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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-4996
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ALLTEL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 34-0868285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allied Drive, Little Rock, Arkansas 72202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
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(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
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Number of common shares outstanding as of September 30, 1998:
274,428,563
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The Exhibit Index is located at sequential page 19 .
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<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, 1998, 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, 1998 and 1997.
Consolidated Balance Sheets - September 30, 1998 and 1997 and
December 31, 1997.
Consolidated Statements of Cash Flows - for the nine and
twelve months ended September 30, 1998 and 1997.
2
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
PART I - FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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GENERAL
The following is a discussion and analysis of the historical results of
operations and financial condition of ALLTEL Corporation ("ALLTEL" or the
"Company"). This discussion should be read in conjunction with the unaudited
consolidated financial statements, including the notes thereto, for the interim
periods ended September 30, 1998 and 1997, and the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
Forward-Looking Statements
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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, Year 2000 compliance 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; the risks associated with relatively large, multi-year contracts in
the Company's information services business; and higher than anticipated
expenditures associated with the Company's Year 2000 efforts. 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.
3
<PAGE>
COMPLETION OF MERGER
On July 1, 1998, ALLTEL completed its merger with 360 Communications
Company ("360"). The merger was accounted for as a pooling of interests;
and accordingly, all prior period financial information has been restated to
include the 360 operations. The financial statements presented include
certain eliminations and reclassification adjustments to conform the accounting
and financial reporting policies of ALLTEL and 360. See note 2 to the
unaudited consolidated financial statements for additional information regarding
the merger transaction. As further discussed below, results for the third
quarter were affected by merger and integration expenses and other non-recurring
and unusual items.
OVERVIEW-CONSOLIDATED RESULTS OF OPERATIONS
Revenues and sales increased $186.7 million or 16 percent, $457.7 million or
14 percent and $548.7 million or 12 percent for the three, nine and twelve month
periods ended September 30, 1998, respectively. Growth in revenues and sales in
the nine and twelve month periods of 1998 was impacted by the sale of the
Company's wire and cable subsidiary, HWC Distribution Corp. ("HWC"). The sale of
information services' healthcare operations also impacted revenues and sales
growth in the twelve month period of 1998. Adjusted to exclude the sold
operations, revenues and sales would have increased $500.6 million or 15 percent
and $658.1 million or 15 percent in the nine and twelve months ended
September 30, 1998.
Operating income decreased $262.6 million or 95 percent, $161.9 million or
22 percent and $115.0 million or 12 percent for the three, nine and twelve month
periods ended September 30, 1998, respectively. As further discussed below,
operating income for all periods of 1998 was affected by merger and integration
expenses and other non-recurring charges to reduce the carrying value of certain
assets. The sales of the HWC and healthcare operations also impacted operating
income growth in the nine and twelve month periods of 1998. Adjusted to exclude
the results from operations for the asset dispositions, merger and integration
expenses and asset write-downs, operating income would have increased $44.4
million or 16 percent, $129.6 million or 17 percent and $183.7 million or 19
percent for the three, nine and twelve months ended September 30, 1998,
respectively.
In addition to reflecting the third quarter merger and integration expenses
and asset write-downs, reported net income and earnings per share amounts for
all periods of 1998 include gains realized from the sale of certain investments.
As a result of the impact of all non-recurring and unusual items, reported net
income decreased $178.9 million or 119 percent, $84.1 million or 18 percent and
$54.8 million or 10 percent for the three, nine and twelve month periods ended
September 30, 1998, respectively. Basic earnings per common share also decreased
118 percent, 18 percent and 9 percent for the three, nine and twelve month
periods ended September 30, 1998, respectively. Excluding the impact in each
period of the asset dispositions and non-recurring and unusual items, net income
would have increased $29.0 million or 23 percent, $81.3 million or 23 percent
and $114.5 million or 26 percent, while basic earnings per share would have
increased 24 percent, 25 percent and 28 percent in the three, nine and twelve
month periods ended September 30, 1998, respectively.
4
<PAGE>
Net income and basic earnings per share adjusted for the asset dispositions and
the non-extraordinary, non-recurring and unusual items are summarized in the
following table:
<TABLE>
(Dollars in thousands, except per share amounts)
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Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Net income (loss), as reported $(27,975) $150,943 $373,713 $457,793 $505,301 $560,094
Disposition of healthcare and
wire and cable operations - - - (838) - (4,726)
Non-recurring and unusual items:
Merger and integration expenses
and provision to reduce
carrying value of certain assets 234,600 - 234,600 11,744 234,600 11,744
Gain on disposal of assets (49,233) (22,569) (179,770) (121,485) (179,770) (121,485)
-------- -------- -------- -------- -------- --------
Net income, as adjusted $157,392 $128,374 $428,543 $347,214 $560,131 $445,627
======== ======== ======== ======== ======== ========
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Basic earnings (loss) per share,
as reported $(.10) $.55 $1.36 $1.65 $1.84 $2.02
Disposition of healthcare and
wire and cable operations - - - - - (.02)
Non-recurring and unusual items:
Merger and integration expenses
and provision to reduce
carrying value of certain assets .85 - .85 .04 .85 .04
Gain on disposal of assets (.18) (.09) (.65) (.44) (.65) (.44)
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Basic earnings per share, as adjusted $ .57 $.46 $1.56 $1.25 $2.04 $1.60
===== ==== ===== ===== ===== =====
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</TABLE>
The net income and basic earnings per share impact of the asset dispositions and
the non-recurring and unusual items has been presented as supplemental
information only. The non-recurring items reflected in the above table are
discussed in reference to the caption in the consolidated statements of income
in which they are reported.
Merger and Integration Expenses and Provision to Reduce Carrying Value of
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Certain Assets
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During the third quarter of 1998, the Company recorded transaction costs and
one-time charges totaling $307 million related to the closing of its merger with
360 and to changes in a customer care and billing contract with a major
customer. The merger and integration expenses, which total $252 million on a
pretax basis, include professional and financial advisors' fees of $31.5
million, employee-related expenses of $48.7 million and integration costs of
$171.8 million. The integration costs include several adjustments resulting from
the redirection of a number of strategic initiatives based on the merger with
360 and ALLTEL's expanded wireless presence. These adjustments include a
write-down in the carrying value of certain in-process software development
assets, costs associated with the early termination of certain service
obligations and a write-down in the carrying value of certain assets resulting
from a revised Personal Communications Services ("PCS") deployment plan. In
addition, the Company recorded a $55 million charge related to its contract with
GTE Corporation ("GTE"). Due to its pending merger with Bell Atlantic
Corporation, GTE has re-evaluated its billing and customer care requirements and
has modified its billing conversion plans and will purchase certain software
usage rights and processing services from ALLTEL for an interim period. The net
income impact of these transaction and one-time charges decreased net income
$234.6 million or $.85 per share in the three, nine and twelve month periods
ended September 30, 1998.
5
<PAGE>
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 $.04 per share in the nine and twelve month
periods ended September 30, 1997.
Gain on Disposal of Assets and Other
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During the third quarter of 1998, the Company recorded a pretax gain of
$80.9 million from the sale of a portion of its investment in MCI WorldCom, Inc.
("MCI WorldCom") common stock. This gain increased net income $49.2 million or
$.18 per share in the three month period ended September 30, 1998. In addition
to including this gain, the nine and twelve month periods of 1998 also include
pretax gains of $184.8 million resulting from additional sales of MCI WorldCom
common stock completed in the first and second quarters of 1998, and a pretax
gain of $30.5 million resulting from the sale of the Company's ownership
interest in a cellular partnership serving the Omaha, Nebraska market. The gains
from the transactions recorded during the first two quarters of 1998 resulted in
an increase in net income of $130.6 million or $.47 in earnings per share.
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 increased net income $22.6 million or $.09 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 MCI WorldCom common stock. This
transaction resulted in an increase of $88.1 million in net income and $.31 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. In addition, the Company recorded a pretax gain of $3.0 million from
the divestiture of its ownership interest in two unconsolidated cellular
partnerships. These first quarter transactions increased net income $10.8
million or $.04 per share.
See notes 3 and 4 to the unaudited consolidated financial statements for
additional information regarding the merger and integration expenses and other
non-recurring and unusual items recorded during 1998.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
<TABLE>
Communications-Wireless Operations
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Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) September 30, September 30, September 30,
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1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $554,738 $473,057 $1,575,308 $1,359,339 $2,054,513 $1,774,053
Operating income $177,246 $134,920 $ 452,162 $ 342,229 $ 570,386 $ 424,967
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</TABLE>
Wireless revenues and sales increased $81.7 million or 17 percent, $216.0
million or 16 percent and $280.5 million or 16 percent for the three, nine and
twelve month periods ended September 30, 1998, respectively. Operating income
increased $42.3 million or 31 percent, $109.9 million or 32 percent and $145.4
million or 34 percent for the three, nine and twelve month periods ended
September 30, 1998, respectively. During the past twelve month period,
subscriber growth remained strong as the number of wireless customers grew to
3,862,871 from 3,366,757, an increase of 15 percent. During the first nine
months of 1998, the Company placed more than 1,029,000 gross units in service,
compared to nearly 985,000 gross units for the same period of 1997. Overall, the
Company's market penetration rate (number of customers as a percent of the total
population in ALLTEL's service areas) increased to 11.6 percent as of
September 30, 1998. Customer churn (average monthly rate of customer
disconnects) increased slightly and was 2.2 percent, 2.1 percent and 2.1
percent for the three, nine and twelve months ended September 30, 1998,
respectively, compared to 2.0 percent for each of the same three periods
in 1997.
