<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File No. 0-10516
---------------------------------------
Aliant Communications Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0632436
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 M Street, Lincoln, Nebraska 68508
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 402-436-3737
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at July 31, 1998
$.25 par Value 35,630,998
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INTRODUCTION 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Earnings 3
Consolidated Statements of Cash Flows 4
CONDENSED NOTES TO FINANCIAL STATEMENTS 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of
Security Holders *
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
- --------------------
* Denotes none or not applicable.
SIGNATURES 17
<PAGE>
INTRODUCTION
The unaudited interim financial statements presented herein include the
consolidated statements of Aliant Communications Inc. and its subsidiaries
(the Company). The unaudited statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. The Company believes, however, that the disclosures are
adequate to make the information presented not misleading. The Company's
condensed consolidated balance sheet at December 31, 1997, was derived from
the Company's audited consolidated balance sheet as of that date. The
Company's financial statements should be read in conjunction with the
financial statements and notes thereto in the Annual Report on Form 10-K of
the Company for the year ended December 31, 1997, and the current year's
previously issued Form 10-Q, which are incorporated by reference.
-1-
<PAGE>
<TABLE>
Item 1 - Financial Statements
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 22,575 $ 27,867
Temporary investments 3,577 3,693
Accounts receivable and other 66,209 61,035
-------- --------
Total current assets 92,361 92,595
Property and equipment less accumulated
depreciation and amortization 302,692 258,955
Investments and other assets 189,387 176,052
Deferred charges 18,928 20,040
-------- --------
Total assets $603,368 $547,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable to banks $ 16,000 $ 11,000
Current installment of long-term debt 8,000 8,000
Accounts payable and accrued liabilities 70,632 65,782
-------- --------
Total current liabilities 94,632 84,782
Deferred credits and other long-term liabilities 64,147 61,363
Long-term debt, excluding current installment 136,000 94,000
Minority interest 5,707 -
(Continued on next page)
-2-
<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS (Cont'd)
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
(Dollars in Thousands)
<S> <C> <C>
Preferred stock, 5%, redeemable - 4,499
Stockholders' equity 302,882 302,998
-------- --------
Total liabilities and stockholders' equity $603,368 $547,642
======== ========
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Six Months
Ended June 30 Ended June 30
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Operating revenues:
Telephone revenues:
Local network services $21,931 $19,841 $43,260 $39,183
Access and wholesale services 15,047 14,384 29,330 29,770
Long distance services 7,941 7,873 16,306 15,724
Other wireline communications services 7,911 6,974 15,558 13,250
------- ------- ------- -------
Total telephone revenues 52,830 49,072 104,454 97,927
Wireless communications services 32,373 19,631 54,199 36,377
Telephone equipment sales and services 4,692 4,193 9,447 8,733
Intercompany revenues (3,851) (2,260) (6,946) (4,213)
------- ------- ------- -------
Total operating revenues 86,044 70,636 161,154 138,824
------- ------- ------- -------
Operating expenses:
Depreciation and amortization 14,249 12,594 26,836 24,600
Other operating expenses 47,492 36,666 89,099 73,500
Taxes, other than payroll and income 1,179 1,134 2,270 2,101
Intercompany expenses (3,851) (2,260) (6,946) (4,213)
------- ------- ------- -------
Total operating expenses 59,069 48,134 111,259 95,988
------- ------- ------- -------
Operating income 26,975 22,502 49,895 42,836
------- ------- ------- -------
Non-operating income and expense:
Income from interest and other
investments 979 1,938 2,769 3,948
Minority interest 613 - 971 -
Other deductions 385 173 626 498
Interest expense 2,978 2,223 5,191 4,402
------- ------- ------- -------
Net non-operating expense 2,997 458 4,019 952
------- ------- ------- -------
Income before income taxes and
extraordinary item 23,978 22,044 45,876 41,884
Income taxes 9,602 8,856 18,382 16,718
------- ------- ------- -------
Income before extraordinary item 14,376 13,188 27,494 25,166
(Continued on next page)
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<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS (Cont'd)
(UNAUDITED)
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in Thousands Except Per Share Data)
Extraordinary item, net of income tax (2,097) - (2,097) -
------- ------- ------- -------
Net income 12,279 13,188 25,397 25,166
Preferred dividends 254 56 310 112
------- ------- ------- -------
Earnings available
for common shares $12,025 $13,132 $25,087 $25,054
======= ======= ======= =======
Basic and diluted earnings per common share:
Earnings before extraordinary item $ .39 $ .36 $ .75 $ .69
Extraordinary item (.06) - (.06) -
------- ------- ------- -------
