<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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission 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
36,203,218 shares outstanding
at April 30, 1998
ALIANT COMMUNICATIONS CO. Common stock, $3.125 par value
1,000 shares outstanding at
April 30, 1998
<PAGE>
ALIANT COMMUNICATIONS INC. AND
ALIANT COMMUNICATIONS CO.
EXHIBIT INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
CONTENTS
Page
INTRODUCTION 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALIANT COMMUNICATIONS INC.
Consolidated Balance Sheets 2
Consolidated Statements of Earnings 3-4
Consolidated Statements of Cash Flows 5-6
ALIANT COMMUNICATIONS CO.
Balance Sheets 7
Statements of Earnings 8
Statements of Cash Flows 9-10
CONDENSED NOTES TO FINANCIAL STATEMENTS OF
Aliant Communications Inc. and
Aliant Communications Co. 11-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for
Aliant Communications Inc. and
Aliant Communications Co. 13-21
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 22
- --------------------
* Denotes none or not applicable.
SIGNATURES 23
<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, 1997, 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 Annual Report
on Form 10-K of the Company and Telco for the year ended December 31, 1997.
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.
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<TABLE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
Mar. 31, 1998 Dec. 31, 1997
(Unaudited) (Audited)
------------- -------------
(Dollars in Thousands)
<CAPTION>
ASSETS
<S> <C> <C>
Current assets $106,838 $ 92,595
Property and equipment less accumulated
depreciation and amortization 294,836 258,955
Investments and other assets 171,511 176,052
Deferred charges 19,885 20,040
-------- --------
Total assets $593,070 $547,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable to banks $ 11,000 $ 11,000
Accounts payable and accrued liabilities 81,792 73,782
-------- --------
Total current liabilities 92,792 84,782
Deferred credits and other long-term liabilities 66,531 61,363
Long-term debt 106,000 94,000
Minority interest 13,502 -
Preferred stock, 5%, redeemable 4,499 4,499
Stockholders' equity 309,746 302,998
-------- --------
Total liabilities and stockholders' equity $593,070 $547,642
======== ========
</TABLE>
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<TABLE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands Except Per Share Data)
<CAPTION>
<S> <C> <C>
Operating revenues:
Telephone revenues:
Local network services $21,329 $19,342
Access and wholesale services 14,283 15,386
Long distance services 8,365 7,851
Other wireline communications services 7,647 6,276
------- -------
Total telephone revenues 51,624 48,855
Wireless communications services 21,826 16,746
Telephone equipment sales and services 4,755 4,540
Intercompany revenues (3,095) (1,953)
------- -------
Total operating revenues 75,110 68,188
------- -------
Operating expenses:
Depreciation and amortization 12,587 12,006
Other operating expenses 41,607 36,834
Taxes, other than payroll and income 1,091 967
Intercompany expenses (3,095) (1,953)
------- -------
Total operating expenses 52,190 47,854
------- -------
Operating income 22,920 20,334
------- -------
Non-operating income and expense:
Income from interest and other investments 1,790 2,010
Minority interest 358 -
Other deductions 241 325
Interest expense 2,213 2,179
------- -------
Net non-operating expense 1,022 494
------- -------
Income before income taxes 21,898 19,840
Income taxes 8,780 7,862
------- -------
(Continued on following page)
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<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EARNINGS (Cont'd)
(UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands Except Per Share Data)
Net income 13,118 11,978
Preferred dividends 56 56
------- -------
Earnings available for common shares $13,062 $11,922
======= =======
Basic and diluted earnings
per common share $ .36 $ .33
======= =======
Weighted average common shares outstanding
(in thousands) 36,204 36,436
======= =======
Dividends declared per common share $ .18 $ .16
======= =======
</TABLE>
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<TABLE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands)
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $13,118 $11,978
------- -------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 12,707 12,014
Net change in investments and other assets 369 (931)
Deferred income taxes 401 (1,471)
Changes in assets and liabilities resulting
from operating activities:
Receivables 7,502 2,349
Other assets (402) (1,007)
Accounts payable and accrued expenses (6,028) (3,509)
Minority interest (88) -
Other liabilities 9,807 6,092
------- -------
Total adjustments 24,268 13,537
