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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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
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Aliant Communications Inc.
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(Exact name of registrant as specified in its charter)
Nebraska 47-0632436
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 M Street, Lincoln, Nebraska 68508
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(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
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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 April 30, 1999
$.25 par Value 35,634,726
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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 5
CONDENSED NOTES TO FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 18
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* Denotes none or not applicable.
SIGNATURES 19
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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, 1998 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, 1998.
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ALIANT COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
Mar. 31, 1999 Dec. 31, 1998
(Unaudited) (Audited)
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(Dollars in Thousands)
<CAPTION>
ASSETS
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,659 $ 26,554
Temporary investments 975 985
Accounts receivable and other 66,467 71,180
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Total current assets 100,101 98,719
Property and equipment less accumulated
depreciation and amortization 328,969 320,130
Investments and other assets 189,731 186,124
Deferred charges 20,297 19,695
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Total assets $639,098 $624,668
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable to banks $ 55,000 $ 39,000
Current installment of long-term debt 11,000 10,000
Accounts payable and accrued liabilities 70,813 75,685
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Total current liabilities 136,813 124,685
Deferred credits and other long-term liabilities 67,703 64,744
Long-term debt, excluding current installment 105,000 108,000
Minority interest - 6,481
Stockholders' equity 329,582 320,758
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Total liabilities and stockholders' equity $639,098 $624,668
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ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
March 31, 1999 March 31, 1998
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(Dollars in thousands except per share data)
<CAPTION>
<S> <C> <C>
Operating revenues:
Telephone revenues:
Local network services $24,016 $21,329
Access and wholesale services 15,776 14,283
Long distance services 8,351 8,365
Other wireline communications services 9,634 7,647
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Total telephone revenues 57,777 51,624
Wireless communications services 31,021 21,826
Telephone equipment sales and services 5,959 4,755
Intercompany revenues (4,992) (3,095)
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Total operating revenues 89,765 75,110
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Operating expenses:
Depreciation and amortization 15,980 12,587
Other operating expenses 49,479 41,607
Taxes, other than payroll and income 1,195 1,091
Intercompany expenses (4,992) (3,095)
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Total operating expenses 61,662 52,190
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Operating income 28,103 22,920
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Non-operating income and expense:
Income from interest and other investments 647 1,790
Minority interest - 358
Other deductions 359 241
Interest expense 2,656 2,213
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Net non-operating expense 2,368 1,022
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Income before income taxes 25,735 21,898
Income taxes 10,430 8,780
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(Continued on following page)
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ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS (Cont'd)
(UNAUDITED)
Three Months Ended
March 31, 1999 March 31, 1998
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(Dollars in thousands except per share data)
Net income 15,305 13,118
Preferred dividends - 56
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Earnings available for common shares $15,305 $13,062
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Basic and diluted earnings
per common share $ .43 $ .36
======= =======
Weighted average common shares outstanding
(in thousands) 35,636 36,204
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Dividends declared per common share $ .18 $ .18
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ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, 1999 March 31, 1998
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(Dollars in thousands)
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $15,305 $13,118
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Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 16,011 12,607
Net change in investments and other assets 156 369
Deferred income taxes 1,321 401
Changes in assets and liabilities resulting
from operating activities:
Receivables 4,454 7,502
Other assets (352) (402)
Accounts payable and accrued expenses (11,859) (6,028)
Minority interest - (88)
Other liabilities 8,626 9,807
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Total adjustments 18,357 24,168
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Net cash provided by operating
activities 33,662 37,286
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Cash flows from investing activities:
Expenditures for property and equipment (23,746) (20,463)
Net salvage on retirements 851 9,038
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Net capital additions (22,895) (11,425)
Proceeds from sale of investments and other
assets 4 1,686
Purchases of investments and other assets (23) (1,224)
Purchases of temporary investments - (279)
Maturities and sales of temporary investments 10 1,020
Acquisition, net of cash acquired (12,171) 1,284
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Net cash used for investing
activities (35,075) (8,938)
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(Continued on following page)
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ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(UNAUDITED)
Three Months Ended
March 31, 1999 March 31, 1998
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(Dollars in thousands)
Cash flows from financing activities:
Dividends to stockholders (6,415) (6,208)
Payments of long term debt (2,000) (6,500)
Proceeds from issuance of notes payable 16,000 -
Net purchases and sales of common and
treasury stock (67) 204
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Net cash provided by/(used in)
financing activities 7,518 (12,504)
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Net increase in cash and cash
equivalents 6,105 15,844
Cash and cash equivalents at beginning of year 26,554 27,867
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Cash and cash equivalents at end
of quarter $32,659 $43,711
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Supplemental disclosures of cash flow information:
Interest paid $ 904 $ 1,134
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Taxes paid $ 2,716 $ 825
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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 Systems Inc.