6
<PAGE>
Wireless revenues and sales increased in all periods primarily due to the
growth in the Company's customer base. Increases in local airtime, roaming and
long-distance revenues, reflecting higher volumes of network usage, also
contributed to the growth in revenues and sales in all periods. The increased
usage of the Company's network facilities boosted the average revenue per
customer per month for the third quarter of 1998 to $49 compared to $48 for the
third quarter of 1997. Average revenue per customer per month was $48 and $47
for the nine and twelve months ended September 30, 1998, respectively. On a
comparative basis, average revenue per customer per month was $48 for both the
nine and twelve month periods ended September 30, 1997. Growth in average
revenue per customer per month for all periods of 1998 was affected by the
industry-wide trends of decreased roaming revenue rates and continued
penetration into lower-usage market segments. The Company expects these trends
to continue. In addition, the growth rate of new customers is expected to
decline as the Company's wireless customer base grows. Accordingly, future
revenue growth will be dependent upon ALLTEL's success in maintaining customer
growth in existing markets, increasing customer usage of the Company's network
and providing customers with enhanced products and services.
The growth in operating income for all periods of 1998 primarily reflects
the increases in revenues and sales noted above. Improved margins realized on
the sale of wireless equipment, a reduction in branding and other advertising
costs and a decline in losses sustained from fraud also contributed to the
growth in operating income in all periods. Partially offsetting these increases
in operating income in all periods were increases in sales commissions, customer
service-related expenses, and general administrative expenses consistent with
the overall growth in revenues and sales. In addition, depreciation and
amortization expense increased in all periods primarily due to growth in
wireless plant in service. The reduction in branding and other advertising costs
reflects savings realized as a result of the merger, as the Company ceased
promotion of the 360 brand name during the third quarter. The decline in
losses sustained from fraud reflects the Company's continuing efforts to control
unauthorized usage of its customers' wireless telephone numbers that results in
unbillable fraudulent roaming activity.
Cost to acquire a new wireless customer was $254, $286 and $282 for the
three, nine and twelve month periods ended September 30, 1998, respectively,
compared to $281, $280 and $282 for the same periods of 1997. The significant
decrease in the cost to acquire a new customer in the three month period was
primarily due to the reduction in branding and advertising costs noted above, as
well as distributing costs over a larger number of customers acquired when
compared to the corresponding prior year period. The increase in the cost to
acquire a new customer in the nine month period primarily resulted from
increased commissions paid to national dealers, reflecting increased sales from
external distribution channels. Although the Company intends to continue to
utilize its large dealer network, the Company has expanded its internal sales
distribution channels to include its own retail stores and kiosks located in
shopping malls and other retail outlets. Incremental sales costs at a Company
retail store or kiosk are significantly lower than commissions paid to national
dealers. Accordingly, the Company intends to manage the costs of acquiring new
customers by continuing to expand and enhance its internal distribution
channels.
<TABLE>
Communications-Wireline Operations
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Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) September 30, September 30, September 30,
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1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Local service $148,624 $135,721 $432,865 $396,109 $ 572,610 $ 524,925
Network access and long-distance 160,160 154,667 473,750 450,785 632,325 592,392
Miscellaneous 22,775 22,083 69,735 65,881 92,608 89,127
-------- -------- -------- -------- ---------- ----------
Total revenues and sales $331,559 $312,471 $976,350 $912,775 $1,297,543 $1,206,444
Operating income $115,483 $113,278 $347,841 $329,527 $ 468,299 $ 430,822
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</TABLE>
7
<PAGE>
Wireline revenues and sales increased $19.1 million or 6 percent, $63.6
million or 7 percent and $91.1 million or 8 percent for the three, nine and
twelve months ended September 30, 1998, respectively. Wireline operating income
increased $2.2 million or 2 percent, $18.3 million or 6 percent and $37.5
million or 9 percent for the three, nine and twelve month periods ended
September 30, 1998, respectively.
Local service revenues increased $12.9 million or 10 percent, $36.8 million
or 9 percent and $47.7 million or 9 percent in the three, nine and twelve month
periods ended September 30, 1998, respectively. Customer access lines increased
more than 6 percent during the past twelve month period, including the sales of
residential and second access lines. Growth in custom calling and other enhanced
services revenues also contributed to the increases in local service revenues in
all periods of 1998.
Network access and long-distance revenues increased $5.5 million or 4
percent, $23.0 million or 5 percent and $39.9 million or 7 percent for the
three, nine and twelve month periods ended September 30, 1998, respectively. The
increases in all periods primarily reflect higher volumes of access usage and
growth in customer access lines. These increases were partially offset by a
reduction in intrastate toll revenues.
Miscellaneous revenues increased $0.7 million or 3 percent, $3.8 million or
6 percent and $3.5 million or 4 percent for the three, nine and twelve month
periods ended September 30, 1998, respectively. The increases in all periods
reflect increases in directory advertising and equipment rental revenues.
As more fully discussed in note 8 to the unaudited interim consolidated
financial statements, the Georgia Public Service Commission ("Georgia PSC")
issued an order requiring that ALLTEL's wireline subsidiaries which operate
within its jurisdiction reduce their annual network access charges by
$24 million, prospectively, effective July 1, 1996. The Company appealed the
Georgia PSC order. In November 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 ordering the rate reductions. 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
in July 1997, the Georgia Court of Appeals (the "Appellate Court") reversed the
Superior Court's decision. The Company appealed the Appellate Court's decision
to the Georgia Supreme Court. On October 5, 1998, the Georgia Supreme Court, in
a 4-3 decision, upheld the Appellate Court's ruling that the Georgia PSC had the
authority to order the rate reductions. The case will now return to the Superior
Court for a hearing on the merits and provide ALLTEL the opportunity to
challenge the Georgia PSC's order by asserting a number of additional federal
and state constitutional and other legal grounds. Since the Company believes
that it will prevail in this case, the Company has not implemented any revenue
reductions or established any reserves for refund related to this matter at this
time.
Operating income for the three month period reflects the increases in
wireline operating revenues and sales, partially offset by increases in data
processing charges, network-related expenses, depreciation and amortization, and
general administrative expenses. Depreciation and amortization expense increased
in the three month period primarily due to growth in wireline plant in service.
The growth in wireline operating income for the nine and twelve month periods of
1998 primarily reflects the increases in revenues and sales noted above.
ALLTEL'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
ALLTEL'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) 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,
8
<PAGE>
ALLTEL's wireline subsidiaries could begin to experience increased competition
in their local service areas. To date, competition has not had a significant
adverse effect on the operations of ALLTEL'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 (the "Eighth Circuit Court") 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 communications
services. In responding to petitions for rehearing of its earlier decision, the
Eighth Circuit Court ruled on October 14, 1997, that ILECs are not required by
the 96 Act to recombine network elements purchased by requesting carriers on an
unbundled basis. The FCC asked the U.S. Supreme Court ("Supreme Court") to
review two interconnection decisions of the Eighth Circuit Court, and the
Supreme Court agreed to review these decisions. Oral arguments were held before
the Supreme Court on October 13, 1998.
In May 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 ALLTEL's wireline
subsidiaries are not price cap regulated companies, the access charge
regulations, with few exceptions, are not currently applicable to them. However,
the FCC instituted a rulemaking in June 1998 in which it proposed to amend the
access charge rules for rate-of-return LECs in a manner similar to that earlier
adopted for price cap LECs. The FCC's proposal involves the modification of the
transport rate structure, the reallocation of costs in the transport
interconnection charge, and amendments to reflect changes necessary to implement
universal service. The issue of additional pricing flexibility for
rate-of-return LECs is expected to be addressed in a subsequent phase of the
proceeding. Comments and reply comments on the FCC's proposal were filed August
17th and September 17th, respectively. Once the access charge rules for
rate-of-return LECs are finalized, ALLTEL will assess the impact, if any, the
new rules will have on its wireline operations. Based upon ALLTEL's review of
the FCC's regulations concerning the universal service subsidy, it is unlikely
that material changes in the universal service funding for ALLTEL'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 determined the content of any such proxy model,
the impact, if any, of this change in the universal service funding for ALLTEL's
wireline subsidiaries cannot be determined at this time. The impact of the FCC's
universal service order on ALLTEL's other telecommunications operations
continues to be evaluated. Appeals of certain aspects of the universal service
order are before the U.S. Fifth Circuit Court of Appeals.
