UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Date of Report (Date of earliest event reported): December 2, 1998
ALLTEL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-4996 34-0868285
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
One Allied Drive, Little Rock, Arkansas 72202
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
---------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 7. Financial Statements and Exhibits
ALLTEL Corporation is filing restated audited financial
statements to reflect the Company's July 1, 1998 merger with
360 Communications Company. The merger was accounted for as a
pooling of interests. The restated audited financial statement
information included in this filing consists of the following:
(a) Audited balance sheets as of December 31, 1997 and 1996.
(b) Audited statements of income for the years ended December 31,
1997, 1996 and 1995.
(c) Audited statements of cash flows for the years ended
December 31, 1997, 1996 and 1995.
(d) Audited statements of shareholders' equity for the years
ended December 31, 1997, 1996 and 1995.
(e) Notes to audited consolidated financial statements for the
years ended December 31, 1997, 1996 and 1995.
(f) Management's Discussion and Analysis of Financial Condition
and Results of Operations for the years ended December 31,
1997, 1996 and 1995.
Exhibits.
See Exhibit Index.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLTEL CORPORATION
------------------------------------------------------
(Registrant)
By: /s/ Dennis J. Ferra
------------------------------------------------------
Dennis J. Ferra
Senior Vice President and Chief Administrative Officer
(Principal Financial Officer)
December 2, 1998
3
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Page
Number Description of Exhibits Number
------- ----------------------- ------
23.1 Consent of Ernst & Young LLP
(Financial statements of 360 Communications Company
are not included separately in this Form 8-K) 44
23.2 Consent of Arthur Andersen LLP
(Financial statements of GTE Mobilnet of South Texas
Limited Partnership are not included separately in
this Form 8-K) 45
23.3 Consent of Arthur Andersen LLP
(Financial statements of Chicago SMSA Limited Partnership
are not included separately in this Form 8-K) 46
23.4 Consent of PricewaterhouseCoopers LLP
(Financial statements of New York SMSA Limited
Partnership are not included separately in this Form
8-K) 47
23.5 Consent of PricewaterhouseCoopers LLP
(Financial statements of Orlando SMSA Limited Partnership
are not included separately in this Form 8-K) 48
27.1 Financial Data Schedule for the year ended December 31, 1997 49
99.1 Restated audited consolidated financial statements
of ALLTEL Corporation for the years ended December 31,
1997, 1996 and 1995:
(i) Reports of Independent Public Accountants 6-11
(ii) Audited consolidated statements of income for the
years ended December 31, 1997, 1996 and 1995 12
(iii) Audited consolidated balance sheets as of
December 31, 1997 and 1996 13
(iv) Audited consolidated statements of cash flows for
the years ended December 31, 1997, 1996 and 1995 14
(v) Audited consolidated statements of
shareowners' equity for the years ended
December 1997, 1996 and 1995 15
(vi) Business segment information for the years ended
December 31, 1997, 1996 and 1995 16
(vii) Notes to audited consolidated financial statements 17-31
(viii) Management's Discussion and Analysis of Financial
Condition and Results of Operations for the years
ended December 31, 1997, 1996 and 1995 32-43
4
Exhibit 99.1
ALLTEL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995
TOGETHER WITH AUDITORS' REPORT
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ALLTEL Corporation:
We have audited the accompanying consolidated balance sheets of ALLTEL
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of 360 Communications Company, a company acquired during 1998 in a
transaction accounted for as a pooling of interests, as discussed in Note 2, as
of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997. Such statements are included in the consolidated
financial statements of ALLTEL Corporation and reflect total assets and total
revenues of 34 percent and 30 percent, respectively, of the related consolidated
totals in 1997; 34 percent and 26 percent, respectively, of the related
consolidated totals in 1996, and 22 percent of total revenues for the year ended
December 31, 1995. These statements were audited by other auditors whose report
has been furnished to us and our opinion, insofar as it relates to the amounts
included for 360 Communications Company, is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of ALLTEL Corporation and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
December 1, 1998.
6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
360 Communications Company
We have audited the accompanying consolidated balance sheets of 360
Communications Company and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareowners' equity, and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of GTE Mobilnet of
South Texas Limited Partnership, New York SMSA Limited Partnership, Orlando SMSA
Limited Partnership and Chicago MSA Limited Partnership, equity investees of the
Company, for which the Company's investment in these partnerships is
$191,275,000 and $121,654,000 at December 31, 1997 and 1996, respectively, and
the Company's equity in the net income of these partnerships is $48,344,000,
$39,644,000 and $32,753,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Those financial statements were audited by other auditors
whose reports have been furnished to us. Our opinion, insofar as it relates to
data included for such partnerships, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of 360 Communications
Company and Subsidiaries at December 31, 1997 and 1996, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/Ernst & Young LLP
Chicago, Illinois
March 6, 1998
7
<PAGE>
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To GTE Mobilnet of South Texas Limited Partnership:
We have audited the accompanying balance sheets of the GTE Mobilnet of South
Texas Limited Partnership (a Delaware limited partnership) as of December 31,
1997 and 1996, and the related statements of operations, changes in partners'
capital, and cash flows for the years then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Mobilnet of South Texas
Limited Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 13, 1998
8
<PAGE>
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of the
Chicago SMSA Limited Partnership:
We have audited the balance sheets of the CHICAGO SMSA LIMITED PARTNERSHIP (an
Illinois partnership) as of December 31, 1997 and 1996, and the related
statements of income, partners' capital and cash flows for the years then ended;
such financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Chicago SMSA Limited
Partnership as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Chicago, Illinois
January 16, 1998
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of the New York SMSA Limited Partnership:
We have audited the accompanying balance sheets of the New York SMSA Limited
Partnership (the Partnership) as of December 31, 1997 and 1996, and the related
statements of income, changes in partners' capital and cash flows for the years
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the New York SMSA Limited
Partnership as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand L.L.P
New York, New York
February 13, 1998
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of the Orlando SMSA Limited Partnership
We have audited the accompanying consolidated balance sheet of the Orlando SMSA
Limited Partnership as of December 31, 1997, and the related consolidated
statements of income, changes in partners' capital and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Orlando SMSA
Limited Partnership as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 6, 1998
11
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(Dollars in thousands, except per share amounts)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues and Sales:
Service revenues $4,033,811 $3,588,233 $3,246,666
Product sales 511,329 651,234 651,766
---------- ---------- ----------
Total revenues and sales 4,545,140 4,239,467 3,898,432
---------- ---------- ----------
Costs and Expenses:
Operations 2,377,399 2,150,110 1,954,261
Cost of products sold 494,537 586,651 590,275
Depreciation and amortization 635,464 570,956 524,530
Provision to reduce carrying value of certain assets 16,874 120,280 -
---------- ---------- ----------
Total costs and expenses 3,524,274 3,427,997 3,069,066
---------- ---------- ----------
Operating Income 1,020,866 811,470 829,366
Other income, net 15,278 6,792 8,043
Interest expense (261,770) (237,196) (272,668)
Gain on disposal of assets, write-down of assets and other 209,651 (2,278) 30,775
---------- ---------- ----------
Income before income taxes 984,025 578,788 595,516
Income taxes 394,644 227,532 242,595
---------- ---------- ----------
Net income 589,381 351,256 352,921
Preferred dividends 1,008 1,071 1,158
---------- ---------- ----------
Net income applicable to common shares $ 588,373 $ 350,185 $ 351,763
========== ========== ==========
Earnings per Share:
Basic $2.13 $1.27 $1.28
Diluted $2.11 $1.26 $1.27
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
12
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands)
<CAPTION>
Assets 1997 1996 Liabilities and Shareholders' Equity 1997 1996
- ----------------------------------------------------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current Assets: Current Liabilities:
Cash and short-term investments $ 19,683 $ 16,428 Current maturities of long-term debt $ 48,028 $ 37,798
Accounts receivable (less allowance Accounts and notes payable 497,142 511,974
for doubtful accounts of $25,164 Advance payments and
and $27,001, respectively) 723,999 719,601 customer deposits 115,994 106,394
Materials and supplies 14,237 17,152 Accrued taxes 92,527 59,883
Inventories 85,631 121,878 Accrued dividends 55,012 52,440
Prepaid expenses and other 37,241 54,790 Other current liabilities 195,789 173,055
---------- ---------- ---------- ----------
Total current assets 880,791 929,849 Total current liabilities 1,004,492 941,544
- ----------------------------------------------------------------- ----------------------------------------------------------------
Long-term debt 3,699,519 3,455,920
Investments 1,228,712 1,184,129 Deferred income taxes 710,723 779,430
Goodwill and other intangibles 1,637,393 1,548,179 Other liabilities 432,239 425,218
Preferred stock, redeemable 5,625 6,455
- ----------------------------------------------------------------- ----------------------------------------------------------------
Property, Plant and Equipment:
Wireline 3,909,756 3,694,690
Wireless 2,303,215 1,996,270 Shareholders' Equity:
Information services 539,743 506,905 Preferred stock 9,155 9,198
Other 169,754 160,587 Common stock 273,411 278,448
Under construction 358,323 255,283 Additional capital 801,936 967,963
---------- ---------- Unrealized holding gain on investments 300,671 351,867
Total property, plant and equipment 7,280,791 6,613,735 Retained earnings 1,332,634 952,131
Less accumulated depreciation 2,901,382 2,488,770 ---------- ----------
---------- ---------- Total shareholders' equity 2,717,807 2,559,607
Net property, plant and equipment 4,379,409 4,124,965
- ----------------------------------------------------------------- ----------------------------------------------------------------
Other assets 444,100 381,052
- ----------------------------------------------------------------- ----------------------------------------------------------------
Total Liabilities
Total Assets $8,570,405 $8,168,174 and Shareholders' Equity $8,570,405 $8,168,174
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
13
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Dollars in thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Provided from Operations:
Net income $ 589,381 $ 351,256 $ 352,921
Adjustments to reconcile net income to net cash
provided from operations:
Depreciation and amortization 635,464 570,956 524,530
Provision to reduce carrying value of certain assets,
gain on disposal of assets, write-down of
assets, and other (111,180) 74,197 (19,849)
Other, net 93,887 85,268 84,905
Increase in deferred income taxes 41,523 83,386 101,513
Changes in operating assets and liabilities:
Accounts receivable (137,077) (76,841) (108,627)
Inventories and materials and supplies 6,558 (15,225) 12,693
Accounts payable 13,297 181,939 (38,676)
Other current liabilities 46,727 (24,765) 1,314
Other, net 2,837 (40,358) (66,185)
---------- ---------- ---------
Net cash provided from operations 1,181,417 1,189,813 844,539
---------- ---------- ---------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (826,886) (763,824) (846,715)
Additions to capitalized software development costs (74,225) (78,319) (52,308)
Additions to other intangible assets (146,526) - -
Additions to investments (124,295) (44,263) (54,206)
Purchase of property, net of cash acquired (112,852) (352,533) -
Proceeds from the sale of/return on investments 203,637 47,157 15,592
Proceeds from the sale of assets 202,300 38,687 212,911
Other, net (86,707) (63,044) (72,019)
---------- ----------- ---------
Net cash used in investing activities (965,554) (1,216,139) (796,745)
---------- ----------- ---------
Cash Flows from Financing Activities:
Dividends on preferred and common stock (206,312) (198,095) (182,270)