(Systems); Aliant Midwest Inc. (Midwest); Aliant Network Services Inc.
(Network); Aliant Wireless Holdings Inc. (Wireless Holdings); and Aliant
Cellular Inc. (Cellular), a wholly-owned subsidiary of Wireless Holdings.
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.
(2) CELLULAR REORGANIZATION
Effective January 1, 1999, after the Company completed the acquisition of
the remaining limited partner for $15.2 million, the Company now owns 100%
of its Omaha cellular market. Also, as of January 1, 1999, the Company's
cellular markets (Omaha and Lincoln MSAs and Nebraska RSAs) have been
consolidated into a single subsidiary, Cellular, for efficiency and
management purposes.
(3) REPORTABLE SEGMENTS
The Company has significant operations principally in two industry
segments: landline operations and wireless operations. The landline
operations provide a full array of telecommunications services to both
retail customers (consumers, businesses, government, and education) and
wholesale customers (communications companies that may be competitors at
the retail level). The wireless operations consist of cellular and paging
services.
Landline Wireless All
Operations Operations Other Total
---------- ---------- ----- -----
(Dollars in thousands)
Quarter ended March 31, 1999
- ----------------------------
Revenues from external customers
including intersegment revenues $ 59,291 31,125 5,959 96,375
Intersegment revenues 6,506 104 - 6,610
Income from operations 15,443 9,922 370 25,735
As of March 31, 1999
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Segment assets $327,449 298,145 29,264 654,858
Expenditures for segment assets 20,776 2,923 282 23,981
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A reconciliation of reportable segment amounts to the Company's
consolidated balances follows:
Quarter ended March 31,
Revenue 1999
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Total revenue for reportable segments $ 90,416
Other revenue 5,959
Elimination of intersegment revenue (6,610)
------
Total consolidated revenue $ 89,765
======
As of March 31,
Assets 1999
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Total assets for reportable segments $625,594
Other segment assets 29,264
Consolidating and eliminating adjustments (15,760)
-------
Total consolidated assets $639,098
=======
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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.
Revenues
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Three Months Ended March 31
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(Dollars in thousands) 1999 1998 Change %
- ---------------------- ---- ---- --------------
Telephone revenues:
Local network $24,016 $21,329 $2,687 12.6
Access and wholesale 15,776 14,283 1,493 10.5
Long distance 8,351 8,365 (14) (0.2)
Other wireline 9,634 7,647 1,987 26.0
------ ------ ------ -----
Total telephone
revenues 57,777 51,624 6,153 11.9
Wireless communications 31,021 21,826 9,195 42.1
Equipment sales/service 5,959 4,755 1,204 25.3
Intercompany revenues (4,992) (3,095) (1,897) (61.3)
------ ------ ------ ------
Total operating
revenues $89,765 $75,110 $14,655 19.5
All comparisons made in the following section are of first quarter 1999
with the same period in 1998.