Earnings per common share $ .33 $ .36 $ .69 $ .69
======= ======= ======= =======
Weighted average common shares
outstanding (in thousands) 36,049 36,248 36,126 36,342
======= ======= ======= =======
Dividends declared per common share $ .18 $ .16 $ .36 $ .32
======= ======= ======= =======
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
-----------------
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,397 $ 25,166
-------- --------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 27,327 24,615
Net change in investments and other assets 347 (2,375)
Deferred income taxes 696 (2,505)
Changes in assets and liabilities resulting
from operating activities:
Receivables 2,603 (1,713)
Other assets 261 (3,983)
Accounts payable and accrued expenses 153 2,179
Minority interest 43 -
Other liabilities (2,186) (369)
-------- --------
Total adjustments 29,244 15,849
-------- --------
Net cash provided by operating activities 54,641 41,015
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (39,896) (17,261)
Net salvage on retirements 7,594 283
-------- --------
Net capital additions (32,302) (16,978)
Proceeds from sale of investments and other assets 1,692 299
Purchases of investments and other assets (4,252) (4,852)
Purchases of temporary investments (949) (698)
Maturities and sales of temporary investments 1,065 865
Acquisitions, net of cash acquired (23,105) -
-------- --------
Net cash used for investing activities (57,851) (21,364)
-------- --------
Cash flows from financing activities:
Dividends to stockholders and premium on redemption
of preferred stock (13,006) (11,770)
Proceeds from issuance of long-term debt 130,000 11,000
Proceeds from issuance of notes payable 5,000 -
Retirement of preferred stock (4,499) -
Debt issuance cost (909) -
(Continued on next page)
-6-
<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(UNAUDITED)
Six Months Ended
June 30
-----------------
1998 1997
---- ----
(Dollars in Thousands)
Payments of long-term debt (106,500) (13,362)
Net purchases and sales of common and treasury stock (12,168) (3,700)
-------- --------
Net cash used in financing activities (2,082) (17,832)
-------- --------
Net increase (decrease) in cash and cash equivalents (5,292) 1,819
Cash and cash equivalents at beginning of year 27,867 25,290
-------- --------
Cash and cash equivalents at end of quarter $ 22,575 $ 27,109
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 2,009 $ 4,352
======== ========
Taxes paid $ 18,557 $ 21,139
======== ========
</TABLE>
-7-
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited interim financial statements include the consolidated
statements of the Company. The Company has the following wholly-owned
subsidiaries: Aliant Communications Co. (Telco); Aliant Cellular Inc.
(Cellular); Aliant Systems Inc. (Systems); Prairie Communications, Inc.
(Prairie); Aliant Midwest Inc. (Midwest); and Aliant Network Services Inc.
(Network). As of February 27, 1998, Cellular and Prairie combined own 100%
of Omaha Cellular General Partnership (OCGP), which has a controlling
interest in Omaha Cellular Limited Partnership (OCLP). In the opinion of
management of the Company, its respective financial statements reflect all
adjustments necessary for a fair presentation of results of operations,
financial position, and cash flows. All such adjustments made are of a
normal recurring nature except when noted as extraordinary or nonrecurring.
Certain prior period items have been reclassified to conform to the 1998
format. Most significantly, the Company reclassified wholesale services
from Other Wireline Communications Services revenue to Access and Wholesale
Services revenue.
(2) CHANGE IN LONG-TERM DEBT STRUCTURE
The Company sold $100 million of senior unsecured 6 3/4% notes in a public
debt offering. The bonds are dated April 1, 1998, and will mature on April
1, 2028. Interest is payable every six months on April 1 and October 1.
Further information about the new long-term debt structure is presented
under the section entitled "Liquidity and Capital Resources" in
Management's Discussion and Analysis below.
(3) INVESTMENT IN OMAHA CELLULAR MARKET
Effective February 27, 1998, the Company completed the acquisition of the
remaining 50% of OCGP, which at March 31, 1998, owned 55.82% of OCLP and
manages that operation. The purchase price was approximately $15 million,
and the transaction was accounted for as a purchase. Beginning March 1,
1998, OCLP's operating revenues and expenses are consolidated with those of
the Company's other activities. OCLP, doing business as Aliant Cellular-
Omaha, provides cellular communications services in the Omaha Metropolitan
Statistical Area (MSA). On April 28, 1998, OCGP purchased an additional
25.93% of OCLP from other limited partners for approximately $24 million,
bringing the Company's ownership of OCLP to 81.75%. This transaction was
also accounted for as a purchase. OCLP has a definitive agreement to
purchase the remaining 18.25% of the partnership between January 1 and June
30, 1999 from the other remaining limited partner. Upon completion of this
purchase, the Company will be the sole owner of OCLP. Further information
about the Company's acquisition is presented under the section entitled
"Managed Cellular Markets" in Management's Discussion and Analysis below.