On October 5, 1998, the FCC began a proceeding to consider a represcription
of the authorized rate of return for the interstate access services of
approximately 1,300 ILECs, including ALLTEL's wireline subsidiaries. The
currently prescribed rate of return is 11.25 percent. The purpose of the FCC's
proceeding is to determine whether the prescribed rate of return corresponds to
current market conditions and whether the rate should be changed. A decision by
the FCC related to this matter is not expected until 1999.
As 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, ALLTEL cannot predict at this
time the specific effects that the 96 Act and future competition will have on
its wireline operations.
9
<PAGE>
<TABLE>
Communications-Emerging Businesses
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Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) September 30, September 30, September 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $ 28,168 $13,544 $ 68,803 $ 33,410 $ 87,395 $ 39,193
Operating loss $(12,712) $(6,478) $(29,881) $(17,981) $(34,049) $(22,587)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Emerging businesses consist of the Company's long-distance, competitive
local exchange carrier ("CLEC"), Internet access, network management and PCS
operations. Long-distance and Internet access services are currently marketed to
residential and business customers in the majority of states in which ALLTEL
provides communications services. The Company began providing PCS service in
Jacksonville, Florida in March 1998, and ALLTEL expects to begin offering PCS
service in other markets in the near future. ALLTEL has begun to offer local
access and network management services in select markets outside its traditional
service areas to business customers.
Emerging businesses' revenues and sales increased $14.6 million or 108
percent, $35.4 million or 106 percent and $48.2 million or 123 percent for the
three, nine and twelve month periods ended September 30, 1998. The growth in
revenues and sales in all periods primarily reflects growth in the long-distance
operations. Due to the start-up nature of these operations, operating losses
sustained by emerging businesses increased $6.2 million or 96 percent, $11.9
million or 66 percent and $11.5 million or 51 percent for the three, nine and
twelve month periods of 1998, respectively.
<TABLE>
Information Services
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) September 30, September 30, September 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $292,169 $244,256 $856,221 $710,003 $1,120,369 $964,663
Operating income $ 40,417 $ 34,944 $116,609 $104,202 $ 157,335 $147,420
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Information services' revenues and sales increased $47.9 million or 20
percent, $146.2 million or 21 percent and $155.7 million or 16 percent for the
three, nine and twelve month periods ended September 30, 1998, respectively.
Growth in revenues and sales for the twelve month period was impacted by the
sale of the healthcare operations completed in January 1997. Excluding the sold
healthcare operations, revenues and sales would have increased $189.1 million or
20 percent in the twelve month period ended September 30, 1998. Revenues and
sales increased in all periods of 1998, primarily due to growth in the financial
services, international and telecommunications outsourcing operations,
reflecting volume growth in existing data processing contracts and the addition
of new outsourcing agreements. The increases in revenues and sales in both
periods were partially offset by lost operations from contract terminations due
primarily to the merger and consolidation activity in the domestic financial
services market. The domestic financial services industry continues to
experience consolidation due to mergers.
Operating income increased $5.5 million or 16 percent, $12.4 million or 12
percent and $9.9 million or 7 percent for the three, nine and twelve month
periods ended September 30, 1998, respectively. Excluding the impact of the sold
healthcare operations, operating income would have increased $15.2 million or 11
percent for the twelve months ended September 30, 1998. The increases in
operating income for all periods of 1998 reflect the growth in revenues and
sales noted above, additional fees collected from the early termination of
contracts and improved profit margins realized from the international financial
services business. The increases in operating income in all periods attributable
to revenue growth, termination fees and increased profitability of the
international operations were partially offset by lower margins realized by the
telecommunications operations. The decrease in telecommunications operating
margins reflects increases in depreciation and amortization expense and
increases in software maintenance and other operating costs.
10
<PAGE>
Depreciation and amortization expense increased in both periods primarily due to
the acquisition of additional data processing equipment and due to an increase
in amortization of internally developed software.
<TABLE>
Other Operations
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) September 30, September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $178,593 $109,517 $425,155 $371,747 $532,330 $502,463
Operating income $ 6,975 $ 5,249 $ 19,242 $ 18,187 $ 22,994 $ 25,596
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Other operations consist of the Company's product distribution and directory
publishing operations. Revenues and sales increased $69.1 million or 63 percent,
$53.4 million or 14 percent and $29.9 million or 6 percent for the three, nine
and twelve month periods ended September 30, 1998, respectively. Operating
income increased $1.7 million or 33 percent, increased $1.1 million or 6 percent
and decreased $2.6 million or 10 percent for the three, nine and twelve month
periods ended September 30, 1998, respectively. Revenues and sales and operating
income for the nine and twelve month periods of 1997 include the operating
results of HWC, which was sold in May 1997, as previously discussed. Excluding
the impact of the HWC operations in each period, revenues and sales would have
increased $96.3 million or 29 percent and $105.9 million or 25 percent, while
operating income would have increased $2.5 million or 15 percent and $0.7
million or 3 percent for the nine and twelve month periods ended September 30,
1998, respectively.
Revenues and sales increased in all periods of 1998 primarily due to growth
in sales of telecommunications and data products to both affiliated and
non-affiliated customers, including increased retail sales of these products at
the Company's counter showrooms. Sales to affiliates increased $60.5 million,
$76.1 million and $80.8 million in the three, nine and twelve month periods
ended September 30, 1998. The increases in affiliate sales in all periods was
primarily due to additional purchases made by the Company's wireless
subsidiaries, reflecting the merger with 360 and the expansion of ALLTEL
Supply's product lines to include wireless equipment. The increases in other
operations' revenues and sales in the nine and twelve month periods of 1998
attributable to ALLTEL Supply's operations were partially offset by decreases in
directory publishing revenues, primarily reflecting the loss of one large
directory publishing contract.
Operating income increased in the three and nine month periods of 1998
primarily due to the increases in revenues and sales noted above. Growth in
other operations' operating income for all periods of 1998 was impacted by lower
gross profit margins realized by ALLTEL Supply, reflecting a reduction in
margins earned on affiliated sales and increased competition from other
distributors and from direct sales by manufacturers. Excluding the impact of the
HWC operations, operating income would have increased in the twelve month period
of 1998 primarily due to the increase in ALLTEL Supply's sales, partially offset
by increased selling and marketing expenses and the impact of the lower gross
profit margins discussed above. The increase in selling and marketing expenses
reflects additional costs incurred by the Company to open several new counter
showroom facilities during the last six months of 1997.
<TABLE>
Corporate Expenses
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) September 30, September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Corporate operating expenses $ 6,765 $5,686 $ 12,731 $11,106 $ 19,041 $15,378
Merger and integration expenses
and provision to reduce carrying
value of certain assets 307,000 - 307,000 16,874 307,000 16,874
-------- ------ -------- ------- -------- -------
Total corporate expenses $313,765 $5,686 $319,731 $27,980 $326,041 $32,252
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
As indicated in the above table, corporate expenses for all periods of 1998
include the $307 million of merger and integration expenses and one-time charges
related to changes in GTE's customer care and billing contract, as previously
discussed. Corporate expenses for the nine and twelve month periods ended
September 30, 1997 include the write-down of $16.9 million to reflect the fair
value less cost to sell the HWC operations recorded in the second quarter of
1997. Excluding the impact of the merger and integration expenses and asset
write-downs in each period, corporate expenses would have increased $1.1 million
or 19 percent, $1.7 million or 15 percent and $3.7 million or 24 percent for the
three, nine and twelve month periods ended September 30, 1998. Net of the merger
and integration expenses and asset write-downs, the increases in corporate
expenses in all periods of 1998 reflect increases in corporate advertising and
employee benefit costs.
OTHER FINANCIAL STATEMENT ITEMS
Other Income, Net
- -----------------
Other income, net increased $12.3 million or 247 percent, $21.1 million or
303 percent and $27.3 million or 300 percent for the three, nine and twelve
month periods ended September 30, 1998, respectively. The increases in all
periods primarily reflect growth in equity income recognized by the Company on
its investments in wireless partnerships, partially offset by an increase in the
minority interest in earnings of the Company's wireless operations by others.
Increases in capitalized interest costs also contributed to the growth in other
income, net for the nine and twelve month periods of 1998. Capitalized interest
costs increased in the nine and twelve month periods of 1998 primarily due to
the acquisition of the PCS licenses, as interest related to the license cost is
capitalized for those markets not yet operational.
Interest Expense
- ----------------
Interest expense increased $0.2 million or less than 1 percent, increased
$5.0 million or 3 percent and increased $12.7 million or 5 percent for the
three, nine and twelve month periods ended September 30, 1998, respectively. The
increases in interest expense in the nine and twelve month periods reflect
increases in both the average amount of borrowings outstanding and weighted
average borrowing rates applicable to the Company's revolving credit agreement.