Reductions in long-term debt (42,647) (1,642,468) (277,636)
Purchase of common stock (212,012) (79,126) -
Preferred stock redemptions and purchases (873) (704) (1,137)
Distributions to minority investors (45,063) (35,426) (6,971)
Contributions from minority investors - 5,636 35,168
Long-term debt issued 282,611 1,948,874 376,646
Common stock issued 11,688 3,619 17,225
---------- ----------- ---------
Net cash (used in) provided from financing activities (212,608) 2,310 (38,975)
---------- ----------- ---------
Increase (decrease) in cash and short-term investments 3,255 (24,016) 8,819
Cash and Short-term Investments:
Beginning of the year 16,428 40,444 31,625
---------- ----------- ---------
End of the year $ 19,683 $ 16,428 $ 40,444
========== =========== =========
Supplemental Cash Flow Disclosures:
Interest paid $ 250,360 $ 202,478 $ 268,991
Income taxes paid $ 270,635 $ 206,282 $ 107,190
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
14
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31,
(Dollars in thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Preferred Stock:
Balance at beginning of the year $ 9,198 $ 9,241 $ 9,320
Conversion of preferred stock (43) (43) (79)
---------- ---------- ----------
Balance at end of the year 9,155 9,198 9,241
---------- ---------- ----------
Common Stock:
Balance at beginning of the year 278,448 275,651 274,364
Acquisition of subsidiaries 872 4,810 -
Employee plans, net 618 439 1,227
Conversion of preferred stock and debentures 67 28 60
Repurchase of stock (6,594) (2,480) -
---------- ---------- ----------
Balance at end of the year 273,411 278,448 275,651
---------- ---------- ----------
Additional Capital:
Balance at beginning of the year 967,963 641,799 625,572
Acquisition of subsidiaries 26,348 145,503 -
Employee plans, net 11,070 3,180 15,998
Conversion of preferred stock and debentures 266 100 229
Repurchase of stock (205,418) (76,646) -
Capital contributions by Sprint Corporation
in connection with spinoff of a subsidiary - 253,160 -
Other, net 1,707 867 -
---------- ---------- ----------
Balance at end of the year 801,936 967,963 641,799
---------- ---------- ----------
Unrealized Holding Gain on Investments:
Balance at beginning of the year 351,867 208,681 84,275
Change in unrealized holding gain
on investments (51,196) 143,186 124,406
---------- ---------- ----------
Balance at end of the year 300,671 351,867 208,681
---------- ---------- ----------
Retained Earnings:
Balance at beginning of the year 952,131 802,261 635,601
Net income for the year 589,381 351,256 352,921
Dividends:
Common (207,870) (200,315) (185,103)
Preferred (1,008) (1,071) (1,158)
---------- ---------- ----------
Balance at end of the year 1,332,634 952,131 802,261
---------- ---------- ----------
Total shareholders' equity $2,717,807 $2,559,607 $1,937,633
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
15
<PAGE>
<TABLE>
BUSINESS SEGMENTS
For the years ended December 31,
(Dollars in thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues and Sales:
Wireless $1,838,544 $1,544,537 $1,198,942
Wireline 1,233,968 1,167,408 1,208,724
Emerging businesses 52,002 10,221 -
---------- ---------- ----------
Total communications 3,124,514 2,722,166 2,407,666
Information services 974,151 960,075 929,727
Product distribution 360,042 452,585 448,359
Other operations 118,880 137,355 139,705
Less: intercompany eliminations (32,447) (32,714) (27,025)
---------- ---------- ----------
Total $4,545,140 $4,239,467 $3,898,432
========== ========== ==========
Operating Income:
Wireless $ 460,453 $ 370,228 $ 262,031
Wireline 449,985 409,317 418,589
Emerging businesses (22,149) (9,197) -
---------- ---------- ----------
Total communications 888,289 770,348 680,620
Information services 144,928 65,367 130,603
Product distribution 13,922 23,464 27,142
Other operations 8,010 10,503 6,262
Corporate expenses (34,283) (58,212) (15,261)
---------- ---------- ----------
Total $1,020,866 $ 811,470 $ 829,366
========== ========== ==========
Identifiable Assets:
Wireless $3,990,529 $3,581,312 $2,657,837
Wireline 2,744,525 2,679,813 2,663,904
Emerging businesses 39,343 1,505 -
---------- ---------- ----------
Total communications 6,774,397 6,262,630 5,321,741
Information services 806,015 783,738 745,451
Product distribution 68,534 126,339 169,903
Other operations 46,979 56,091 58,243
Corporate 874,480 939,376 759,289
---------- ---------- ----------
Total $8,570,405 $8,168,174 $7,054,627
========== ========== ==========
Capital Expenditures:
Wireless $ 372,975 $ 395,055 $ 444,925
Wireline 271,305 278,119 308,468
Emerging businesses 66,915 1,503 -
---------- ---------- ----------
Total communications 711,195 674,677 753,393
Information services 87,937 83,530 77,871
Product distribution 1,465 974 2,034
Other operations and corporate 26,289 4,643 13,417
---------- ---------- ----------
Total $ 826,886 $ 763,824 $ 846,715
========== ========== ==========
Depreciation and Amortization Expense:
Wireless $ 267,049 $ 215,440 $ 169,587
Wireline 241,839 228,054 236,486
Emerging businesses 1,295 15 -
---------- ---------- ----------
Total communications 510,183 443,509 406,073
Information services 112,316 112,911 102,033
Product distribution 800 1,409 1,277
Other operations and corporate 12,165 13,127 15,147
---------- ---------- ----------
Total $ 635,464 $ 570,956 $ 524,530
========== ========== ==========
<FN>
Note: A. Corporate expenses for 1997 and 1996 include pretax write-downs to reduce the carrying value of the Company's wire and
cable subsidiary of $16.9 million and $45.3 million, respectively. (See Note 9.)
B. Information services' operating income for 1996 includes pretax write-downs of $75.0 million to reduce the carrying value
of certain assets. (See Note 9.)
C. Refer to page 17 for additional information concerning business segments.
</FN>
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies:
Description of Business - ALLTEL Corporation ("ALLTEL" or the "Company")
is a customer-focused information technology company that provides
wireline and wireless communications and information services. The Company
owns subsidiaries that provide wireline local, long-distance, network
access and internet services, wireless communications and information
processing management services and advanced applications software.
Business Segments - 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
domestic markets: Southeast, Mid-Atlantic, Midwest and West. The Company's
wireline subsidiaries provide local service and network access in 14
states. Emerging businesses include the Company's long-distance, local
competitive access ("CLEC"), and internet access operations. During 1998,
the Company began offering network management and Personal Communications
Services ("PCS"), and operating results of these two additional start-up
operations will be included in emerging businesses beginning in 1998.
Long-distance and internet access services are marketed in the majority of
states in which the Company provides communications services. The CLEC and
network management operations are provided in select areas within the
Company's geographically focused communications markets. In March 1998,
ALLTEL began offering PCS in Jacksonville, Florida, and the Company
expects to begin offering PCS in other markets in the near future.
Information services provides information processing management,
outsourcing services and application software, primarily to financial and
telecommunications clients. The principal markets for information
services' products and services are commercial banks and financial
institutions and telecommunications companies in the United States and
major international markets.
Product distribution sells communications and data products to affiliated
and non-affiliated communications companies and related industries in the
United States. Prior to May 1997, product distribution also included the
wire and cable operations which were sold in 1997. (See Note 9.) Other
operations primarily consist of directory publishing operations. Corporate
identifiable assets consist principally of cash, investments and
headquarters facilities and equipment. Corporate items represent general
corporate expenses and assets not allocated to segments. (Refer to Page 16
for a schedule of business segment information.)
Basis of Presentation - ALLTEL prepares its consolidated financial
statements in accordance with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses and
disclosure of contingent assets and liabilities. The estimates and
assumptions used in the accompanying consolidated financial statements are
based upon management's evaluation of the relevant facts and circumstances
as of the date of the financial statements. Actual results may differ from
the estimates and assumptions used in preparing the accompanying
consolidated financial statements.
The consolidated financial statements include the accounts of ALLTEL, its
subsidiary companies and majority-owned partnerships. Investments in 20%
to 50% owned entities and all unconsolidated partnerships are accounted
for using the equity method. Investments in less than 20% owned entities
and in which the Company does not exercise significant influence over
operating and financial policies are accounted for under the cost method.
All intercompany transactions, except those with certain affiliates
described below, have been eliminated in the consolidated financial
statements. Certain prior year amounts have been reclassified to conform
with the 1997 financial statement presentation.
Service revenues consist of local service, network access, long distance
and miscellaneous wireline operating revenues, wireless access and network
usage revenues, information services' data processing and software
maintenance revenues. Product sales revenues primarily consist of the
product distribution and directory publishing operations and information
services' software licensing revenues and equipment sales.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies, Continued:
Transactions with Certain Affiliates - ALLTEL Supply, Inc. sells equipment
and materials to wireline subsidiaries of the Company ($115.8 million in
1997, $109.2 million in 1996 and $127.9 million in 1995) as well as to
other non-affiliated communications companies and related industries. The
cost of equipment and materials sold to such subsidiaries is included,
principally, in wireline plant in the consolidated financial statements.
ALLTEL Information Services, Inc. provides the data processing services
for the Company's wireline operations ($103.9 million in 1997, $103.2
million in 1996 and $95.7 million in 1995) in addition to other
non-affiliated companies. Directory publishing services are provided to
the wireline subsidiaries by ALLTEL Publishing Corporation ("Publishing").
Wireline revenues and sales include directory royalties received from
Publishing ($33.5 million in 1997, $32.2 million in 1996 and $26.9 million
in 1995). These intercompany transactions have not been eliminated because
the directory royalty revenues earned from Publishing and the prices
charged by the supply and information services subsidiaries are included
in the wireline subsidiaries' rate base and/or are recovered through the
regulatory process.
Regulatory Accounting - The Company's wireline subsidiaries follow the
accounting for regulated enterprises prescribed by Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types
of Regulation" ("SFAS 71"). This accounting recognizes the economic
effects of rate regulation by recording costs and a return on investment
as such amounts are recovered through rates authorized by regulatory
authorities. Accordingly, SFAS 71 requires the Company's wireline
subsidiaries to depreciate wireline plant over useful lives as approved by
regulators, which could be longer than the useful lives that would
otherwise be determined by management. SFAS 71 also requires deferral of
certain costs and obligations based upon approvals received from
regulators to permit recovery of such amounts in future years. The
Company's wireline subsidiaries periodically review the applicability of
SFAS 71 based on the developments in their current regulatory and
competitive environments.
Cash and Short-term Investments - Cash and short-term investments consist
of highly liquid investments with original maturities of three months or
less.
Inventories - Inventories are stated at the lower of cost or market value.
Cost is determined using the first-in, first-out method of valuation.
Investments - Investments in equity securities are recorded at fair value
in accordance with Statement of Financial Accounting Standards No. 115
(See Note 4). Investments in unconsolidated partnerships are accounted for
using the equity method (See Note 3). All other investments are accounted
for using the cost method. Investments were as follows at December 31 (in
thousands):
1997 1996
---- ----
Equity securities $ 575,501 $ 695,497
Investments in unconsolidated partnerships 580,029 449,184
Other cost investments 73,182 39,448
---------- ----------
$1,228,712 $1,184,129
========== ==========
Investments in unconsolidated partnerships include the excess of the
purchase price over the underlying net book value of cellular partnerships
of $300.7 million and $248.2 million as of December 31, 1997 and 1996,
respectively. Amortization expense for the years ended December 31, 1997,
1996 and 1995 was $6.5 million, $5.8 million and $5.8 million,
respectively, and is included in other income, net, in the accompanying
consolidated statements of income (See Note 13).