(4) SUPPLEMENTAL CASH FLOW DISCLOSURES
In connection with the February 27, 1998 OCGP purchase and the April 28,
1998 purchase of other limited partners, the following assets were
acquired, liabilities assumed, and long-term debt issued:
-8-
<PAGE>
4/28/98
2/27/98 Limited
OCGP Partner
(Dollars in thousands) Purchase Purchase
- ---------------------- -------- --------
Property plant & equipment $(35,919) $ --
Price in excess of cost of net assets acquired (30,507) (16,464)
Notes payable 3,500 --
Prior investment in OCGP 1,420 --
Minority interest 13,590 (7,925)
Retirement of PIK debt 48,678 --
Other assets and liabilities - OCGP (17,623) --
Other assets and liabilities - OCLP 3,145 --
Issuance of note payable 15,000 --
-------- --------
Increase (decrease) in cash $ 1,284 $(24,389)
======== ========
(5) RETIREMENT OF TELCO FIRST MORTGAGE BONDS
Effective May 1, 1998, the Company redeemed approximately $47.5 million of
Telco first mortgage bonds at an interest rate of 9.91 percent, including a
premium of approximately $3.5 million. This premium resulted in a $2.1
million after-tax charge to earnings in second quarter 1998. Further
information about the retirement is presented under the section entitled
"Liquidity and Capital Resources" in Management's Discussion and Analysis
below.
(6) REDEMPTION OF TELCO PREFERRED STOCK
Effective May 15, 1998, the Company began redeeming Telco's 5% preferred
stock ($100 par value) at a redemption price of $105 per share, plus an
accrued dividend of $0.63. Further information about the redemption is
presented under the section entitled "Liquidity and Capital Resources" in
Management's Discussion and Analysis below.
(7) ACCOUNTING PRONOUNCEMENT
FAS 130, Reporting Comprehensive Income, establishes standards for the
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The standard also requires
disclosure of the total of comprehensive income in interim financial
statements. The Company adopted the provisions of FAS 130 effective
January 1, 1998. For the period ended June 30, 1998, the Company does not
have any elements of comprehensive income other than the elements currently
recognized in the consolidated statement of earnings.
-9-
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following tables summarize information from the Company's statements of
earnings.
<TABLE>
<CAPTION>
Revenues
- --------
Three Months Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
(Dollars in 000s) 1998 1997 Change % 1998 1997 Change %
- ----------------- ---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Telephone revenues:
Local network $21,931 $19,841 $ 2,090 10.5 $ 43,260 $ 39,183 $ 4,077 10.4
Access & wholesale 15,047 14,384 663 4.6 29,330 29,770 (440) (1.5)
Long distance 7,941 7,873 68 0.9 16,306 15,724 582 3.7
Other wireline 7,911 6,974 937 13.4 15,558 13,250 2,308 17.4
------- ------- ------- -------- -------- -------
Total telephone
revenues 52,830 49,072 3,758 7.7 104,454 97,927 6,527 6.7
Wireless 32,373 19,631 12,742 64.9 54,199 36,377 17,822 49.0
Equipment sales
and service 4,692 4,193 499 11.9 9,447 8,733 714 8.2
Intercompany (3,851) (2,260) (1,591) (70.4) (6,946) (4,213) (2,733) (64.9)
------- ------- ------- -------- -------- -------
Total operating
revenues $86,044 $70,636 $15,408 21.8 $161,154 $138,824 $22,330 16.1
</TABLE>
All comparisons made in the following section are of the second quarter and
six-month periods of 1998, respectively, with the same periods in 1997.
Local network services revenue increased $2,090,000 (10.5%) and $4,077,000
(10.4%). Basic local services revenue constituted $1,096,000 and
$2,478,000 of the increases. The basic local revenue increase was due to
several factors. First, residential revenue grew due to an increase in
residential basic local service rates effective May 16, 1998. This was
offset by a comparable decrease in business basic local service rates.
Second, additional installations of second phone lines contributed to the
rise in residential revenues, with a 19.1% increase in second lines.
Third, business and Centrex services continued to contribute to the growth
in basic local revenue. Fourth, expanded area service revenue grew by
$370,000 (18.4%) and $763,000 (19.2%), resulting from a July 1997 rate
increase. Fifth, basic residential rates were increased approximately 10%,
effective March 23, 1997. Telco access lines in service increased to
274,856, up 8,087 lines (3.0%) from June 30, 1997.