Local network services revenue increased $2,687,000 (12.6%). Basic local
services revenue constituted $1,437,000 of the increase. The basic local
revenue increase was primarily due to the following factors. First,
residential revenue grew due to an increase in residential basic local
service rates effective May 16, 1998. This was partially offset by a
decrease in business basic local service rates. Second, additional
installations of second phone lines contributed to the rise in residential
revenues, with a 42.5% increase in second lines. Telco access lines in
service increased to 287,113, up 11,084 lines (4.0%) from March 31, 1998.
The access lines for Midwest, the Company's competitive local exchange
carrier (CLEC), increased to 6,004, up 4,637 (339.2%) from March 31, 1998.
The local network services revenue increase was also affected by private
line revenue increasing $333,000 (44.1%), due to new Integrated Services
Digital Network (ISDN) revenue and to growth. Enhanced services revenue,
consisting of custom calling features, Custom Local Area Signaling Services
(CLASS) and voice mail, continued its growth with an increase of $351,000
(21.9%). The growth of Midwest also contributed $704,000 of the increase.
Access and wholesale services revenue increased $1,493,000 (10.5%). The
access revenue share of the increase was primarily due to the following
factors. First, subscriber line charge revenue increased because of a July
1998 rate increase. Second, traffic sensitive access increased due to July
1998 and January 1999 local transport rate increases. These increases were
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partially offset by an intrastate access rate decrease in May 1998 which
coincided with local service rate increases, and by interstate switched
access rate reductions in January 1998 and July 1998. The wholesale
revenue portion of the increase is represented by Network's revenue, which
increased $307,000. Access minutes of use reached a total of 276.3 million
minutes in the first three months of 1999, compared to 265.7 million
minutes for the same period in 1998, a 4.0% increase.
Other wireline communications services revenue includes directory
advertising and sales, carrier billing and collections, data
communications, public paystations, and miscellaneous items. This revenue
category increased $1,987,000 (26.0%). Data communications growth is up
$1,093,000 (54.3%), primarily due to the growth of Navix, the Company's
Internet access service. The growth of Midwest contributed $379,000 of the
increase. Directory advertising revenue also increased by $142,000,
substantially due to a rate increase for directory advertising in the
Company's latest directory editions.
Wireless communications services revenue increased $9,195,000 (42.1%). As
a result of increased ownership in the Omaha market, operating revenues
from the Omaha MSA were included in the Company's operating revenues
beginning March 1, 1998. Prior to that time, the Company's portion of the
net results from the Omaha market were reported in non-operating income
from investments. The inclusion of the Omaha market contributed $6,100,000
of the total wireless revenue increase. Customer lines in the total
cellular market increased by 36,899 (13.6%) since March 31, 1998.
Telephone equipment sales and services revenue increased $1,204,000 (25.3%)
due to increased sales of business telecommunications products and
services.
Overall, Company operating revenues increased $14,655,000 (19.5%).
Operating Expenses
- ------------------
Three Months Ended March 31
--------------------------------
(Dollars in thousands) 1999 1998 Change %
- ---------------------- ---- ---- --------------
Depreciation and
amortization $15,980 $12,587 $3,393 27.0
Other operating 49,479 41,607 7,872 18.9
Other taxes 1,195 1,091 104 9.5
Intercompany expenses (4,992) (3,095) (1,897) (61.3)
------ ------ ------
Total $61,662 $52,190 $9,472 18.1
Depreciation and amortization expense increased $3,393,000 (27.0%). The
inclusion of the Omaha market in consolidated results contributed
$2,066,000 of the increase in depreciation. The addition of depreciable
assets primarily in Cellular, Midwest and Network contributed to the
remaining increase.
Other operating expenses increased by $7,872,000 (18.9%). 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 the Omaha
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market in consolidated results. Total cellular operations expenses
increased by $3,864,000, and $3,616,000 of the increase was attributable to
the inclusion of the Omaha market. Navix expenses grew $482,000 due to the
continued growth of Navix Internet service. Midwest contributed $436,000
of operating expenses as a result of start-up costs and ongoing expenses.
Other taxes increased by $104,000 (9.5%), primarily because of the
inclusion of the Omaha market in consolidated results.