------- -------
Net cash provided by operating
activities 37,386 25,515
------- -------
Cash flows from investing activities:
Expenditures for property and equipment (20,463) (6,448)
Net salvage on retirements 8,938 614
------- -------
Net capital additions (11,525) (5,834)
Proceeds from sale of investments and other
assets 1,686 287
Purchases of investments and other assets (1,224) (1,112)
Purchases of temporary investments (279) (299)
Maturities and sales of temporary investments 1,020 265
Acquisition, net of cash acquired 1,284 -
------- -------
Net cash used for investing
activities (9,038) (6,693)
------- -------
(Continued on following page)
-5-
<PAGE>
ALIANT COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands)
Cash flows from financing activities:
Dividends to stockholders (6,208) (5,883)
Payments of long term debt (6,500) (1,007)
Net purchases and sales of common and
treasury stock 204 397
------- -------
Net cash used in
financing activities (12,504) (6,493)
------- -------
Net increase in cash and cash
equivalents 15,844 12,329
Cash and cash equivalents at beginning of year 27,867 25,290
------- -------
Cash and cash equivalents at end
of quarter $43,711 $37,619
======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 1,134 $ 1,081
======= =======
Taxes paid $ 825 $ 4,116
======= =======
</TABLE>
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<TABLE>
ALIANT COMMUNICATIONS CO.
BALANCE SHEETS
Mar. 31, 1998 Dec. 31, 1997
(Unaudited) (Audited)
------------- -------------
(Dollars in Thousands)
<CAPTION>
ASSETS
<S> <C> <C>
Current assets $ 74,526 $ 62,673
Property and equipment less accumulated
depreciation and amortization 214,441 216,499
Investments and other assets 458 471
Deferred charges 15,928 16,761
-------- --------
Total assets $305,353 $296,404
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Accounts payable and accrued liabilities $ 61,263 $ 55,078
Deferred credits and other long-term liabilities 55,144 54,207
Long-term debt 44,000 44,000
Preferred stock, 5%, redeemable 4,499 4,499
Stockholder's equity 140,447 138,620
-------- --------
Total liabilities and stockholder's equity $305,353 $296,404
======== ========
</TABLE>
-7-
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<TABLE>
ALIANT COMMUNICATIONS CO.
STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in thousands)
<CAPTION>
<S> <C> <C>
Operating revenues:
Telephone revenues:
Local network services $21,175 $19,342
Access and wholesale services 13,501 15,386
Long distance services 2,817 2,891
Other wireline communications services 7,512 6,161
------- -------
Total telephone revenues 45,005 43,780
------- -------
Wireless communications services 5,701 5,039
Telephone equipment sales and services 1,791 1,570
------- -------
Total operating revenues 52,497 50,389
------- -------
Operating expenses:
Depreciation 9,109 9,548
Other operating expenses 24,879 23,888
Taxes, other than payroll and income 893 791
------- -------
Total operating expenses 34,881 34,227
------- -------
Operating income 17,616 16,162
------- -------
Non-operating income and expense:
Income from interest and other
investments 304 379
Other deductions 241 325
Interest expense 1,115 1,140
------- -------
Net non-operating expense 1,052 1,086
------- -------
Income before income taxes 16,564 15,076
Income taxes 6,432 5,744
------- -------
Net income 10,132 9,332
Preferred dividends 56 56
------- -------
Earnings available for common shares $10,076 $ 9,276
======= =======
</TABLE>
-8-
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<TABLE>
ALIANT COMMUNICATIONS CO.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands)
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $10,132 $ 9,332
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,129 9,555
Deferred income taxes (56) (259)
Changes in assets and liabilities resulting
from operating activities:
Receivables (1,764) 1,271
Other assets (266) (733)
Accounts payable and accrued expenses 814 (3,304)
Other liabilities 6,116 3,921
------- -------
Total adjustments 13,973 10,451
------- -------
Net cash provided by operating
activities 24,105 19,783
------- -------
Cash flows from investing activities:
Expenditures for property and equipment (13,354) (3,821)
Net salvage on retirements 6,302 599
------- -------
Net capital additions (7,052) (3,222)
Purchases and sales of investments and other
assets, net - 12
Purchases of temporary investments (279) (299)
Maturities and sales of temporary investments 1,020 265
------- -------
Net cash used for investing
activities (6,311) (3,244)
------- -------
Cash flows used for financing activities:
Dividends to stockholders (8,056) (7,056)
------- -------
Net cash used in financing
activities (8,056) (7,056)
------- -------
(Continued on following page)
-9-
<PAGE>
ALIANT COMMUNICATIONS CO.