-10-
<PAGE>
The local network services revenue increase was also affected by private
line revenue increasing $228,000 (38.7%) and $478,000 (43.6%), due to new
Integrated Services Digital Network (ISDN) revenue and to growth. Enhanced
services revenue, consisting of custom calling features, Custom Local Area
Signaling Services (CLASS) and voice mail, continued its strong growth with
$392,000 (30.6%) and $755,000 (30.0%) increases.
Access and wholesale services revenue increased $663,000 (4.6%) and
decreased $440,000 (1.5%). The second quarter increase was due to an
increase in access minutes of use, and to the contribution of wholesale
services revenue. Access minutes of use reached a total of 545.7 million
minutes in the first six months of 1998, compared to 503.6 million minutes
for the same period in 1997, a 10.9% increase for the comparative quarter
and an 8.4% year-to-date increase. Wholesale services revenue, which
represents Network's revenue, increased $453,000 and $658,000. The six-
month decrease was due to a decrease in intrastate access charges which
occurred concurrently with the previously mentioned March 23, 1997
residential basic local service rate increase. Intrastate access rates
were further reduced on May 16, 1998, coinciding with local service rate
increases.
Long distance services revenue increased $68,000 (.9%) and $582,000 (3.7%),
even though intraLATA rates were reduced on March 23, 1997, and again on
May 16, 1998. The increases are due to an ongoing marketing effort to gain
market share from residential and larger business long distance users.
Other wireline communications services revenue includes directory
advertising and sales, carrier billing and collections, data
communications, public paystations, and miscellaneous items. This revenue
category increased $937,000 (13.4%) and $2,308,000 (17.4%). Data
communications growth is up $630,000 (40.7%) and $1,179,000 (39.1%), mainly
due to the growth of Navix, the Company's Internet access service.
Directory advertising revenue also increased by $307,000 and $767,000,
substantially due to a rate increase for directory advertising in the
Company's latest directory editions.
Wireless communications services revenue increased $12,742,000 (64.9%) and
$17,822,000 (49.0%). As a result of increased ownership in the Omaha
market mentioned previously, operating revenues from the Omaha MSA are
included in the Company's operating revenues beginning March 1, 1998.
Prior to that time, the Company's portion of the net results from OCLP were
reported in non-operating income from investments. The inclusion of OCLP
contributed $9,091,000 and $11,814,000 of the total wireless revenue
increases. Customer lines in the total cellular market increased by 47,371
(20.3%) since June 30, 1997.
Telephone equipment sales and services revenue increased $499,000 (11.9%)
and $714,000 (8.2%). The increase is mainly due to a July 1997 rate
increase for inside wire maintenance.
Overall, Company operating revenues increased $15,408,000 (21.8%) and
$22,330,000 (16.1%).
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<PAGE>
<TABLE>
<CAPTION>
Operating Expenses
- ------------------
Three Months Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
(Dollars in 000s) 1998 1997 Change % 1998 1997 Change %
- ----------------- ---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and
amortization $14,249 $12,594 $ 1,655 13.1 $ 26,836 $ 24,600 $ 2,236 9.1
Other operating 47,492 36,666 10,826 29.5 89,099 73,500 15,599 21.2
Other taxes 1,179 1,134 45 4.0 2,270 2,101 169 8.0
Intercompany (3,851) (2,260) (1,591) (70.4) (6,946) (4,213) (2,733) (64.9)
------- ------- ------- -------- -------- -------
Total $59,069 $48,134 $10,935 22.7 $111,259 $ 95,988 $15,271 15.9
</TABLE>
Depreciation and amortization expense increased $1,655,000 (13.1%) and
$2,236,000 (9.1%). The inclusion of OCLP in consolidated earnings
contributed $1,379,000 and $1,851,000 of the increase in depreciation. The
addition of depreciable assets primarily in Cellular, Midwest and Network
contributed the remaining increases.
Other operating expenses increased by $10,826,000 (29.5%) and $15,599,000
(21.2%). The increase is largely a result of the growth of cellular
operations expenses, due to significant growth in cellular services and to
the inclusion of OCLP in consolidated earnings. Total cellular operations
expenses increased by $6,699,000 and $8,709,000, and $4,343,000 and
$5,793,000 of those increases were attributable to the inclusion of OCLP.
Navix expenses grew $627,000 and $1,241,000 due to the continued growth of
Navix Internet service. Midwest contributed $1,096,000 and $2,049,000 of
operating expenses as a result of start-up costs.
Overall, Company operating expenses increased $10,935,000 (22.7%) and
$15,271,000 (15.9%).