In addition, the issuance of $100 million of 6.65 percent notes in January 1998,
also contributed to the increase in interest expense in the nine and twelve
month periods ended September 30, 1998.
Income Taxes
- ------------
Income tax expense decreased $25.1 million or 25 percent, increased $24.7
million or 8 percent and increased $40.8 million or 11 percent for the three,
nine and twelve month periods ended September 30, 1998, respectively. The
changes in income tax expense in all periods primarily reflect the tax-related
impact of the merger and integration expenses and the other non-recurring and
unusual items previously discussed. Excluding the impact on tax expense of these
items in each period, income tax expense would have increased $27.5 million or
32 percent, $63.7 million or 28 percent and $79.8 million or 27 percent in the
three, nine and twelve month periods ended September 30, 1998, respectively,
consistent with the overall growth in the Company's earnings from continuing
operations before non-recurring and unusual items.
Average Common Shares Outstanding
- ---------------------------------
The average number of common shares outstanding decreased 1 percent in each
of the three, nine and twelve month periods ended September 30, 1998. The
decreases in all periods were primarily due to the Company's repurchase of its
common stock on the open market in 1997, partially offset by additional shares
issued in connection with the acquisition of a wireline property in the State of
Georgia and by additional shares issued under the Company's stock option plans.
12
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
ALLTEL's total capital structure was $6.6 billion at September 30, 1998,
reflecting 45 percent common and preferred equity and 55 percent debt. This
compares to a capital structure of $6.5 billion at December 31, 1997, reflecting
42 percent common and preferred equity and 58 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 from operations continues to be ALLTEL's primary source of
liquidity. Cash provided from operations was $835.6 million and $1,238.6 million
for the nine and twelve month periods ended September 30, 1998, respectively,
compared to $778.3 million and $1,136.7 million for the same periods in 1997.
The increases in the nine and twelve month periods reflect growth in the
earnings of the Company, changes in working capital requirements and the timing
of additional income tax payments associated with gains realized from the sale
of a portion of ALLTEL's investment in MCI WorldCom common stock.
Capital expenditures for the nine and twelve month periods of 1998 were
$559.5 million and $863.0 million, respectively, compared to $523.4 million and
$764.3 million for the same periods in 1997. During the past two-year period,
the Company funded the majority of its capital expenditures through internally
generated funds. Capital expenditures were incurred to continue to modernize and
upgrade ALLTEL's telecommunications network and to expand into existing
information services markets. In addition, capital expenditures were incurred to
construct additional network facilities to provide PCS and to offer other
communications services, including long-distance, Internet and local competitive
access services. Capital expenditures are forecast at approximately $850 million
for 1998, which are expected to be funded primarily from internally generated
funds.
Cash flows from investing activities for the nine and twelve month periods
of 1998 include cash outlays for the acquisition of property of $55.1 million
and $64.1 million, respectively. Cash outlays for the nine months ended
September 30, 1998, include $34.6 million related to the acquisition of two
wireless properties in Georgia and $20.5 million related to the acquisition of
additional ownership interests in wireless properties in North Carolina and
Texas. In addition to these acquisitions, cash outlays for the twelve months
ended September 30, 1998 include the purchase of a wireline property in Georgia.
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 PCS
licensing rights. The Company acquired PCS licensing rights for 73 markets in 12
states. Cash flows from investing activities for the nine month period of 1997
also include cash outlays of $103.8 million for the acquisition of two wireless
properties in Alabama and the purchase of additional ownership interests in 16
wireless properties. In addition to these acquisitions, cash flows from
investing activities for the twelve month period of 1997 also include a cash
outlay of $243.0 million related to the acquisition of Independent Cellular
Network, Inc. ("ICN"). ICN owned and operated cellular systems serving more than
140,000 customers in Ohio, Kentucky, Pennsylvania and West Virginia.
Cash flows from investing activities for both the nine and twelve month
periods ended September 30, 1998 include proceeds of $290.9 million primarily
from the sale of a portion of the Company's investment in MCI WorldCom common
stock. Cash flows from investing activities for the nine and twelve month
periods ended September 30, 1997 also include proceeds of $185.9 million from
the sale of MCI WorldCom common stock. In addition, cash flows from investing
activities for both the nine and twelve month periods of 1997 include proceeds
of $202.3 million from the sale of property, principally consisting of three
non-strategic operations. In September 1997, ALLTEL received cash proceeds of
$48.7 million from the sale of an investment in a software company. In May 1997,
the Company completed the sale of HWC for approximately $45.0 million in cash;
and in January 1997, ALLTEL received cash proceeds of $104.9 million in
connection with the sale of its healthcare operations. The proceeds from these
asset sales were used primarily to reduce borrowings under the Company's
revolving credit agreement.
13
<PAGE>
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 ended September 30, 1998 were
$161.0 million and $212.3 million, respectively, compared to $154.9 million and
$204.4 million for the same periods in 1997. The increases in dividend payments
in both periods reflect the October 1997 action of the Board of Directors to
increase the quarterly common stock dividend. On October 22, 1998, the Board of
Directors approved a 5.2 percent increase in the quarterly common stock dividend
rate from $.29 to $.305 per share. This action raised the annualized dividend to
$1.22 per share and marked the 38th consecutive year in which ALLTEL has
increased its common stock dividend. Under a share repurchase program initiated
in 1996 and expanded in 1997, the Company repurchased approximately 2.7 million
of its common shares at a total cost of $95.2 million during the twelve month
period ended September 30, 1998. ALLTEL did not repurchase any of its common
stock during the first nine months of 1998. During the twelve month period ended
September 30, 1997, the Company repurchased approximately 6.4 million of its
common shares at a total cost of $195.2 million. Of this total, $116.8 million
was spent during the first nine months of 1997.
The Company has a $1 billion line of credit under a revolving credit
agreement. Borrowings outstanding under this agreement at September 30, 1998
were $633.6 million, compared to $847.9 million that were outstanding at
December 31, 1997. Borrowings outstanding under this agreement at September 30,
1997 were $750.3 million. The weighted average interest rate on borrowings
outstanding under this agreement at September 30, 1998, was 5.6 percent. As
previously discussed, proceeds from the sales of MCI WorldCom common stock and
the HWC and healthcare operations were used primarily to reduce the amount of
borrowings outstanding under the revolving credit agreement. The net reduction
in revolving credit borrowings for the nine and twelve months ended
September 30, 1998, represents a portion of the long-term debt retired in those
periods. Scheduled long-term debt retirements, net of the revolving credit
agreement activity, amounted to $29.0 million and $46.7 million for the nine
and twelve month periods ended September 30, 1998, respectively. As previously
indicated, in January 1998, the Company issued $100 million of 6.65 percent
notes due 2008. This debt issuance represents substantially all of the
long-term debt issued in the nine and twelve month periods ended September 30,
1998. Long-term debt issued in the nine month period of 1997 primarily consists
of the issuance of $200 million of 7.6 percent notes due 2009. Proceeds from
both the $100 million and $200 million debt issues were used to reduce
borrowings outstanding under the revolving credit agreement. Long-term debt
issued in the twelve month period of 1997 also includes the issuance of
subordinated promissory notes and other debt issued in connection with the ICN
acquisition.
Year 2000 Compliance
- --------------------
The Year 2000 issue affects the Company's internal computer systems and
infrastructure, as well as certain software, systems and services that the
Company provides to its customers. The Company began its Year 2000 compliance
efforts several years ago and plans to achieve Year 2000 compliance by June 30,
1999. The Company's Year 2000 plan consists of eight phases: (i) Awareness;
(ii) Inventory; (iii) Third-Party Strategies; (iv) Risk Assessment;
(v) Planning; (vi) Remediation; (vii) Testing; and (viii) Implementation.
For the Company's internal computer systems and software, systems and
services that the Company provides to its customers and for which the Company is
responsible, the Awareness and Inventory phases have been completed. The Company
has commenced work on and plans to complete the Third-Party Strategies phase by
November 30, 1998, the Planning phase by December 15, 1998, the Risk Assessment
phase by January 15, 1999, and the Remediation, Testing and Implementation
phases by June 30, 1999.
14
<PAGE>
For the Company's infrastructure, including facilities and embedded
technologies, the Company has completed the Awareness phase and has commenced
work on and plans to complete the Third-Party Strategies, Planning and Risk
Assessment phases by November 30, 1998, and the Remediation, Testing and
Implementation phases by June 30, 1999.
As part of its Year 2000 plan, the Company has implemented a third party
management process and is continuing to contact its vendors, suppliers and other
third parties upon which the Company depends regarding their plans for making
their products, services and systems Year 2000 compliant. The Company's ability
to meet its target completion dates is dependent upon the timely provision of
upgrades or other solutions from its vendors and suppliers. Some third party
upgrades or other solutions may not be available until early 1999, which may
delay the Company's completion of its Remediation, Testing, and Implementation
phases. The Company is also dependant upon other third parties who provide
essential services (such as utilities, interexchange carriers, etc.) to make
their critical systems Year 2000 compliant in a timely manner. Generally, the
Company does not have the ability to test those systems for Year 2000 compliance
and, instead, must rely on the third parties' representations.
