<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
----------- ---------------------------------- ------------------
0-10516 ALIANT COMMUNICATIONS INC. 47-0632436
(A Nebraska Corporation)
1440 M Street
Lincoln, NE 68508
402-436-5289
2-39373 ALIANT COMMUNICATIONS CO. 47-0223220
(A Delaware Corporation)
1440 M Street
Lincoln, NE 68508
402-436-5289
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.
ALIANT COMMUNICATIONS INC. Yes [x] No [ ]
ALIANT COMMUNICATIONS CO. 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.
ALIANT COMMUNICATIONS INC. Common stock, $.25 par value
36,186,311 shares outstanding
at October 31, 1997
ALIANT COMMUNICATIONS CO. Common stock, $3.125 par value
1,000 shares outstanding at
October 31, 1997
<PAGE>
ALIANT COMMUNICATIONS INC. AND
ALIANT COMMUNICATIONS CO.
EXHIBIT INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
CONTENTS
Page
INTRODUCTION 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALIANT COMMUNICATIONS INC.
Consolidated Statements of Earnings 2-3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5-6
ALIANT COMMUNICATIONS CO.
Statements of Earnings 7
Balance Sheets 8
Statements of Cash Flows 9-10
CONDENSED NOTES TO FINANCIAL STATEMENTS OF
Aliant Communications Inc. and
Aliant Communications Co. 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for
Aliant Communications Inc. and
Aliant Communications Co. 12-23
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 *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 24
- --------------------
* Denotes none or not applicable.
SIGNATURES 25-26
<PAGE>
INTRODUCTION
The unaudited interim financial statements presented herein include the
consolidated statements of Aliant Communications Inc. and its subsidiaries
(the Company), as well as separate financial statements for Aliant
Communications Co. (Telco). The unaudited statements have been prepared by
the Company and Telco, respectively, 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
and Telco believe, however, that the disclosures are adequate to make the
information presented not misleading. The Company's condensed consolidated
balance sheet and Telco's balance sheet at December 31, 1996, were derived
from the Company's audited consolidated balance sheet and Telco's audited
balance sheet, respectively, as of that date. The Company's and Telco's
financial statements should be read in conjunction with the financial
statements and notes thereto incorporated by reference in the respective
Annual Reports on Form 10-K of the Company and Telco for the year ended
December 31, 1996, and the current year's previously issued Forms 10-Q.
In the opinion of the Company and Telco, their respective interim financial
statements filed as part of this Form 10-Q reflect all adjustments
necessary to present fairly the results for the respective periods.
-1-
<PAGE>
<TABLE>
Item 1 - Financial Statements
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Operating revenues:
Telephone revenues:
Local network services $20,682 $18,759 $59,865 $55,823
Access services 13,848 13,857 42,460 42,302
Long distance services 7,973 7,829 23,697 23,963
Other wireline communications services 8,432 6,231 22,840 19,091
------- ------- ------- -------
Total telephone revenues 50,935 46,676 148,862 141,179
Wireless communications services 19,969 17,387 56,346 46,395
Telephone equipment sales and services 4,985 4,426 13,718 13,920
Intercompany revenues (2,323) (1,914) (6,536) (6,042)
------- ------- ------- -------
Total operating revenues 73,566 66,575 212,390 195,452
------- ------- ------- -------
Operating expenses:
Depreciation and amortization 12,902 11,513 37,502 34,273
Other operating expenses 38,276 34,711 111,776 105,558
Taxes, other than payroll and income 1,170 1,077 3,271 3,008
Intercompany expenses (2,323) (1,914) (6,536) (6,042)
------- ------- ------- -------
Total operating expenses 50,025 45,387 146,013 136,797
------- ------- ------- -------
Operating income 23,541 21,188 66,377 58,655
------- ------- ------- -------
Non-operating income and expense:
Income from interest and other investments 2,054 1,565 6,002 5,132
Other deductions 128 135 626 577
Interest expense 2,157 2,230 6,559 6,875
------- ------- ------- -------
Net non-operating expense 231 800 1,183 2,320
------- ------- ------- -------
Income before income taxes 23,310 20,388 65,194 56,335
Income taxes 9,315 8,223 26,033 22,735
------- ------- ------- -------
Net income 13,995 12,165 39,161 33,600
Preferred dividends 57 57 169 169
------- ------- ------- -------
(Continued on next page)
-2-
<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)
Earnings available for common shares $13,938 $12,108 $38,992 $33,431
======= ======= ======= =======
Earnings per common share $ .39 $ .33 $ 1.08 $ .91
======= ======= ======= =======
Weighted average common shares
outstanding (in thousands) 36,178 36,623 36,286 36,649
======= ======= ======= =======
Dividends declared per common share $ .17 $ .15 $ .49 $ .45
======= ======= ======= =======
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1997 1996
------------ -----------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
- ------
Current assets $ 85,841 $ 81,218
Property and equipment less accumulated
depreciation and amortization 251,657 255,020
Investments and other assets 176,939 171,684
Deferred charges 16,316 13,480
-------- --------
Total assets $530,753 $521,402
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued liabilities $ 73,117 $ 73,594
Deferred credits and other long-term liabilities 60,820 61,662
Long-term debt 97,000 103,080
Preferred stock, 5%, redeemable 4,499 4,499
Stockholders' equity 295,317 278,567
-------- --------
Total liabilities and stockholders' equity $530,753 $521,402
======== ========