<TABLE>
<CAPTION>
Non-Operating Income and Expense
- --------------------------------
Three Months Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
(Dollars in 000s) 1998 1997 Change % 1998 1997 Change %
- ----------------- ---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from
interest and
other investments $ 979 $ 1,938 $ (959) (49.5) $ 2,769 $ 3,948 $(1,179) (29.9)
Minority interest 613 0 613 0.0 971 0 971 0.0
Other deductions 385 173 212 122.5 626 498 128 25.7
Interest expense 2,978 2,223 755 34.0 5,191 4,402 789 17.9
------- ------- ------- ------- ------- -------
Total $ 2,997 $ 458 $ 2,539 554.4 $ 4,019 $ 952 $ 3,067 322.2
</TABLE>
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<PAGE>
Income from interest and other investments decreased by $959,000 (49.5%)
and $1,179,000 (29.9%). Prior to March 1998, this category included the
Company's portion of the net results of OCLP. Since March 1, 1998, OCLP
has been consolidated into operations.
Minority interest represents the portion of the net results of OCLP that is
not owned by the Company, which was 44.2% beginning March 1, 1998, and
18.25% effective April 1, 1998.
Income Taxes
- ------------
Income taxes increased $746,000 (8.4%) and $1,664,000 (10.0%). The
increases are proportionate to the increases in taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as its ability to generate resources to
finance business expansion, construct capital assets, pay its current
obligations, and pay dividends. Telco's operations have historically
provided a stable source of cash flow which has helped the Company make
capital improvements. In order to provide cash for various needs described
below, the Company recently issued $100 million in long-term debt effective
April 1, 1998, from its $250 million debt shelf registration. The Company
can also obtain external financing through existing committed bank lines of
credit. Consequently, no funding difficulties are anticipated.
Net cash provided by Company operating activities was $54,641,000 for the
first six months of 1998 compared to $41,015,000 for the first six months
of 1997. The principal factors involved in the increase were an increase
in operating income before depreciation and amortization, and a decrease in
accounts receivable. Cash from operating activities is the Company's
primary source of liquidity, and it funds primarily capital expenditures
and dividends. During the six-month period ended June 30, 1998 cash
provided by operating activities, less dividends paid, exceeded capital
expenditures.
Net cash used for Company investing activities was $57,851,000 and
$21,364,000 for the six months ended June 30, 1998 and 1997. The increase
was largely due to the previously mentioned cellular acquisitions.
Capital expenditures for the first six months of 1998 were $39,896,000.
The Company's capital expenditures increased $22,635,000 for the first six
months of 1998 compared to 1997. Total capital additions for both new and
updated networks and communications facilities for 1998 are projected to be
$80,000,000 for the Company.
Net cash used in Company financing activities was $2,082,000 and
$17,832,000 for the six months ended June 30, 1998 and 1997. The decrease
was largely due to the issuance of long-term debt.
The Company's consolidated debt to cash flow ratio was 1.05 to 1.00, its
consolidated debt to capital ratio was 1.00 to .74, and its EBITDA to
interest expense ratio was 24.30 to 1.00.
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<PAGE>
At June 30, 1998, the Company had $136.0 million of long-term debt,
consisting of the following:
- $100.0 million senior unsecured 6 3/4% notes due April 1, 2028.
- A $22.0 million variable rate term loan due July 6, 2000, with 13
consecutive quarterly installments commencing on September 15, 1997.
- A $22.0 million revolving loan due July 1, 1999. This loan was
arranged in accordance with the credit agreement described below.
- Excludes current installments of long-term debt of $8.0 million.
The Company filed a $250 million debt shelf registration statement with the
Securities and Exchange Commission on February 23, 1998. This will allow
the Company to offer and sell from time to time, debentures, notes, and/or
other unsecured evidences of indebtedness at an aggregate initial offering
price not to exceed $250 million.
In accordance with the $250 million debt shelf registration, the Company
sold $100 million of senior unsecured 6 3/4% notes in a public debt
offering. The bonds are dated April 1, 1998 and will mature on April 1,
2028. Interest is payable every six months on April 1 and October 1. The
proceeds were used as follows in second quarter 1998: (a) to repay the $15
million revolving loan that was incurred in order to acquire the remaining
50% interest in OCGP; (b) to redeem approximately $47.5 million of Telco
first mortgage bonds at an interest rate of 9.91 percent, including a
premium of approximately $3.5 million; (c) to redeem all of the outstanding
Telco 5% preferred stock, including a redemption premium of approximately
$225,000; and (d) to repay approximately $31 million of other bank debt.
The debt issue is rated AA+ by Standard and Poor's and A2 by Moody's.