STATEMENTS OF CASH FLOWS (Cont'd)
(UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands)
Net increase in cash and cash equivalents 9,738 9,483
Cash and cash equivalents, beginning of year 20,973 17,865
------- -------
Cash and cash equivalents, end of quarter $30,711 $27,348
======= =======
Supplemental disclosure of cash flow information:
Interest paid $ 11 $ 13
======= =======
Income taxes paid $ 1,322 $ 2,894
======= =======
</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). As of February 27,
1998, Cellular and Prairie own Omaha Cellular General Partnership (OCGP),
which has a controlling interest in Omaha Cellular Limited Partnership
(OCLP). 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.
Certain prior period items have been reclassified to conform to the 1998
format. Most significantly, the Company and Telco reclassified wholesale
services from Other Wireline Communications Services revenue to Access and
Wholesale Services revenue.
(2) CHANGE IN LONG-TERM DEBT STRUCTURE
The Company sold $100 million of senior unsecured 6 3/4% notes in a public
debt offering. The bonds are dated April 1, 1998, and will mature on April
1, 2028. Interest will be payable every six months on April 1 and October
1. Further information about the new long-term debt structure is presented
under the section entitled "Liquidity and Capital Resources" in
Management's Discussion and Analysis below.
(3) INVESTMENT IN OCGP
Effective February 27, 1998, the Company completed the acquisition of the
remaining 50% of OCGP, which at March 31, 1998, owned 55.82% of OCLP and
manages that operation. Beginning March 1, 1998, OCLP's operating revenues
and expenses are consolidated with those of the Company's other activities.
OCLP, doing business as Aliant Cellular-Omaha, provides cellular
communications services in the Omaha Metropolitan Statistical Area (MSA).
Additionally, on April 28, 1998, OCGP purchased 25.93% of OCLP from other
limited partners for $24.4 million, bringing the Company's ownership of
OCLP to 81.75%. Further information about the Company's acquisition is
presented under the section entitled "Managed Cellular Markets" in
Management's Discussion and Analysis below.
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<PAGE>
(4) SUPPLEMENTAL CASH FLOW DISCLOSURES
In connection with the acquisition of the remaining 50% interest of OCGP,
the following assets were acquired, liabilities assumed, and long-term debt
issued.
(in thousands)
Property plant & equipment $(35,919)
Price in excess of cost of net assets acquired (30,507)
Notes payable 3,500
Prior investment in OCGP 1,420
Minority interest 13,590
Retirement of PIK debt 48,678
Other assets and liabilities - OCGP (17,623)
Other assets and liabilities - OCLP 3,145
Issuance of note payable 15,000
--------
Increase in cash $ 1,284
========
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<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 51 percent and 70 percent of the Company's assets and
revenues, respectively.