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 39,161 $ 33,600
-------- --------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 37,597 34,296
Net change in investments and other assets (3,759) (2,810)
Deferred income taxes (986) 2,457
Changes in assets and liabilities resulting
from operating activities:
Receivables (5,182) (5,832)
Other assets (4,265) (263)
Accounts payable and accrued expenses (770) (2,443)
Other liabilities (603) 1,196
-------- --------
Total adjustments 22,032 26,601
-------- --------
Net cash provided by operating activities 61,193 60,201
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (31,905) (25,269)
Net salvage on retirements 350 (48)
-------- --------
Net capital additions (31,555) (25,317)
Proceeds from sale of investments and other assets 312 35
Purchases of investments and other assets (4,466) (1,288)
Purchases of temporary investments (1,338) (10,392)
Maturities and sales of temporary investments 2,225 16,208
-------- --------
Net cash used for investing activities (34,822) (20,754)
-------- --------
Cash flows from financing activities:
Dividends to stockholders (17,619) (16,661)
Retirement of notes payable 11,000 --
Proceeds from issuance of long-term debt -- (10,000)
Payments of long term debt (16,362) (8,111)
Net purchases and sales of treasury stock (4,471) (1,349)
-------- --------
Net cash used in financing activities (27,452) (36,121)
-------- --------
(Continued on next page)
-5-
<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(UNAUDITED)
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
(Dollars in Thousands)
Net increase (decrease) in cash and cash equivalents $ (1,081) $ 3,326
Cash and cash equivalents at beginning of year 25,290 21,151
-------- --------
Cash and cash equivalents at end of quarter $ 24,209 $ 24,477
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 5,582 $ 5,796
======== ========
Taxes paid $ 29,589 $ 19,301
======== ========
</TABLE>
-6-
<PAGE>
<TABLE>
Item 1 - Financial Statements
<CAPTION>
ALIANT COMMUNICATIONS CO.
STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Operating revenues:
Telephone revenues:
Local network services $20,658 $18,758 $59,841 $55,822
Access services 13,848 13,857 42,460 42,302
Long distance services 2,563 3,034 8,121 9,284
Other wireline communications services 8,312 6,113 22,488 18,750
------- ------- ------- -------
Total telephone revenues 45,381 41,762 132,910 126,158
Wireless communications services 5,755 4,896 16,538 13,583
Telephone equipment sales and services 1,752 1,747 4,746 5,213
------- ------- ------- -------
Total operating revenues 52,888 48,405 154,194 144,954
------- ------- ------- -------
Operating expenses:
Depreciation and amortization 10,104 9,271 29,655 27,568
Other operating expenses 23,922 22,677 71,407 68,669
Taxes, other than payroll and income 996 918 2,742 2,525
------- ------- ------- -------
Total operating expenses 35,022 32,866 103,804 98,762
------- ------- ------- -------
Operating income 17,866 15,539 50,390 46,192
------- ------- ------- -------
Non-operating income and expense:
Income from interest and other investments 416 303 1,193 1,375
Other deductions 128 135 626 577
Interest expense 1,158 1,111 3,421 3,393
------- ------- ------- -------
Net non-operating expense 870 943 2,854 2,595
------- ------- ------- -------
Income before income taxes 16,996 14,596 47,536 43,597
Income taxes 6,494 5,600 18,162 16,702
------- ------- ------- -------
Net income 10,502 8,996 29,374 26,895
Preferred dividends 57 57 169 169
------- ------- ------- -------
Earnings available for common shares $10,445 $ 8,939 $29,205 $26,726
======= ======= ======= =======
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS CO.
BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1997 1996
------------ -----------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
- ------
Current assets $ 67,000 $ 58,903
Property and equipment less accumulated
depreciation and amortization 214,002 221,905
Investments and other assets 372 409
Deferred charges 14,608 12,427
-------- --------
Total assets $295,982 $293,644
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Accounts payable and accrued liabilities $ 56,352 $ 61,022
Deferred credits and other long-term liabilities 54,979 55,176
Long-term debt 44,000 44,000
Preferred stock, 5%, redeemable 4,499 4,499
Stockholder's equity 136,152 128,947
-------- --------
Total liabilities and stockholder's equity $295,982 $293,644
======== ========
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
ALIANT COMMUNICATIONS CO.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,374 $ 26,895
-------- --------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 29,678 27,591
Deferred income taxes (452) 782
Changes in assets and liabilities resulting
from operating activities:
Receivables (4,272) 1,427
Other assets (6,369) (3,552)
Accounts payable and accrued expenses (3,570) (4,322)
Other liabilities (1,346) 79
-------- --------
Total adjustments 13,669 22,005
-------- --------
Net cash provided by operating activities 43,043 48,900
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (22,106) (20,789)
Net salvage on retirements 354 (83)
-------- --------
Net capital additions (21,752) (20,872)
Purchases and sales of investments and other assets, net 34 (421)
Purchases of temporary investments (1,338) (10,098)
Maturities and sales of temporary investments 2,225 14,358
-------- --------
Net cash used for investing activities (20,831) (17,033)
-------- --------
Cash flows from financing activities:
Dividends to stockholders (21,669) (19,669)
Payments on note payable to bank -- (8,000)
-------- --------
Net cash used in financing activities (21,669) (27,669)
-------- --------
(Continued on next page)
-9-
<PAGE>
ALIANT COMMUNICATIONS CO.
