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
Commission file number 1-4996
ALLTEL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-0868285
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allied Drive, Little Rock, Arkansas 72202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Number of common shares outstanding as of September 30, 1997:
185,339,884
The Exhibit Index is located at sequential page 15 .
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements of ALLTEL Corporation
and subsidiaries, included in the interim report of ALLTEL Corporation to its
stockholders for periods ended September 30, 1997, a copy of which is attached
hereto, are incorporated herein by reference:
Consolidated Statements of Income - for the three, nine and twelve
months ended September 30, 1997 and 1996.
Consolidated Balance Sheets - September 30, 1997 and 1996 and
December 31, 1996.
Consolidated Statements of Cash Flows - for the nine and twelve
months ended September 30, 1997 and 1996.
2
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ALLTEL CORPORATION
FORM 10-Q
PART I - FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total capital structure was $4.1 billion at September 30,
1997, reflecting 56 percent common and preferred equity and 44 percent debt.
This compares to a capital structure of $3.9 billion at December 31, 1996,
reflecting 54 percent common and preferred equity and 46 percent debt. The
Company has adequate internal and external resources available to finance its
ongoing operating requirements, including capital expenditures, business
development and the payment of dividends.
Cash provided by operations, which is the Company's primary source of
liquidity, was $577.7 million and $807.1 million for the nine and twelve month
periods of 1997, respectively, compared to $576.8 million and $767.0 million
for the same periods of 1996. The increase in the twelve month period
primarily reflects decreased working capital requirements and the timing of
additional income tax payments related to gains realized from the sale of
certain investments. Growth in the earnings of the Company, excluding the
impact of certain non-cash, non-extraordinary charges further discussed below,
also contributed to the increase in cash provided by operations for the twelve
month period of 1997.
Cash flows from investing activities for the nine and twelve month periods
of 1997 include net proceeds of $200.6 million received from the sale of
property, principally consisting of three non-strategic operations. In
September 1997, the Company received cash proceeds of $48.7 million in
connection with the sale of an investment in a software company. Additionally,
in May 1997, the Company completed the sale of its wire and cable subsidiary,
HWC Distribution Corp. ("HWC"), for approximately $45.0 million in cash; and in
January 1997, the Company received cash proceeds of $104.9 million in
connection with the sale of its healthcare operations. Cash from investing
activities for the nine and twelve month periods of 1997 also include proceeds
of $185.9 million related to the sale of a portion of the Company's investment
in WorldCom, Inc. common stock. The proceeds from these asset sales were used
primarily to reduce borrowings under the Company's revolving credit agreement.
In addition, cash flows from investing activities for the nine and twelve
month periods of 1997 include a cash outlay of $146.5 million related to the
acquisition of Personal Communications Services ("PCS") licensing rights. The
Company participated in the Federal Communications Commission's ("FCC") "D" and
"E" band PCS auctions, and in January 1997, the Company was awarded the PCS
licensing rights for 73 markets in 12 states. The PCS licenses increase the
size of the Company's potential wireless customer base to 34 million. Cash
flows from investing activities for the nine and twelve month periods of 1997
also include a cash outlay of $40.4 million related to the acquisition of two
wireless properties in Alabama and the purchase of an additional ownership
interest in a Georgia wireless property.
Capital expenditures for the nine and twelve month periods of 1997 were
$369.1 million and $503.5 million, respectively, compared to $329.4 million
and $443.1 million for the same periods of 1996. In each of the past two-year
periods, the Company financed the majority of its capital expenditures through
the internal generation of funds. During each of the past two-year periods,
the Company's capital expenditures were incurred to continue to modernize and
upgrade its telecommunications network, to invest in equipment to provide new
telecommunications services and to expand into existing information services
markets. Capital expenditures, including the construction of the PCS network,
are forecast at $602.1 million for 1997, which are expected to be financed
primarily from internally generated funds.
3
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Included in cash flows from financing activities are dividend payments and
the repurchase by the Company of its common stock. Common and preferred
dividend payments for the nine and twelve month periods of 1997 were
$154.9 million and $204.4 million, respectively, compared to $148.6 million
and $194.3 million for the same periods of 1996. The increases in dividend
payments in the 1997 periods primarily reflect the October 1996 action of the
Board of Directors to increase the quarterly common stock dividend rate from
$.26 per share to $.275 per share. On October 21, 1996, the Company announced
its plans to repurchase up to 3.5 million shares of its common stock. On
April 24, 1997, the Company announced expansion of its share repurchase program
to include an additional 3.5 million shares, for a total of 7.0 million shares.
Through September 30, 1997, the Company had repurchased 5.3 million shares at a
total cost of $168.3 million. Of this total, $92.7 million was expended during
the first nine months of 1997. The stock repurchase program expires at the
end of 1997.
The Company has a $750 million revolving credit agreement. Borrowings
outstanding under this agreement at September 30, 1997 were $120.3 million,
compared to $83.7 million that were outstanding at December 31, 1996. There
were no borrowings outstanding under this agreement at September 30, 1996.
The weighted average interest rate on borrowings outstanding under this
agreement at September 30, 1997, was 6.6 percent. Borrowings under this
agreement in 1997 were incurred primarily to fund the stock repurchase program,
to acquire the PCS licensing rights and to fund general corporate requirements.
As previously noted, the proceeds from the sales of the wire and cable and
healthcare operations and from the sale of investments in a software company
and WorldCom, Inc. common stock were used primarily to reduce borrowings under
the revolving credit agreement. The net increase in revolving credit agreement
borrowings from December 31, 1996, represent all of the long-term debt issued
in the nine month period ended September 30, 1997, while the net increase in
revolving credit agreement borrowings from September 30, 1996, represent
substantially all of the long-term debt issued in the twelve month period ended
September 30, 1997. Scheduled long-term debt retirements amounted to
$24.9 million and $42.5 million for the nine and twelve month periods of 1997,
respectively.
CONSOLIDATED RESULTS OF OPERATIONS
Revenues and sales increased $6.3 million or 1 percent, $28.8 million or
1 percent and $61.3 million or 2 percent for the three, nine and twelve month
periods ended September 30, 1997, respectively. Operating income increased
$134.9 million or 242 percent, $136.2 million or 33 percent and $142.6 million
or 24 percent for the three, nine and twelve month periods of 1997,
respectively. Growth in revenues and sales in all periods of 1997 was impacted
by the sales of HWC and information services' healthcare operations. Operating
results for the nine and twelve month periods of 1997 were also impacted by the
sale of certain wireline properties to Citizens Utilities Company ("Citizens")
completed during the first quarter of 1996 and the fourth quarter of 1995.