Revenues
- --------
Three Months Ended March 31
--------------------------------
(Dollars in Thousands) 1998 1997 Change %
- ---------------------- ---- ---- --------------
Telephone revenues:
Local network $21,329 $19,342 $1,987 10.3
Access and wholesale 14,283 15,386 (1,103) (7.2)
Long distance 8,365 7,851 514 6.5
Other wireline 7,647 6,276 1,371 21.8
------ ------ ------
Total telephone
revenues 51,624 48,855 2,769 5.7
Wireless communications 21,826 16,746 5,080 30.3
Equipment sales/service 4,755 4,540 215 4.7
Intercompany revenues (3,095) (1,953) (1,142) (58.5)
------ ------ ------
Total operating
revenues $75,110 $68,188 $6,922 10.2
All comparisons made in the following section are of first quarter 1998,
with the same period in 1997.
Local network services revenue, attributable mainly to Telco, increased
$1,987,000 (10.3%). Basic local services revenue constituted $1,382,000 of
the increase. The basic local revenue increase was due to several factors.
First, residential revenue grew due to an increase of 10% in residential
basic local service rates effective March 23, 1997. Second, additional
installations of second phone lines contributed to the rise in residential
revenues, with a 23.4% increase in second lines. Third, business and
Centrex services continued to contribute to the growth in basic local
revenue. Fourth, expanded area service revenue grew by $393,000 (20.0%)
due to a July 1997 rate increase. Telco access lines in service increased
to 276,029, up 9,936 lines (3.7%) from March 31, 1997.
The local network services revenue increase was also affected by private
line revenue increasing $250,000 (49.4%), 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 a
$363,000 (29.3%) increase. The public telephone portion of local network
services revenue decreased $199,000 due to the 1997 deregulation and
reclassification of public paystations to other wireline communications
services revenues.
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<PAGE>
Access and wholesale services revenue decreased $1,103,000 (7.2%). This
decrease was primarily due to a 16% decrease in intrastate access service
rates, which occurred concurrently with the previously mentioned
residential basic local service rate increase. Access minutes of use
reached a total of 265.7 million minutes in the first quarter of 1998,
compared to 251.1 million minutes in first quarter 1997, a 5.8% increase.
Wholesale services revenue, which represents Network's revenue, increased
$205,000.
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 $514,000 (6.5%). This overall net increase resulted largely from
a $74,000 decrease for Telco and a $574,000 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 $1,371,000 (21.8%). The previously mentioned deregulation of
public paystations contributed $180,000 of the three-month 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. Both of these charges were determined
by the Federal Communications Commission (FCC) and were contested by the
interexchange carriers and returned to the FCC for reconsideration. The
FCC issued an order to reduce the per call compensation rate to 28.4 cents
per call effective October 7, 1997. The per phone compensation 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 local network services revenue to its other wireline
communications services revenue. Also, data communications growth is up
$549,000 (37.5%), mainly due to the growth of Navix, the Company's Internet
access service. Directory advertising revenue also increased by $460,000,
substantially due to a rate increase for directory advertising in the
Company's latest directory editions.
Wireless communications services revenues increased $5,080,000 (30.3%).
The Company's ownership interest in OCLP, which operates the Omaha MSA
cellular market, was increased from 27.91% to 55.82%. As a result,
operating revenues from the Omaha MSA are included in the Company's
operating revenues beginning March 1, 1998, and they contributed $2,723,000
of the increase. Prior to that time, the Company's portion of the net
results from OCLP were reported among non-operating income from
investments. Cellular's revenues increased $1,695,000 (14.5%). Cellular
revenues from the Lincoln, Nebraska MSA, held by Telco, increased $644,000
(13.3%). Customer lines in the cellular market increased by 25,045
(22.5%), while those in Telco's increased by 9,726 (22.7%) since March 31,
1997. Customer lines in the Omaha MSA increased by 19.9% since March 31,
1997.
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<PAGE>
Telephone equipment sales and services revenues increased $215,000 (4.7%)
for the three months, attributable almost entirely to Telco. The increase
is mainly due to a July 1997 rate increase for inside wire maintenance.