Goodwill and Other Intangibles - Goodwill represents the excess of cost
over the fair value of net assets acquired and is amortized on a
straight-line basis for periods up to 40 years. The Company has acquired
identifiable intangible assets through its acquisitions of interests in
various cellular systems and acquisitions of wireline properties. The cost
of acquired entities is allocated to identifiable assets at the date of
the acquisition and the excess of the total purchase price over the
amounts assigned to identifiable assets is recorded as goodwill.
Intangible assets related to the acquisition of entities in which the
Company does not have a controlling interest are included in investments
in unconsolidated partnerships. At December 31, 1997 and 1996, goodwill,
net of amortization, was $1,483.4 million and $1,548.2 million,
respectively. Amortization expense amounted to $44.7 million in 1997,
$39.6 million in 1996 and $37.0 million in 1995.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies, Continued:
Other intangibles consist of the cost of PCS licenses acquired in 1997.
The PCS licenses will be amortized upon commencement of operations on a
straight-line basis over 40 years. The carrying value of goodwill and
other intangibles is periodically evaluated by the Company for the
existence of impairment on the basis of whether the intangible assets are
fully recoverable from projected, undiscounted net cash flows of the
related business unit.
Property, Plant and Equipment - Property, plant and equipment are stated
at original cost. The Company capitalizes interest during periods of
construction. Depreciation is computed using the straight-line method for
financial reporting purposes. Depreciation expense amounted to $565.7
million in 1997, $503.3 million in 1996 and $458.0 million in 1995. The
composite depreciation rates by class of property as a percent of average
depreciable plant and equipment were:
1997 1996 1995
---- ---- ----
Wireline 6.3% 6.2% 6.5%
Wireless 13.1 12.6 12.9
Information services 17.0 16.8 15.7
Other 6.2 6.8 6.3
Revenue Recognition - Communications revenues are recognized when earned
as determined by contractual arrangements with customers and are primarily
derived from usage of the Company's networks and facilities or under
revenue-sharing arrangements with other telecommunications carriers.
Information services revenues consist of data processing revenue
recognized as services are performed, software licensing revenue
recognized when delivery of the software occurs, and software maintenance
revenue recognized ratably over the maintenance period. Certain long-term
contracts are accounted for using the percentage-of-completion method.
Under this method, revenue and profit are recognized throughout the term
of the contract, based upon estimates of the total costs to be incurred
and revenues to be generated throughout the term of the contract. Changes
in estimates for revenues, costs and profits are recognized in the period
in which they are determinable. Due to the uncertainty of these estimates,
it is reasonably possible that these estimates could change in the near
term and the change could be material to the accompanying consolidated
financial statements. For all other operations, revenue is recognized when
products are delivered or services are rendered to customers.
Included in accounts receivable and other assets are unbilled receivables
primarily related to the information services segment totaling $185.9
million and $176.9 million at December 31, 1997 and 1996, respectively.
Included in these unbilled receivables are amounts totaling $94.5 million
and $82.1 million at December 31, 1997 and 1996, respectively, which
represent costs and estimated earnings in excess of billings related to
long-term contracts accounted for under the percentage-of-completion
method.
Computer Software Development Costs - For the Company's information
services operations, research and development expenditures related to
internally developed computer software are charged to expense as incurred.
The development costs of software to be marketed are charged to expense
until technological feasibility is established. After that time, the
remaining software development costs are capitalized and recorded in other
assets in the accompanying consolidated balance sheets. As of December 31,
1997 and 1996, capitalized software development costs, net of
amortization, were $206.6 million and $197.9 million, respectively.
Amortization of the capitalized amounts is computed on a
product-by-product basis using the straight-line method over the remaining
estimated economic life of the product, not exceeding six years.
Amortization expense amounted to $25.1 million in 1997, $28.1 million in
1996 and $29.5 million in 1995.
The net realizable value of capitalized software development costs is
periodically evaluated by the Company. This evaluation requires
considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future revenues
generated by the software, estimated economic life of the software and
changes in software and hardware technologies. Accordingly, it is
reasonably possible that estimates of anticipated future revenues
generated by the software, the remaining economic life of the software, or
both, could be reduced in the near term, materially impacting the carrying
value of capitalized software development costs. As a result of this
periodic evaluation, the Company recorded a write-down of software in
1996. (See Note 9.)
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies, Continued:
Earnings Per Share - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), which established new standards for
computing and presenting earnings per share information. As required, the
Company adopted the provisions of SFAS 128 in its year-end 1997 financial
statements and has restated all prior-year earnings per share information.
Basic earnings per share of common stock was determined by dividing net
income applicable to common shares by the weighted average number of
common shares outstanding during each year. Diluted earnings per share
reflects the potential dilution that could occur assuming conversion or
exercise of all outstanding preferred stocks and issued and unexercised
stock options. Options to purchase approximately 2,447,000 and 1,326,000
shares of common stock at December 31, 1997 and 1996, respectively, were
excluded from the computation of diluted earnings per share because the
effect was antidilutive. A reconciliation of the net income and numbers of
shares used in computing basic and diluted earnings per share was as
follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts) 1997 1996 1995
------------------------------------------------ ---- ---- ----
<S> <C> <C> <C>
Basic Earnings per Share:
-------------------------
Net income applicable to common shares $588,373 $350,185 $351,763
Weighted average common shares 276,590 276,637 275,232
outstanding for the year
Basic earnings per share of common stock $2.13 $1.27 $1.28
===== ===== =====
Diluted Earnings per Share:
---------------------------
Net income applicable to common shares $588,373 $350,185 $351,763
Adjustments for convertible securities:
Preferred stocks 206 220 236
-------- -------- --------
Net income applicable to common shares
Assuming conversion of above securities $588,579 $350,405 $351,999
======== ======== ========
Weighted average common shares 276,590 276,637 275,232
outstanding for the year
Increase in shares which would result from:
Exercise of stock options 1,431 1,233 1,324
Conversion of convertible preferred stocks 523 559 603
------ ------- -------
Weighted average common shares, assuming
Conversion of the above securities 278,544 278,429 277,159
======= ======= =======
Diluted earnings per share of common stock $2.11 $1.26 $1.27
===== ===== =====
</TABLE>
2. Merger:
On July 1, 1998, the Company 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 the Company. In connection
with the merger, each outstanding share of 360 common stock was
converted into the right to receive .74 shares of the Company's 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. Accordingly, the accompanying financial statements have been
restated to include the accounts and results of operations 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.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Merger, Continued:
Separate and combined results of operations are as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
Six Months Ended ------------------------------------------
(In thousands) June 30, 1998 1997 1996 1995
-------------- ------------- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
ALLTEL $1,781,454 $3,263,563 $3,192,418 $3,109,725
360 753,448 1,347,172 1,095,872 834,415
Eliminations and reclassifications (52,032) (65,595) (48,823) (45,708)
---------- ---------- ---------- ----------
Combined $2,482,870 $4,545,140 $4,239,467 $3,898,432
========== ========== ========== ==========
Net Income (loss):
ALLTEL $320,449 $507,886 $291,737 $354,616
360 81,239 81,495 59,519 (1,695)
-------- -------- -------- --------
Combined $401,688 $589,381 $351,256 $352,921
======== ======== ======== ========
</TABLE>
Prior to March 7, 1996, 360 was a subsidiary of Sprint Corporation
("Sprint"). On March 7, 1996, Sprint effected a tax-free spinoff of 360
to Sprint shareholders. In conjunction with the spinoff, 360
repaid $1.4 billion of intercompany debt to Sprint, and Sprint contributed
the remaining intercompany debt, net of receivables from affiliates, to
360 as additional paid-in capital. Funding for the repayment was derived
from the proceeds of $900 million of senior notes issued under an
indenture and approximately $500 million of initial borrowings under a
revolving credit facility with a number of banks and institutional
lenders. In addition, a recapitalization of 360's common stock was
effected pursuant to which 360 split its 10 shares of issued and
outstanding common stock into 116.7 million new shares of common stock to
allow for the pro rata distribution of 360 stock to the Sprint
shareholders. This distribution was effected as a tax-free dividend.
Prior to the spinoff, 360 borrowed from Sprint and certain
affiliates to the extent cash requirements were not met through cash flows
from operations and cash contributions from minority partners. Interest
expense on intercompany debt was $23.5 million and $127.2 million in 1996
and 1995, respectively.
3. Investments in Unconsolidated Partnerships
The Company has investments in 26 cellular entities in which it holds a
minority interest. The interest owned in each unconsolidated partnership
ranges from .82% to 49%. Condensed combined financial information, a
portion of which is unaudited, for investments in unconsolidated
partnerships accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
(In thousands) 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C>
Results of operations:
Operating revenues $2,779,253 $2,706,525 $2,226,312
---------- ---------- ----------
Cost of equipment sales 81,234 97,691 43,954
Operating, selling, general, administrative
and other expenses 1,660,192 1,603,794 1,331,041
Depreciation and amortization 298,653 281,126 251,005
---------- ---------- ----------
Total operating expenses 2,040,079 1,982,611 1,626,000
---------- ---------- ----------
Operating income 739,174 723,914 600,312
Non-operating income (expenses) 12,622 883 (14,194)
---------- ---------- ----------
Income before cumulative effects
of changes in accounting principles 751,796 724,797 586,118
Cumulative effects of changes in
accounting principles, net (19,278) - -
---------- ---------- ----------
Net income $ 732,518 $ 724,797 $ 586,118
========== ========== ==========
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Investments in Unconsolidated Partnerships, Continued:
December 31,
--------------------------------
1997 1996
---- ----
Assets
Current assets $ 609,737 $ 655,695
Noncurrent assets 2,287,621 2,131,790
---------- ----------
$2,897,358 $2,787,485
========== ==========
Liabilities and equity
Current liabilities $ 276,276 $ 469,847
Long-term liabilities 15,025 12,327
Minority interests - 3,384
Equity 2,606,057 2,301,927
---------- ----------
$2,897,358 $2,787,485
========== ==========
4. Financial Instruments and Investment Securities:
The carrying amount of cash and short-term investments approximates fair
value due to the short maturity of the instruments. The fair value of
investments was $1,228.7 million in 1997 and $1,184.1 million in 1996
based on quoted market prices and the carrying value of investments for
which there is no quoted market price. The fair value of the Company's
long-term debt, after deducting current maturities, was estimated to be
$3,804.6 million in 1997 and $3,465.6 million in 1996 compared to a
carrying value of $3,699.5 million in 1997 and $3,455.9 million in 1996.
The fair value estimates were based on the overall weighted rates and
maturity compared to rates and terms currently available in the long-term
financing markets. The fair value of the Company's redeemable preferred
stock was estimated to be $17.5 million in 1997 and $16.6 million in 1996
compared to a carrying amount of $5.6 million in 1997 and $6.5 million in
1996. The fair value estimates were based on the conversion of the Series
D convertible redeemable preferred stock to common stock of the Company
and the carrying value of the Series A redeemable preferred stock for
which there is no quoted market price. The fair value of all other
financial instruments were estimated by management to approximate the
carrying value.
Equity securities owned by the Company have been classified as
available-for-sale and are reported at fair value, with unrealized gains
and losses reported, net of tax, in a separate component of shareholders'
equity. The Company had unrealized gains, net of tax, on its investment in
MCI WorldCom, Inc. (formerly WorldCom, Inc.) of $300.7 million, $351.9
million and $208.7 million at December 31, 1997, 1996 and 1995,
respectively. The unrealized gains, including the related tax impact, are
non-cash items and accordingly have been excluded from the accompanying
consolidated statements of cash flows. All other unrealized gains and
losses on investments in equity securities are not material to the
Company's financial position or results of operations. During 1997, the
Company sold a portion of its investment in MCI WorldCom, Inc. (See
Note 10.)