STATEMENTS OF CASH FLOWS (Cont'd)
(UNAUDITED)
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
(Dollars in Thousands)
Net increase (decrease) in cash and cash equivalents $ 543 $ 4,198
Cash and cash equivalents at beginning of year 17,865 13,496
-------- --------
Cash and cash equivalents at end of quarter $ 18,408 $ 17,694
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 2,220 $ 2,307
======== ========
Taxes paid $ 21,627 $ 15,868
======== ========
</TABLE>
-10-
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
ALIANT COMMUNICATIONS CO.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited interim financial statements include the consolidated
statements of the Company, as well as separate financial statements for
Telco, the primary subsidiary. Additionally, the Company has the following
wholly-owned subsidiaries: Aliant Cellular Inc. (Cellular); Aliant Systems
Inc. (Systems); Prairie Communications, Inc. (Prairie); Aliant Midwest Inc.
(Midwest); and Aliant Network Services Inc. (Network). In the opinion of
management of the Company and of Telco, their 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) CHANGE IN LONG-TERM DEBT STRUCTURE
The Company made several changes in its long-term debt structure during
second quarter 1997. Cellular previously had variable rate notes owed to
Rural Telephone Finance Cooperative (RTFC) totaling $12.4 million. On
April 23, 1997, the Company increased its borrowings under a variable rate
revolving loan by $11.0 million and used those proceeds to extend an inter-
company loan to Cellular. The inter-company loan plus internal funds on
hand allowed Cellular to retire its RTFC notes. 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.
-11-
<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. The Telco portion of Company operations is identified separately
in the following paragraphs. Whenever Telco is discussed, it should be
assumed that the Company is also affected, since Telco constitutes
approximately 56 percent and 72 percent of the Company's assets and
revenues, respectively.
<TABLE>
<CAPTION>
Revenues
- --------
Three Months Nine Months
Ended September 30 Ended September 30
----------------------------- -----------------------------
(Dollars in 000s) 1997 1996 Change % 1997 1996 Change %
- ----------------- ---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Telephone revenues:
Local network $20,682 $18,759 $1,923 10.3 $ 59,865 $ 55,823 $ 4,042 7.2
Access 13,848 13,857 (9) (0.1) 42,460 42,302 158 0.4
Long distance 7,973 7,829 144 1.8 23,697 23,963 (266) (1.1)
Other wireline 8,432 6,231 2,201 35.3 22,840 19,091 3,749 19.6
------ ------ ----- ------- ------- -----
Total telephone
revenues 50,935 46,676 4,259 9.1 148,862 141,179 7,683 5.4
Wireless 19,969 17,387 2,582 14.9 56,346 46,395 9,951 21.4
Equipment sales
and service 4,985 4,426 559 12.6 13,718 13,920 (202) (1.5)
Intercompany (2,323) (1,914) (409) (21.4) (6,536) (6,042) (494) (8.2)
------ ------ ----- ------- ------- ------
Total operating
revenues $73,566 $66,575 $6,991 10.5 $212,390 $195,452 $16,938 8.7
</TABLE>
All comparisons made in the following section are of the third quarter and
nine-month periods of 1997, respectively, with the same periods in 1996.
Local network services revenue, attributable entirely to Telco, increased
$1,923,000 (10.3%) and $4,042,000 (7.2%). Excluding the paystation revenue
explained in the following paragraph, the increases in local network
services revenue would have been $2,214,000 (12.0%) and $4,702,000 (8.6%).
Basic local services revenue constituted $1,645,000 and $4,128,000 of the
increases. The basic local revenue increase was due to several factors.
First, residential revenue grew due to the increase in residential basic
local service rates effective March 23, 1997 (further described in the
section below entitled "Competition and Regulatory Environment").
Second, additional installations of second phone lines contributed to the
rise in residential revenues, with a 25.8% increase in second lines.
Third, business and Centrex services continued to contribute to the growth
in basic local revenue. Telephone access lines in service increased to
271,284, up 10,059 lines (3.9%) from September 30, 1996.