Contingency planning to maintain and restore service in the event of a
natural disaster, power failure, or software related interruption has long been
part of the Company's standard business practices. The Company is working to
leverage this experience in the development and implementation of its Year 2000
contingency plans, which assess the potential for business disruption in various
scenarios, including a possible, but unlikely, "worst case" scenario involving
the interruption of telecommunications and data processing services and/or
interruption of customer billing, operating and other information systems, and
provide for key-operation back-up and alternative solutions for recovery. The
Company expects to complete contingency planning for its critical systems by
December 31, 1998.
The Company estimates the total cost of its Year 2000 efforts to be
approximately $80 million. As of September 30, 1998, the Company has incurred
approximately $40 million of that amount. Of the total Year 2000 cost to be
incurred, approximately one-half of the cost will be capitalized and
subsequently amortized over a 3 to 5 year period, including costs relating to
the remediation of the Company's software products. Some Year 2000 costs are not
incremental, but rather represent the redeployment of existing resources. The
estimated costs associated with making customers' systems Year 2000 compliant,
in those situations where the Company is obligated to do so, has been treated as
a contract cost and is not included in the Company's estimated Year 2000 costs.
The Company continues to evaluate the estimated costs associated with its Year
2000 efforts based on actual experience. While the efforts involve additional
costs, the Company believes, based on available information, that these costs
will not have a material adverse effect on its results of operations.
The above information is based on the Company's current best estimates using
numerous assumptions of future events. Given the complexity of the Year 2000
issues and possible unidentified risks, actual results may vary from those
anticipated and discussed above.
Other Financial Information
- ---------------------------
During the first nine months of 1998, there were no material changes in the
market risks discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
15
<PAGE>
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities", ("SFAS 133"). This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. SFAS 133 requires that changes in a derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS 133
is effective for fiscal years beginning after June 15, 1999, and cannot be
applied retroactively. ALLTEL has not yet quantified the impacts of adopting
SFAS 133 on its financial statements; however, SFAS 133 could increase the
volatility of reported earnings and other comprehensive income once adopted.
16
<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 Page 19.
(b) Reports on Form 8-K:
On September 2, 1998, ALLTEL filed under Form 8-K/A, Amendment
No. 1 to its Current Report on Form 8-K dated June 30, 1998,
reporting under Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits. The Form 8-K/A included the
required historical financial statements of 360 required
pursuant to Rule 3-05 of Regulation S-X and the pro forma
financial information required pursuant to Article 11 of
Regulation S-X.
No other reports on Form 8-K have been filed during the quarter
for which this report is filed.
17
<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 Administrative Officer
(Principal Financial Officer)
November 13, 1998
18
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
INDEX OF EXHIBITS
Form 10-Q Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
(19) Interim Report to Stockholders and 20 - 30
Notes to Unaudited Consolidated Financial Statements
for the periods ended September 30, 1998 and 1997
(27) Financial Data Schedule 31
for the nine months ended September 30, 1998
19
EXHIBIT 19
<TABLE>
HIGHLIGHTS (UNAUDITED)
<CAPTION>
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) 1998 1997 (Decrease) 1998 1997 (Decrease) 1998 1997 (Decrease)
- -------------------------- ---- ---- ---------- ---- ---- ---------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM CURRENT BUSINESSES:
Revenues and sales:
Wireless $ 554,738 $ 473,057 17 $1,575,308 $1,359,339 16 $2,054,513 $1,774,053 16
Wireline 331,559 312,471 6 976,350 912,775 7 1,297,543 1,206,444 8
Emerging businesses 28,168 13,544 108 68,803 33,410 106 87,395 39,193 123
---------- ---------- --------- ---------- ---------- ----------
Total communications 914,465 799,072 14 2,620,461 2,305,524 14 3,439,451 3,019,690 14
Information services 292,169 244,256 20 856,221 710,003 21 1,120,369 931,290 20
Other operations 178,593 109,517 63 425,155 328,900 29 532,330 426,443 25
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 1,385,227 1,152,845 20 3,901,837 3,344,427 17 5,092,150 4,377,423 16
Less:intercompany eliminations 53,060 7,336 623 81,222 24,403 233 89,266 32,624 174
---------- ---------- ---------- ---------- ---------- ----------
Total revenues and sales $1,332,167 $1,145,509 16 $3,820,615 $3,320,024 15 $5,002,884 $4,344,799 15
========== ========== ========== ========== ========== ==========
Operating income:
Wireless $ 177,246 $ 134,920 31 $ 452,162 $ 342,229 32 $ 570,386 $ 424,967 34
Wireline 115,483 113,278 2 347,841 329,527 6 468,299 430,822 9
Emerging businesses (12,712) (6,478) (96) (29,881) (17,981) (66) (34,049) (22,587) (51)
---------- ---------- ---------- ---------- ---------- ----------
Total communications 280,017 241,720 16 770,122 653,775 18 1,004,636 833,202 21
Information services 40,417 34,944 16 116,609 104,202 12 157,335 142,097 11
Other operations 6,975 5,249 33 19,242 16,714 15 22,994 22,259 3
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 327,409 281,913 16 905,973 774,691 17 1,184,965 997,558 19
Corporate expenses 6,765 5,686 19 12,731 11,049 15 19,041 15,321 24
---------- ---------- ---------- ---------- ---------- ----------
Total operating income $ 320,644 $ 276,227 16 $ 893,242 $ 763,642 17 $1,165,924 $ 982,237 19
========== ========== ========== ========== ========== ==========
Net income $ 157,392 $ 128,374 23 $ 428,543 $ 347,214 23 $ 560,131 $ 445,627 26
Basic earnings per share $.57 $.46 24 $1.56 $1.25 25 $2.04 $1.60 28
AS REPORTED:
Revenues and sales $1,332,167 $1,145,509 16 $3,820,615 $3,362,871 14 $5,002,884 $4,454,192 12
Operating income $ 13,644 $ 276,227 (95) $ 586,242 $ 748,184 (22) $ 858,924 $ 973,966 (12)
Net income (loss) $ (27,975) $ 150,943 (119) $ 373,713 $ 457,793 (18) $ 505,301 $ 560,094 (10)
Basic earnings (loss) per share $.(10) $.55 (118) $1.36 $1.65 (18) $1.84 $2.02 (9)
Weighted average common shares 274,293,000 276,467,000 (1) 274,127,000 277,321,000 (1) 274,152,000 277,454,000 (1)
Current annual dividend rate
per common share $1.16 $1.10 5
Capital expenditures $ 220,817 $ 187,737 18 $ 559,480 $ 523,383 7 $ 862,983 $ 764,301 13
Total assets $8,926,844 $8,579,933 4
Wireless customers 3,862,871 3,366,757 15
Wireline customers 1,870,328 1,752,433 7
Long-distance customers 461,995 321,440 44
<FN>
Current businesses excludes the sold healthcare, wire and cable operations, merger and integration expenses and provision to reduce
carrying value of certain assets, and gain on disposal of assets.