Overall, Company operating expenses increased $9,472,000 (18.1%).
Non-Operating Income and Expense
- --------------------------------
Three Months Ended March 31
--------------------------------
(Dollars in thousands) 1999 1998 Change %
- ---------------------- ---- ---- --------------
Income from interest
and other investments $ 647 $1,790 (1,143) (63.9)
Minority interest 0 358 (358) --
Other deductions 359 241 118 49.0
Interest expense 2,656 2,213 443 20.0
----- ----- ----
Net $2,368 $1,022 $1,346 131.7
Income from interest and other investments decreased by $1,143,000 (63.9%).
Prior to March 1998, this category included the Company's portion of the
net results of the Omaha market. Since March 1, 1998, the Omaha market has
been consolidated into operations.
Minority interest represents the portion of the net results of the Omaha
market not owned by the Company, which was 44.2% beginning March 1, 1998,
and 18.25% effective April 1, 1998. The remaining minority interest was
purchased effective January 1, 1999.
Interest expense increased by $443,000 (20.0%). The increases resulted
from additional debt for (1) the redemption of Telco preferred stock; (2)
the retirement of Telco first mortgage bonds, including a $3.5 million
redemption premium; and (3) the Omaha Cellular acquisitions. The interest
expense increase was partially offset by the reduction from the replacement
of 9.91% Telco first mortgage bond debt with 6.75% senior unsecured notes.
Income Taxes
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Income taxes increased $1,650,000 (18.8%). The increase was proportionate
to the increase in taxable income.
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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. 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 $33,662,000 for the
first three months of 1999 compared to $37,286,000 for the first three
months of 1998. The principal factors involved in the decrease were a
decrease in accounts payable and accrued expenses, and a decrease in cash
flow from accounts receivable. Cash from operating activities is the
Company's primary source of liquidity, and primarily funds capital
expenditures and dividends. During the three-month period ended March 31,
1999, cash provided by operating activities, less dividends paid, exceeded
capital expenditures.
Net cash used for Company investing activities was $35,075,000 and
$8,938,000 for the three months ended March 31, 1999 and 1998,
respectively. The increase was largely due to the previously mentioned
cellular acquisitions as well as an increase in net capital additions.
Capital expenditures for the first three months of 1999 were $22,895,000,
an increase of $11,470,000 compared to 1998. Total Company capital
additions for both new and updated networks and communications facilities
for 1999 are projected to be $82,000,000.
Net cash provided by/(used in) Company financing activities was $7,518,000
and ($12,504,000) for the three months ended March 31, 1999 and 1998,
respectively. The additional cash provided from financing activity was
largely due to the issuance of new notes payable.
The Company's consolidated debt to cash flow ratio was .97 to 1.00, its
consolidated debt to capital ratio was 1.00 to 2.61, and its EBITDA to
interest expense ratio was 20.21 to 1.00.
At March 31, 1999, the Company had $105.0 million of long-term debt
(excluding current installments of $11 million), consisting of the
following:
- $100.0 million senior unsecured 6 3/4% notes due April 1, 2028.
- A $16.0 million variable rate term loan due July 6, 2000, with 13
consecutive quarterly installments commencing on September 15, 1997.
The Company filed a debt shelf registration statement with the Securities
and Exchange Commission on February 23, 1998 to enable the Company to offer
and sell from time to time, up to an aggregate of $250 million in
debentures, notes, and/or other unsecured evidences of indebtedness.
As part of the $250 million debt shelf registration, the Company sold $100
million of senior unsecured 6 3/4% notes in a public debt offering. The
bonds are dated April 1, 1998 and will mature on April 1, 2028. Interest
is payable every six months on April 1 and October 1.
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As of July 6, 1998, the Company and its subsidiaries renewed previously
existing credit facilities aggregating $75.0 million of borrowing capacity
with two banks. The maturity date for all such facilities is July 1, 1999.