-12-
<PAGE>
The local network services revenue increase was also affected by private
line revenue increasing 50.2% and 21.8%, due to new Integrated Services
Digital Network (ISDN) revenue and to normal growth. Enhanced services
revenue, consisting of custom calling features, Custom Local Area Signaling
Services (CLASS) and voice mail, continued its strong growth with 35.4% and
23.0% increases. The public telephone portion of local network services
revenue decreased $291,000 and $660,000, due to deregulation of public
paystations mandated by the Federal Communications Commission (FCC). This
deregulated revenue is now reflected in other wireline communications
services revenues.
Long distance services are provided by Telco (which serves the traditional
Telco territory of southeast Nebraska), and Systems (which serves calling
areas beyond Telco's operating territory). Long distance services revenue
increased $144,000 (1.8%) for the three months ended September 30, 1997,
compared to the same period in 1996. This overall net increase resulted
from a $472,000 decrease for Telco and a $614,000 increase for Systems.
Year-to-date long distance revenues decreased $266,000 (1.1%). This
overall decrease resulted primarily from a $1,163,000 decrease for Telco
and an $894,000 increase for Systems. The Telco decreases are due to the
impact of a decrease in long distance rates which occurred concurrently
with the previously mentioned residential basic local service rate
increase. The Systems increases are due to an ongoing marketing effort to
gain market share from residential and larger business long distance users.
Other wireline communications services revenues includes directory
advertising and sales, carrier billing and collections, data
communications, public paystations, and miscellaneous items. This revenue
category, substantially all of which is attributable to Telco operations,
increased $2,201,000 (35.3%) and $3,749,000 (19.6%). The previously
mentioned deregulation of public paystations contributed $767,000 of the
three-month increase and $1,741,000 of the year-to-date increase. Telco's
non-regulated public paystation business began billing interexchange
carriers an interim $45.85 per paystation monthly access charge in March
1997. This charge was based on the industry average for 800 service and
cut-through calls. This interim rate was to be replaced with a permanent
35 cents per call charge in October 1997. Both of these charges were
determined by the FCC and were contested by the interexchange carriers and
returned to the FCC for reconsideration. The FCC has issued an order to
reduce the permanent rate to 28.4 cents per call effective October 7,
1997. The interim rate is still under consideration by the FCC. Part of
the increase in other wireline communications services revenues is a
combination of a rate increase in local paystation calls from 25 cents to
35 cents per call, effective March 23, 1997, and the movement of that
paystation usage revenue from Telco's regulated to its non-regulated
activity. Also, data communications growth is up $426,000 (34.6%) and
$891,000 (23.6%), mainly due to the growth of Navix, the Company's Internet
access service. Directory advertising revenue also increased by $258,000
and $660,000, substantially due to a rate increase for directory advertising
in the Company's latest directory editions.
Wireless communications services revenues increased $2,582,000 (14.9%) and
$9,951,000 (21.4%). This was due to continued expansion of the customer
base. The Lincoln, Nebraska Metropolitan Statistical Area (Lincoln MSA),
held by Telco, recorded revenue increases of $834,000 (17.7%) and
$2,864,000 (21.9%), and 11,027 customer lines were added between September
30, 1996, and September 30, 1997. Cellular's revenues increased $1,723,000
-13-
<PAGE>
(13.8%) and $6,996,000 (21.3%), and 25,452 customer lines were added
between September 30, 1996, and September 30, 1997.
Telephone equipment sales and services revenues increased $559,000 (12.6%)
for the three months, attributable almost entirely to Systems. Year-to-
date equipment sales and service revenues decreased $202,000 (1.5%), made
up of a $468,000 decrease for Telco and a $266,000 increase for Systems.
The three- and nine-month changes reflect the sporadic nature of equipment
sales; Systems' third quarter 1997 revenue was high relative to average
quarterly revenue. Telco decreases were partly caused by a reduction in
the variety of phones and accessories included in the retail product lines.
Overall, Company operating revenues increased $6,991,000 (10.5%) and
$16,938,000 (8.7%), of which $4,483,000 and $9,240,000 were due to Telco
operations.
<TABLE>
<CAPTION>
Operating Expenses
- ------------------
Three Months Nine Months
Ended September 30 Ended September 30
----------------------------- -----------------------------
(Dollars in 000s) 1997 1996 Change % 1997 1996 Change %
- ----------------- ---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and
amortization $12,902 $11,513 $1,389 12.1 $ 37,502 $ 34,273 $3,229 9.4
Other operating 38,276 34,711 3,565 10.3 111,776 105,558 6,218 5.9
Other taxes 1,170 1,077 93 8.6 3,271 3,008 263 8.7
Intercompany (2,323) (1,914) (409) (21.4) (6,536) (6,042) (494) (8.2)
------ ------ ----- ------ ------ -----
Total $50,025 $45,387 $4,638 10.2 $146,013 $136,797 $9,216 6.7
</TABLE>
Depreciation and amortization increased $1,389,000 (12.1%) and $3,229,000
(9.4%), of which $833,000 and $2,087,000 was attributed to Telco. The
increases result from the addition of depreciable assets, particularly
among asset categories with shorter depreciable lives.