Overall, Company operating revenues increased $6,922,000 (10.2%), of which
$2,108,000 was due to Telco operations.
Operating Expenses
- ------------------
Three Months Ended March 31
--------------------------------
(Dollars in Thousands) 1998 1997 Change %
- ---------------------- ---- ---- --------------
Depreciation and
amortization $12,587 $12,006 $ 581 4.8
Other operating 41,607 36,834 4,773 13.0
Other taxes 1,091 967 124 12.8
Intercompany expenses (3,095) (1,953) (1,142) (58.5)
------ ------ ------
Total $52,190 $47,854 $4,336 9.1
Depreciation and amortization expense increased $581,000 (4.8%), of which a
decrease of $439,000 was attributed to Telco. The inclusion of OCLP in
consolidated earnings contributed $473,000 of the Company's increase in
depreciation. The addition of depreciable assets in Cellular, Midwest and
Network contributed $478,000 of the Company increase. The Telco decrease
was caused by a reduction in depreciation rates prescribed by the Nebraska
Public Service Commission (NPSC) in fourth quarter 1997.
Other operating expenses increased by $4,773,000 (13.0%), of which $991,000
was due to Telco. The increase is largely a result of the growth of
cellular operations expenses, due to significant growth in cellular
services and to the inclusion of OCLP in consolidated earnings. Cellular
operations expenses increased by $2,010,000, and $1,450,000 of that
increase was attributable to the inclusion of OCLP. Navix expenses grew
$615,000 due to the continued growth of Navix Internet service. Midwest
contributed $953,000 of operating expenses as a result of incurring start-
up costs.
Overall, Company operating expenses increased $4,336,000 (9.1%), of which
$654,000 was due to Telco operations.
Non-Operating Income and Expense
- --------------------------------
Three Months Ended March 31
--------------------------------
(Dollars in Thousands) 1998 1997 Change %
- ---------------------- ---- ---- --------------
Income from interest
and other investments $1,790 $2,010 $(220) (10.9)
Minority interest 358 0 358 --
Other deductions 241 325 (84) (25.8)
Interest expense 2,213 2,179 34 1.6
----- ----- ----
Net $1,022 $ 494 $ 528 106.9
-15-
<PAGE>
Income from interest and other investments decreased by $220,000 (10.9%),
of which a decrease of $75,000 was due to Telco. Prior to March 1998, this
category included the Company's portion of the net results of OCLP. Since
the previously mentioned acquisition, OCLP has been consolidated into
operations.
Beginning March 1998, minority interest represents the portion (44.2%) of
the net results of OCLP that is not owned by the Company.
Income Taxes
- ------------
Income taxes increased $918,000 (11.7%), of which $688,000 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. In order to provide cash for various needs described
below, the Company recently issued $100 million in long-term debt effective
April 1, 1998, from its $250 million debt shelf registration. The Company
can also obtain external financing through existing committed bank lines of
credit. Consequently, no funding difficulties are anticipated in the
foreseeable future.
Net cash provided by Company operating activities was $37,386,000 for the
first three months of 1998 compared to $25,515,000 for the first three
months of 1997. The principal factors involved in the increase in net cash
provided by operating activities were the increase in net income 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 three-month period ended March 31,
1998, cash provided by operating activities, less dividends paid, exceeded
capital expenditures for the Company and Telco.
Net cash used for Company investing activities was $9,038,000 and
$6,693,000 for the three months ended March 31, 1998 and 1997. The
increase was largely due to the use of funds for capital additions.
Capital expenditures for the first three months of 1998 were $20,463,000,
of which $13,354,000 was due to Telco. The Company's capital expenditures
increased $14,015,000 for the three months of 1998 compared to 1997, and
Telco's portion of this increase was $9,533,000. Total capital additions
for both new and updated networks and communications facilities for 1998
are projected to be $80,000,000 for the Company, of which $49,084,000 is
attributable to Telco.
Net cash used in Company financing activities was $12,504,000 and
$6,493,000 for the three months ended March 31, 1998 and 1997. The
increase was largely due to payments of long-term debt.