At April 30, 1999, the Company had utilized $55 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 cancelled the Company's share repurchase plan
effective February 17, 1999.
COMPETITION AND REGULATORY ENVIRONMENT
Telco is now a party to three approved interconnection agreements with
CLECs. The first agreement was negotiated with US West Communications,
Inc. (US West) during 1998 and 1999. It was approved by the Nebraska
Public Service Commission (NPSC) on February 17, 1999. US West is now in a
position to offer competitive local exchange services within the Company's
traditional ILEC market. However, US West has stated that it does not
intend to do so until it has approval to offer interLATA long-distance
service in Nebraska. On June 23, 1998, US West filed a petition with the
NPSC seeking permission to offer such service. The NPSC does not actually
grant final approval, but rather makes a recommendation to the FCC as to
whether US West has met the requirements set by FCC rules under Section 271
of the Telecommunications Act. On April 9, 1999, the NPSC ruled that US
West had met only 8 of 14 requirements, and recommended disapproval of the
application. On March 29, 1999, the NPSC approved a resale interconnection
agreement between Telco and Nebraska Technology and Telecommunications,
Inc. (NTT), which is a consortium of small Nebraska local exchange
carriers. On April 20, 1999, E-Z Phone Connections received NPSC approval
to also adopt the terms of the NT&T agreement under Section 252(i) of the
Telecommunications Act. Other carriers may make such requests to seek to
establish CLEC operations in Telco's operating area in the future, either
through adoption of an approved agreement or through negotiation of a new
agreement.
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, rates charged for
intrastate access, and rates charged on other enhanced services.
Competition will largely eliminate the ability to cross-subsidize customers
and services in this manner.
Telco has taken steps to prepare for competition by instituting several
rate changes. 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
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$11.00 to $13.75 per month). This increase was implemented on May 16,
1998. Approval of this rate increase is important to Telco's efforts to
respond to the competitive environment required by the Act. Competitive
market forces require Telco to bring prices for residential basic local
exchange service closer to actual cost, and to lower rates for business
customers who are especially attractive to potential competitors. The
additional revenue generated by such increase was offset by (a) reductions
in Telco's business basic local service rates to $31.40 per month (previous
business rates ranged from $33.00 to $39.00 per month); (b) the elimination
of a separate touch tone charge ($.50 and $1.50 per month for residential
and business customers, respectively); (c) the reduction of day time
intraLATA toll rates from $.18 per minute to $.13 per minute; and (d) the
reduction of intrastate access charges by approximately $900,000 per year.
The net impact of all these changes was immaterial to revenues. Revenue
neutrality is required by Nebraska Statute 86-803(9), under which Telco
filed its rate rebalancing application.
Access reform is a major policy initiative affecting Telco. Access rates
are the fees that ILECs charge long distance carriers for use of their
network. The FCC issued an order in May 1997 that reduces access rates
over a period of time on interstate calls by basing such rates on forward-
looking incremental costs. For some time, a movement has been underway to
enable the NPSC to establish a similar rate structure for access charges on
intrastate calls. AT&T launched a ballot initiative to attempt to drive
Nebraska's intrastate access charges to actual cost. Telco, as well as all
other local exchange carriers in Nebraska, opposed the initiative because
it proposed to strip all subsidies out of intrastate access charges without
creating an alternative mechanism for subsidizing local service in rural
areas. On November 3, 1998, AT&T's ballot initiative failed, gathering 42%
of the vote compared with 58% against. While Telco still supports access
reform at the state level, the defeat of the ballot initiative was critical
in that it allows the issue to be handled by the NPSC in conjunction with
the creation of a state universal service fund.
The NPSC has determined that the issues of access reform and universal
service should be handled concurrently in a single "super docket". After
receiving comments from interested parties, on January 13, 1999, the NPSC
issued its Findings and Conclusions (the Order) in the "super docket"
which had been assigned Application No. C-1628.