As of July 6, 1998, the Company and its subsidiaries renewed previously
existing credit facilities aggregating $75.0 million of borrowing capacity
with several banks. The maturity date for all such facilities is July 1,
1999. At July 31, 1998, the Company had utilized $38.0 million of said
borrowing capacity. Interest on all such borrowings accrues on a LIBOR-
based pricing formula.
The Company will require cash for Network to build and operate fiber optic
transmission facilities outside of Telco's traditional service area.
Capacity on the network is leased to long distance and wireless carriers.
The Company expects to finance these planned expenditures primarily through
internally provided sources.
The Board of Directors has authorized the Company to purchase 1,500,000
shares of its common stock since April 24, 1991, and the shares are
purchased from time to time as market conditions warrant. During second
quarter 1998, 510,030 shares were purchased. As of June 30, 1998, a total
of 175,000 shares remain available for purchase under authority of the most
recent Board of Directors resolution, dated May 28, 1997. These purchases
are in addition to the purchases which the Company has been making for
purposes of satisfying participant requirements under the Employee and
Stockholder Dividend Reinvestment and Stock Purchase Plan, satisfying
Employer Matching and Stock Bonus Contributions under the Company's 401(k)
Savings and Stock Ownership Plan, and satisfying participant requirements
under the Company's 1989 Stock and Incentive Plan.
-14-
<PAGE>
COMPETITION AND REGULATORY ENVIRONMENT
Telco is taking measures to prepare for competition in its traditional
service territory. Upon passage of the Telecommunications Act of 1996 (the
Act), it became clear that Incumbent Local Exchange Carriers (ILECs) would
need to adjust local exchange service rates to better reflect the actual
cost of providing service. Traditionally, residential local exchange
service has been priced below cost, and has been subsidized through rates
charged to businesses, rates charged on toll calls and rates charged on
other enhanced services. Competition will largely eliminate the ability to
cross-subsidize customers and services in this manner.
Telco received a bona fide request on January 9, 1998, from US West
Communications, Inc. (US West) to negotiate an interconnection agreement.
After interconnection terms and conditions have been negotiated pursuant to
the Telecommunications Act of 1996 (the Act), and the Nebraska Public
Service Commission (NPSC) approves such interconnection agreements, it is
expected that US West will be in a position to offer competitive local
exchange services within the Company's traditional ILEC market. On June
23, 1998, US West filed a petition with the NPSC seeking permission to
offer interLATA long distance service in Nebraska. The NPSC has 90 days
from that date to determine if US West meets FCC requirements for offering
long distance service. On August 3, 1998, Telco received a second bona
fide request for interconnection. This request came from Nebraska
Telecommunications and Technology (NTT), which is a consortium of small
Nebraska local exchange carriers. This request will be handled on a
similar time frame as that received from US West. Other carriers may make
such requests to seek to establish Competitive Local Exchange Carrier
(CLEC) operations in Telco's operating area in the future.
Since 1986, Nebraska law has provided that ILECs may raise basic local
exchange service rates by as much as 10% per year without regulatory review
unless a sufficient number of subscriber petitions are filed with the NPSC.
Telco invoked this statute in 1997, raising residential local exchange
service rates by 10%. 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.
On March 10, 1998, Telco received approval of its application with the NPSC
to increase Telco's residential basic local service rates to $16.35 per
month (previous residential rates ranged from $11.00 to $13.75 per month).
This increase was implemented on May 16, 1998. Approval of this rate
increase is important to Telco's efforts to respond to the competitive
environment required by the Act. Competitive market forces require Telco
to bring prices for residential basic local exchange service closer to
actual cost, and to lower rates for business customers who are especially
attractive to potential competitors. The additional revenue generated by
such increase is being offset by (a) reductions in Telco's business basic
local service rates to $31.40 per month (previous business rates ranged
from $33.00 to $39.00 per month); (b) the elimination of a separate touch
tone charge ($.50 and $1.50 per month for residential and business
-15-
<PAGE>
customers, respectively); (c) the reduction of day time intraLATA toll
rates from $.18 per minute to $.13 per minute; and (d) the reduction of
intraLATA access charges by approximately $900,000 per year. Telco has
estimated that the net impact of all these changes will be immaterial to
revenues. Revenue neutrality is required by Nebraska Statute 86-803(9),
under which Telco filed its rate application.
Other regulatory issues continue to 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. Also, the
FCC has ruled 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.
In response, FCC Chairman William Kennard has recently suggested that the
federal share of this responsibility may need to be increased. The FCC
released a Public Notice on April 15, 1998, to examine this and other
issues regarding universal service support.