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<PAGE>
The Company's consolidated debt to cash flow ratio was .79 to 1.00, its
consolidated debt to capital ratio was 1.00 to 3.59 and its EBITDA to
interest expense ratio was 17.02 to 1.00.
At March 31, 1998, the Company had $106.0 million of long-term debt,
consisting of the following:
- $44.0 million of Telco Series K first mortgage bonds due June 1,
2000.
- A $24.0 million variable rate term loan due July 6, 2000, with 13
consecutive quarterly installments commencing on September 15, 1997.
- A $31.0 million variable rate revolving loan with principal due July
6, 1998, and interest currently due monthly.
- A $15.0 million revolving loan for the period beginning March 27,
1998, and ending March 31, 1998. This loan was arranged in
accordance with the credit agreement described below.
- Excludes current installments of long-term debt of $8.0 million.
The Company filed a $250 million debt shelf registration statement with the
Securities and Exchange Commission on February 23, 1998. This will allow
the Company to offer and sell from time to time, debentures, notes, and/or
other unsecured evidences of indebtedness at an aggregate initial offering
price not to exceed $250 million.
In accordance with the $250 million debt shelf registration, the Company
sold $100 million of senior unsecured 6 3/4% notes in a public debt
offering. The bonds are dated April 1, 1998, and will mature on April 1,
2028. Interest will be payable every six months on April 1 and October 1.
The proceeds will be used as follows: (a) to repay the $15 million
revolving loan that was incurred in order to acquire the remaining 50%
interest in OCGP; (b) to redeem approximately $47.5 million of Telco first
mortgage bonds at an interest rate of 9.91 percent, including a make-whole
premium of approximately $3.5 million; (c) to redeem all of the outstanding
Telco 5% preferred stock, including a redemption premium of approximately
$225,000; and (d) to repay approximately $31 million of additional bank
debt. The debt issue is rated AA+ by Standard and Poor's and A2 by
Moody's.
Early redemption of the Telco first mortgage bonds will require payment of
a premium to bondholders, resulting in a charge to earnings of
approximately $2.1 million after taxes, which will be recorded in second
quarter 1998.
On September 15, 1997, the Company and its subsidiaries 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. The Company is currently negotiating with those banks to extend the
facilities to July 1, 1999. At April 30, 1998, the Company had utilized
$39.0 million of said borrowing capacity. Interest on all such borrowings
accrues on a LIBOR-based pricing formula.
The Company will require cash for Network to build and operate fiber optic
transmission facilities outside of Telco's traditional service area.
Capacity on the network is leased to long distance and wireless carriers.
The Company expects to finance these planned expenditures primarily through
internally provided sources.
-17-
<PAGE>
The Board of Directors has authorized the Company to purchase 1,500,000
shares of its common stock since April 24, 1991. The shares are purchased
from time to time as market conditions warrant. No shares were purchased
during first quarter 1998, and as of March 31, 1998, 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.
COMPETITION AND REGULATORY ENVIRONMENT
Telco is taking measures to prepare for competition in its traditional
service territory. Upon passage of the Telecommunications Act of 1996 (the
Act), it became clear that Incumbent Local Exchange Carriers (ILECs) would
need to adjust local exchange service rates to better reflect the actual
cost of providing service. Traditionally, residential local exchange
service has been priced below cost, and has been subsidized through rates
charged to businesses, rates charged on toll calls and rates charged on
other enhanced services. Competition will largely eliminate the ability to
cross-subsidize customers and services in this manner.
Telco received a bona fide request on January 9, 1998, from US West
Communications, Inc. (US West) to negotiate an interconnection agreement.
After interconnection terms and conditions have been negotiated pursuant to
the Telecommunications Act of 1996 (the Act), it is expected that US West
will be in a position to offer competitive local exchange services within
the Company's traditional ILEC market. At this time, no other requests
have been received by the Company to provide interconnection services or
network elements to carriers seeking to establish competitive wireline
telecommunications businesses in Telco's operating area. However, other
carriers may make such requests to seek to establish Competitive Local
Exchange Carrier (CLEC) operations in Telco's operating area in the future.