The Order required Telco to file a rate transition plan on May 3, 1999 that
lowers intrastate access charges to actual cost over a three-year
transition period. The Nebraska Universal Service Fund (NUSF) will serve
as a revenue replacement mechanism. In order to participate in the NUSF,
Telco will need to raise its basic local residential service rate from
$16.35 to $17.50 per month. Because Telco's business rates have also
served as a source of rate subsidy, Telco proposes to lower business rates
over the three-year period. If approved, Telco's basic monthly business
rate will be lowered from $31.40 to $27.50 in three separate steps over the
next three years. This revenue is also eligible for replacement through
the NUSF. If approved, these new rates will take effect on September 1,
1999.
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As proposed, Telco's rate transition plan will eliminate roughly $10
million in implicit rate subsidies in the next year. Because of earnings
limitations included in the Order, Aliant will not recover this entire
amount. Through the residential rate increase and revenue from the NUSF,
Telco should receive about $8.5 million. Despite the shortfall, however,
this rate transition plan is very positive for Telco. It greatly
solidifies Telco's competitive position by removing implicit rate
subsidies. As noted, these rate subsidies create considerable competitive
vulnerability for certain services. The rate transition should also
stimulate demand for the services receiving price decreases, including
business service and intrastate access service.
The Order contemplates funding the NUSF through a surcharge on intrastate
telecommunications service billings to customers in Nebraska. While this
surcharge will apply to many wireless, data communications, and other
telecommunications services provided by Telco, the surcharge will be
competitively neutral and should not adversely impact Telco's market share
or the demand for such services.
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.
MANAGED CELLULAR MARKETS
The Company owns and manages cellular markets providing service in the
Lincoln and Omaha MSAs and 89 of the other 90 counties in Nebraska. These
markets contain approximately 231,000, 634,000, and 848,000 POPs (potential
customers), respectively. 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 for 1998. Prior to March
1998, the Company's portion of Omaha's net results was included with income
from investments. Effective January 1, 1999, the Omaha market is wholly-
owned. The Company also owns a 9.2% interest in, and manages cellular
operations in, Iowa Rural Service Area 1 (RSA 1).
As of March 31, 1999, there were 308,223 customer lines in service in the
Company's three wholly-owned markets, compared to 271,324 a year earlier.
The consolidated penetration rate (subscribers compared to POPs) for these
three markets was 18.0%.
Earnings before interest, income taxes, depreciation and amortization
(EBITDA) totaled $15,538,000 for the first quarter of 1999, compared to
$13,051,000 in the same period in 1998. Net operating income was
$10,139,000 an increase of $932,000 (26.6%).
ACCOUNTING PRONOUNCEMENTS
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
-15-
<PAGE>
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 uses software and related technologies throughout its business
that could be affected by the date change in the year 2000 (Y2K). An
inventory of Information Technology (IT) and non-Information Technology
(non-IT) system resources was initially made during 1997. This inventory
is maintained and updated as resources are found that may have date
functionality that could be affected by dates after December 31, 1999.
Included in the IT category would be mainframe, mini/micro, workstation,
data exchange, and telephone switch platforms. Non-IT systems include
items such as environmental controls, security, motor vehicle, and
elevators.
Awareness and assessment phases have been completed for all significant IT
resources. Renovation of all application coding updates and changes was
scheduled to be completed by June 30, 1999. It is now known that some
support application areas will not be completed until later this year. All
workstation platforms are being replaced with hardware and software that is
Y2K compliant before June 1999. All telephone switches are being upgraded
or replaced before year-end 1999, with the last switch upgrade scheduled
for November 1, 1999.
Most of the remediation effort has been completed for non-IT systems. A
review of these items disclosed few items with date rollover issues. All
identified non-IT items have a contingency plan in place in the event a
resolution is not reached prior to January 1, 2000.
All major service providers have been solicited concerning their progress
in compliance with Y2K date issues. Service providers include utilities
and manufacturers of IT and non-IT equipment. Aliant is relying on vendor
and supplier representations related to their specific product/service
ability to operate properly after December 31, 1999.