In addition, operating income for all periods of 1996 included nonrecurring
charges to writedown the carrying value of certain assets, as further discussed
below. Adjusted to exclude these asset dispositions and write-downs, revenues
and sales would have increased $74.0 million or 10 percent, $190.5 million or
9 percent and $247.4 million or 9 percent and operating income would have
increased $17.6 million or 10 percent, $35.8 million or 7 percent and
$54.4 million or 8 percent for the three, nine and twelve months ended
September 30, 1997, respectively.
Net income increased $103.2 million or 548 percent, $202.9 million or 104
percent and $207.2 million or 72 percent for the three, nine and twelve month
periods ended September 30, 1997, respectively. Primary earnings per common
share increased 550 percent, 107 percent and 75 percent for the three, nine and
twelve month periods of 1997, respectively. In addition to the sales of HWC,
the healthcare operations and certain wireline properties, reported net income
and primary earnings per share were impacted by several non-extraordinary,
nonrecurring items. Excluding the impact in each period of the asset
dispositions and the non-extraordinary, nonrecurring items discussed below, net
income would have increased $9.7 million or 11 percent, $22.2 million or 8
percent and $37.1 million or 11 percent and primary earnings per share would
have increased 13 percent, 10 percent and 12 percent in the three, nine and
twelve month periods ended September 30, 1997, respectively.
4
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Net income and primary earnings per share adjusted for the asset dispositions
and the nonrecurring, non-extraordinary items are summarized in the following
table:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
- ------------------------------------------------
Three Months Nine Months Twelve Months
Ended Ended Ended
------------ ----------- -------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net income, as reported $122,064 $18,824 $397,662 $194,805 $494,594 $287,382
Disposition of healthcare, wire
and cable and wireline operations - (1,698) (838) (2,541) (4,981) (13,926)
Nonrecurring items, net of tax:
Provision to reduce carrying
value of certain assets - 72,716 11,744 72,716 11,744 72,716
Gain on disposal of assets (22,569) - (119,895) (8,465) (119,895) (20,651)
Termination fees on early
retirement of long-term debt - - - 9,946 - 18,890
-------- ------- -------- -------- -------- --------
Net income, as adjusted $ 99,495 $89,842 $288,673 $266,461 $381,462 $344,411
======== ======= ======== ======== ======== ========
Earnings per share, as reported $.65 $.10 $2.11 $1.02 $2.62 $1.50
Disposition of healthcare, wire
and cable and wireline operations - (.01) (.01) (.02) (.03) (.07)
Nonrecurring items:
Provision to reduce carrying
value of certain assets - .38 .06 .38 .06 .38
Gain on disposal of assets (.12) - (.63) (.04) (.63) (.11)
Termination fees on early
retirement of long-term debt - - - .05 - .10
---- ---- ----- ----- ----- -----
Earnings per share, as adjusted $.53 $.47 $1.53 $1.39 $2.02 $1.80
==== ==== ===== ===== ===== =====
</TABLE>
The net income and earnings per share impact of the asset dispositions and the
non-extraordinary, nonrecurring items has been presented as supplemental
information only. The following narrative provides a description of each of
the nonrecurring items reflected in the above table, and are discussed in
reference to the caption in the consolidated statements of income in which the
nonrecurring items are reported.
Provision to Reduce Carrying Value of Certain Assets
During the second quarter of 1997, the Company recorded a pretax write-down
of $16.9 million to reflect the fair value less cost to sell its wire and cable
subsidiary, HWC. The net income impact of this write-down resulted in a
decrease in net income of $11.7 million or $.06 per share.
During the third quarter of 1996, the Company incurred non-cash, pretax
charges of $120.3 million to writedown the carrying value of certain assets
consisting of the following: In accordance with the Company's plan to dispose
of its wire and cable subsidiary, the Company recorded a pretax write-down of
goodwill in the amount of $45.3 million. In addition, information services
recorded a pretax write-down of $53.0 million in the carrying value of certain
assets, primarily consisting of capitalized software development costs. The
write-down of software resulted from performing a net realizability evaluation
of software-related products that have been impacted by changes in software and
hardware technologies. Information services also recorded a pretax write-down
of $22.0 million to adjust the carrying value of its community banking
operations to their estimated fair value based upon projections of future cash
flows. The net income impact of these write-downs resulted in a decrease in
net income of $72.7 million or $.38 per share.
5
<PAGE>
Gain on Disposal of Assets and Other
During the third quarter of 1997, the Company recorded a pretax gain of
$34.4 million primarily related to the sale of its investment in a software
company. This gain resulted in an increase of $22.6 million in net income and
$.12 in earnings per share. In the second quarter of 1997, the Company
recorded a pretax gain of $156.0 million from the sale of a portion of its
investment in WorldCom, Inc. common stock. This transaction resulted in an
increase of $88.1 million in net income and $.46 in earnings per share.
During the first quarter of 1997, the Company recorded a pretax gain of
$16.2 million from the sale of information services' healthcare operations.
The net income impact from this transaction resulted in an increase of
$9.2 million in net income and $.05 in earnings per share.
During the first quarter of 1996, the Company recorded a pretax gain of
$15.3 million from the sale of wireline properties in Nevada to Citizens. The
Company also realized a loss of $1.8 million related to the withdrawal of its
investment in GO Communications Corporation ("GOCC"). The net income impact
from these transactions resulted in a net increase of $8.5 million in net
income and $.04 in earnings per share. The Company also incurred $15.8 million
of termination fees related to the early retirement of $200 million of
long-term debt completed in March 1996. The payment of termination fees
resulted in a decrease of $9.9 million in net income and $.05 in earnings per
share.
The twelve month period ended September 30, 1996, included pretax gains
totaling $34.2 million from the disposal of wireline properties in Arizona,
California, New Mexico, Tennessee and Utah to Citizens, partially offset by the
$1.8 million loss incurred on the withdrawal of the Company's investment in
GOCC. The net income impact from these transactions resulted in a net increase
of $20.7 million in net income and $.11 in earnings per share. In addition,
the Company incurred termination fees totaling $29.8 million related to the
refinancing of long-term debt completed in October 1995 and March 1996. The
payment of termination fees resulted in a decrease of $18.9 million in net
income and $.10 in earnings per share.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Wireline Operations
Wireline revenues and sales increased $28.2 million or 10 percent,
$61.1 million or 7 percent and $62.3 million or 5 percent for the three, nine
and twelve month periods ended September 30, 1997, respectively. Wireline
operating income increased $12.5 million or 13 percent and $19.1 million or
6 percent and $12.6 million or 3 percent for the three, nine and twelve month
periods of 1997, respectively. Excluding the impact of the sale of properties
to Citizens, wireline's revenues and sales would have increased $66.0 million
or 8 percent and $82.8 million or 7 percent and operating income would have
increased $21.2 million or 7 percent and $22.2 million or 5 percent for the
nine and twelve month periods ended September 30, 1997, respectively.