Since 1986, Nebraska law has provided that ILECs may raise basic local
exchange service rates by as much as 10% per year without regulatory review
unless a sufficient number of subscriber petitions are filed with the NPSC.
Telco invoked this statute in 1997, raising residential local exchange
service rates by 10%. However, competition creates the need for even
greater rate flexibility than was allowed under Nebraska law. In 1997,
legislation was passed which allowed ILECs to raise residential service
rates more than 10% in a twelve-month period. In conjunction with such a
rate increase, rates for other services must be lowered so that the rate
changes do not increase total company revenues by more than 1%. Telco was
active in developing and advocating this legislation, in order to obtain
the rate flexibility to compete effectively in the newly competitive
telecommunications environment.
On March 10, 1998, Telco received approval of its application with the NPSC
to increase Telco's residential basic local service rates to $16.35 per
month (existing residential rates range from $11.00 to $13.75 per month).
This increase will be 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
-18-
<PAGE>
actual cost, and to lower rates for business customers who are especially
attractive to potential competitors. The additional revenue to be
generated by such increase will be offset by (a) reductions in Telco's
business basic local service rates to $31.40 per month (existing business
rates range from $33.00 to $39.00 per month); (b) the elimination of a
separate touch tone charge ($.50 and $1.50 per month for residential and
business customers, respectively); (c) the reduction of day time intraLATA
toll rates from $.18 per minute to $.13 per minute; and (d) the reduction
of intraLATA access charges by approximately $900,000 per year. Telco has
estimated that the net impact of all these changes will be immaterial to
revenues. Revenue neutrality is required by Nebraska Statute 86-803(9),
under which Telco filed its rate application.
Other regulatory issues continue to take shape at the state and federal
levels. Universal service funding, which compensates companies for
providing service to high-cost (usually rural) customers, will take an
entirely new shape in the competitive environment. Implicit subsidies can
no longer be built into the rates charged to low-cost customers. Instead,
such subsidies must be made explicit and competitively neutral. Also, the
FCC has ruled that 75% of the responsibility for funding universal service
shall be borne by the states. This creates a difficult situation for
sparsely-populated, rural states with a high percentage of high-cost
customers. Telco, other ILECs, and many public officials have expressed
concern about this policy decision to the FCC and to members of Congress.
In response, FCC Chairman William Kennard has recently suggested that the
federal share of this responsibility may need to be increased. The FCC
released a Public Notice on April 15, 1998, to examine this and other
issues regarding universal service support.
Access reform is a major policy initiative affecting Telco. Access rates
are the fees that ILECs charge long distance carriers for use of their
network. The FCC issued an order in May 1997 that reduces access rates
over a period of time on interstate calls by basing such rates on forward-
looking incremental costs. For some time, a movement has been underway to
enable the NPSC to establish a similar rate structure for access charges on
intrastate calls. The NPSC has determined that the issues of access reform
and universal service should be handled concurrently in a single "super
docket". Telco supports their decision, since decisions regarding access
reform could place tremendous pressure on consumers for support of
universal service. Telco filed comments in this docket on March 6, 1998,
and reply comments on April 27, 1998. Telco will continue to actively
participate in the NPSC docket.
Wireless telecommunications service continues to be an increasingly
important sector of the Company's business. The FCC has taken steps to
increase the number of wireless competitors by auctioning radio spectrum
for Personal Communications Services (PCS). As many as seven new wireless
competitors are allowed in each market.
The FCC has also imposed new requirements for the Company to separate
wireless operations from Telco. Currently, the cellular license for the
Lincoln MSA is held by Telco.
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<PAGE>
MANAGED CELLULAR MARKETS
The Company owns and manages cellular markets providing service in the
Lincoln MSA (held by Telco) and 89 of the other 92 counties in Nebraska.