Access reform is a major policy initiative affecting Telco. Access rates
are the fees that ILECs charge long distance carriers for use of their
network. The FCC issued an order in May 1997 that reduces access rates
over a period of time on interstate calls by basing such rates on forward-
looking incremental costs. For some time, a movement has been underway to
enable the NPSC to establish a similar rate structure for access charges on
intrastate calls. The NPSC has determined that the issues of access reform
and universal service should be handled concurrently in a single "super
docket". Telco supports their decision, since decisions regarding access
reform could place tremendous pressure on consumers for support of
universal service. Telco filed comments in this docket on March 6, 1998,
and reply comments on April 27, 1998. Telco will continue to actively
participate in the NPSC docket.
A petition has been filed to place on the general election ballot for
Nebraska's November 3, 1998 general election a proposal to authorize the
NPSC to remove subsidies from intrastate access rates and base those rates
on forward-looking costs. Based on preliminary indications, it appears
that the number of signatures submitted will be sufficient to place this
proposal on the general election ballot. Telco has taken the position
that, while state subsidies should be removed in a competitive
telecommunications environment, it is important that a universal service
funding mechanism, similar to the FCC's Subscriber Line Charge, be in place
before access charge rates are reduced. Telco is, therefore, opposed to
the proposal as it is currently worded and supports resolution of this
issue through the NPSC regulatory process. If adopted without any
universal service funding mechanism, the proposal could lead to an annual
revenue loss for Telco, based on fiscal 1997 figures, of approximately
$16,000,000. However, Telco would expect to fully offset any such annual
revenue loss through the rate rebalancing mechanism or through the Nebraska
Universal Service Fund.
-16-
<PAGE>
Wireless telecommunications service continues to be an increasingly
important sector of the Company's business. The FCC has taken steps to
increase the number of wireless competitors by auctioning radio spectrum
for Personal Communications Services (PCS). As many as seven new wireless
competitors are allowed in each market.
The FCC has also imposed new requirements for the Company to separate
wireless operations from Telco. Currently, the cellular license for the
Lincoln MSA is held by Telco.
MANAGED CELLULAR MARKETS
The Company owns and manages cellular markets providing service in the
Lincoln MSA (held by Telco) and 89 of the other 92 counties in Nebraska.
These markets contain approximately 231,000 and 848,000 POPs (potential
customers), respectively. OCLP, a limited partnership doing business as
Aliant Cellular-Omaha, provides service in the Omaha MSA containing
approximately 634,000 POPs. The Company has an interest (50% prior to
February 27, 1998 and 100% thereafter) in OCGP which owned 55.82% of OCLP
at March 31, 1998, and manages that operation. Effective April 1998, OCGP
increased its interest in OCLP from 55.82% to 81.75%. On April 28, 1998,
OCGP completed the purchase of the interests of several of the limited
partners for approximately $24 million. Beginning in March 1998, Omaha's
operating revenues and expenses are consolidated with those of the
Company's other activities, and the net results from Omaha attributable to
other partners are separately reported as minority interest. Prior to
March 1998, the Company's portion of Omaha's net results was included with
income from investments.
As of June 30, 1998, there were 281,210 customer lines in service in these
three markets, compared to 233,839 a year earlier. Penetration rates
(subscribers compared to POPs) achieved were 23.4% in Lincoln, 16.7% in the
rural areas of Nebraska, and 13.5% in Omaha. Earnings before interest,
income taxes, depreciation and amortization (EBITDA) totaled $16,296,000
and $29,347,000 for the second quarter and six months of 1998,
respectively, compared to $14,640,000 and $25,781,000 in the same periods
in 1997. Net operating income was $12,264,000 and $21,741,000, an increase
of $807,000 (7.0%) and $2,209,000 (11.5%).
In addition, the Company has a 16.1% interest in, and manages, cellular
operations in Iowa Rural Service Area 1 (RSA 1), which is contiguous to
Omaha and to the Company's telephone operating area in Nebraska. RSA 1
contains approximately 62,000 POPs.
ACCOUNTING PRONOUNCEMENTS
FAS 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997. FAS 131 establishes standards for
the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in annual financial
reports issued to shareholders. It also established standards for related
disclosures about products and services, geographic areas, and major
customers. FAS 131 is effective for periods beginning after December 15,
1997. The Company anticipates adopting this accounting pronouncement in
the fourth quarter of 1998; however, management believes it will not have a
significant impact on the Company's annual consolidated financial
statements.
-17-
<PAGE>
FAS 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, was issued in February 1998. FAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does
not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits
to the extent practicable and requires additional information on changes in
the benefit obligations and fair values of plan assets that will facilitate
financial analysis. FAS 132 is effective for periods beginning after
December 15, 1997. Management believes that adopting this accounting
pronouncement in 1998 will not have a significant effect on the level of
disclosures in its consolidated financial statements.