Other operating expenses increased by $3,565,000 (10.3%) and $6,218,000
(5.9%), with $1,245,000 and $2,738,000 due to Telco. The increase is
primarily a result of the greater costs associated with cellular operations
and Navix Internet service due to the significant growth of both services
during the time period. Cellular operations expenses grew by $1,187,000
and $3,564,000, of which $421,000 and $1,698,000 was due to Telco. Telco's
Navix expenses grew by $433,000 for the third quarter and $1,398,000 for
the nine months.
Overall, Company operating expenses increased $4,638,000 (10.2%) and
$9,216,000 (6.7%), of which $2,156,000 and $5,042,000 were due to Telco
operations.
-14-
<PAGE>
<TABLE>
<CAPTION>
Non-Operating Income and Expense
- --------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
----------------------------- -----------------------------
(Dollars in 000s) 1997 1996 Change % 1997 1996 Change %
- ----------------- ---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $2,054 $1,565 $ 489 31.2 $6,002 $5,132 $ 870 17.0
Other deductions 128 135 (7) (5.2) 626 577 49 8.5
Interest expense 2,157 2,230 (73) (3.3) 6,559 6,875 (316) (4.6)
----- ----- --- ----- ----- -----
Net $ 231 $ 800 $(569) (71.1) $1,183 $2,320 $(1,137) (49.0)
</TABLE>
Company investment income increased $489,000 (31.2%) and $870,000 (17.0%),
of which a three-month increase of $113,000 and a nine-month decrease of
$182,000 were attributable to Telco. The Company increases are due to an
increase in cellular profits for the Company's managed partnership in the
Omaha cellular market; this profit flows into the investment income
category. The Telco changes are due to fluctuations in the temporary cash
investment base.
Interest expense decreased $73,000 (3.3%) and $316,000 (4.6%), and Telco's
portion was increases of $47,000 and $28,000. The Company decreases were
primarily a result of debt reductions.
Income Taxes
- ------------
Income taxes increased $1,092,000 (13.3%) and $3,298,000 (14.5%), of which
$894,000 and $1,460,000 was attributed to Telco. 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. The Company expects to continue to meet the majority
of its liquidity needs from internally generated funds, but it can also
obtain external financing through existing committed bank lines of credit.
Consequently, no funding difficulties are anticipated in the foreseeable
future.
Net cash provided by Company operating activities was $61,193,000 for the
first nine months of 1997 compared to $60,201,000 for the first nine months
of 1996. The principal factors involved in the increase in net cash
provided by operating activities were changes in deferred tax accounts 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 nine-month period ended
-15-
<PAGE>
September 30, 1997, cash provided by operating activities, less dividends
paid, exceeded capital expenditures for the Company. Telco capital
expenditures for the same period slightly exceeded cash provided by operating
activities, less dividends paid.
Net cash used for Company investing activities was $34,822,000 and
$20,754,000 for the nine months ended September 30, 1997 and 1996. The
increase was due in part to the acquisition of Telebeep, a reseller of
Cellular service, at $2,828,000 (see "Managed Cellular Markets" below).
It was also due to the use of funds for capital additions, repayment of
debt, and for re-purchase of the Company's stock.
Capital expenditures for the first nine months of 1997 were $31,905,000, of
which $22,106,000 was due to Telco. The Company's capital expenditures
increased $6,636,000 for the nine months of 1997 compared to 1996, and
Telco's portion of this increase was $1,317,000. These expenditures were
financed through cash provided by operating activities. Total capital
additions for both new and updated networks and communications facilities
for 1997 are projected to be $54,128,000 for the Company, of which
$41,999,000 is attributable to Telco.
Net cash used in Company financing activities was $27,452,000 and
$36,121,000 for the nine months ended September 30, 1997 and 1996. The
decrease is primarily due to the 1996 payment of an $8,000,000 note
payable.
Telco's 9.91% Series K Bonds (issued in a private placement) are rated AAA
by Standard and Poor's Corporation and AA2 by Moody's. The Company's
consolidated debt to cash flow ratio was 0.74 to 1.00, its consolidated
debt to capital ratio was 1.00 to 3.78 and its EBITDA to Interest Expense
ratio was 15.98 to 1.00.
At September 30, 1997, the Company had $97.0 million of long-term debt,
consisting of the following:
- $44.0 million of Telco Series K First Mortgage Bonds due June 1,
2000.
- A $28.0 million variable rate term loan due July 6, 2000, with 13
consecutive quarterly installments commencing on September 15, 1997.
- A $33.0 million variable rate revolving loan with principal due July
6, 1998, and interest currently due monthly. Approximately $11.0
million was added to this loan in second quarter 1997, which replaced
the retirement of Cellular's RTFC notes.
- Less current installments of long-term debt of $8.0 million.
On September 15, 1997, the Company, Telco, Cellular, Midwest, Systems,
Prairie, and Network entered into committed credit facilities aggregating
$75.0 million of borrowing capacity with several banks. The maturity date
for all such facilities is July 6, 1998. At October 31, 1997, the Company
had utilized $11.0 million of said borrowing capacity. Interest on all
such borrowings accrues on a LIBOR-based pricing formula.