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Debt:
Long-term debt, after deducting current maturities, was as follows at
December 31:
<TABLE>
<CAPTION>
(Thousands)
--------------------------
1997 1996
---- ----
<S> <C> <C>
Debentures and notes, without collateral,
Weighted rate 7.3% in 1997 and 1996
Weighted maturity 10 years in 1997 and 11 years in 1996 $2,512,312 $2,339,919
Subsidiary credit facility borrowings,
Weighted rate 6.5% in 1997 and 6.0% in 1996
Weighted maturity 5 years in 1997 and 1996 600,000 680,000
Rural Telephone Bank and Federal Financing Bank notes,
Weighted rate 7.7% in 1997 and 1996
Weighted maturity 16 years in 1997 and 17 years in 1996 255,006 262,547
Revolving credit agreement,
Weighted rate 6.5% in 1997 and 7.1% in 1996
Weighted maturity 5 years in 1997 and 1996 247,920 83,700
Rural Utilities Service notes,
Weighted rate 4.5% in 1997 and 4.4% in 1996
Weighted maturity 16 years in 1997 and 1996 61,917 66,911
First mortgage bonds and collateralized notes,
Weighted rate 8.4% in 1997 and 8.7% in 1996
Weighted maturity 4 years in 1997 and 5 years in 1996 15,864 14,485
Industrial revenue bonds and collateralized notes,
Weighted rate 5.4% in 1997 and 6.0% in 1996
Weighted maturity 10 years in 1997 and 1996 6,500 8,358
---------- ----------
Total long-term debt $3,699,519 $3,455,920
========== ==========
Weighted rate 7.1% 7.0%
Weighted maturity 9.5 years 10.3 years
</TABLE>
At December 31, 1997, ALLTEL had a $750 million revolving credit agreement
with a termination date of October 1, 2002, with provision for annual
extensions. In July 1998, the terms of the revolving credit agreement were
amended and provide for a line of credit of $1 billion with a termination
date of October 1, 2003. The revolving credit agreement provides for a
variety of pricing options. In connection with its merger with
360, the Company in July 1998 repaid all borrowings outstanding
under a separate $1 billion revolving credit facility of 360
("Subsidiary credit facility").
In February 1997, a subsidiary filed a shelf registration with the
Securities and Exchange Commission which became effective and provided for
the issuance, from time to time, of up to $500 million in aggregate
initial offering price of unsecured debt securities and/or warrants to
purchase debt securities. The net proceeds to be received will be
available for general purposes and may be used for the repayment of
short-term debt and borrowings under the Subsidiary credit facility and
for the funding of future acquisitions, capital expenditures and working
capital requirements. On March 17, 1997, the subsidiary issued $200
million in aggregate principal amount of 7.6% Notes due 2009. The net
proceeds from the sale of these debt securities were used to repay a
portion of the long-term indebtedness outstanding under the
Subsidiary credit facility.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Debt, Continued:
The indentures and agreements, as amended, provide, among other things,
for various restrictions on the payment of dividends by the Company.
Retained earnings unrestricted as to payment of dividends by the Company
amounted to $1,323.4 million at December 31, 1997. Certain properties have
been pledged as collateral on $339.3 million of obligations.
Interest expense on long-term debt amounted to $260.6 million in 1997,
$235.8 million in 1996 and $271.6 million in 1995. Maturities and sinking
fund requirements for the four years after 1998 for long-term debt
outstanding, excluding the revolving credit agreement, as of December 31,
1997, were $54.3 million, $44.9 million, $48.1 million and $48.8 million
for the years 1999 through 2002, respectively.
6. Common Stock:
At December 31, 1997, there were 500 million shares of $1 par value common
stock authorized of which 273,410,553 and 278,448,412 shares were
outstanding at December 31, 1997 and 1996, respectively. In June 1998,
the Company increased the number of authorized shares of its common stock
to 1 billion. At December 31, 1997, the Company had 20,192,678 common
shares reserved for issuance in connection with convertible preferred
stock (851,495) and stock options (19,341,183).
The Company has stock-based compensation plans. Under these plans, the
Company may grant fixed and performance-based incentive and non-qualified
stock options to officers and other key employees. The maximum number of
shares of the Company's common stock that may be issued to officers and
other key employees under all stock options plans in effect at
December 31, 1997 are 19,319,669 shares. Fixed options granted under the
stock option plans generally become exercisable in one to five years from
the date of grant. Certain fixed options granted in 1997 become
exercisable in equal increments over a six-year period beginning three
years from the date of grant. Performance-based options were granted for
the first time in 1997, and such options become exercisable one year from
the date in which certain performance goals related to operating income
growth and return on invested capital are achieved for the four most
recent consecutive calendar quarters. Four separate levels of performance
goal targets have been established, each specifying different minimum
growth and return rates. Depending upon which of the four performance goal
target levels is attained, 25%, 50%, 75% or 100% of the option award will
vest and become exercisable.
Under the 1994 Stock Option Plan for Nonemployee Directors (the
"Directors' Plan"), the Company grants fixed, non-qualified stock options
to directors for up to 1,000,000 shares of common stock. Under the
Directors' Plan, directors receive a one-time grant to purchase 10,000
shares of common stock. Directors are also granted each year, on the date
of the annual meeting of stockholders, an option to purchase a specified
number of shares of common stock (currently 3,500 shares). Options granted
under the Directors' Plan become exercisable the day immediately preceding
the date of the first annual meeting of stockholders following the date of
grant.
For all plans, the exercise price of the option equals the market value of
the Company's common stock on the date of grant. For fixed stock options,
the maximum term for each option granted is 10 years. Any performance-
based option that remains unvested as of January 29, 2003, will expire.
For stock options granted subsequent to January 1, 1995, the fair value of
each option was estimated on the grant date using the Black-Scholes
option-pricing model and the following weighted average assumptions:
1997 1996 1995
---- ---- ----
Expected life 5.6 years 5.5 years 5.5 years
Expected volatility 21.6% 23.8% 25.3%
Dividend yield 2.9% 2.0% 1.9%
Risk-free interest rate 6.2% 6.1% 6.8%
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Common Stock, Continued:
The following is a summary of stock options outstanding, granted,
exercised, forfeited and expired under the Company's stock-based compensation
plans:
<TABLE>
<CAPTION>
Weighted Average Price
Shares Per Share
--------------------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 6,526,562 5,659,152 7,147,884 $24.75 $22.28 $20.31
Granted 4,411,398 1,459,214 246,368 32.75 31.75 23.50
Exercised (892,854) (436,588) (1,477,390) 20.30 14.95 12.47
Forfeited (354,892) (155,216) (257,710) 28.67 27.93 25.05
Expired (45,034) - - 25.79 - -
--------- --------- --------- ------ ------ ------
Outstanding at end of period 9,645,180 6,526,562 5,659,152 $28.68 $24.75 $22.28
Exercisable at end of period 3,814,026 3,628,833 3,173,574 $23.56 $21.55 $19.65
Nonvested at end of period:
Fixed 5,544,654 2,897,729 2,485,578
Performance-based 286,500 - -
Weighted average fair value of stock
options granted during the year $7.56 $8.93 $11.97
</TABLE>
<TABLE>
The following is a summary of stock options outstanding as of December 31, 1997:
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number of Remaining Exercise Price Number of Exercise Price
Exercise Price Options Contractual Life Per Share Options Per Share
---------------- ----------- ---------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$10.21 - $16.98 652,548 2.5 years $13.35 652,548 $13.35
$20.00 - $25.90 1,320,089 4.6 years 20.83 1,206,170 20.55
$26.12 - $32.52 5,204,982 7.7 years 29.75 1,923,267 28.72
$33.88 - $36.44 2,432,041 9.7 years 34.54 32,041 34.34
$39.19 - $47.30 35,520 8.2 years 43.24 - -
--------- --------- ------ --------- ------
9,645,180 7.3 years $28.68 3,814,026 $23.56
========= ========= ====== ========= ======
</TABLE>
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 and related Interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized
by the Company in the accompanying consolidated statements of income for
any of the fixed stock options granted. Compensation cost for
performance-based options is recognized as expense over the expected
vesting period and is adjusted for changes in the market value of the
Company's common stock. Compensation cost for the performance-based
options amounted to $547,000 in 1997. Had compensation cost for options
granted been determined on the basis of the fair value of the awards at
the date of grant, consistent with the methodology prescribed by Statement
of Financial Accounting Standards No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma
amounts for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1997 1996 1995
---------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $589,381 $351,256 $352,921
Pro forma $583,749 $346,985 $352,232
Basic earnings per share As reported $2.13 $1.27 $1.28
Pro forma $2.11 $1.25 $1.28
Diluted earnings per share As reported $2.11 $1.26 $1.27
Pro forma $2.09 $1.24 $1.27
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Common Stock, Continued:
The pro forma net income and earnings per share amounts reflect only the
effect of stock options granted subsequent to January 1, 1995.
Accordingly, the pro forma amounts may not be representative of the future
effects on reported net income and earnings per share that will result
from the future granting of stock options, since the pro forma
compensation expense is allocated over the periods in which options become
exercisable and new option awards may be granted each year.
7. Employee Benefit Plans:
The Company has a trusteed, non-contributory, defined benefit pension plan
which provides retirement benefits for eligible employees of the Company.
Pension benefits are based on an employee's years of service and
compensation. The Company's funding policy for the defined benefit
contributions is to satisfy the funding requirements of the Employees'
Retirement Income Security Act of 1974 ("ERISA"). Certain key officers
have unfunded executive compensation agreements that provide retirement
benefits in lieu of payments under the Company's pension plan.
Pension expense (credit), including provision for executive compensation
agreements, totaled $(5,327,000) in 1997, $577,000 in 1996 and $5,662,000
in 1995.
Pension expense (credit) includes the following components:
<TABLE>
<CAPTION>
(Thousands)
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Benefits earned during the year $10,415 $12,589 $14,966
Interest cost on projected
benefit obligation 24,401 23,597 22,301
Actual return on plan assets (65,702) (40,660) (61,720)
Net amortization and deferral 25,559 5,051 30,115
------- ------- -------
Pension expense (credit) $(5,327) $ 577 $ 5,662
======= ======= =======
</TABLE>
The following table presents the funded status of the plan at December 31:
<TABLE>
<CAPTION>
(Thousands)
-------------------------
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits
of $288,973 in 1997 and $257,236 in 1996 $299,075 $266,348
-------- --------
Actuarial present value of projected
benefit obligation 352,405 313,878
Plan assets at fair value 444,326 394,533
-------- --------
Plan assets in excess of projected benefit
obligation 91,921 80,655
Unrecognized net gain (50,665) (44,689)
Remaining unrecognized prior service cost (3,198) (4,315)
Unrecognized transition asset being
amortized over 16 years (7,100) (8,283)
-------- --------
Prepaid pension expense $ 30,958 $ 23,368
======== ========
</TABLE>
Actuarial assumptions used to calculate the projected benefit obligations
were 7.25% for the settlement rate in 1997 and 7.75% in 1996, and 5% for
future compensation level increases in 1997 and 1996. The investment
earnings rate was 9% in 1997 and 1996. The changes in the actuarial
present value of the accumulated benefit obligation and the projected
benefit obligation for 1997 primarily resulted from the decrease in the
settlement rate assumption. Assets of the plan consist primarily of listed
stocks, including common stock of the Company amounting to $25.3
million and $19.2 million at December 31, 1997 and 1996, respectively,
and corporate and government debt.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Employee Benefit Plans, Continued:
The Company has a non-contributory defined contribution plan in the form
of profit-sharing arrangements for eligible employees, except bargaining
unit employees. The amount of profit-sharing contributions to the plan is
determined annually by the Company's Board of Directors. Profit-sharing
expense amounted to $22.8 million in 1997, $20.4 million in 1996 and $28.7
million in 1995.