Local service revenues increased $9.8 million or 9 percent, $29.2 million
or 9 percent and $41.3 million or 10 percent in the three, nine and twelve
month periods ended September 30, 1997, respectively. Customer access lines
increased more than 5 percent during the past twelve month period, reflecting
increased sales of residential and second access lines. Growth in custom
calling and other special feature revenues also contributed to the increase in
local service revenues in all periods. In addition, local service revenues
also increased by $7.3 million and $10.4 million in the nine and twelve months
of 1997, respectively, due to the expansion of local calling areas in North
Carolina and Georgia, which reclassified certain revenues from network access
and long-distance revenues to local service revenues. The increases in local
service revenues for the nine and twelve month periods resulting from growth
in customer access lines, growth in custom calling and other special feature
revenues and expansion of local calling areas were partially offset by the sale
of properties to Citizens, which reduced local service revenues $1.3 million
and and $4.6 million for the nine and twelve month periods ended
September 30, 1997, respectively.
6
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Network access and long-distance revenues increased $15.9 million or 11
percent, $24.6 million or 5 percent and $13.0 million or 2 percent for the
three, nine and twelve month periods ended September 30, 1997, respectively.
The increases in all periods primarily reflect growth in the Company's
long-distance operations, which began serving customers during the second
quarter of 1996. The long-distance operations, which currently serve nearly
263,000 customers, generated growth in operating revenues of $8.0 million,
$20.9 million and $26.0 million during the three, nine and twelve month periods
ended September 30, 1997, respectively, as compared to the corresponding
periods of 1996. Higher volumes of access usage also contributed to the growth
in revenues in all periods of 1997. For the nine and twelve month periods of
1997, the growth in revenues attributable to the long-distance operations and
additional access usage was partially offset by the sale of properties to
Citizens, which reduced revenues by $2.8 million and $13.3 million,
respectively. For the nine and twelve month periods of 1997, growth in network
access and long-distance revenues was also impacted by the reclassification
of certain revenues to local service, as previously discussed.
On July 12, 1996, the Georgia Public Service Commission ("Georgia PSC")
issued an order requiring that the Company's wireline subsidiaries which
operate within its jurisdiction reduce their annual network access charges by
$24 million, prospectively, effective July 1, 1996. The Georgia PSC's action
was in response to the Company's election to move from a rate-of-return method
of pricing to an incentive rate structure, as provided by a 1995 Georgia
telecommunications law. The Company appealed the Georgia PSC order. On
November 6, 1996, the Superior Court of Fulton County, Georgia, (the "Superior
Court") rendered its decision and reversed the Georgia PSC order, finding,
among other matters, that the Georgia PSC had exceeded its authority by
conducting a rate proceeding after the Company's election of alternative
regulation. The Superior Court did not rule on a number of other assertions
made by the Company as grounds for reversal of the Georgia PSC order. The
Georgia PSC appealed the Superior Court's decision, and on July 3, 1997, the
Georgia Court of Appeals reversed the Superior Court's decision. On
July 16, 1997, the Georgia Court of Appeals denied the Company's request to
reconsider its decision. On August 5, 1997, the Company filed with the
Georgia Supreme Court a petition for writ of certiorari requesting that the
Georgia Court of Appeals' decision be reversed. The Georgia Supreme Court has
not yet ruled on this petition. The Company has not implemented any revenue
reductions or established any reserves for refund related to this matter.
Miscellaneous revenues increased $2.5 million or 7 percent, $7.2 million or
7 percent and $8.0 million or 6 percent for the three, nine and twelve month
periods of 1997, respectively. The increases in all periods primarily reflect
growth in directory advertising revenues, direct sales of wireline equipment,
rental revenues, and sales of wireline equipment protection plans. The growth
in miscellaneous revenues for the nine and twelve month periods of 1997 was
partially offset by the sale of properties to Citizens, which reduced revenues
by $0.8 million and $2.6 million in the nine and twelve month periods,
respectively.
Total wireline operating expenses increased $15.8 million or 8 percent,
$42.0 million or 7 percent and $49.7 million or 7 percent for the three, nine
and twelve months ended September 30, 1997, respectively. Excluding the impact
of the sale of properties to Citizens, wireline's operating expenses would have
increased $44.8 million and $60.6 million or 8 percent for the nine and twelve
month periods of 1997, respectively. The long-distance operations accounted
for $6.7 million, $17.2 million and $22.1 million of the increases in operating
expenses for the three, nine and twelve month periods of 1997, respectively.
Operating expenses for all periods of 1997 also reflect increases in
depreciation and network-related expenses, increased data processing charges
and additional costs incurred as a result of the Company consolidating its
customer service operations. Until the new regional customer service centers
become fully operational and replace all existing customer call centers later
this year, the Company will continue to incur some duplicate costs in operating
both the existing and new facilities.
7
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The Company's wireline subsidiaries follow the accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). If
the Company's wireline subsidiaries no longer qualified for the provisions of
SFAS 71, the accounting impact to the Company would be an extraordinary
non-cash charge to operations of an amount that could be material. Criteria
that would give rise to the discontinuance of SFAS 71 include (1) increasing
competition that restricts the wireline subsidiaries' ability to establish
prices to recover specific costs and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. The Company periodically reviews these criteria to ensure the
continuing application of SFAS 71 is appropriate. As a result of the passage
of the Telecommunications Act of 1996 (the "96 Act") and state
telecommunications reform legislation, the Company's wireline subsidiaries
could begin to experience increased competition in their local service areas.
Presently, competition has not had a significant adverse effect on the
operations of the Company's wireline subsidiaries.