-16-
<PAGE>
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 will be leased to long distance and wireless
carriers. The Company expects to finance these planned expenditures
primarily through internally provided sources.
On May 28, 1997, the Board of Directors authorized the Company to purchase
500,000 shares of its common stock from time to time as market conditions
warrant, bringing to 1,500,000 the number of shares authorized to be
purchased by the Company since April 24, 1991. No shares were purchased
during third quarter 1997, and as of September 30, 1997, a total of 685,030
shares remain available for purchase. 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 128, "Earnings per Share". SFAS
128 revises the calculation and presentation provisions of Accounting
Principles Board Opinion 15 and related interpretations. It is effective
for the Company's fiscal year ending December 31, 1997, and retroactive
application is required. The Company believes that adoption of SFAS 128
will not have a significant effect on its reported earnings per share.
SFAS 130, "Reporting Comprehensive Income", and SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information", were issued in
June 1997. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 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 establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Both SFAS 130 and SFAS 131 are effective for periods beginning
after December 15, 1997. The Company does not believe that adoption of
these standards will have a significant effect on its consolidated
financial statements.
COMPETITION AND REGULATORY ENVIRONMENT
Telecommunications Rulings
- --------------------------
The Telecommunications Act of 1996 (the Act) was signed in February 1996.
The Act facilitates the entry of new competitors into the local exchange
market by allowing competing companies to purchase and resell Incumbent
Local Exchange Carrier (ILEC) services, by requiring ILECs to unbundle
their networks, and by requiring ILECs to negotiate interconnection
agreements with companies desiring connection to ILEC networks. Telco may
-17-
<PAGE>
apply to the Nebraska Public Service Commission (NPSC) for a waiver or
modification of interconnection requirements pursuant to Section 251(f)2 of
the Act. The Act also provides new business opportunities for the Company,
such as entry into the cable television market, and entry into additional
geographic markets with either a full range of services or selected
services to niche markets.
The FCC released an Order (the Interconnection Order) on August 8, 1996, to
implement the interconnection portion of the Act. While ILECs were
optimistic that the Act would accommodate fair and effective competition,
the FCC's interpretation of the legislation has caused some concern. On
several occasions, the FCC's rules stemming from the Act have not
accurately reflected Congressional intent and have contained pricing
proxies that are unfavorable to ILECs. This has been confirmed in three
separate rulings by the Eighth Circuit Court of Appeals. First, the court
found that the FCC was placing overly burdensome constraints on state
commissions for the pricing of network elements. In this same ruling, the
court struck down the "pick and choose" rule, which allowed competitors
to select only the portions of previously-negotiated agreements that it
desired, without agreeing to any of its other provisions. The court
recognized that this rule would have made effective negotiations impossible
for ILECs.
The court also found that the FCC overstepped its authority by ordering
ILECs to implement intraLATA dialing parity more quickly than Regional Bell
Operating Companies (RBOCs). The court found that this issue is the
exclusive jurisdiction of state commissions. As a result, Telco will
implement intraLATA dialing parity at the end of 1998, rather than August
of 1997. This is very important in terms of developing marketing strategy
for the retention of intraLATA market share.
In its most recent ruling, the court found that the FCC cannot order ILECs
to package unbundled network elements at a price that is equal to the sum
of the individual element prices. The court recognized that costs are
incurred in the connection of network elements, and that ILECs are entitled
to recover these costs. The elimination of "phantom unbundling" reduces
the opportunity for competitors to engage in unfair arbitrage practices.
The FCC released orders concerning the Federal Universal Service Fund and
Access Charge Reform in May 1997. Under the Universal Service Order, Telco
would be part of a group of companies which will not receive Federal
universal service funding until a new FCC plan for larger companies is
completed. This plan is not expected before 1999. The FCC also adopted a
plan, as part of the universal service proceeding, to make $2.25 billion
available annually to fund discounts on telecommunications for schools,
libraries, and rural health care providers. Because the FCC is planning to
fund these discounts, there will be no revenue impact on Telco. The
program, which will begin on January 1, 1998, will offer discounts on all
telecommunications services, and recipients will be chosen based on need.
The Access Charge Reform Order applies only to companies under price cap
regulation, which includes Telco. Two issues in the Order that will affect
Telco include the following: an increase by the FCC in the Subscriber Line
Charge (SLC) on additional residential lines, and changes which will cause a
-18-
<PAGE>
reduction in access charges to long distance companies. While the Access
Charge Reform Order results in some loss of revenue for Telco, the immediate
impact is expected to be modest. Interstate access rates will be driven
toward cost over the next five years, both by regulatory and competitive
pressures. Intrastate access rates remain subject to negotiation between
companies. There is some movement to either legislatively dictate
intrastate access rates or grant authority to the state commissions to set
rates. Telco and other Nebraska companies have convinced the NPSC to
address this issue in conjunction with implementation of the State Universal
Service Fund. The NPSC is doing so through a "super docket" which will
allow access charge reform to move forward in conjunction with consideration
of the universal service fund subsidy mechanism.