The Company also sponsors employee savings plans under section 401(k) of
the Internal Revenue Code. The plans cover substantially all full-time
employees, except bargaining unit employees. Employees may elect to
contribute to the plans a portion of their eligible pretax compensation up
to certain limits as specified by the plans. The Company also makes annual
contributions to the plans. Amounts contributed by the Company to the
plans amounted to $14.4 million in 1997, $14.7 million in 1996 and $5.4
million in 1995.
8. Postretirement Benefits Other Than Pensions:
The Company provides postretirement healthcare and life insurance benefits
for eligible employees. The healthcare benefit is based on comprehensive
hospital, medical and surgical benefit provisions, while the life
insurance is based on annual earnings at the time of retirement. Employees
who retired before specified dates are eligible for these benefits at no
cost. Employees retiring after specified dates are eligible for these
benefits on a shared cost basis. The Company funds the accrued costs as
benefits are paid.
The postretirement expense includes the following components:
<TABLE>
<CAPTION>
(Thousands)
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Benefits earned $ 387 $ 427 $ 233
Amortization of transition obligation 976 976 976
Other amortization and deferral (115) 40 (918)
Interest cost on accumulated postretirement
benefit obligation 2,817 2,868 2,509
------ ------ ------
Postretirement expense $4,065 $4,311 $2,800
====== ====== ======
</TABLE>
The following table presents the plan status at December 31:
<TABLE>
<CAPTION>
(Thousands)
------------------------
1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $41,522 $34,337
Fully eligible active plan participants 984 883
Other active plan participants 4,140 3,172
------- -------
Total accumulated postretirement benefit obligation 46,646 38,392
Unrecognized net gain (loss) (4,333) 6,517
Unrecognized prior service cost (235) (245)
Unrecognized transition obligation being amortized
over 20 years (14,638) (15,614)
------- -------
Accrued postretirement benefit obligation $27,440 $29,050
======= =======
</TABLE>
Actuarial assumptions used to calculate the accumulated postretirement
benefit obligation were 7.25% for the weighted average discount rate in
1997 and 7.75% for 1996, and 9% for the healthcare cost trend rate in 1997
and 10% for 1996, decreasing on a graduated basis to an ultimate rate of
6% in the year 2000. A one percentage point change in the assumed
healthcare cost trend rate for each future year would change the
postretirement benefit cost by approximately $285,000 for the year ended
December 31, 1997, and the accumulated postretirement benefit obligation
as of December 31, 1997, by approximately $3.3 million.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Provision to Reduce Carrying Value of Certain Assets:
During the second quarter of 1997, the Company recorded a pretax
write-down of $16.9 million to reflect the fair value less cost to sell
its product distribution segment's wire and cable subsidiary, HWC
Distribution Corp. ("HWC"). The sale of HWC was completed in May 1997. The
net income impact of this write-down resulted in a decrease in net income
of $11.7 million or $.04 per share for the year ended December 31, 1997.
During the third quarter of 1996, the Company incurred non-cash, pretax
charges of $120.3 million to write down the carrying value of certain
assets. In accordance with the Company's plan to dispose of its wire and
cable subsidiary, the Company recorded a pretax write-down of $45.3
million in the carrying value of goodwill related to HWC. In addition, the
information services segment recorded a pretax write-down of $53.0
million, primarily consisting of an adjustment to the carrying value of
certain capitalized software development costs. The write-down of software
resulted from performing a net realizability evaluation of
software-related products that have been impacted by changes in software
and hardware technologies. Finally, due to current and projected future
operating losses sustained by its community banking operations,
information services also recorded a pretax write-down of $22.0 million to
adjust the carrying value of these operations to their estimated fair
value based upon projections of future cash flows. The net income impact
of these write-downs resulted in a decrease in net income of $72.7 million
or $.25 per share for the year ended December 31, 1996.
Operating results of the wire and cable subsidiary included in the
Company's consolidated results of operations were as follows:
(Thousands)
---------------------------------
1997 1996 1995
---- ---- ----
Revenues and sales $42,847 $156,536 $158,605
Operating income $ 1,473 $ 7,919 $ 11,039
10. Gain on Disposal of Assets, Write-down of Assets and Other:
During the third quarter of 1997, the Company recorded a pretax gain of
$34.4 million primarily related to the sale of its investment in a
software company. During 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, Inc. common stock. Proceeds from the sale of
this stock amounted to $185.9 million. During the first quarter of 1997,
the Company recorded a pretax gain of $16.2 million from the sale of
information services' healthcare operations; and the Company recorded a
pretax gain of $3.0 million from the divestiture of its ownership
interests in two unconsolidated partnerships. The net income impact from
these transactions resulted in an increase of $121.5 million in net income
or $.44 per share for the year ended December 31, 1997.
During the first quarter of 1996, the Company recorded a pretax gain of
$15.3 million from the sale of wireline properties in Nevada to Citizens
Utilities Company ("Citizens"). The Company also incurred $15.8 million of
termination fees related to the early retirement of $200 million of
long-term debt, and the Company realized a pretax loss of $1.8 million
related to the withdrawal of its investment in GO Communications
Corporation. The net income impact from these transactions resulted in a
decrease in net income of $1.5 million or $.01 per share for the year
ended December 31, 1996.
During 1995, the Company recorded pretax gains of $49.8 million on the
sale of its wireline properties in Arizona, California, New Mexico,
Oregon, Tennessee, Utah, and West Virginia to Citizens. In addition, the
Company incurred $14.0 million of termination fees related to the early
retirement of $200 million of long-term debt. Finally, the Company
recorded an additional pretax write-down of $5.0 million to reflect the
net realizable value of its information services segment's check
processing operations. The net income impact from these transactions
resulted in an increase of $19.8 million in net income or $.07 per share
for the year ended December 31, 1995.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Lease Commitments
Minimum rental commitments for all non-cancelable operating leases,
consisting principally of leases for office space, office equipment, real
estate and tower space, were as follows as of December 31, 1997 (in
thousands):
Year Amount
---- ------
1998 $ 48,484
1999 39,476
2000 32,218
2001 27,856
2002 22,694
Thereafter 104,700
--------
Total $275,428
========
Rental expense under operating leases totaled $47.3 million in 1997, $44.4
million in 1996 and $45.5 million in 1995.
12. Income Taxes
Income tax expense was as follows:
(Thousands)
---------------------------------------
1997 1996 1995
---- ---- ----
Federal $343,460 $181,246 $194,620
State and other 51,184 46,286 47,975
-------- -------- --------
$394,644 $227,532 $242,595
======== ======== ========
The federal income tax expense consists of the following:
(Thousands)
--------------------------------------
1997 1996 1995
---- ---- ----
Currently payable $242,809 $158,089 $114,104
Deferred 105,574 32,090 89,772
Investment tax credit amortized (4,923) (8,933) (9,256)
-------- -------- --------
$343,460 $181,246 $194,620
======== ======== ========
Deferred income tax expense results principally from temporary differences
between depreciation expense for income tax purposes and depreciation
expense recorded in the financial statements. Deferred tax balances are
adjusted to reflect tax rates, based on currently enacted tax laws, that
will be in effect in the years in which the temporary differences are
expected to reverse. For the Company's regulated operations, the
adjustment in deferred tax balances for the change in tax rates is
reflected as a regulatory asset or liability. These regulatory assets and
liabilities are amortized over the lives of the related depreciable asset
or liability concurrent with recovery in rates.
Differences between the federal income tax statutory rates and effective
income tax rates, which include both federal and state income taxes, were
as follows:
1997 1996 1995
---- ---- ----
Statutory income tax rates 35.0% 35.0% 35.0%
Increase (decrease):
Investment tax credit (0.5) (1.5) (1.6)
State income taxes, net of
federal benefit 3.4 5.2 5.2
Amortization of intangibles 1.3 1.9 2.3
Other items 0.9 (1.3) (0.2)
---- ---- ----
Effective income tax rates 40.1% 39.3% 40.7%
==== ==== ====
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Income Taxes, Continued:
The significant components of the Company's net deferred income tax
liability were as follows at December 31:
(Thousands)
-----------------------
1997 1996
---- ----
Property, plant and equipment $539,856 $522,471
Capitalized computer software 80,466 71,609
Unrealized holding gain on investments 196,634 231,982
Operating loss carryforwards (48,915) (43,709)
Other, net (76,880) (13,072)
-------- --------
691,161 769,281
Valuation allowance 19,562 10,149
-------- --------
Total $710,723 $779,430
======== ========
At December 31, 1997 and 1996, total deferred tax assets were $275.8
million and $245.9 million, respectively, and total deferred tax
liabilities were $986.5 million and $1,025.3 million, respectively.
The valuation allowance primarily represents tax benefits of certain state
operating loss carryforwards and other deferred tax assets which may
expire unutilized. During 1997, the valuation allowance increased $9.4
million primarily due to purchase accounting adjustments related to a 1996
acquisition. As of December 31, 1997 and 1996, the Company had available
tax benefits associated with federal and state operating loss
carryforwards of $24.7 million and $14.5 million, respectively, which
expire in varying amounts annually from 1998 to 2012.
13. Other Income, Net:
The components of other income, net were as follows:
<TABLE>
<CAPTION>
(Thousands)
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Equity earnings in unconsolidated partnerships $ 92,087 $ 77,500 $ 59,046
Minority interest in consolidated partnerships (87,966) (80,073) (62,014)
Capitalized interest during construction 13,964 7,394 7,774
Interest and dividend income 524 500 1,052
Other non-operating income (expense) (3,331) 1,471 2,185
-------- -------- --------
$ 15,278 $ 6,792 $ 8,043
======== ======== ========
</TABLE>
30
<PAGE>
14. QUARTERLY FINANCIAL INFORMATION - (Unaudited)
(Dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------ ------------------------------------------------------
Total 4th 3rd 2nd 1st Total 4th 3rd 2nd 1st
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and sales $4,545,140 $1,182,269 $1,145,509 $1,141,717 $1,075,645 $4,239,467 $1,091,321 $1,076,815 $1,067,286 $1,004,045
Operating income $1,020,866 $ 272,682 $ 276,227 $ 248,019 $ 223,938 $ 811,470 $ 225,782 $ 119,429 $ 248,671 $ 217,588
Net income $ 589,381 $ 131,588 $ 150,943 $ 195,697 $ 111,153 $ 351,256 $ 102,301 $ 41,711 $ 116,192 $ 91,052
Preferred dividends 1,008 243 251 256 258 1,071 258 265 274 274
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income applicable
to common shares $ 588,373 $ 131,345 $ 150,692 $ 195,441 $ 110,895 $ 350,185 $ 102,043 $ 41,446 $ 115,918 $ 90,778
Earnings per share:
Basic $2.13 $ .48 $ .55 $ .70 $ .40 $1.27 $ .37 $ .15 $ .42 $ .33
Diluted $2.11 $ .47 $ .54 $ .70 $ .40 $1.26 $ .36 $ .15 $ .42 $ .33
From Current Businesses1:
Revenues and sales $4,502,293 $1,182,269 $1,145,509 $1,130,400 $1,044,115 $3,967,839 $1,024,775 $1,008,575 $ 998,730 $ 935,759
Operating income $1,036,324 $ 272,682 $ 276,227 $ 264,573 $ 222,842 $ 921,358 $ 218,637 $ 237,036 $ 250,015 $ 215,630
Net income $ 478,802 $ 131,588 $ 128,374 $ 119,155 $ 99,685 $ 419,822 $ 98,440 $ 112,986 $ 117,125 $ 91,271
Basic earnings
per share $1.73 $ .48 $ .46 $ .43 $ .36 $1.51 $ .35 $ .41 $ .42 $ .33
Diluted earnings
per share $1.72 $ .47 $ .46 $ .43 $ .36 $1.50 $ .35 $ .40 $ .42 $ .33
<FN>
1Excludes the sold wireline, healthcare, wire and cable operations and the provision to reduce carrying value of certain assets,
gain on disposal of assets and other.