In August 1996, the FCC issued regulations implementing the local
competition provisions of the 96 Act. These regulations established pricing
rules for state regulatory commissions to follow with respect to entry by
competing carriers into the local, intrastate markets of incumbent local
exchange carriers ("ILECs"), and addressed interconnection, unbundled network
elements and resale rates. The FCC's authority to adopt such pricing rules,
including permitting new entrants to "pick and choose" among the terms and
conditions of approved interconnection agreements, was challenged in federal
court by various ILECs and state regulatory commissions. On July 18, 1997, the
U.S. Eighth Circuit Court of Appeals issued its decision and vacated the FCC's
pricing rules including the "pick and choose" provisions, finding, among other
matters, that the FCC had exceeded its jurisdiction in establishing pricing
rules for intrastate communication services. In responding to petitions for
rehearing of its earlier decision, the U.S. Eighth Circuit Court of Appeals
ruled on October 14, 1997, that ILECs are not required by the 96 Act to
recombine network elements that are purchased by requesting carriers on an
unbundled basis. The FCC is evaluating whether it will appeal this decision to
the U.S. Supreme Court.
On May 7, 1997, the FCC issued regulations relating to access charge reform
and universal service. The access charge reform regulations are applicable
mainly to price cap regulated local exchange companies. Since the Company's
wireline subsidiaries are all rate-of-return regulated companies, the access
charge regulations, with few exceptions, are not applicable. The FCC has
indicated that a further notice of proposed rulemaking will be issued later
this year to address access charge reform for rate-of-return companies. Based
upon its review of the FCC's regulations concerning the universal service
subsidy, it is unlikely that material changes in the universal service funding
for the Company's wireline subsidiaries will occur prior to 2001. In 2001, the
universal service subsidy is scheduled to change from being based on actual
costs to being based on a proxy model. Since the FCC has not yet defined the
structure or content of any such proxy model, the impact of this change, if
any, in the universal service funding for the Company's wireline subsidiaries
cannot be determined at this time. The impact of the FCC's universal service
order on the Company's other telecommunications operations is still being
evaluated. Petitions for reconsideration of various aspects of both the
universal service and access charge reform orders are pending at the FCC. In
addition, petitions to review these orders have also been filed with various
federal courts of appeal.
Because resolution of the regulatory matters discussed above that are
currently under FCC and/or judicial review is uncertain and regulations to
implement other provisions of the 96 Act have yet to be issued, the Company
cannot predict at this time the specific effects that the 96 Act and future
competition will have on its wireline subsidiaries. However, the Company is
intent on taking advantage of the various opportunities that competition should
provide.
8
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Wireless Operations
Wireless revenues and sales reflect increases of $15.5 million or 13
percent, $50.3 million or 14 percent and $72.8 million or 16 percent for the
three, nine and twelve month periods ended September 30, 1997, respectively.
Operating income increased $5.9 million or 14 percent, $18.2 million or 16
percent and $25.5 million or 18 percent for the three, nine and twelve month
periods of 1997, respectively. During the twelve month period ended
September 30, 1997, customer growth remained strong as the number of wireless
customers grew to 921,103 from 738,040, an increase of 183,063 customers or
25 percent. The acquisition of two wireless properties in Alabama, completed
in February 1997, added approximately 22,000 customers, and accounted for a
3 percent increase in customers.
Wireless revenues and sales increased in all periods primarily as a result
of the significant growth in its customer base and the acquisition of two
wireless properties in Alabama. Growth in revenues and sales for all periods
was also favorably impacted by a reduction in uncollectible revenues,
reflecting decreased write-offs from bad debts. Partially offsetting the
increases in revenues and sales resulting from customer growth, acquisitions
and lower uncollectible revenues were declines in the average monthly revenue
per subscriber. Average monthly revenue per subscriber was $51, $52 and $53
for the three, nine and twelve months ended September 30, 1997, compared to
$60 for each of the same three periods in 1996. The declines in average
monthly revenue per subscriber primarily reflect the migration of existing
customers to lower rate plans, reductions in roaming revenue rates and the
industry-wide trend of continued penetration into lower-usage market segments.
As a result of increased current and expected future competition in its service
areas, the Company has increased its offering of monthly service plans which
have lower base access rates and include more packaged airtime minutes.
Migration of existing customers to the newly offered rate plans is expected to
continue throughout the remainder of 1997, and accordingly, this trend could
continue to impact future revenue growth.
The growth in operating income for all periods of 1997 primarily reflects
the increases in revenues and sales, previously noted. The increases in
operating income attributable to growth in revenues and sales were partially
offset by higher expenses for selling and advertising, depreciation and other
operating expenses. In addition, operating income for all periods was
favorably impacted by a reduction in losses incurred from fraud and bad
debts. During the third quarter of 1996, the Company implemented new
technologies to control fraud and enhanced its credit and collection
procedures. For each of the past four consecutive calendar quarters, the
Company has experienced a decline in losses sustained from fraud and bad debts.
Information Services
Information services' revenues and sales decreased slightly in the three
month period and increased $4.4 million and $7.1 million or 1 percent for the
nine and twelve month periods ended September 30, 1997, respectively. Growth
in revenues and sales for all periods of 1997 was impacted by the sale of the
healthcare operations completed in January 1997. Excluding the sold healthcare
operations, information services' revenues and sales would have increased
$29.4 million or 14 percent, $80.6 million or 13 percent and $86.9 million or
10 percent in the three, nine and twelve month periods of 1997, respectively.
Excluding the impact of the sale of the healthcare operations, revenues and
sales increased in all periods primarily due to growth in the financial
services and telecommunications outsourcing business, reflecting volume growth
in existing data processing contracts and the addition of new outsourcing
agreements. Additional software maintenance and service revenues also
contributed to the increase in revenues and sales for all periods. The
increases in revenues and sales in all periods were partially offset by a
reduction in revenues earned on an outsourcing agreement accounted for under
the percentage-of-completion method, lost operations from contract terminations
due primarily to the merger and consolidation activity in the domestic
financial services market, and by a reduction in revenues collected for early
9
<PAGE>
termination of facilities management contracts. The domestic financial
services industry continues to experience consolidation due to mergers.
Operating income increased $76.4 million or 185 percent, $80.8 million or
341 percent and $83.2 million or 129 percent for the three, nine and twelve
month periods ended September 30, 1997, respectively. Operating income for all
three periods of 1996 include the impact of the $75.0 million write-down in the
carrying value of software and certain other assets recorded during the third
quarter of 1996, as previously discussed. Excluding the impact of these
write-downs and the sold healthcare operations, operating income would have
increased $2.6 million or 8 percent, $2.2 million or 2 percent and $8.4 million
or 6 percent for the three, nine and twelve months ended September 30, 1997,
respectively. Operating income for all periods of 1997 reflect the growth in
revenues and sales noted above, as well as, improved profit margins realized
from the international financial services business. Operating income for the
nine month period of 1997 also increased due to the sale of the healthcare
business, as these operations had incurred operating losses during the
corresponding period of 1996. Growth in operating income for all periods of
1997 was adversely impacted by start-up and product development costs
associated with several new business initiatives designed to expand the
Company's service offerings into existing markets. Included in these
initiatives are the Enterprise Network Services, Professional Services and Call
Center business units. Additionally, growth in operating income in all periods
of 1997 was adversely impacted by the loss of higher-margin operations due to
contract terminations, reductions in fees collected on the early termination of
facilities management contracts, and an increase in operating costs
corresponding with the growth in revenues and sales.