Two Nebraska telecommunications bills were passed in June 1997. LB 660
provides a framework for the changes necessary to implement competition in
local exchange service in Nebraska. It allows telecommunications companies
the flexibility required to adjust rates between different classes of
consumers, such as business and residential customers, and it also provides
for total forbearance from rate regulation in the presence of local
competition. LB 686 established a Nebraska Universal Service Fund and a
Nebraska Lifeline service program to ensure continued local service to
high-cost areas and low-income consumers. Since the Company serves many
high-cost rural areas, a number of its rural exchanges may be eligible for
funding. LB 660 was effective June 3, 1997, while LB 686 became effective
September 10, 1997.
In January 1998, Nebraska will enter the Federal Lifeline assistance
program. This program will reduce the monthly service bill by $5.25 for
qualifying customers on fixed or limited incomes. This program will be
helpful to Telco, because it should ease regulatory resistance to Telco's
effort to rebalance rates.
Rate Changes
- ------------
On November 8, 1996, Telco announced a 10% increase to residential basic
local service rates effective March 23, 1997. Telco had not increased such
rates since 1991. The residential basic local exchange service increase is
offset by an 8% to 10% reduction in Telco's long distance rates within its
service area, and by a reduction to intrastate access service rates of
approximately 16%. The passage of the Act, which encourages local exchange
competition, necessitates rate adjustments by Telco to bring prices for
residential basic local exchange service closer to actual costs. Taken as
a whole, the projected annual revenue impact to Telco is expected to be a
reduction of approximately $1.1 million in operating revenues. Also
effective March 23, Telco raised rates for paystation calls and directory
assistance calls.
Rates for several optional business and residential services increased July
1, 1997. Services affected include several custom calling services,
Extended Area Service (EAS), Enhanced Local Calling Area Plans (ELCAP),
some directory listings, and inside wire maintenance. The rates for some
leased telephones also increased. These rate increases should result in
increased annual revenues of approximately $1 million.
-19-
<PAGE>
Cellular rates were reduced and simplified in June 1997. Formerly,
separate rate plans had existed for Lincoln, Omaha, and Nebraska statewide
customers. The new plan consolidates the former plans to only two sets of
rates--one for the metropolitan areas of Lincoln and Omaha, and one for
statewide customers. The rate decreases accompanying the new rate plan
will result in an annual revenue reduction of approximately $6 million;
however, it is anticipated that the lower rates will stimulate demand to
partially offset the revenue reduction, and the impact of recently
negotiated interconnection agreements will also help to offset the
reduction (see "Interconnection Agreements" below).
Competitive Local Exchange Carrier
- ----------------------------------
Midwest, the Company's Competitive Local Exchange Carrier (CLEC), began
limited operations outside the Company's traditional southeast Nebraska
service area in June. Midwest is currently providing service to certain
residential and business customers in the Omaha metropolitan area.
Cellular Competition
- --------------------
Sprint PCS has begun operations in the Lincoln and Omaha areas. The
Company expects to remain competitive with Sprint PCS and all cellular
providers by developing new marketing programs and by continuing to expand
its network so that high-quality customer service is maintained.
Interconnection Agreements
- --------------------------
On July 31, 1997, Telco received a bona fide request for interconnection
from a CLEC, Nebraska Technology and Telecommunications Company, Inc.
(NT&T). However, this request was officially withdrawn by NT&T in August
1997. No other bona fide requests from CLECs were pending as of September
30, 1997.
Telco has interconnection agreements with several wireless providers and
ILECs, and Midwest and Cellular also have interconnection agreements with
various ILECs. The impact of these interconnection agreements is not
expected to be material to the Company's consolidated financial statements.
MANAGED CELLULAR MARKETS
The Company manages all four cellular entities in which it has an ownership
interest. The Lincoln MSA (held by Telco) and Cellular are wholly-owned
markets containing approximately 231,000 and 848,000 POPs (potential
customers), respectively. Through its general partnership with Centel
Nebraska, the Company holds a 27.6% interest in the limited partnership
that operates the Omaha MSA market, containing approximately 634,000 POPs.
The Company also holds an option to purchase an additional 27.6% interest
in the limited partnership during the two-year period ending December 31,
1998.
In addition, the Company has an 11.8% interest in Iowa Rural Service Area 1
(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 third quarter 1997, penetration (subscribers compared to POPs) rates
-20-
<PAGE>
achieved in these markets by the entities in which the Company holds
interests were 20.6% in the Lincoln MSA, 14.4% in Cellular, 11.8% in the
Omaha MSA, and 6.4% in RSA 1.
Effective May 15, 1997, Cellular acquired approximately 10,000 customer
service agreements between Telebeep and its customers who had previously
received cellular telecommunications services provided by Cellular through
Telebeep on a resold basis. These customers are located principally in
northeastern Nebraska. As a result of the acquisition of this additional
customer base, Cellular will provide its cellular telecommunications
services directly to these customers on a retail basis rather than through
Telebeep on a wholesale basis. This acquisition is expected to result in
increased annual revenue of approximately $1.3 million.
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.