Emerging businesses includes the long-distance, local competitive access, internet access, network management and PCS operations.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Nine Months Twelve Months
Ended Sept. 30, Ended Sept. 30, Ended Sept. 30,
----------------------- ----------------------- -----------------------
(Dollars in thousands, except per share amounts) 1998 1997 1998 1997 1998 1997
- ----------------------------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND SALES:
Service revenues $1,204,528 $1,028,618 $3,425,237 $2,968,723 $4,490,325 $3,904,766
Product sales 127,639 116,891 395,378 394,148 512,559 549,426
---------- ---------- ---------- ---------- ---------- ----------
Total revenues and sales 1,332,167 1,145,509 3,820,615 3,362,871 5,002,884 4,454,192
---------- ---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Operations 696,635 594,003 2,022,819 1,753,812 2,646,406 2,328,985
Cost of products sold 138,073 115,162 380,962 375,981 499,518 515,308
Depreciation and amortization 176,815 160,117 523,592 468,020 691,036 619,059
Merger and integration expenses and
provision to reduce carrying value of
certain assets 307,000 - 307,000 16,874 307,000 16,874
---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses 1,318,523 869,282 3,234,373 2,614,687 4,143,960 3,480,226
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME 13,644 276,227 586,242 748,184 858,924 973,966
Other income, net 17,273 4,973 28,021 6,949 36,350 9,089
Interest expense (66,296) (66,087) (199,052) (194,006) (266,816) (254,067)
Gain on disposal of assets and other 80,901 34,413 296,150 209,651 296,150 209,651
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 45,522 249,526 711,361 770,778 924,608 938,639
Income taxes 73,497 98,583 337,648 312,985 419,307 378,545
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (27,975) 150,943 373,713 457,793 505,301 560,094
Preferred dividends 239 251 710 765 953 1,023
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable
to common shares $ (28,214) $ 150,692 $ 373,003 $ 457,028 $ 504,348 $ 559,071
========== ========== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic $.(10) $.55 $1.36 $1.65 $1.84 $2.02
Diluted $.(10) $.54 $1.35 $1.64 $1.82 $2.00
</TABLE>
21
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Twelve Months
Ended Sept. 30, Ended Sept. 30,
(Dollars in thousands) ------------------------ ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET CASH PROVIDED FROM OPERATIONS $835,553 $778,326 $1,238,644 $1,136,701
-------- -------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (559,480) (523,383) (862,983) (764,303)
Purchase of property, net of cash acquired (55,073) (103,834) (64,091) (346,754)
Additions to capitalized software development costs (69,059) (54,391) (88,893) (76,860)
Additions to other intangible assets - (146,526) - (146,526)
Additions to investments (16,478) (118,402) (22,371) (126,693)
Proceeds from the sale of/return on investments 322,084 192,097 333,624 195,443
Proceeds from the sale of assets - 202,300 - 202,300
Other, net (90,327) (52,080) (124,954) (77,363)
-------- -------- ---------- ----------
Net cash used in investing activities (468,333) (604,219) (829,668) (1,140,756)
-------- -------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on preferred and common stock (160,952) (154,937) (212,327) (204,446)
Reductions in long-term debt (243,283) (38,300) (163,410) (244,847)
Purchase of common stock - (116,827) (95,185) (195,246)
Distributions to minority investors (58,056) (28,856) (74,263) (47,215)
Preferred stock redemptions and purchases (637) (793) (717) (772)
Long-term debt issued 107,304 198,391 107,304 707,995
Common stock issued 18,770 7,297 23,161 7,024
-------- -------- ---------- ----------
Net cash provided from (used in) financing activities (336,854) (134,025) (415,437) 22,493
-------- -------- ---------- ----------
Increase (decrease) in cash and short-term investments 30,366 40,082 (6,461) 18,438
CASH AND SHORT-TERM INVESTMENTS:
Beginning of period 19,683 16,428 56,510 38,072
-------- -------- ---------- ----------
End of period $ 50,049 $ 56,510 $ 50,049 $ 56,510
======== ======== ========== ==========
</TABLE>
22
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
ASSETS (Dollars in thousands) 1998 1997 1997
- ----------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 50,049 $ 19,683 $ 56,510
Accounts receivable (less allowance for
doubtful accounts of $30,605, $25,164
and $28,586, respectively) 775,440 723,999 703,660
Materials and supplies 34,851 14,237 15,563
Inventories 81,860 85,631 78,859
Prepaid expenses and other 60,681 37,241 37,023
---------- ---------- ----------
Total current assets 1,002,881 880,791 891,615
---------- ---------- ----------
Investments 1,362,227 1,249,414 1,348,262
Goodwill and other intangibles 1,641,080 1,637,393 1,724,032
PROPERTY, PLANT AND EQUIPMENT:
Wireline 4,058,431 3,909,756 3,823,404
Wireless 2,533,567 2,303,215 2,211,944
Information services 608,741 539,743 519,545
Other 180,487 169,754 145,777
Under construction 418,530 358,323 279,092
---------- ---------- ----------
Total property, plant and equipment 7,799,756 7,280,791 6,979,762
Less accumulated depreciation 3,292,756 2,901,382 2,765,135
---------- ---------- ----------
Net property, plant and equipment 4,507,000 4,379,409 4,214,627
---------- ---------- ----------
Other assets 413,656 444,100 401,397
---------- ---------- ----------
TOTAL ASSETS $8,926,844 $8,591,107 $8,579,933
========== ========== ==========
Sept. 30, Dec. 31, Sept. 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 1997
---------- ---------- ----------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 49,683 $ 48,028 $ 41,302
Accounts and notes payable 415,106 497,142 416,261
Advance payments and customer deposits 132,194 115,994 110,427
Accrued taxes 116,956 92,527 118,466
Accrued dividends 79,825 55,012 52,694
Other current liabilities 305,685 195,789 180,542
---------- ---------- ----------
Total current liabilities 1,099,449 1,004,492 919,692
---------- ---------- ----------
Long-term debt 3,566,429 3,699,519 3,620,668
Deferred income taxes 809,111 710,723 812,983
Other liabilities 448,605 452,941 442,589
Preferred stock, redeemable 5,018 5,625 5,695
SHAREHOLDERS' EQUITY:
Preferred stock 9,125 9,155 9,165
Common stock 274,429 273,411 275,481
Additional capital 826,682 801,936 875,567
Unrealized holding gain on investments 367,413 300,671 363,357
Retained earnings 1,520,583 1,332,634 1,254,736
---------- ---------- ----------
Total shareholders' equity 2,998,232 2,717,807 2,778,306
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,926,844 $8,591,107 $8,579,933
========== ========== ==========
</TABLE>
23
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation:
The consolidated financial statements at September 30, 1998 and 1997 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 1998
financial statement presentation.
2. Merger:
On July 1, 1998, ALLTEL completed its merger with 360 Communications
Company ("360") under a definitive merger agreement entered into on
March 16, 1998. Under the terms of the merger agreement, 360 became a
wholly-owned subsidiary of ALLTEL, and each outstanding share of 360
common stock was converted into the right to receive .74 shares of ALLTEL
common stock, 89.8 million common shares in the aggregate. The merger
qualified as a tax-free reorganization and has been accounted for as a
pooling of interests. The accompanying interim financial statements have
been restated to include the accounts and results of 360 for all periods
presented. The combined results include certain eliminations and
reclassification adjustments to conform the accounting and financial
reporting policies of ALLTEL and 360. Separate and combined results of
operations for certain interim periods are as follows:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months Twelve Months
Ended Ended Ended Ended
(In thousands, except per share amounts) June 30, September 30, September 30, September 30,
---------------------------------------- 1998 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and sales:
ALLTEL $1,781,454 $ 813,746 $2,414,931 $3,221,232
360 753,448 347,509 994,617 1,294,945
Eliminations and reclassifications (46,454) (15,746) (46,677) (61,985)
---------- ---------- ---------- ----------
Combined $2,488,448 $1,145,509 $3,362,871 $4,454,192
========== ========== ========== ==========
Net income:
ALLTEL $ 320,449 $ 122,064 $ 397,662 $ 494,594
360 81,239 28,879 60,131 65,500
Eliminations and reclassifications - - - -
---------- ---------- ---------- ----------
Combined $ 401,688 $ 150,943 $ 457,793 $ 560,094
========== ========== ========== ==========
Combined earnings per share:
Basic $1.46 $.55 $1.65 $2.02
Diluted $1.45 $.54 $1.64 $2.00
</TABLE>
3. Merger and Integration Expenses and Provision to Reduce Carrying Value of
Certain Assets:
During the third quarter of 1998, the Company recorded transaction costs
and one-time charges totaling $307 million related to the closing of its
merger with 360 and to changes in a customer care and billing contract
with a major customer. The merger and integration expenses, which total
$252 million on a pretax basis, include professional and financial
advisors' fees of $31.5 million, severance and employee-related expenses
of $48.7 million and integration costs of $171.8 million. The Company's
merger and integration plan, as approved by ALLTEL's Board of Directors,
provides for a reduction of 447 employees, primarily in the corporate
support functions, to be concluded by the first quarter of 1999. As
of September 30, 1998, the Company had paid $4.2 million in severance
and employee-related expenses and 40 out of the total 447 employee
reductions had been completed. The integration costs include several
adjustments resulting from the redirection of a number of strategic
initiatives based on the merger with 360 and ALLTEL's expanded wireless
presence. These adjustments include a write-down in the carrying value
of certain in-process software development assets, costs associated with
the early termination of certain service obligations and a write-down in
the carrying value of certain assets resulting from a revised Personal
Communications Services deployment plan. The Company expects to complete
its integration plan by the end of 1999. The following is a summary of
activity related to the Company's merger and integration accrual:
(In Millions)
-------------
Total merger and integration costs $252.0
Cash outlays (68.7)
Noncash write-down of assets (74.8)
------
Accrued reserve balance at September 30, 1998 $108.5
======
24
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Merger and Integration Expenses and Provision to Reduce Carrying Value of
Certain Assets (continued):
During the third quarter, the Company recorded a non-recurring operating
expense associated with a contingency reserve on an unbilled receivable
of $55 million related to its contract with GTE Corporation ("GTE"). Due
to its pending merger with Bell Atlantic Corporation, GTE has
re-evaluated its billing and customer care requirements and modified its
billing conversion plans.
The net income impact of these transaction and one-time charges decreased
net income $234.6 million or $.85 per share.
