debt at acquisition. The Company
currently has an $11,000,000 note payable outstanding.
Construction
- ------------
The Company is continuing to invest in new technology. Net cash
expenditures for capital additions to property and equipment were
$50,067,000 in 1997, $42,704,000 in 1996 and $43,022,000 in 1995. Cash
provided by operating activities, less dividends, exceeded capital
additions in each of those years. Gross additions to property and
equipment are expected to approximate $80,000,000 in 1998. The increase in
1998 is due in part to the expansion of the Company's fiber network, adding
and upgrading cellular equipment, expansion of Aliant Midwest's operations
and additions to electronic switching equipment. The Company anticipates
funding this construction from operating activities, existing temporary
investments and debt.
The Company entered into a contract with Northern Telecom Inc. to upgrade
Telco's electronic switching equipment over the next five years requiring a
cash outlay of $20.9 million over the five year period. Among its many
benefits, the contract will provide the capability to offer the same
services throughout Telco's entire service area. Software will only be
needed in three host switches which will be a significant reduction from
the fifteen switches operating at the present time.
Cash and Cash Equivalents
- -------------------------
The Company had cash, cash equivalents, and temporary investments of
$31,560,000 and $31,977,000 at December 31, 1997 and 1996, respectively.
Dividends
- ---------
Quarterly dividends on the Company's common stock were increased from 13
cents per share to 14 cents per share commencing January 10, 1995, to 15
cents per share commencing January 10, 1996, to 16 cents per share
commencing January 10, 1997 and to 17 cents per share commencing October
10,1997. The total cash dividend declared was 66 cents per share in 1997,
61 cents per share in 1996 and 57 cents per share in 1995.
ACQUISITION AND INVESTMENT
During 1995, the Company purchased the remaining issued and outstanding
shares of Aliant Cellular (then Nebraska Cellular Telephone Corporation)
common stock. At December 31, 1994, the Company owned approximately 16% of
the outstanding shares of Nebraska Cellular and used the cost method of
accounting to account for its interest. As consideration for the remaining
84%, the Company issued to the shareholders of Nebraska Cellular an
aggregate of 4,267,146 shares of Company common stock and paid
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<PAGE>
approximately $61.6 million in cash. The acquisition was accounted for as
a purchase. Aliant Cellular provides cellular communications services in
non-metropolitan areas of Nebraska including approximately 848,000 POPs
(potential customers). Its network serves cellular users with transparent
interconnection along the Interstate 80 corridor and other major highway
systems across Nebraska.
On December 31, 1991, Prairie entered into a general partnership that holds
an ownership interest of approximately 56% in the Omaha Cellular Limited
Partnership, now doing business as Aliant Cellular - Omaha, which provides
cellular communications services in the Omaha Metropolitan Statistical Area
(MSA). Prairie is an equal partner with 360 Communications Company of
Nebraska, Inc. (360) in the general partnership and has the option to
purchase 360's remaining 50% interest during the two-year period ending
December 31, 1998. On December 17, 1997 the Company announced that it had
entered into a Purchase Agreement with 360 to acquire 360's ownership
interest for approximately $15,000,000, and the release of 360 from its
obligation pursuant to the discounted note receivable from the general
partnership with a carrying value of approximately $47.7 million at
December 31, 1997. As a result, upon closing, which is anticipated to be
near the end of first quarter 1998, the Company will own 100% of the
general partnership and approximately 56% of Aliant Cellular - Omaha. The
acquisition will be accounted for as a purchase and, accordingly, the
results of the partnership will be included in the operating revenues and
expenses of the Company. Goodwill of approximately $30 million will result
and will be amortized over approximately 34 years. The Company assumed
management of Aliant Cellular-Omaha on January 1, 1992.
Effective May 15, 1997, Aliant Cellular acquired from Telebeep, Inc.
approximately 10,000 customer service agreements and customers who had
previously received cellular telecommunications services provided by Aliant
Cellular on a resold basis. These customers are located principally in
northeastern Nebraska. As a result of the acquisition of this additional
customer base, Aliant Cellular provides its cellular telecommunications
services directly to these customers on a retail basis rather than on a
wholesale basis. This acquisition is expected to result in increased
annual revenue of approximately $1,300,000.