-21-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Proportionate Data For Managed Cellular Markets
Third Quarter
(Dollars in Thousands)
Unaudited
Total
Lincoln Total Total Not Proportionate
MSA Consolidated(1) Consolidated(2) Data
<S> <C> <C> <C> <C> <C>
Customer Lines 1997 47,621 169,952 21,098 191,050
1996 36,594 133,473 16,571 150,044
1995 26,061 95,720 11,337 107,057
Service Revenues 1997 $ 5,547 $ 19,761 $ 2,360 $ 22,121
1996 4,713 17,204 2,147 19,351
1995 3,470 13,270 1,580 14,850
Operating Expenses 1997 $ 3,197 $ 10,210 $ 1,172 $ 11,382
(before 1996 2,776 9,023 1,082 10,105
depreciation) 1995 2,064 6,569 963 7,532
Net Operating 1997 $ 1,870 $ 7,408 $ 852 $ 8,260
Income 1996 1,512 6,490 780 7,270
1995 1,028 5,217 396 5,613
EBITDA (3) 1997 $ 2,350 $ 9,551 $ 1,188 $ 10,739
1996 1,937 8,181 1,065 9,246
1995 1,406 6,701 617 7,318
</TABLE>
(1) Financial activities of the Lincoln MSA and Cellular are included
in respective operating portions of the Company's Consolidated
Statements of Earnings.
(2) The Company's share of the financial activities of the Omaha MSA
(27.6%) and RSA 1 (11.8%) are not included in the operating
portions of the Company's Consolidated Statements of Earnings.
(3) Earnings before interest, income taxes, depreciation, and
amortization (EBITDA) 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.
-22-
<PAGE>
RESTRUCTURING CHARGES AND WORK FORCE REDUCTION
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 are both management and non-management
employees who are employed by the Company, Telco, and Systems. The Company
implemented an enhancement to its pension plan by adding five years to both
the age and net credited service for eligible employees. The program also
provides 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 (including 319 Telco employees) accepting this voluntary
early retirement offer, the Company recorded a reduction to its pension
assets and recognized a restructuring charge of $20.1 million at December
31, 1995 (of which $19.7 million was attributable to Telco).
The charge reflected pension enhancements of $23.4 million less curtailment
gains of $3.3 million. Because the entire restructuring charge for the
work force reduction was recorded in December 1995, and because the
enhanced pension payments are paid through the Company pension fund, there
has been no further financial impact recognized by the Company.
Retirements under the voluntary early retirement program are being phased
in and will become fully effective by December 31, 1997. As of the end of
third quarter 1997, 187 employees of the Company (including 178 Telco
employees) have retired under the program. Because of the higher-than-
anticipated response to the program, it is expected that approximately 100
positions will need to be replaced by new hires at a lower cost.
OTHER
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. These expenses may be significant and may
continue into the year 1999.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Filing concerning the future prospects
of the Company and its Subsidiaries and Affiliates are "Forward-Looking
Statements" within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. Although each of the Company and Telco believes
that its expectations are based on reasonable assumptions, no assurance can
be given that actual results may not differ materially from those in the
Forward-Looking Statements herein for reasons that include the speed and
degree to which competition enters telecommunications markets; state and
federal legislative and regulatory initiatives that increase competition,
affect cost and investment recovery, and have an impact on rate structures;
the economic climate and industrial, commercial, and residential growth in
the service territory of the Company; the weather and other natural
phenomena; the timing and extent of changes in interest rates; conditions
of the capital markets and equity markets; and growth in opportunities for
subsidiaries of the Company.
-23-
<PAGE>
PART II - OTHER INFORMATION
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
Aliant Communications Inc. and Aliant Communications Co. filed no
reports on Form 8-K during the quarter ended September 30, 1997.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, Aliant Communications Inc., has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Aliant Communications Inc.
------------------------------
(Registrant)
November 14, 1997 /s/ Robert L. Tyler
Date..................... ......................................
(Signature)
Robert L. Tyler, Senior Vice President-
Chief Financial Officer
November 14, 1997 /s/ Michael J. Tavlin
Date..................... ......................................
(Signature)
Michael J. Tavlin, Vice President-
Treasurer
____________________________
*See General Instruction G
**Print name and title of the signing officer under his signature.
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, Aliant Communications Co., has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Aliant Communications Co.
------------------------------
(Registrant)
November 14, 1997 /s/ Robert L. Tyler
Date..................... ......................................
(Signature)
Robert L. Tyler, Senior Vice President-
Chief Financial Officer
November 14, 1997 /s/ Michael J. Tavlin
Date..................... ......................................
(Signature)
Michael J. Tavlin, Vice President-
Treasurer
-26-
<PAGE>
ALIANT COMMUNICATIONS INC. AND SUBSIDIARIES
ALIANT COMMUNICATIONS CO.
EXHIBIT INDEX TO FORM 10-Q
Exhibit No. Title Page No.
- ----------- ----- --------
27 Financial Data Schedule *
Aliant Communications Inc.
Aliant Communications Co.
<PAGE>
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