Note: A. Third quarter 1997 net income includes a pretax gain of $34.4 million primarily related to the sale of the Company's
investment in a software company. This gain increased net income by $22.6 million or approximately $.09 per share.
(See Note 10.)
B. Second quarter 1997 operating income includes a pretax write-down of $16.9 million to reflect the fair value less cost to
sell the Company's wire and cable operations. In addition, the Company recorded a pretax gain of $156.0 million from the
sale of a portion of its investment in MCI WorldCom, Inc. common stock. These transactions increased net income by $76.4
million or $.27 per share. (See Notes 9 and 10.)
C. First quarter 1997 net income includes 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
interests in two unconsolidated entities. These transactions increased net income by $10.8 million or $.04 per share.
(See Note 10.)
D. Third quarter 1996 operating income includes pretax write-downs of $45.3 million and $22.0 million in the carrying value
of the Company's wire and cable operations and the information services segment's community banking operations,
respectively. In addition, the information services segment recorded a pretax write-down of $53.0 million to reflect the
net realizable value of certain capitalized software development costs. These transactions decreased net income by $72.7
million or $.25 per share. (See Note 9.)
E. First quarter 1996 net income includes a pretax gain of $15.3 million from the sale of certain wireline properties, $15.8
million of termination fees related to the early retirement of long-term debt and a pretax loss of $1.8 million from the
withdrawal of an investment. These transactions decreased net income by $1.5 million or less than $.01 per share.
(See Note 10.)
F. All adjustments necessary for a fair presentation of results for each period have been included.
</FN>
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 audited
consolidated financial statements, including the notes thereto, for the years
ended December 31, 1997, 1996 and 1995.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes, and future filings by the Company on Form 10-K, Form
10-Q and Form 8-K and future oral and written statements by the Company and its
management may include, certain forward-looking statements, including (without
limitation) statements with respect to anticipated future operating and
financial performance, growth opportunities and growth rates, acquisition and
divestitive opportunities, 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
accounting under Statement of Financial Accounting Standards No. 71 for 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.
32
<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
audited consolidated financial statements for additional information regarding
the merger transaction.
RESULTS OF OPERATIONS
Overview
- --------
In 1997, ALLTEL continued to focus on its strategic priorities and undertook
several initiatives designed to strengthen its communications business and to
expand its position as an information technology provider to the financial
services and communications industries. ALLTEL also provided new or enhanced
services to its customers and pursued new growth opportunities. During 1997, the
Company converged its wireline and wireless businesses into a single operation
capable of delivering to customers one-stop shopping for a full range of
communications products and services. ALLTEL also constructed network facilities
to provide communications services in select areas within its geographically
focused communications markets that are located outside its traditional service
areas. In addition, information services invested in new businesses in order to
expand its service offerings into existing markets. The Company also completed
the sale of certain non-strategic operations and investments within its
information services and product distribution segments. Results for 1997 reflect
the impact of these initiatives. Wireless operating results reflect continued
growth in its customer base. Wireline's operating results remained solid
reflecting steady access line growth. Information services' operating results,
adjusted for the impact of the asset disposals, reflect increased revenues and
sales and operating income primarily due to growth in existing data processing
contracts and the addition of new outsourcing agreements. Product distribution's
operating results reflect the disposal of the wire and cable operations
completed in May 1997.
Revenues and sales increased $305.7 million or 7 percent in 1997, $341.0
million or 9 percent in 1996 and $398.5 million or 11 percent in 1995. Operating
income increased $209.4 million or 26 percent in 1997, decreased $17.9 million
or 2 percent in 1996 and increased $109.9 million or 15 percent in 1995. Growth
in revenues and sales in 1997 was impacted by the sales of HWC and information
services' healthcare operations, while revenues and sales for 1996 and 1995 were
impacted by the sale of certain wireline properties. Operating income for 1997
and 1996 also includes non-recurring charges to write down the carrying value of
certain assets, as further discussed below. Adjusted to exclude the results from
operations for the asset dispositions and to exclude the impact of the asset
write-downs, revenues and sales would have increased $534.5 million or 13
percent in 1997, $450.7 million or 13 percent in 1996 and $391.8 million or 13
percent in 1995, and operating income would have increased $115.0 million or 12
percent in 1997, $142.0 million or 18 percent in 1996 and $121.6 million or 18
percent in 1995.
Net income increased $238.1 million or 68 percent in 1997, decreased $1.7
million or less than 1 percent in 1996 and increased $100.9 million or 40
percent in 1995. Basic and diluted earnings per share increased 68 percent and
67 percent, respectively in 1997, both decreased 1 percent in 1996 and basic and
diluted earnings per share increased 41 percent and 40 percent, respectively in
1995. In addition to the asset write-downs and dispositions, reported net income
and basic and diluted earnings per share were impacted by several
non-extraordinary, non-recurring items discussed below. Excluding the impact in
each year of the asset dispositions, write-downs and non-recurring items, net
income would have increased $59.8 million or 14 percent in 1997, $117.8 million
or 39 percent in 1996 and $39.8 million or 15 percent in 1995. Basic and diluted
earnings per share both would have increased 15 percent in 1997, 39 percent in
1996 and 15 percent in 1995.
33
<PAGE>
Net income and earnings per share adjusted for the asset dispositions,
write-downs and non-extraordinary, non-recurring items are summarized in the
following tables:
<TABLE>
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income, as reported $589,381 $351,256 $352,921
Disposition of healthcare, wire and cable
and wireline operations (838) (6,429) (31,881)
Non-recurring items, net of tax:
- --------------------------------
Provision to reduce carrying value of certain assets 11,744 72,716 -
Gain on disposal of assets (121,485) (8,465) (28,793)
Termination fees on early retirement of long-term debt - 9,946 8,944
-------- -------- --------
Net income, as adjusted $478,802 $419,024 $301,191
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
Basic Diluted
--------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings per share, as reported $2.13 $1.27 $1.28 $2.11 $1.26 $1.27
Disposition of healthcare, wire and cable
and wireline operations - (.02) (.12) - (.02) (.12)
Non-recurring items:
- --------------------
Provision to reduce carrying value
of certain assets .04 .25 - .04 .25 -
Gain on disposal of assets (.44) (.03) (.10) (.43) (.03) (.10)
Termination fees on early retirement
of long-term debt - .04 .03 - .04 .03
----- ----- ----- ----- ----- -----
Earnings per share, as adjusted $1.73 $1.51 $1.09 $1.72 $1.50 $1.08
===== ===== ===== ===== ===== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The net income and earnings per share impact of the asset dispositions,
write-downs and the non-extraordinary, non-recurring items has been presented as
supplemental information only. The non-recurring items reflected in the above
tables are discussed below in reference to the caption in the consolidated
statements of income in which they are reported.
Provision to Reduce Carrying Value of Certain Assets
- ----------------------------------------------------
During 1997, ALLTEL 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.
During 1996, the Company incurred non-cash, pretax charges of $120.3
million to write down the carrying value of certain assets. In accordance with
ALLTEL's plan to dispose of its wire and cable subsidiary, the Company recorded
a pretax write-down of goodwill in the amount of $45.3 million. In addition,
information services recorded a pretax write-down of $53.0 million in the
carrying value of certain assets primarily consisting of capitalized software
development costs. The write-down of software resulted from performing a net
realizability evaluation of software-related products that have been impacted by
changes in software and hardware technologies. Information services also
recorded a pretax write-down of $22.0 million to adjust the carrying value of
its community banking operations to their estimated fair value based upon
projections of future cash flows. The net income impact of these write-downs
resulted in a decrease in net income of $72.7 million or $.25 per share.
Gain on Disposal of Assets, Write-down of Assets and Other
- ----------------------------------------------------------
During 1997, the Company recorded a pretax gain of $37.5 million primarily
related to the sale of its investment in a software company. ALLTEL also
recorded a pretax gain of $156.0 million from the sale of a portion of its
investment in MCI WorldCom, Inc. (formerly WorldCom, Inc.) common stock. In
addition, the Company recorded a pretax gain of $16.2 million from the sale of
information services' healthcare operations; and the Company recorded a pretax
gain of $3.0 million from the divestiture of its ownership interests in two
unconsolidated partnerships. The net income impact from these transactions
resulted in an increase in net income of $121.5 million or $.44 per share ($.43
per share on a diluted basis).
34
<PAGE>
In 1996, the Company recorded a pretax gain of $15.3 million from the
sale of wireline properties in Nevada to Citizens Utilities Company
("Citizens"). ALLTEL also incurred $15.8 million of termination fees related to
the early retirement of $200 million of long-term debt. Additionally, ALLTEL
realized a pretax loss of $1.8 million related to the withdrawal of its
investment in GO Communications Corporation ("GOCC"). The net income impact from
these transactions resulted in a decrease of $1.5 million in net income or $.01
per share.
In 1995, the Company recorded pretax gains totaling $49.8 million from
the disposal of certain wireline properties in Arizona, California, New Mexico,
Oregon, Tennessee, Utah and West Virginia to Citizens. The Company also recorded
an additional pretax write-down of $5.0 million to reflect the net realizable
value of information services' check processing operations. Additionally, ALLTEL
incurred $14.0 million of termination fees related to the early retirement of
$200 million of long-term debt. The net income impact from these transactions
resulted in an increase of $19.8 million in net income or $.07 per share.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Communications-Wireless Operations
- ----------------------------------
(Dollars in millions) 1997 1996 1995
- --------------------------------------------------------------------
Revenues and sales $1,838.5 $1,544.5 $1,198.9
Operating income $ 460.4 $ 370.2 $ 262.0
Total customers 3,523,839 2,951,548 2,126,299
Market penetration rate 10.7% 9.1% 7.7%
Churn 2.0% 2.0% 1.9%
Wireless revenues and sales increased $294.0 million or 19 percent in 1997,
$345.6 million or 29 percent in 1996 and $334.6 million or 39 percent in 1995.
Operating income increased $90.2 million or 24 percent in 1997, $108.2 million
or 41 percent in 1996 and $96.0 million or 58 percent in 1995.
Customer growth continued, as the number of customers increased 19
percent over 1996, compared to annual growth rates in customers of 39 percent in
1996 and 40 percent in 1995. While the rate of customer growth has declined, the
overall market penetration rate (number of customers as a percentage of the
total population in ALLTEL's service areas) has increased.
Wireless revenues and sales increased in all periods primarily due to the
significant growth in ALLTEL's customer base. The acquisition of new wireless
properties and increased ownership interest in existing wireless properties also
contributed to the growth in revenues and sales in all periods. Partially
offsetting the increases in revenues resulting from customer growth and
acquisitions were declines in the average monthly revenue per customer. Average
monthly revenue per customer was $48 for 1997, $52 for 1996 and $56 for 1995.