Product Distribution Operations
Product distribution's revenues and sales reflect decreases of $31.9
million or 29 percent, $70.4 million or 20 percent and $65.7 million or 15
percent for the three, nine and twelve month periods ended September 30, 1997,
respectively. Operating income decreased $2.8 million or 47 percent, $7.3
million or 38 percent and $8.1 million or 33 percent for the three, nine and
twelve month periods of 1997, respectively.
The decreases in revenues and sales for all periods of 1997 primarily
reflect the sale of HWC completed in May, which resulted in decreases in sales
of electrical wire and cable products of $38.0 million, $80.5 million and
$85.9 million for the three, nine and twelve month periods of 1997,
respectively. Sales of telecommunications and data products increased
$6.1 million, $10.1 million and $20.2 million for the three, nine and twelve
month periods of 1997, respectively, primarily reflecting increased retail
sales of these products at the Company's counter showrooms. Additional sales
to non-affiliated customers also contributed to the growth in the sales of
telecommunications and data products for the three and nine month periods of
1997.
Operating income decreased in all periods primarily due to the decreases
in revenues and sales noted above. Operating income for all periods of 1997
has also been adversely impacted by lower gross profit margins realized on the
sale of telecommunications and data products reflecting the effects of
increased competition and a reduction in product cost rebates received from
vendors. In addition, increased selling expenses also impacted operating
income growth in all periods of 1997.
Other Operations
Other operations revenues and sales decreased $5.3 million or 15 percent,
$16.5 million or 15 percent and $15.2 million or 11 percent for the three, nine
and twelve month periods ended September 30, 1997, respectively. Operating
income decreased $0.4 million and $1.2 million or 15 percent for the three and
nine month periods of 1997, respectively. Operating income increased
$0.9 million or 10 percent for the twelve month period of 1997.
10
<PAGE>
Revenues and sales for other operations decreased in all periods primarily
due to a decrease in directory publishing revenues attributable to a reduction
in the number of directories published. Compared to the corresponding periods
of 1996, seventeen, thirty-six and thirty-three fewer directories were
published in the three, nine and twelve month periods ended September 30, 1997,
respectively.
The decreases in operating income for the three and nine month periods of
1997 primarily reflect the decrease in directory publishing revenues. The
increase in operating income for the twelve month period of 1997 reflects a
reduction in directory publishing expenses resulting from the elimination of
certain amounts paid to GTE Directories Corporation. The Company's publishing
subsidiary had contracted with GTE Directories Corporation to receive directory
advertising sales support, printing and other services. Beginning in the
second quarter of 1996, these sales and service functions were performed at a
lower cost internally by the Company's publishing subsidiary. Operating income
for the twelve month period also reflects lower expenses for advertising,
market research and new product development.
Corporate Expenses
Corporate expenses decreased $43.3 million or 83 percent, $26.8 million or
42 percent and $28.5 million or 40 percent for the three, nine and twelve month
periods ended September 30, 1997, respectively. Corporate expenses for the
nine and twelve month periods of 1997 include the $16.9 million write-down to
reflect the fair value less cost to sell the HWC operations recorded in the
second quarter of 1997, and corporate expenses for the three, nine and twelve
month periods of 1996 include the $45.3 million write-down in the carrying
value of goodwill related to HWC recorded in the third quarter of 1996.
Excluding the impact of these write-downs in each period, corporate expenses
would have increased $2.0 million or 29 percent and $1.7 million or 9 percent
in the three and nine month periods of 1997, respectively, and would have
decreased slightly in the twelve month period of 1997. Net of the write-downs,
the increases in corporate expenses for the three and nine month periods
primarily reflect an increase in employee benefit costs, partially offset by a
reduction in amortization of excess cost resulting from the write-down in the
carrying value of HWC's goodwill.
Interest Expense
Interest expense increased slightly in the three month period of 1997 and
decreased $1.9 million and $2.6 million or 2 percent for the nine and twelve
month periods of 1997, respectively. The decreases in interest expense in the
nine and twelve month periods reflect the issuance of $300 million of 7.0
percent debentures in March 1996 to retire $200 million of 9.5 percent
debentures and to reduce borrowings under the Company's revolving credit
agreement. The decreases in interest expense in the nine and twelve month
periods resulting from the debt refinancing were partially offset by increases
in both the amount of borrowings outstanding and average borrowing rates
applicable to the Company's revolving credit agreement.
Income Taxes
Income tax expense increased $66.3 million or more than 1000 percent,
$144.0 million or 126 percent and $140.8 million or 81 percent for the three,
nine and twelve month periods ended September 30, 1997, respectively. The
increases in income tax expense in all periods primarily reflect the
tax-related impact of the various nonrecurring, non-extraordinary items
previously discussed. Income tax expense for the three month period of 1997
includes net additional tax expense of $11.8 million resulting from the gain
primarily related to the sale of the Company's investment in a software
company. Income tax expense for the nine and twelve month periods of 1997
also include additional tax expense of $69.8 million related to the gains on
the sale of WorldCom, Inc. stock and the healthcare operations, partially
offset by the write-down of HWC. Income tax expense for all periods of 1996
primarily included a net tax benefit of $47.6 million
11
<PAGE>
resulting from the third quarter 1996 write-downs of the wire and cable
subsidiary, community banking operations and other assets primarily consisting
of capitalized software development costs. Excluding the impact on tax expense
of all nonrecurring items, income tax expense would have increased $6.9 million
or 13 percent, $14.1 million or 9 percent and $12.5 million or 6 percent in the
three, nine and twelve month periods of 1997, respectively, consistent with the
overall growth in the Company's earnings from continuing operations before
nonrecurring, non-extraordinary items.