Correspondence has been sent to all customers who have Aliant
telecommunication systems, along with manufacturer information on the
equipment's ability to handle date issues. The Company responds regularly
to customer and regulatory inquiries on the status of Y2K issues.
The current estimate of mainframe application Y2K renovation costs is
approximately 28,000 person hours at an approximate cost of $1.5 million
with 24,000 hours of labor (at a cost of $1.2 million) completed to date.
Virtually all of the Y2K compliance costs are due to reprogramming, since
all switching equipment will be Y2K compliant without additional
significant cost to the Company. These estimated costs are not expected to
significantly affect operating results or the financial condition of the
Company.
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<PAGE>
The Company bears a significant risk if programming changes are either
overlooked or not completed by January 1, 2000. A significant risk is
random embedded chip failures throughout the Company's network, which may
be hard to find, troubleshoot, and replace. Additional test equipment,
replacement parts, and labor hours may be required to address this risk.
During the remainder of 1999, the Company will evaluate, and implement as
appropriate, cost-effective contingencies for identified Y2K risks and
exposures. Short-term power interruption concerns are minimized by existing
and enhanced alternative power generation and battery backup capabilities.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This filing may contain "forward-looking" statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as amended.
These statements contain potential risks and uncertainties that may cause
the actual results, performance, achievements, plans, and objectives of the
Company to be materially different from any future results, performance,
achievements, plans, and objectives expressed or implied by such forward-
looking statements.
Important assumptions and other important factors that could cause actual
results to differ from those set forth in the forward-looking information
are discussed in this report and in other reports filed by the Company with
the Securities and Exchange Commission and include, but are not limited to:
changes in the national and local economic and market conditions;
demographic changes; the size and growth of the overall telecommunications
market; changes in competition in markets in which the Company operates;
advances in telecommunications technology; changes in the telecommunications
regulatory environment; the need for regulatory approval to make acquisitions
or undertake certain other activities, including rate re-balancing; changes
in business strategy or development plans; pending and future litigation;
availability of future financing; start-up of Personal Communications
Services operations; new product and service development and introductions;
changes in consumer preferences; and unanticipated changes in growth in
cellular customer, penetration rates, churn rates, and the mix of products
and services offered in the Company's markets. The Company undertakes no
obligation to update publicly any forward-looking statements whether as a
result of new information, future events or otherwise.
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<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission Matters to a Vote of Security Holders
- ---------------------------------------------------------
(a) and (c). The Company held its annual meeting of shareholders on April
27, 1999, and the following matters were voted on at that meeting:
1. The Company's proposed merger with a wholly-owned subsidiary of ALLTEL
Corporation, was approved by the following shareholder vote:
For, 26,628,658; Against, 1,105,546; Withheld, 163,949.
2. The election of the following directors for a term expiring at the
earlier of the proposed closing of the merger, the date of the 2002
annual meeting of shareholders, or such time as their successors are
elected and qualified:
DIRECTOR FOR WITHHELD
-------- --- --------
Duane W. Acklie 29,991,446 1,067,323
John Haessler 29,997,538 1,044,722
William C. Smith 29,771,701 1,244,736
Lyn Wallin Ziegenbein 29,736,776 1,113,318
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
27. Financial Data Schedule (filed electronically with the SEC)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, Aliant Communications Inc., has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Aliant Communications Inc.
--------------------------
(Registrant)
May 17, 1999 /s/ Robert L. Tyler
Date..................... ......................................
(Signature)
Robert L. Tyler, Senior Vice President-
Chief Financial Officer
May 17, 1999 /s/ Michael J. Tavlin
Date..................... ......................................
(Signature)
Michael J. Tavlin, Vice President-
Treasurer
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<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
EXHIBIT INDEX TO FORM 10-Q
Exhibit No. Title Page No.
- ----------- ----- --------
27 Financial Data Schedule *
Aliant Communications Inc.
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