4. Gain on Disposal of Assets and Other:
During the third quarter of 1998, the Company recorded a pretax gain of
$80.9 million from the sale of a portion of its investment in MCI
WorldCom, Inc. (formerly WorldCom, Inc.). Proceeds from this sale amounted
to $87.6 million. This transaction increased net income $49.2 million or
$.18 per share. During the second quarter of 1998, the Company recorded a
pretax gain of $148.2 million from the sale of a portion of its investment
in MCI WorldCom, Inc. common stock. Proceeds from this sale amounted to
$162.6 million. This transaction increased net income $90.2 million or
$.33 per share. During the first quarter of 1998, the Company recorded a
pretax gain of $36.6 million primarily from the sale of a portion of its
investment in MCI WorldCom, Inc. common stock. Proceeds from the sale of
stock amounted to $40.7 million. In addition, the Company recorded a
pretax gain of $30.5 million from the sale of its ownership interest in a
cellular partnership serving the Omaha, Nebraska market. The gains from
these transactions resulted in an increase of $40.4 million in net income
and $.14 in earnings per share.
5. Earnings per Share:
A reconciliation of the net income and number of shares used in computing
basic and diluted earnings per share for the three, nine and twelve month
periods ended September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
(In thousands, except per share amounts) September 30, September 30, September 30,
---------------------------------------- ------------------------ ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) applicable to common shares $ (28,214) $ 150,692 $ 373,003 $ 457,028 $ 504,348 $ 559,071
Weighted average common shares
outstanding for the period 274,293 276,467 274,127 277,321 274,152 277,454
---------- --------- ---------- ---------- --------- ----------
Basic earnings (loss) per share $.(10) $.55 $1.36 $1.65 $1.84 $2.02
===== ==== ===== ===== ===== =====
Diluted earnings (loss) per share:
Net income (loss) applicable to common shares $ (28,214) $ 150,692 $ 373,003 $ 457,028 $ 504,348 $ 559,071
Adjustments for convertible securities:
Preferred stocks 45 51 129 157 178 211
---------- ---------- ---------- ---------- --------- ----------
Net income applicable to common shares
assuming conversion of above securities $ (28,169) $ 150,743 $ 373,132 $ 457,185 $ 504,526 $ 559,282
---------- ---------- ---------- ---------- --------- ----------
Weighted average common shares
outstanding for the period 274,293 276,467 274,127 277,321 274,152 277,454
Increase in shares which would result from:
Exercise of stock options 2,303 1,248 2,384 1,304 2,195 1,274
Conversion of convertible preferred stocks 465 520 471 533 476 538
---------- ---------- ---------- ---------- --------- ----------
Weighted average common shares
assuming conversion of above securities 277,061 278,235 276,982 279,158 276,823 279,266
---------- ---------- ---------- ---------- --------- ----------
Diluted earnings (loss) per share $.(10) $.54 $1.35 $1.64 $1.82 $2.00
===== ==== ===== ===== ===== =====
</TABLE>
6. Comprehensive Income:
Effective January 1, 1998, ALLTEL adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). Annual financial statements of ALLTEL for prior periods will be
reclassified to conform to SFAS 130's presentation requirements.
Comprehensive income for the three, nine and twelve month periods ended
September 30, 1998 and 1997 was as follows:
25
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Comprehensive Income (continued):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) September 30, September 30, September 30,
---------------------- ---------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(27,975) $150,943 $373,713 $457,793 $505,301 $560,094
-------- -------- -------- -------- -------- --------
Other comprehensive income (loss):
Unrealized holding gains on
investments arising during the period 57,649 64,209 376,912 170,380 275,981 295,227
Income tax expense 22,624 25,186 148,725 71,085 110,480 111,878
-------- -------- -------- -------- -------- --------
35,025 39,023 228,187 99,295 165,501 183,349
-------- -------- -------- -------- -------- --------
Less: Reclassification adjustments for
gains included in net income (80,901) - (265,644) (155,993) (265,644) (155,993)
Income tax expense 31,733 - 104,199 68,188 104,199 68,188
-------- -------- -------- -------- -------- --------
(49,168) - (161,445) (87,805) (161,445) (87,805)
-------- -------- -------- -------- -------- --------
Other comprehensive income (loss)
before taxes (23,252) 64,209 111,268 14,387 10,337 139,234
Income tax expense (benefit) (9,109) 25,186 44,526 2,897 6,281 43,690
-------- -------- -------- -------- -------- --------
Other comprehensive income (loss) (14,143) 39,023 66,742 11,490 4,056 95,544
-------- -------- -------- -------- -------- --------
Comprehensive income (loss) $(42,118) $189,966 $440,455 $469,283 $509,357 $655,638
======== ======== ======== ======== ======== ========
</TABLE>
7. Business Segment Information:
In 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which requires reporting segment information consistent with
the way management internally disaggregates an entity's operations to
access performance and to allocate resources. As permitted, the Company
early adopted the provisions of SFAS 131 in its interim financial state-
ments for the periods ended September 30, 1998 and 1997; and ALLTEL has
restated its prior year segment information to conform to SFAS 131's
requirements.
ALLTEL disaggregates its business operations based upon differences in
products and services. The Company's communications operations consists of
its wireless, wireline and emerging businesses segments. Wireless
communications and paging services are provided in 22 states in four major
markets: Southeast, Mid-Atlantic, Midwest and West. The Company's wireline
subsidiaries provide primary local service and network access in 14
states. Emerging businesses include the Company's long-distance, local
competitive access, internet access, network management and PCS
operations. Long-distance and internet access services are marketed in the
majority of states in which ALLTEL provides communications services. The
Company is currently providing local competitive access, PCS and network
management services in select areas within its geographically focused
communications markets. Information services provides information
processing, outsourcing services and application software primarily to
financial and telecommunications customers. The principal markets for
information services' products and services are commercial banks,
financial institutions and telecommunications companies in the United
States and major international markets. Other operations consist of the
Company's product distribution and directory publishing operations.
Corporate items represent general corporate expenses, headquarters
facilities and equipment, investments, goodwill and other non-recurring
and unusual items not allocated to the segments.
The accounting policies used in measuring segment assets and operating
results are the same as those used in preparing the interim consolidated
financial statements. The non-recurring and unusual items discussed in
Notes 3 and 4 are not allocated to the segments and are included in
corporate operations. Accordingly, the Company evaluates performance of
the segments based on segment operating income, excluding non-recurring
and unusual items. The Company accounts for intersegment sales at current
market prices or in accordance with regulatory requirements.
The wireline subsidiaries purchase equipment and materials from ALLTEL
Supply, Inc. The cost of such equipment and materials is included,
principally in wireline plant in the consolidated financial statements.
ALLTEL Information Services, Inc. provides data processing services to the
wireline subsidiaries. Directory publishing services are provided to the
wireline subsidiaries by ALLTEL Publishing Corporation ("Publishing").
Wireline revenues and sales include directory royalty payments received
from Publishing. Intercompany profit, to the extent not offset by
depreciation on the capitalized cost of equipment and materials, has not
been eliminated in preparing the consolidated financial statements,
because prices charged by the supply and information services subsidiaries
are recovered through the regulatory process.