Average Common Shares Outstanding
The average number of common shares outstanding decreased 2 percent in both
the three and nine month periods of 1997 and decreased 1 percent in the twelve
month period ended September 30, 1997. The decreases in all periods were
primarily due to the Company's repurchase of its common stock on the open
market, partially offset by additional shares issued in connection with the
acquisition of a wireless property in Georgia and by additional shares issued
under the Company's stock option plans.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes, and future filings by the Company on Form 10-K,
Form 10-Q and Form 8-K and future oral and written statements by the Company
and its management may include, certain forward-looking statements, including
(without limitation) statements with respect to anticipated future operating
and financial performance, growth opportunities and growth rates, acquisition
and divestitive opportunities and other similar forecasts and statements of
expectation. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," and "should", and variations of these words
and similar expressions, are intended to identify these forward-looking
statements. Forward-looking statements by the Company and its management are
based on estimates, projections, beliefs and assumptions of management and are
not guarantees of future performance. The Company disclaims any obligation to
update or revise any forward-looking statement based on the occurrence of
future events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Representative
examples of these factors include (without limitation) rapid technological
developments and changes in the telecommunications and information services
industries; ongoing deregulation (and the resulting likelihood of significantly
increased price and product/service competition) in the telecommunications
industry as a result of the Telecommunications Act of 1996 and other similar
federal and state legislation and the federal and state rules and regulations
enacted pursuant to that legislation; regulatory limitations on the Company's
ability to change its pricing for communications services; the possible future
unavailability of SFAS 71 to the Company's wireline subsidiaries; continuing
consolidation in certain industries, such as banking, served by the Company's
information services business; and the risks associated with relatively large,
multi-year contracts in the Company's information services business. In
addition to these factors, actual future performance, outcomes and results may
differ materially because of other, more general, factors including (without
limitation) general industry and market conditions and growth rates, domestic
and international economic conditions, governmental and public policy changes
and the continued availability of financing in the amounts, at the terms and
on the conditions necessary to support the Company's future business.
12
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See the exhibits specified on the Index of Exhibits located at
Sequential Page 15.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLTEL CORPORATION
(Registrant)
/s/ Dennis J. Ferra
Dennis J. Ferra
Senior Vice President and
Chief Financial Officer
November 12, 1997
14
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
INDEX OF EXHIBITS
Form 10-Q Sequential
Exhibit No. Description Page No.
(19) Interim Report to Stockholders and 16 - 23
Notes to Consolidated Financial Statements
for the periods ended September 30, 1997
(27) Financial Data Schedule 24
for the nine months ended September 30, 1997
15
EXHIBIT 19
<TABLE>
<CAPTION>
HIGHLIGHTS (UNAUDITED)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, Twelve Months Ended Sept. 30,
---------------------------- ---------------------------- -----------------------------
Dollars in thousands, % Increase % Increase % Increase
(except per share amounts) 1997 1996 (Decrease) 1997 1996 (Decrease) 1997 1996 (Decrease)
- -------------------------- ---- ---- ---------- ---- ---- ---------- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and sales $813,746 $807,398 1 $2,414,931 $2,386,117 1 $3,221,232 $3,159,972 2
Net income $122,064 $ 18,824 548 $ 397,662 $ 194,805 104 $ 494,594 $ 287,382 72
Primary earnings per average
common share outstanding $.65 $.10 550 $2.11 $1.02 107 $2.62 $1.50 75
From current businesses 1:
Revenues $813,746 $739,731 10 $2,372,084 $2,181,608 9 $3,111,839 $2,864,480 9
Operating income $190,721 $173,072 10 $ 559,506 $ 523,693 7 $ 736,054 $ 681,643 8
Net income $ 99,495 $ 89,842 11 $ 288,673 $ 266,461 8 $ 381,462 $ 344,411 11
Earnings per share $.53 $.47 13 $1.53 $1.39 10 $2.02 $1.80 12
Average common shares
including equivalents 187,288,000 190,456,000 (2) 187,665,000 190,584,000 (2) 188,159,000 190,531,000 (1)
Annual dividend rate
per common share $1.10 $1.04 6
Total assets $5,599,636 $5,173,935 8
Wireline access lines 1,752,433 1,664,851 5
Wireless customers 921,103 738,040 25
- ----------
<FN>
1 Excludes the sold wireline, healthcare, wire and cable operations and the provision to reduce carrying value of certain assets,
gain on disposal of assets and other.
</FN>
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENTS (UNAUDITED)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, Twelve Months Ended Sept. 30,
---------------------------- ----------------------------- -----------------------------
% Increase % Increase % Increase
(Dollars in thousands) 1997 1996 (Decrease) 1997 1996 (Decrease) 1997 1996 (Decrease)
- ---------------------- ---- ---- ---------- ---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and Sales:
Wireline $321,029 $292,788 10 $ 933,499 $ 872,432 7 $1,230,143 $1,167,838 5
Wireless 138,719 123,259 13 400,547 350,227 14 525,429 452,637 16
-------- -------- ---------- ---------- ---------- ----------
Total communications 459,748 416,047 11 1,334,046 1,222,659 9 1,755,572 1,620,475 8
Information services 244,541 244,771 - 709,318 704,929 1 963,460 956,342 1
Product distribution 79,181 111,038 (29) 279,185 349,598 (20) 381,967 447,715 (15)
Other operations 30,276 35,542 (15) 92,382 108,931 (15) 120,233 135,440 (11)
-------- -------- ---------- ---------- ---------- ----------
Total $813,746 $807,398 1 $2,414,931 $2,386,117 1 $3,221,232 $3,159,972 2
======== ======== ========== ========== ========== ==========
Operating Income:
Wireline $111,817 $ 99,350 13 $ 326,356 $ 307,304 6 $ 427,434 $ 414,810 3
Wireless 47,042 41,155 14 131,129 112,945 16 169,904 144,422 18
-------- -------- ---------- ---------- ---------- ----------
Total communications 158,859 140,505 13 457,485 420,249 9 597,338 559,232 7
Information services 35,018 (41,380) 185 104,421 23,667 341 147,789 64,615 129
Product distribution 3,124 5,936 (47) 11,754 19,057 (38) 16,357 24,462 (33)
Other operations 2,326 2,726 (15) 7,037 8,274 (15) 10,044 9,104 10
Corporate expenses (8,606) (51,952) (83) (36,592) (63,357) (42) (43,688) (72,221) (40)
-------- -------- ---------- ---------- ---------- ----------
Total $190,721 $ 55,835 242 $ 544,105 $ 407,890 33 $ 727,840 $ 585,192 24