The decline in average monthly revenue per customer in 1997 reflects the
migration of existing customers to lower rate plans, increased penetration into
lower-usage market segments and a reduction in roaming revenue rates. As a
result of increased current and expected future competition in its service
areas, ALLTEL increased its offering of monthly service plans, which have lower
base access rates and include more packaged airtime minutes. Migration of
existing customers to the newly offered rate plans is expected to continue, and
accordingly, this trend could impact future revenue growth. The declines in
average monthly revenue per customer in 1996 and 1995 primarily reflect
increased penetration into lower-usage market segments and reductions in roaming
revenue rates.
Operating income increased in all periods primarily due to the growth in
revenues and sales and effective management of the cost to acquire new
customers. The cost to acquire new customers represents sales, marketing and
advertising costs and losses on equipment sales for each new cellular customer
added. The cost to acquire each new cellular customer was $285, $295 and $286
for the years ended December 31, 1997, 1996 and 1995, respectively. The decrease
in 1997 was due to a decline in advertising, promotional and other marketing
expenses related to branding in 1996. The increases in operating income for all
periods were also partially offset by higher expenses for depreciation related
to increased capital investment and other operating expenses. Operating income
in 1997 was favorably impacted by a reduction in losses incurred from fraud and
adversely impacted in 1996 by increased losses from fraud. During the third
quarter of 1996, the Company implemented new technologies to control fraud and
enhanced its credit and collection procedures. For each of the past three
calendar quarters, the Company has experienced a decline in losses sustained
from fraud.
35
<PAGE>
Communications-Wireline Operations
- ----------------------------------
(Dollars in millions) 1997 1996 1995
- -------------------------------------------------------------------------
Local service $ 535.9 $ 487.1 $ 474.0
Network access and long-distance 609.4 589.9 643.6
Miscellaneous 88.7 90.4 91.1
-------- -------- --------
Total revenues and sales $1,234.0 $1,167.4 $1,208.7
Operating income $ 450.0 $ 409.3 $ 418.6
Access lines in service 1,789,317 1,681,395 1,623,440
Wireline's revenues and sales increased $66.6 million or 6 percent in 1997,
decreased $41.3 million or 3 percent in 1996 and increased $12.1 million or 1
percent in 1995. Operating income increased $40.7 million or 10 percent in 1997,
decreased $9.3 million or 2 percent in 1996 and increased $18.4 million or 5
percent in 1995. As previously discussed, ALLTEL sold certain wireline
properties in eight states to Citizens during 1996 and 1995. The sale of
properties to Citizens resulted in decreases in revenues and sales and operating
income in 1996 of $88.4 million and $31.7 million, respectively, while in 1995,
the disposition of properties resulted in decreases in revenues and sales and
operating income of $27.2 million and $7.2 million, respectively. Excluding the
impact of the sale of properties to Citizens, wireline's revenues and sales
would have increased $47.1 million or 4 percent in 1996 and $39.3 million or 4
percent in 1995, and operating income would have increased $22.4 million or 6
percent in 1996 and $25.6 million or 7 percent in 1995.
Local service revenues increased $48.8 million or 10 percent in 1997,
$13.1 million or 3 percent in 1996 and $20.8 million or 5 percent in 1995. The
increases in local service revenues in all periods reflect growth in customer
access lines and growth in enhanced services and other special feature revenues.
Customer access lines increased 6 percent in 1997, primarily reflecting
increased sales of residential and second access lines. Local service revenues
for 1997 also reflect the expansion of local calling areas in North Carolina and
Georgia, which reclassified certain revenues from network access and
long-distance revenues to local service revenues. The increases in local service
revenues in 1996 and 1995 resulting from growth in both customer access lines
and enhanced services and other special feature revenues were partially offset
by the property sales to Citizens. Future access line growth is expected to
result from population growth in the Company's service areas, from sales of
second access lines and through strategic acquisitions.
Network access and long-distance revenues increased $19.5 million or 3
percent in 1997, compared to decreases of $53.7 million or 8 percent in 1996 and
$10.4 million or 2 percent in 1995. The increase in 1997 primarily reflects
higher volumes of access usage, partially offset by the reclassification of
certain revenues to local service revenues, as previously discussed. The
decrease in network access and long-distance revenues in 1996 primarily reflects
the sale of properties to Citizens, partially offset by higher volumes of access
usage. Network access and long-distance revenues decreased in 1995 primarily due
to the impact of certain regulatory commission actions designed to reduce
earnings levels in California and Ohio and due to the sale of wireline
properties to Citizens.
Miscellaneous revenues decreased $1.7 million or 2 percent in 1997,
decreased $0.7 million or 1 percent in 1996 and increased $1.7 million or 2
percent in 1995. The decrease in 1997 primarily reflects a reduction in
intrastate billing and collection revenues. The decrease in miscellaneous
revenues in 1996 primarily reflects the sale of properties to Citizens,
partially offset by increases in directory advertising revenues. The increase in
miscellaneous revenues in 1995 was primarily due to increases in directory
advertising revenues, partially offset by the sale of properties to Citizens.
Total wireline operating expenses increased $25.9 million or 3 percent in
1997, compared to decreases of $32.0 million or 4 percent in 1996 and $6.3
million or 1 percent for 1995. Operating expenses for 1997 reflect increases in
depreciation, network-related expenses, increased data processing charges and
additional costs incurred by ALLTEL in consolidating its customer service
operations. Operating expenses decreased in 1996 and 1995 by approximately $56.7
million and $20.0 million, respectively, as a result of the sale of properties
to Citizens. The decrease in operating expenses in 1996 attributable to the sale
of properties to Citizens was partially offset by increased expense for
maintenance and repair of cable, digital electronic switching and circuit
equipment and an increase in depreciation expense. Operating expenses decreased
in 1995 primarily due to the sale of properties to Citizens, lower maintenance
costs for buildings and electro-mechanical switching equipment and decreases in
call completion and other general and administrative expenses. These decreases
were partially offset by increases in depreciation, maintenance and repair
expenses and information services and engineering charges.
36
<PAGE>
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
(the "Appellate Court") 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 Appellate Court's decision be reversed. 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.
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,
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
37
<PAGE>
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.
Communications-Emerging Businesses
- ----------------------------------
(Millions) 1997 1996 1995
- -----------------------------------------------------------
Revenues and sales $ 52.0 $10.2 $ -
Operating loss $(22.1) $(9.2) $ -
Emerging businesses primarily consist of the Company's long-distance operations
which began providing service to customers in May 1996. During 1997, the Company
also began to offer competitive local access and Internet access services.
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. As a competitive local exchange carrier ("CLEC"), the
Company offers local access services to business customers in select markets
outside its traditional service areas. During 1998, the Company began offering
network management services to business customers in select markets. In March
1998, the Company also began providing Personal Communications Services ("PCS")
service in Jacksonville, Florida, and ALLTEL expects to begin offering PCS
service in other markets in the near future.
Revenues and sales increased in 1997 primarily due to growth in the
long-distance operations. The operating losses sustained by emerging businesses
reflect the start-up nature of these operations.
Information Services Operations
- -------------------------------
(Millions) 1997 1996 1995
- --------------------------------------------------------------
Revenues and sales $974.2 $960.1 $929.7
Operating income $144.9 $ 65.4 $130.6
Information services' revenues and sales increased $14.1 million or 1 percent in
1997, $30.4 million or 3 percent in 1996 and $66.0 million or 8 percent in 1995.
Growth in revenues and sales for 1997 was impacted by the sale of healthcare
operations completed in January 1997. Excluding the sold healthcare operations,
information services' revenues and sales would have increased $123.7 million or
15 percent in 1997.
Excluding the impact of the sold healthcare operations, revenues and
sales increased in 1997 primarily due to growth in the financial services and
telecommunications businesses, while revenues and sales increased in 1996 and
1995 primarily due to growth in the telecommunications operations. The increases
in revenues and sales for all periods reflect volume growth in existing
contracts, the addition of new outsourcing agreements and additional software
maintenance and service revenues. Growth in revenues and sales for 1996 was also
impacted by a reduction in revenues earned on an outsourcing agreement accounted
for under the percentage-of-completion method, while revenue growth for 1996 and
1995 was impacted by the sale of the check processing operations completed in
September 1995. Additionally, the increases in revenues and sales in all periods
were partially offset by lost operations from contract terminations due to the
merger and consolidation activity in the domestic financial services market and
by a reduction in revenues collected for
38
<PAGE>
early termination of facilities management contracts. Although the number of
mortgage loans serviced increased in all periods, growth in the related
processing revenues has occurred at a slower rate due to consolidations in the
mortgage industry, which have resulted in lower incremental revenues realized on
a per-loan basis. The domestic financial services industry continues to
experience consolidation due to mergers.
Operating income increased $79.5 million or 122 percent in 1997,
decreased $65.2 million or 50 percent in 1996 and increased $1.8 million or 1
percent in 1995. Operating income for 1996 includes the impact of the $75.0
million write-down in the carrying value of software and certain other assets,
as previously discussed. Excluding the impact of these write-downs and the sold
healthcare operations, operating income would have increased $6.2 million or 5
percent in 1997 and $16.1 million or 13 percent in 1996. Operating income for
1997 reflects the growth in revenues and sales noted above, as well as improved
profit margins realized from the international financial services business,
partially offset by the loss of operations due to the sale of the healthcare
business. Growth in operating income for 1997 was adversely impacted by start-up
and product development costs associated with several new business initiatives
designed to expand the Company's service offerings in existing markets. Included
in these initiatives are the Enterprise Network Services, Professional Services
and Call Center Solutions business units. Excluding the impact of the asset
write-downs and dispositions, the increase in operating income in 1996 reflects
the increase in revenues and sales. Operating income in 1996 was also impacted
by start-up costs associated with the Enterprise Network Services business unit.
The increase in operating income in 1995 reflects the growth in revenues and
sales, partially offset by lower margins realized on international software
sales due to increased costs to procure and support these sales. Growth in
operating income for all periods was adversely impacted by the loss of
higher-margin operations due to contract terminations, reductions in fees
collected on the early termination of facilities management contracts and an
increase in operating costs, corresponding with the growth in revenues and
sales. Depreciation and amortization expense increased in 1996 and 1995 due to
the acquisition of additional data processing equipment and an increase in the
amortization of internally developed software.
Product Distribution Operations
- -------------------------------
(Millions) 1997 1996 1995
- ------------------------------------------------------------------
Revenues and sales $360.1 $452.6 $448.4
Operating income $ 13.9 $ 23.4 $ 27.1
Product distribution's revenues and sales decreased $92.5 million or 20 percent
in 1997, compared to increases of $4.2 million or 1 percent in 1996 and $11.4
million or 3 percent in 1995. Operating income decreased $9.5 million or 41
percent in 1997 and $3.7 million or 14 percent in 1996 and increased $3.4
million or 14 percent in 1995.
The decrease in revenues and sales for 1997 primarily reflects the sale
of HWC. Sales of telecommunications and data products increased $21.1 million in
1997 primarily reflecting increased sales to affiliated and non-affiliated
customers and additional retail sales of these products at the Company's counter
showrooms. Revenues and sales increased in 1996 primarily due to growth in sales
of telecommunications and data products to non-affiliated customers, including
increased retail sales of these products at counter showrooms. Sales of
telecommunications and data products to affiliates decreased $18.1 million in
1996, primarily reflecting the sale of properties to Citizens and an overall
reduction in capital expenditures by the remaining wireline subsidiaries, as
compared to 1995. Sales of electrical wire and cable products also decreased
slightly in 1996. The increase in revenues and sales in 1995 was primarily due
to growth in the sale of telecommunications and data products.