These markets contain approximately 231,000 and 848,000 POPs (potential
customers), respectively. OCLP, a limited partnership doing business as
Aliant Cellular-Omaha, provides service in the Omaha MSA containing
approximately 634,000 POPs. The Company has an interest (50% prior to
February 27, 1998 and 100% thereafter) in OCGP which owned 55.82% of OCLP
at March 31, 1998, and manages that operation. Beginning in March 1998,
Omaha's operating revenues and expenses are consolidated with those of the
Company's other activities, and the net results from Omaha attributable to
other partners are separately reported as minority interest. Prior to
March 1998, the Company's portion of Omaha's net results was included with
income from investments.
Effective April 1998, the Company increased its interest in OCLP from 55.82%
to 81.75%. On April 28, 1998, the Company completed the purchase with
several of the limited partners for approximately $24.4 million.
As of March 31, 1998, there were 271,324 customer lines in service in these
three markets, compared to 222,850 a year earlier. Penetration rates
(subscribers compared to POPs) achieved were 22.7% in Lincoln, 16.1% in the
rural areas of Nebraska, and 13.0% in Omaha. Earnings before interest,
income taxes, depreciation and amortization totaled $13,051,000 for the
first quarter 1998, compared to $11,141,000 in the same period in 1997.
Net operating income was $8,407,000, an increase of $602,000 (7.7%).
In addition, the Company has a 16.1% interest in, and manages, cellular
operations in Iowa Rural Service Area 1 (RSA 1), which is contiguous to
Omaha and to the Company's telephone operating area in Nebraska. RSA 1
contains approximately 62,000 POPs.
ACCOUNTING PRONOUNCEMENTS
FAS 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997. FAS 131 establishes standards for
the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in annual financial
reports issued to shareholders. It also established standards for related
disclosures about products and services, geographic areas, and major
customers. FAS 131 is effective for periods beginning after December 15,
1997. The Company anticipates adopting this accounting pronouncement in the
fourth quarter of 1998; however, management believes it will not have a
significant impact on the Company's annual consolidated financial statements.
YEAR 2000
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000. The
Company has begun to incur expenses for this change by utilizing internal
resources to identify, correct or reprogram, and test the systems for the
year 2000 compliance. It is anticipated that all reprogramming efforts
will be complete by mid 1999, allowing time for testing. The current
estimate of total year 2000 compliance costs is approximately 30,000 person
hours at an approximate cost of $1.3 million with 13,000 hours of labor
-20-
<PAGE>
completed to date. Virtually all of the year 2000 compliance costs are due
to reprogramming, since all switching equipment will be year 2000 compliant
without any significant cost to the Company. The estimated costs are not
expected to significantly affect operating results or the financial
condition of the Company in 1998 and 1999.
The Company is in the process of inquiring as to the progress of its major
vendors and suppliers regarding their year 2000 compliance. The Company is
monitoring its vendors and suppliers closely with the intent of confirming
their year 2000 compliance with sufficient time for testing.
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.
-21-
<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
Current report on Form 8-K as filed on March 20, 1998, reporting the
Registrant's consolidated balance sheets as of December 31, 1997 and
1996, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, along with the Independent
Auditor's Report thereon of KPMG Peat Marwick. Also reported was the
Registrant's 1997 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Current report on Form 8-K as filed on March 23, 1998, reporting the
Registrant's announcement that it intends to offer $100 million
aggregate principal amount of debt securities.
-22-
<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. and Aliant Communications Co.
--------------------------------------------------------
(Registrants)
May 15, 1998 /s/ Robert L. Tyler
Date..................... ......................................
(Signature)
Robert L. Tyler, Senior Vice President-
Chief Financial Officer
May 15, 1998 /s/ Michael J. Tavlin
Date..................... ......................................
(Signature)
Michael J. Tavlin, Vice President-
Treasurer
-23-
<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.
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