======== ======== ========== ========== ========== ==========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Nine Months Twelve Months
Ended Sept. 30, Ended Sept. 30, Ended Sept. 30,
--------------- --------------- ---------------
(Dollars in thousands,
except per share amounts) 1997 1996 1997 1996 1997 1996
------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues and Sales:
Service revenues $682,271 $638,865 $1,982,042 $1,870,471 $2,636,416 $2,496,092
Product sales 131,475 168,533 432,889 515,646 584,816 663,880
-------- -------- ---------- ---------- ---------- ----------
Total revenues and sales 813,746 807,398 2,414,931 2,386,117 3,221,232 3,159,972
-------- -------- ---------- ---------- ---------- ----------
Costs and Expenses:
Cost of products sold 81,985 111,331 279,156 342,517 385,095 444,213
Operations 372,712 361,203 1,086,185 1,041,245 1,442,566 1,375,717
Maintenance 36,830 37,202 108,582 111,591 144,214 147,409
Depreciation and amortization 114,741 105,392 330,282 314,930 439,467 425,301
Taxes, other than income taxes 16,757 16,155 49,747 47,664 65,176 61,860
Provision to reduce carrying value
of certain assets - 120,280 16,874 120,280 16,874 120,280
-------- -------- ---------- ---------- ---------- ----------
Total costs and expenses 623,025 751,563 1,870,826 1,978,227 2,493,392 2,574,780
-------- -------- ---------- ---------- ---------- ----------
Operating Income 190,721 55,835 544,105 407,890 727,840 585,192
Other income, net 1,898 1,261 1,915 2,038 2,802 4,030
Interest expense (32,517) (32,082) (96,403) (98,281) (128,954) (131,522)
Gain on disposal of assets and other 34,413 - 206,622 (2,278) 206,622 2,570
-------- -------- ---------- ----------- ---------- ----------
Income before income taxes 194,515 25,014 656,239 309,369 808,310 460,270
Income taxes 72,451 6,190 258,577 114,564 313,716 172,888
-------- -------- ---------- ---------- ---------- ----------
Net income 122,064 18,824 397,662 194,805 494,594 287,382
Preferred dividends 251 265 765 813 1,023 1,088
-------- -------- ---------- ---------- ---------- ----------
Net income applicable to common shares $121,813 $ 18,559 $ 396,897 $ 193,992 $ 493,571 $ 286,294
======== ======== ========== ========== ========== ==========
Primary Earnings per Share $.65 $.10 $2.11 $1.02 $2.62 $1.50
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Twelve Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
(Dollars in thousands) 1997 1996 1997 1996
- ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Cash Provided by Operations $577,725 $576,781 $807,126 $767,046
-------- -------- -------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (369,149) (329,361) (503,489) (443,109)
Sale of property 200,598 38,687 200,598 155,654
Purchase of property, net of cash acquired (40,447) - (40,447) -
Additions to capitalized software
development costs (54,391) (55,850) (76,860) (68,962)
Additions to other intangible assets (146,526) - (146,526) -
Investments sold (acquired) 150,542 22,548 145,778 7,145
Other, net (52,080) (37,761) (77,363) (98,123)
-------- -------- -------- --------
Net cash used in investing activities (311,453) (361,737) (498,309) (447,395)
-------- -------- -------- --------
Cash Flows from Financing Activities:
Dividends on preferred and common stock (154,937) (148,586) (204,446) (194,285)
Reductions in long-term debt (24,850) (376,327) (42,481) (473,171)
Preferred stock redemptions and purchases (793) (725) (772) (1,215)
Purchase of common stock (92,675) - (168,279) -
Long-term debt issued 36,550 313,579 122,672 333,140
Common stock issued 7,297 3,797 7,024 9,973
-------- -------- -------- --------
Net cash used in financing activities (229,408) (208,262) (286,282) (325,558)
-------- -------- -------- --------
Increase (decrease) in cash and
short-term investments 36,864 6,782 22,535 (5,907)
Cash and Short-term Investments:
Beginning of period 13,874 21,421 28,203 34,110
-------- -------- -------- --------
End of period $ 50,738 $ 28,203 $ 50,738 $ 28,203
======== ======== ======== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Sept. 30, Dec. 31, Sept. 30,
Assets (Dollars in thousands) 1997 1996 1996
- ----------------------------- ---- ---- ----
<S> <C> <C> <C>
Current Assets:
Cash and short-term investments $ 50,738 $ 13,874 $ 28,203
Accounts receivable (less allowance for
doubtful accounts of $21,286, $21,271
and $20,688, respectively) 535,505 554,316 554,098
Materials and supplies 15,563 17,152 19,164
Inventories 46,545 85,970 83,632
Prepaid expenses 27,737 38,156 41,669
---------- ---------- ----------
Total current assets 676,088 709,468 726,766
---------- ---------- ----------
Investments 872,727 838,651 699,416
Excess of cost over equity in purchased entities
and other intangibles 587,521 425,823 433,511
Property, Plant and Equipment:
Wireline 3,958,886 3,827,659 3,782,042
Wireless 658,053 582,707 544,007
Information services 519,545 506,905 494,401
Other 10,295 27,618 27,229
Under construction 205,202 169,439 153,574
---------- ---------- ----------
Total property, plant and equipment 5,351,981 5,114,328 5,001,253
Less accumulated depreciation 2,243,669 2,072,789 2,003,225
---------- ---------- ----------
Net property, plant and equipment 3,108,312 3,041,539 2,998,028
---------- ---------- ----------
Other assets 354,988 343,702 316,214
---------- ---------- ----------
Total Assets $5,599,636 $5,359,183 $5,173,935
========== ========== ==========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
Liabilities and Shareholders' Equity 1997 1996 1996
- ------------------------------------ ---- ---- ----
<S> <C> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 41,302 $ 37,798 $ 38,082
Accounts payable 214,224 240,570 214,686
Advance payments and customers' deposits 79,382 78,080 77,907
Accrued taxes 96,384 41,932 41,380
Accrued dividends 52,694 52,440 49,772
Other current liabilities 142,934 139,876 139,166
---------- ---------- ----------
Total current liabilities 626,920 590,696 560,993
---------- ---------- ----------
Deferred Credits:
Investment tax 9,203 12,915 16,623
Income taxes 671,415 661,972 614,605
---------- ---------- ----------
Total deferred credits 680,618 674,887 631,228
---------- ---------- ----------
Long-term debt 1,771,025 1,756,142 1,687,411
Other liabilities 237,158 233,896 243,674
Preferred stock, redeemable 5,695 6,455 6,455
Shareholders' Equity:
Preferred stock 9,165 9,198 9,216
Common stock 185,340 187,200 189,603
Additional capital 214,821 285,779 359,230
Unrealized holding gain on investments 363,357 351,867 267,813
Retained earnings 1,505,537 1,263,063 1,218,312
---------- ---------- ----------
Total shareholders' equity 2,278,220 2,097,107 2,044,174
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $5,599,636 $5,359,183 $5,173,935
========== ========== ==========
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation:
The consolidated financial statements at September 30, 1997 and 1996 and
for the three, nine and twelve month periods then ended, are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation
of the financial position and operating results for the interim periods.