FAS 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998. FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. FAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company anticipates
adopting this accounting pronouncement in 2000; however, management
believes it will not have a significant impact on the Company's annual
consolidated financial statements.
YEAR 2000
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000. 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. The current
estimate of total year 2000 compliance costs is approximately 24,000 person
hours at an approximate cost of $1.3 million with 16,000 hours of labor
completed to date. Virtually all of the year 2000 compliance costs are due
to reprogramming, since all switching equipment will be year 2000 compliant
without significant cost to the Company. The estimated costs are not
expected to significantly affect operating results or the financial
condition of the Company in 1998 and 1999.
The Company is in the process of inquiring as to the progress of its major
vendors and suppliers regarding their year 2000 compliance. The Company is
monitoring its vendors and suppliers closely with the intent of confirming
their year 2000 compliance with sufficient time for testing.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This filing may contain "forward-looking" statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as amended.
These statements contain potential risks and uncertainties that may cause
the actual results, performance, achievements, plans, and objectives of the
Company to be materially different from any future results, performance,
achievements, plans, and objectives expressed or implied by such forward-
looking statements.
-18-
<PAGE>
Important assumptions and other important factors that could cause actual
results to differ from those set forth in the forward-looking information
are discussed in this report and in other reports filed by the Company with
the Securities and Exchange Commission and include, but are not limited to:
changes in the national and local economic and market conditions;
demographic changes; the size and growth of the overall telecommunications
market; changes in competition in markets in which the Company operates;
advances in telecommunications technology; changes in the
telecommunications regulatory environment; the need for regulatory approval
to make acquisitions or undertake certain other activities, including rate
re-balancing; changes in business strategy or development plans; pending
and future litigation; availability of future financing; start-up of
Personal Communications Services operations; new product and service
development and introductions; changes in consumer preferences; and
unanticipated changes in growth in cellular customer, penetration rates,
churn rates, and the mix of products and services offered in the Company's
markets. The Company undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future
events or otherwise.
-19-
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
The Company filed a federal trademark infringement lawsuit against a
Wisconsin company known as Interstate Energy Corporation, and the lawsuit
will go to trial October 5, 1998. The lawsuit is the result of the
Wisconsin company choosing a new name, Alliant Corp., for its expanding
utilities business. The Company believes that use of that name will lead
to customer confusion, due to the geographic proximity of the companies and
their customers, and due to the similarity of products and services
provided; and investor confusion, due to the similarity of stock symbols
and convergence taking place in the utilities industry. A U.S. District
Judge has issued a preliminary injunction ordering Interstate Energy
Corporation to refrain from advertising its proposed name and conducting a
shareholder's meeting to change its name until the trademark lawsuit is
heard.
Item 2 - Changes in Securities
- ------------------------------
Effective May 15, 1998, the 5% preferred stock ($100 par value per share)
of Telco was redeemed in its entirety. The redemption price was $105.63
per share (par plus a redemption premium of $5.00 per share plus the
accrued dividend).
Item 5 - Other Information
- --------------------------
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended (Rule 14a-8), for
inclusion in the Company's proxy statement for its 1999 Annual Meeting of
Shareholders is November 20, 1998. Notice to the Company of a shareholder
proposal submitted otherwise than pursuant to Rule 14a-8 will be considered
untimely if received by the Company before January 18, 1999 or after
February 12, 1999, and the persons named in the proxies solicited by the
Board of Directors of the Company for its 1999 Annual Meeting of
Shareholders may exercise discretionary voting power with respect to any
such proposal as to which the Company does not receive timely notice.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
27. Financial Data Schedules (filed electronically with the SEC)
(b) Reports on Form 8-K
Current report on Form 8-K as filed on April 1, 1998, reporting the
Registrant's announcement that it completed an offering of $100 million
aggregate principal amount of its 6 3/4% notes due April 1, 2028.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, Aliant Communications Inc., has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Aliant Communications Inc.
--------------------------
(Registrant)
August 14, 1998 /s/ Robert L. Tyler
Date..................... ......................................
(Signature)
Robert L. Tyler, Senior Vice President-
Chief Financial Officer
August 14, 1998 /s/ Michael J. Tavlin
Date..................... ......................................
(Signature)
Michael J. Tavlin, Vice President-
Treasurer
-21-
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
EXHIBIT INDEX TO FORM 10-Q
Exhibit No. Title Page No.
- ----------- ----- --------
27 Financial Data Schedule *
Aliant Communications Inc.
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