MANAGED CELLULAR MARKETS
The Company manages all four cellular entities in which it has an ownership
interest. The Lincoln MSA and Aliant Cellular (serving ten Nebraska Rural
Service Areas (RSA)) are wholly-owned markets containing approximately
231,000 and 848,000 POPs, respectively. All properties are managed under
the Aliant brand. Through its general partnership with 360, the Company
holds a 27.9% interest (27.6% prior to October, 1997) in Aliant Cellular -
Omaha which operates the Omaha MSA market, comprised of approximately
634,000 POPs. As stated in the "Acquisition and Investment" section
above, the option to purchase 360's ownership interest in that limited
partnership is expected to be completed by the end of March 1998. In
addition, the Company has an 11.8% interest in Iowa RSA 1 which is
contiguous to the Company's telephone operating area in Nebraska and to
Omaha, and contains approximately 62,000 POPs. By the end of 1997,
penetration rates (subscribers compared to POPs) achieved in these markets
33
<PAGE>
by the entities in which the Company holds interests were 22.1% in the
Lincoln MSA, 15.6% in the Aliant Cellular area, 12.7% in the Omaha MSA, and
6.6% in RSA 1.
In these markets, the composite cost to acquire new customer lines,
including a negative margin on equipment sales, was $303 per gross addition
and $455 per net addition in 1997. The churn (the percentage of customers
who are disconnected each month) averaged 0.9% in 1997.
The Company's market indices of penetration, cost to acquire new customers
and churn in its managed markets are among the best in the industry,
according to statistics published by the Cellular Telephone Industry
Association.
SUPPLEMENTAL PROPORTIONATE DATA
The Company believes the use of proportionate operating data for these
managed cellular markets facilitates the understanding and assessment of
its consolidated financial statements. Reporting proportionate data for
the cellular markets is not in accordance with generally accepted
accounting principles. The proportionate data summarized below reflects
the Company's relative ownership interests in its managed markets.
Supplemental Proportionate Data For Managed Cellular Markets (1)
Total Total Not Total
Consolidated Consolidated Proportionate
(2) (3) Data
(Dollars in thousands)
Customer Lines 1997 182,987 22,928 205,915
1996 146,702 18,531 165,233
1995 109,708 13,144 122,852
Service Revenues 1997 $ 75,889 9,296 85,185
1996 62,984 7,940 70,924
1995 32,910 6,019 38,929
Operating Expenses 1997 $ 40,485 4,640 45,125
(before depreciation) 1996 35,768 4,675 40,443
1995 19,147 4,034 23,181
Net Operating Income 1997 $ 26,720 3,352 30,072
(after depreciation) 1996 20,049 2,171 22,220
1995 10,059 1,043 11,102
EBITDA (4) 1997 $ 35,404 4,656 40,060
1996 27,216 3,265 30,481
1995 13,763 1,985 15,748
(1) The Company's interest in Nebraska Cellular prior to acquisition in
July 1995 is not included in the proportionate data.
34
<PAGE>
(2) Financial activities of the Lincoln MSA and Aliant Cellular since
acquisition are included in respective operating portions of the Company's
Consolidated Statements of Earnings.
(3) The Company's share of the financial activities of the Omaha MSA
(27.91% currently and 27.6% prior to October 1997) and the Iowa RSA 1
(11.8%) are not included in the operating portions of the Company's
Consolidated Statements of Earnings.
(4) Earnings before interest, income taxes, depreciation and amortization
is commonly used in the cellular communications industry to analyze
cellular providers on the bases of operating performance, and liquidity.
EBITDA should not be considered an alternate to (i) operating income (as
determined in accordance with generally accepted accounting principles) as
an indicator of the Company's operating performance or (ii) cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) as a measure of liquidity.
At December 31, 1997, the Company had 205,915 proportionate customer lines
in all of its managed markets. This compares with a 1996 year-end managed
operations total of 165,233 customer lines.
Total service revenues in the managed cellular markets increased to
$85,185,000 in 1997 compared to $70,924,000 in 1996 and $38,929,000 in
1995. The acquisition of Aliant Cellular in July 1995 contributed
approximately 80% of the 1996 increase in service revenues. Service
revenues include the net results of outbound roaming. Inbound roaming
contributed 15.8%, 14.9% and 14.6% of service revenues in 1997, 1996 and
1995, respectively. The Company has negotiated roaming agreements with
other cellular providers which include preferred roaming rates for
customers.