Certain prior year amounts have been reclassified to conform with the 1997
financial statement presentation.
2. Excess of Cost Over Equity in Purchased Entities and Other Intangibles:
Other intangibles consist of the cost of the Personal Communications
Services ("PCS") licenses of approximately $146.5 million. The PCS
licenses will be amortized upon commencement of operations on a
straight-line basis over 40 years.
3. Provision to Reduce Carrying Value of Certain Assets:
During the second quarter of 1997, the Company recorded a pretax write-down
of $16.9 million to reflect the fair value less cost to sell its product
distribution segment's wire and cable subsidiary, HWC Distribution Corp.,
("HWC"). The sale of HWC was completed in May. The net income impact of
this write-down resulted in a decrease in net income of $11.7 million or
$.06 per share for the nine and twelve months ended September 30, 1997.
Operating results of the wire and cable subsidiary included in the
Company's consolidated results of operations for the three, nine and twelve
months ended September 30, 1997 and 1996, were as follows:
(Thousands)
--------------------------------------------------
Three Months Nine Months Twelve Months
Ended Ended Ended
------------ ----------- -------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
Revenues and sales $ - $ 38,032 $42,847 $123,363 $76,020 $161,893
Operating income $ - $ 1,918 $ 1,473 $ 6,055 $ 3,337 $ 8,914
4. Gain on Disposal of Assets and Other:
During the third quarter of 1997, the Company recorded a pretax gain of
$34.4 million primarily related to the sale of its investment in a software
company. This gain resulted in an increase of $22.6 million in net income
and $.12 in earnings per share for the three, nine and twelve month periods
ended September 30, 1997. In the second quarter of 1997, the Company
recorded a pretax gain of $156.0 million from the sale of a portion of its
investment in WorldCom, Inc. common stock. The net income impact from
this transaction resulted in an increase of $88.1 million in net income
and $.46 in earnings per share for the nine and twelve month periods ended
September 30, 1997. During the first quarter of 1997, the Company recorded
a pretax gain of $16.2 million from the sale of information services'
healthcare operations. The net income impact from this transaction
resulted in an increase of $9.2 million in net income and $.05 in earnings
per share for the nine and twelve month periods ended September 30, 1997.
22
<PAGE>
TO ALLTEL STOCKHOLDERS:
ALLTEL Corporation recently announced double-digit growth in its third quarter
results from current businesses, led by strong gains in its wireline business
and another double-digit increase in revenues from information services.
Among the highlights in the third quarter results from current businesses:
o Earnings per share grew by 13 percent from a year ago, to 53 cents per
share from current businesses.
o Revenues and operating income for ALLTEL's wireline business increased 10
and 13 percent respectively from last year, driven by a 5.3 percent
increase in access lines and a significant growth in the long-distance
business.
o ALLTEL's successful long-distance initiative resulted in a sequential
quarterly growth of 39 percent, from 189,000 customers in the second
quarter to 263,000 customers at the end of the third quarter.
o Wireless penetration reached 10.4 percent, driven by a 25 percent
increase in customers, giving ALLTEL one of the highest wireless market
penetration rates in the industry.
o Revenues and operating income from information services were up
14 percent and 8 percent respectively, showing positive results due to
the sale of expanded services to existing customers and heightened market
awareness of ALLTEL's ability to offer discrete as well as bundled
information services.
Revenues and operating income from current businesses for the third quarter
were $813,746,000 and $190,721,000, respectively. Both were up 10 percent from
the previous year, generating a net income from current businesses of
$99,495,000, which represents an 11 percent gain over a year ago.
These third quarter results demonstrate the benefit from our long-term
investments in making ALLTEL a pre-eminent provider of integrated
telecommunications and information services.
A major focus of the third quarter was to respond to our customers' desire
for one-stop shopping by continuing to integrate our wireline and wireless
businesses. We are fully integrating our wireline and wireless businesses at
every level, enabling us to better understand and satisfy our customers'
evolving needs.
Information services showed in the third quarter the second consecutive
double-digit growth in revenues from current businesses. This performance was
driven by new contracts as well as sales of additional services to existing
customers. Operating income results improved, even as we made investments in
expanding our most valuable service offerings. I am especially pleased with the
market's acceptance of the Virtuoso suite of products, our proprietary
state-of-the-art customer care and billing system for the wireless industry.
Our customers are using the Virtuoso suite of products to support 3.5 million
subscribers. In addition, GTE has extended its contract for use of the Virtuoso
system through the year 2005.
In the third quarter the Company continued to focus on its strategic
priorities, which include:
o Maintaining ALLTEL's pre-eminent position as an information technology
provider to the financial services industry.
o Expanding the Company's position as a leading provider of information
technology solutions to the communications industry.
o Continuing to strengthen ALLTEL's geographically-focused, integrated
communications business in the Sun Belt and Great Lakes regions.
ALLTEL Completes Purchase of Georgia Telephone Company
Effective October 1, 1997, ALLTEL purchased Georgia Telephone Corporation (GTC)
through acquisition of 100 percent of the stock in the Blakely, Ga.-based
company. The addition of GTC to ALLTEL's Georgia properties adds nearly 200
miles of fiber optic cable to ALLTEL's 3,000 miles of fiber network in the
state, along with more than 6,700 customers.
Board Increases Dividends
ALLTEL's board of directors voted to increase the regular quarterly common
dividend from 27.5 cents to 29 cents per share.
The new indicated annual dividend rate will be $1.16 per common share, an
increase of 6 cents or approximately 5.5 percent over the previous rate. This
is the 37th consecutive annual dividend increase since the Company's founding.
The 29 cent dividend is payable January 3, 1998 to stockholders of record as of
December 5, 1997.
Dividends were also declared on all series of the Company's preferred
stock. Preferred dividends are payable December 15, 1997 to stockholders of
record as of November 21, 1997.
/s/ Joe T. Ford
Joe T. Ford,
Chairman and Chief Executive Officer
October 23, 1997
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER REPORT TO STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH REPORT.
</LEGEND>
<CIK> 0000065873
<NAME> ALLTEL CORPORATION
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 50,738
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5,695
9,165
<COMMON> 185,340
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<TOTAL-REVENUES> 2,414,931
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</TABLE>