26
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Business Segment Information, (continued):
Segment operating results were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
(In thousands) September 30, September 30, September 30,
-------------- ------------------------ ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues and Sales from External Customers:
Wireless $ 554,738 $ 473,057 $1,575,308 $1,359,339 $2,054,513 $1,774,053
Wireline 322,877 304,043 950,617 887,814 1,263,275 1,173,488
Emerging businesses 28,168 13,544 68,803 33,410 87,395 39,193
---------- ---------- ---------- ---------- ---------- ----------
Total communications 905,783 790,644 2,594,728 2,280,563 3,405,183 2,986,734
Information services 254,662 212,002 740,626 613,472 972,458 837,511
Other operations 91,072 82,496 255,937 278,619 332,923 384,588
---------- ---------- ---------- ---------- ---------- ----------
Total business segments $1,251,517 $1,085,142 $3,591,291 $3,172,654 $4,710,564 $4,208,833
========== ========== ========== ========== ========== ==========
Intersegment Revenues and Sales:
Wireless $ - $ - $ - $ - $ - $ -
Wireline 8,682 8,428 25,733 24,961 34,268 32,956
Emerging businesses - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Total communications 8,682 8,428 25,733 24,961 34,268 32,956
Information services 37,507 32,254 115,595 96,531 147,911 127,152
Other operations 87,521 27,021 169,218 93,128 199,407 117,875
---------- ---------- ---------- ---------- ---------- ----------
Total business segments $ 133,710 $ 67,703 $ 310,546 $ 214,620 $ 381,586 $ 277,983
========== ========== ========== ========== ========== ==========
Total Revenues and Sales:
Wireless $ 554,738 $ 473,057 $1,575,308 $1,359,339 $2,054,513 $1,774,053
Wireline 331,559 312,471 976,350 912,775 1,297,543 1,206,444
Emerging businesses 28,168 13,544 68,803 33,410 87,395 39,193
---------- ---------- ---------- ---------- ---------- ----------
Total communications 914,465 799,072 2,620,461 2,305,524 3,439,451 3,019,690
Information services 292,169 244,256 856,221 710,003 1,120,369 964,663
Other operations 178,593 109,517 425,155 371,747 532,330 502,463
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 1,385,227 1,152,845 3,901,837 3,387,274 5,092,150 4,486,816
Less: intercompany eliminations 53,060 7,336 81,222 24,403 89,266 32,624
---------- ---------- ---------- ---------- ---------- ----------
Consolidated revenues and sales $1,332,167 $1,145,509 $3,820,615 $3,362,871 $5,002,884 $4,454,192
========== ========== ========== ========== ========== ==========
Operating Income (Loss):
Wireless $ 177,246 $ 134,920 $ 452,162 $ 342,229 $ 570,386 $ 424,967
Wireline 115,483 113,278 347,841 329,527 468,299 430,822
Emerging businesses (12,712) (6,478) (29,881) (17,981) (34,049) (22,587)
---------- ---------- ---------- ---------- ---------- ----------
Total communications 280,017 241,720 770,122 653,775 1,004,636 833,202
Information services 40,417 34,944 116,609 104,202 157,335 147,420
Other operations 6,975 5,249 19,242 18,187 22,994 25,596
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 327,409 281,913 905,973 776,164 1,184,965 1,006,218
---------- ---------- ---------- ---------- ---------- ----------
Corporate operating expenses (6,765) (5,686) (12,731) (11,106) (19,041) (15,378)
Merger and integration expenses and provision
to reduce carrying value of certain assets (307,000) - (307,000) (16,874) (307,000) (16,874)
---------- ---------- ---------- ---------- ---------- ----------
Total corporate expenses (313,765) (5,686) (319,731) (27,980) (326,041) (32,252)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated operating income $ 13,644 $ 276,227 $ 586,242 $ 748,184 $ 858,924 $ 973,966
========== ========== ========== ========== ========== ==========
</TABLE>
27
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Business Segment Information, (continued):
Segment assets as of September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(In thousands)
-------------------------
1998 1997
---- ----
<S> <C> <C>
Wireless $4,128,253 $3,990,993
Wireline 2,751,781 2,728,641
Emerging businesses 79,616 27,428
---------- ----------
Total communications 6,959,650 6,747,062
Information services 865,975 767,709
Other operations 193,173 133,517
---------- ----------
Total business segments 8,018,798 7,648,288
Add: Corporate assets not allocated to segments:
Headquarters fixed assets, net of accumulated depreciation 129,860 110,514
Investments 680,627 729,918
Goodwill, net of amortization 105,679 91,563
Other assets 58,352 39,802
Less: elimination of intersegment receivables (66,472) (40,152)
---------- ----------
Consolidated assets $8,926,844 $8,579,933
========== ==========
</TABLE>
8. Litigation-Claims and Assessments:
On July 12, 1996, the Georgia Public Service Commission ("Georgia PSC")
issued an order requiring that ALLTEL'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 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. On
October 5, 1998, the Georgia Supreme Court, in a 4-3 decision, upheld the
Georgia Court of Appeals' ruling that the Georgia PSC had the authority to
order the rate reductions. The case will now return to the Superior Court
for a hearing on the merits and provide ALLTEL the opportunity to
challenge the Georgia PSC's order by asserting a number of additional
federal and state constitutional and other legal grounds. Since the
Company believes that it will prevail in this case, the Company has not
implemented any revenue reductions or established any reserves for refund
related to this matter at this time.
28
<PAGE>
TO ALLTEL STOCKHOLDERS:
ALLTEL's record third quarter 1998 financial results from current businesses,
which exclude one-time adjustments, produced revenues and earnings per share
growth of 16 percent and 24 percent, respectively, to $1.3 billion and 57 cents
per share.
For the first time, results include the operations of the former 360
Communications, which merged with ALLTEL July 1. Prior periods have been
restated to reflect 360 Communications' operations.
Among the highlights from current businesses in the third quarter:
o Net income grew to $157 million, an increase of 23 percent from the same
quarter last year.
o Communications and Information Services produced double-digit revenue
growth of 14 percent and 20 percent, respectively.
o Wireless average revenue per customer increased 2 percent over third
quarter of last year.
o The company rebranded the 360 markets in nearly 200 cities to reflect
the ALLTEL brand.
o Wireless operations added 100,173 customers.
o Wireline access line growth exceeded 6 percent for the fourth
consecutive quarter.
o Operating income from Information Services grew 16 percent.
We are pleased to report record revenues and earnings per share from
current businesses. We believe these results demonstrate our ability to execute
our chosen strategy, while integrating the former 360 operations. We are excited
about the outstanding results and progress we have achieved since the merger.
And we remain committed to delivering the merger's many benefits to our
customers and stockholders. Through the merger, we have continued to enhance our
ability to deliver bundled communications services across our geographically
focused markets, and we remain on track to realize forecasted savings related to
the merger synergies.
ALLTEL's wireless operations made a significant contribution to the
company's third quarter performance. Thousands of customers per day are
purchasing our wireless services, and many are choosing to buy additional
products like long-distance, paging, local phone service and Internet access
from ALLTEL. Today, ALLTEL's wireless business serves 3.9 million customers, up
15 percent from 3.4 million at Sept. 30, 1997.
In almost every category of performance we exceeded expectations and
produced outstanding wireless results. The company reported a market penetration
rate of 11.6 percent, compared with 10.3 percent at Sept. 30, 1997. The average
monthly churn rate was 2.2 percent, compared to 2.0 percent in the third quarter
of 1997.
ALLTEL continues to aggressively introduce digital wireless service in many
of our markets. During the third quarter, the company launched digital wireless
service in six markets including: Norfolk and Richmond, Va.; Greensboro, N.C.;
Greenville, S.C.; Toledo, Ohio; and Gainesville, Fla. By year-end, ALLTEL will
have digital service in 13 of our largest markets.
ALLTEL grew wireline access lines more than 6 percent for the fourth
consecutive quarter. The company serves more than 1.8 million access lines in 14
states. The growth in access lines was partially driven by the increase in
second access lines that customers use for purposes such as fax machines,
Internet access, and teen lines.
Revenue from emerging businesses grew more than 100 percent during the
third quarter when compared to the same quarter last year, driven by ALLTEL's
CLEC, PCS and long-distance services. These emerging businesses continue to be a
key part of ALLTEL's growth strategy in delivering a bundled array of products
and services to our customers.
ALLTEL's Information Services business continues to produce double-digit
growth in revenue and operating income. This growth is coming from existing and
new customers such as Green Tree Financial Corp. and Grupa Pekao SA, Poland's
largest bank.
ALLTEL's reported results for the third quarter include an $81 million
pre-tax gain resulting from the company's sale of 1.7 million shares of MCI
WorldCom stock.
Third quarter reported results also include approximately $307 million in
one-time, pre-tax charges related to the 360 merger and changes in GTE's
customer care and billing contract with ALLTEL. Included in this charge is $55
million related to ALLTEL's contract with GTE Corp. Due to its pending merger
with Bell Atlantic, GTE has re-evaluated its billing and customer care
requirements and will purchase certain software usage rights and processing
services from ALLTEL for an interim period.
29
<PAGE>
The merger-related expenses, which total $252 million pre-tax, include
professional and financial advisors' fees, employee-related expenses and other
integration costs. The one-time expenses also include several adjustments
resulting from the redirection of a number of strategic initiatives based on the
merger with 360 and ALLTEL's expanded wireless presence.
These adjustments include an adjustment in the carrying value of certain
duplicate software assets as well as costs from the early termination of certain
service obligations. Results also include adjustments resulting from the
company's PCS deployment schedule.
In total, the one-time items reduced third quarter earnings per share by 67
cents, after taxes.
Our record results for the third quarter from current operations exceeded
expectations. Our team, while integrating two successful companies, continued to
focus on the business -- delivering strong financial results and bringing
additional products and services to our customers.
Board Increases Dividends
ALLTEL's Board of Directors increased the regular quarterly common dividend from
29 cents to 30.5 cents per share. The new indicated annual dividend rate will be
$1.22 per common share, an increase of 6 cents or approximately 5.2 percent over
the previous rate. This is the 38th consecutive annual dividend increase since
the company's founding.
The 30.5 cent dividend is payable January 4, 1999 to stockholders of record
as of December 7, 1998.
Dividends were also declared on all series of the Company's preferred
stock. Preferred dividends are payable December 15, 1998 to stockholders of
record as of November 20, 1998.
Joe T. Ford
Chairman and Chief Executive Officer
October 22, 1998
30
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<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.
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<NAME> ALLTEL CORPORATION
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