Net operating income before interest, depreciation and income taxes
(EBITDA) increased to $40,060,000 in 1997 compared to $30,481,000 in 1996.
The EBITDA margin (EBITDA compared to service revenues) was 47.0% and 43.0%
for the years 1997 and 1996, respectively. In 1995, EBITDA was $15,748,000
margin on sales of equipment, grew to $45,125,000 in 1997, compared to
$40,443,000 in 1996 and $23,181,000 in 1995.
Due to changes in technology, customer growth and usage demand, Aliant
Cellular recently entered into a contract with Motorola to replace the
existing analog cellular equipment in the Lincoln and Omaha MSAs requiring
a $22,000,000 cash outlay. The new digital switching platforms will
increase network capacity and make additional services, such as Caller ID,
available to customers. The network will be upgraded in two phases. By
early spring 1998, Narrowband Advanced Mobile Phone Service (NAMPS) will be
in place which will nearly double the capacity on the network. By early
1999, Code Division Multiple Access (CDMA) will be deployed which will
further improve capacity, coverage and voice quality.
35
<PAGE>
COMPETITION AND REGULATORY ENVIRONMENT
The Telecommunications Act of 1996 (the Act) has now been in effect two
full years. While some uncertainty regarding implementation of the Act
still exists, some of the regulatory concerns and questions raised by the
Act are being clarified.
The Act was designed to facilitate entry of new competitors into the local
exchange market. Competitors were allowed to resell Incumbent Local
Exchange Carrier (ILEC) services by purchasing elements of an ILEC's
network which are necessary to provide competitive services, or by
constructing their own network facilities in an ILEC's traditional service
territory. In order to create rules implementing this aspect of the Act,
the Federal Communications Commission (FCC) released a comprehensive
interconnection order in August 1996 (the Interconnection Order).
The Interconnection Order received immediate criticism from ILECs for
establishing network element prices and resale discounts which gave unfair
advantages to competitors, and for allowing a competitor to "pick and
choose" favorable provisions of interconnection agreements made between
ILECs and competitors. ILECs also contended that the Interconnection Order
improperly precluded state regulatory commissions from performing a
meaningful role in the implementation of the Act.
Several ILECs, including Telco, filed appeals for judicial review of the
Interconnection Order. These petitions were consolidated and assigned to
the Eighth Circuit Court of Appeals. In October 1996, the Eighth Circuit
entered an Order Granting Stay Pending Judicial Review which did stay the
effectiveness of the pricing and the so-called "pick and choose"
provisions of the Interconnection Order. The FCC and several other
telecommunications companies petitioned to review the Eighth Circuit's
decision. On January 23, 1998, the Supreme Court agreed to hear the
appeal. The decision by the Supreme Court is expected in late 1998 or early
1999.
The Telco received a bona fide request on January 9, 1998 from US West
Communications, Inc. to negotiate an interconnection agreement. Telco does
have interconnection agreements in place with two commercial mobile radio
service providers. As a midsize, non-Bell Company, the Telco may apply to
the Nebraska Public Service Commission (NPSC) for relief or waiver of
certain interconnection obligations imposed under the Act. Telco has
agreed with the NPSC not to use such a waiver provision for resale or
transport and termination elements.
The Company is exploring new business opportunities made possible by the
Act. Through Aliant Midwest, the Company was granted a certificate from
the NPSC to provide competitive local exchange service in areas of Nebraska
served by US West, GTE Midwest and Sprint/United. Aliant Midwest also has
been certified by the Iowa Utilities Board to provide service in
Pottawattamie County, Iowa, which is part of the Omaha, Nebraska
metropolitan area. In 1997, Aliant Midwest, doing business as Aliant
Communications, began offering facilities-based service in Omaha, Nebraska
and Grand Island, Nebraska. The Company will continue to evaluate further
entry into other markets.
36
<PAGE>
Telco is also taking measures to prepare for competition in its traditional
service territory. Upon passage of the Act, it became clear that 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.
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.
The Telco invoked this statute in 1997, raising residential local exchange
service rates by 10%. However, competition creates the need for even
greater rate flexibility than was allowed under Nebraska law. In 1997,
legislation was passed which allowed ILECs to raise residential service
rates more than 10% in a twelve month period. In conjunction with such a
rate increase, rates for other services must be lowered so that the rate
changes do not increase total company revenues by more than 1%. Telco was
active in developing and advocating this legislation, in order to obtain
the rate flexibility to compete effectively in the newly competitive
telecommunications environment.
Telco has filed an application with the NPSC to rebalance service rates
under the new Nebraska law. If approved, Telco will significantly reduce
its basic business service rates and some of its toll and access rates,
while raising basic residential service rates closer to actual cost. The
result may be a small decline in total revenue, but the Telco's rate
structure will be more efficient and much more viable in a competitive
environment. Hearings on this application were held on February 4 and 5,
1998, and a decision is anticipated within sixty (60) days after the close
of the hearings. The proposed rates become effective upon entry of the
order.
Other regulatory issues continue to take shape at the state and federal
levels. Universal service funding, which compensates companies for
providing service to high-cost (usually rural) customers, will take an
entirely new shape in the competitive environment. Implicit subsidies can
no longer be built into the rates charged to low-cost customers. Instead,
such subsidies must be made explicit and competitively neutral. The FCC
has further complicated this issue by ruling that 75% of the responsibility
for funding universal service shall be borne by the states. This creates a
difficult situation for sparsely-populated, rural states with a high
percentage of high-cost customers. Telco, other ILECs, and many public
officials have expressed concern about this policy decision to the FCC and
to members of Congress.
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. The NPSC has determined that the issues of access reform
37
<PAGE>
and universal service should be handled concurrently in a single docket.
Telco supports their decision, since decisions regarding access reform
could place tremendous pressure on consumers for support of universal
service. Telco will actively participate in the NPSC docket.
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 the Telco. Currently, the cellular license for
the Lincoln MSA is held by Telco.
YEAR 2000
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000. An
internal study is currently underway to determine the full scope and
related costs to ensure that the Company's systems continue to meet its
internal needs and those of its customers. The Company has begun to incur
expenses for this change, by utilizing internal resources to identify,
correct or reprogram and test the systems for the year 2000 compliance. It
is anticipated that all reprogramming efforts will be complete by mid 1999,
allowing time for testing. Management has not yet assessed the year 2000
compliance expense and related potential effect on the Company's earnings,
however, the expenses may be significant.
ACCOUNTING PRONOUNCEMENTS
FAS 130, "Reporting Comprehensive Income", and FAS 131, "Disclosures
about Segments of an Enterprise and Related Information", were issued in
June 1997. FAS 130 established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. Both FAS 130
and FAS 131 are effective for periods beginning after December 15, 1997.
The Company anticipates providing additional segment reporting information
in 1998, without a significant effect on its consolidated financial
statements.
LABOR CONTRACTS
Three-year agreements between Telco and Local 7470 of the Communications
Workers of America (CWA) will expire on October 14, 1998. Similarly, a
three-year agreement between Aliant Systems and the CWA will expire on May
19, 1998. Each contract concerns wages, benefits and general working
conditions.
38
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
ALIANT COMMUNICATIONS INC.
Date March 20, 1998 /s/ Michael J. Tavlin
-------------- -----------------------------------
Michael J. Tavlin, Vice President-
Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit Page
- ------- ----
23 Consent of KPMG Peat Marwick *
<PAGE>
EXHIBIT 23
KPMG Peat Marwick LLP
233 South 13th Street, Suite 1600
Lincoln, NE 68508-2041
Two Central Park Plaza
Suite 1501
Omaha, NE 68102
Accountants' Consent
The Board of Directors
Aliant Communications Inc.
We consent to the inclusion of our report dated February 6, 1998, with
respect to the consolidated balance sheets of Aliant Communications Inc.
and subsidiaries as of December 31, 1997 and 1996, and related
consolidated statements of earnings, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997,
which report appears in the Form 8-K of Aliant Communications Inc. dated
March 20, 1998.
/s/ KPMG Peat Marwick LLP
Lincoln, Nebraska
March 20, 1998