Operating income decreased in 1997 primarily due to the decrease in
revenues and sales noted above. Lower gross profit margins realized on the sale
of telecommunications and data products due to increased competition and a
reduction in product cost rebates received from vendors also impacted operating
income growth in 1997. In addition, increased selling expenses also impacted
operating income growth in 1997. The decrease in operating income in 1996
primarily reflects lower profit margins realized on the sale of electrical wire
and cable products. During 1996, gross profit margins for electrical wire and
cable products were adversely impacted by sharp declines in copper prices, as
compared to the prior year. Gross profit margins were also impacted by increased
competition, primarily from direct sales by manufacturers. Operating income
increased in 1995 primarily due to the increase in revenues and sales previously
noted, partially offset by an increase in selling-related expenses. Increased
profit margins on electrical wire and cable products, primarily resulting from
an increase in copper prices, also contributed to the growth in operating income
in 1995.
39
<PAGE>
Other Operations
- ----------------
(Millions) 1997 1996 1995
- ----------------------------------------------------------------
Revenues and sales $118.9 $137.4 $139.7
Operating income $ 8.0 $ 10.5 $ 6.3
Other operations' revenues and sales decreased $18.5 million or 13 percent in
1997, $2.3 million or 2 percent in 1996 and $24.6 million or 15 percent in 1995.
Operating income decreased $2.5 million or 24 percent in 1997, increased $4.2
million or 67 percent in 1996 and decreased $8.2 million or 57 percent in 1995.
Revenues and sales decreased in 1997 due to a reduction in the number of
directories published. Compared to 1996, 43 fewer directories were published in
1997. Revenues and sales decreased in 1996 due to a reduction in directory
publishing revenues, primarily resulting from the loss of several large
independent directory contracts. The decrease in revenues and sales in 1996 was
partially offset by the receipt of a one-time settlement from GTE Directories
Corporation ("GTE Directories") for reimbursement of certain computer software
conversion costs incurred by the Company subsequent to its purchase of GTE
Directories' independent directory operations. Revenues and sales decreased in
1995 as a result of a reduction in the number of directories published and due
to a prospective change in accounting in late 1993, whereby the Company began
recognizing all revenues and expenses related to a directory in the month of
publication, instead of recognizing the revenues and expenses ratably over a
12-month period. As a result of this change, revenues and sales in 1994 included
additional revenues from directories accounted for under the previous method
adding to the decrease in 1995.
The decrease in operating income in 1997 primarily reflects the decrease
in directory publishing revenues noted above. The increase in operating income
in 1996 reflects the impact of the one-time settlement received from GTE
Directories, elimination of certain amounts paid to GTE Directories and improved
collection experience related to directory advertising revenues. The Company's
publishing subsidiary had previously contracted with GTE Directories to receive
directory advertising sales support, printing and other services. In 1996, these
sales and service functions were performed at a lower cost internally by the
Company's publishing subsidiary. Operating income decreased in 1995 primarily
due to the decrease in revenues and sales previously noted. Operating income for
1995 also reflects lower margins realized on affiliate directories due to
increased fees for publishing rights paid to affiliates under terms of a new
contract.
Interest Expense
- ----------------
Interest expense increased $24.6 million or 10 percent in 1997, decreased $35.5
million or 13 percent in 1996 and increased $37.1 million or 16 percent in 1995.
The increase in interest expense in 1997 reflects the issuance of $200 million
of debentures completed in March 1997 and the issuance of $122 million of
subordinated promissory notes issued in November 1996 in connection with an
acquisition. The decrease in interest expense in 1996 primarily reflects the two
debt refinancings completed in March 1996 and October 1995, which resulted in
the retirement of three high-cost debt issues. Interest expense in 1996 also
reflects reduced borrowing rates resulting from the recapitalization of
360 at the time of its spinoff from Sprint Corporation. (See note 2 to
the audited financial statements for additional information regarding
360's spinoff). The increase in interest expense in 1995 reflects
increased borrowing levels including amounts outstanding under the Company's
revolving credit agreement, partially offset by the reduction in interest
expense resulting from the refinancing of $200 million of debentures completed
in October 1995.
Income Taxes
- ------------
Income tax expense increased $167.1 million or 73 percent in 1997, decreased
$15.1 million or 6 percent in 1996 and increased $72.1 million or 42 percent in
1995. The changes in income tax expense for all periods primarily reflect the
tax-related impact of the various one-time, non-recurring items, previously
discussed. Excluding the impact on tax expense of these transactions in each
year, income tax expense would have increased $35.7 million or13 percent in
1997, $44.2 million or 19 percent in 1996 and $39.3 million or 20 percent in
1995, consistent with the overall growth in ALLTEL's earnings from continuing
operations before one-time, non-recurring items.
40
<PAGE>
Average Common Shares Outstanding
- ---------------------------------
The average number of common shares outstanding decreased slightly in 1997.
During 1997, 872,000 shares were issued in connection with acquisitions, common
shares issued through stock option plans amounted to 618,000 shares, and
preferred stock and debentures were converted into 67,000 shares. These
increases were offset by the Company's repurchase on the open market of
6,594,000 of its common shares. The average number of common shares outstanding
increased slightly in 1996. During 1996, 4,810,000 shares were issued in
connection with acquisitions, common shares issued through stock option plans
amounted to 439,000 shares, and preferred stock and debentures were converted
into 28,000 shares. These increases were offset by the Company's repurchase on
the open market of 2,480,000 of its common shares. The average number of common
shares outstanding increased slightly in 1995. During 1995, common shares issued
through stock option plans amounted to 1,227,000 shares, and preferred stock and
debentures were converted into 60,000 shares.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
(Dollars in millions,
except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------
Cash provided from operations $1,181.4 $1,189.8 $ 844.5
Capital expenditures $ 826.9 $ 763.8 $ 846.7
Total capital structure $6,471.0 $6,059.8 $5,260.9
Percent equity to total capital 42.1% 42.4% 37.0%
Interest coverage ratio 3.96x 3.45x 3.07x
Book value per share $9.91 $9.16 $7.00
Cash provided from operations continues to be ALLTEL's primary source of
liquidity. The increase in cash provided from operations for 1996 primarily
reflects growth in earnings of the Company and changes in working capital
requirements mainly attributable to timing differences in the payment of
accounts payable. Cash provided from operations increased in 1995 primarily due
to growth in earnings of the Company, partially offset by an increase in working
capital requirements.
Capital expenditures increased in 1997 primarily due to the start-up
construction of ALLTEL's PCS network and due to construction of additional
network facilities. Capital expenditures decreased in 1996 and 1995 primarily as
a result of the sale of wireline properties and a reduction in capital
expenditures by the remaining wireline subsidiaries. The Company financed the
majority of its capital expenditures through the internal generation of funds in
each of the past three years. Capital expenditures were incurred to continue to
modernize and upgrade ALLTEL's telecommunications network, to invest in
equipment to provide new telecommunications services, such as PCS, Internet
access and long-distance, and to expand into existing information services
markets. 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 1997 include a cash outlay of
$146.5 million related to the acquisition of PCS licensing rights. ALLTEL
acquired PCS licensing rights for 73 markets in 12 states. The PCS licenses
increase the size of ALLTEL's potential wireless customer base to 50.6 million.
Cash flows from investing activities for 1997 also include a total cash outlay
of $124.3 million for additional investments in cellular partnerships in which
the Company owns a minority interest. Included in this total is a cash outlay of
$80 million for a 25 percent ownership interest in a cellular partnership
serving the Orlando, Florida and Richmond, Virginia markets. Cash flows from
investing activities for 1997 also include total cash outlays of $112.9 million
for various acquisitions, including a wireline property in Georgia, two wireless
properties in Alabama and the purchase of additional ownership interests in 16
wireless properties in which the Company owns a controlling interest. Cash flows
from investing activities for 1996 include a cash outlay of $352.5 million
primarily 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 1997 include proceeds of $185.9
million from the sale of a portion of ALLTEL's investment in MCI WorldCom, Inc.
common stock. Additionally, cash flows from investing activities for 1997
include proceeds of $202.3 million received from the sale of property,
41
<PAGE>
principally consisting of three non-strategic operations. In September 1997, the
Company received cash proceeds of $48.7 million in connection with the sale of
an investment in a software company. In May 1997, ALLTEL completed the sale of
its wire and cable subsidiary, HWC, for approximately $45.0 million in cash; and
in January 1997, the Company received cash proceeds of $104.9 million in
connection with the sale of its healthcare operations. The proceeds from the
sale of assets were used primarily to reduce borrowings under the Company's
revolving credit agreement. Cash flows from investing activities for both 1996
and 1995 include proceeds totaling $38.7 million and $212.9 million,
respectively, which were received principally from the sale of certain wireline
properties to Citizens, as previously discussed. Cash flows from investing
activities for 1996 also include proceeds of $30.4 million related to the
withdrawal of ALLTEL's investment in GOCC.
Cash flows from financing activities include dividend payments and the
repurchase by ALLTEL of its common stock. Common and preferred dividend payments
amounted to $206.3 million in 1997, $198.1 million in 1996 and $182.3 million in
1995. The increases in each year primarily reflect growth in the annual dividend
rates on ALLTEL's common stock. Under a share repurchase program initiated by
the Company in 1996 and expanded in 1997, the Company repurchased 6.6 million
and 2.4 million of its shares at a total cost of $212.0 million and $79.0
million in 1997 and 1996, respectively. The Company believes it has adequate
internal and external capital resources available to finance its ongoing
operating requirements including capital expenditures, business development and
the payment of dividends.
At December 31, 1997, ALLTEL and 360 had separate lines of credit
under revolving credit agreements. Borrowings outstanding under these agreements
at December 31, 1997, 1996 and 1995 were $847.9 million, $763.7 million and
$151.5 million, respectively. The weighted average interest rate on borrowings
outstanding under these agreements at December 31, 1997, was 6.5 percent. Upon
completion of its merger with 360, ALLTEL refinanced the borrowings
outstanding under 360's revolving credit agreement (approximately $495
million) through ALLTEL's existing credit facilities, and 360's
revolving credit agreement was terminated. Additional borrowings under the
revolving credit agreements in 1997 were incurred primarily to fund the stock
repurchase program and to acquire the PCS licensing rights. As previously noted,
proceeds from the sales of the wire and cable and healthcare operations and from
the sale of investments in a software company and MCI WorldCom, Inc. common
stock were used primarily to reduce borrowings outstanding under the revolving
credit agreements.
Long-term debt issued was $282.6 million in 1997, $1,948.9 million in
1996 and $376.6 million in 1995, while retirements of long-term debt amounted to
$42.6 million in 1997, $1,642.5 million in 1996 and $277.6 million in 1995.
Long-term debt issued in 1997 includes the net increase in revolving credit
agreement borrowings from December 31, 1996 and the issuance of $200 million of
7.6 percent notes. In 1996, ALLTEL issued $300 million of 7.0 percent debentures
to refinance $200 million of 9.5 percent debentures and to reduce borrowings
under its revolving credit agreement. Also in 1996, in connection with its
spinoff from Sprint, 360 repaid $1.4 billion of intercompany debt. The
repayment was funded by proceeds from the issuance of $900 million of senior
notes and from $500 million of initial borrowings under 360's revolving
credit agreement. In addition, the Company issued $122 million of subordinated
promissory notes in connection with the ICN acquisition. In 1995, the Company
issued $200 million of 6.75 percent debentures to refinance two existing
high-cost debt issues. The repayment of intercompany debt to Sprint and the
refinanced debt issue represent substantially all of the long-term debt retired
in 1996, while the two refinanced debt issues represent the majority of
long-term debt retired in 1995. In connection with the debt refinancings
completed in 1996 and 1995, the Company was required to pay termination fees in
the amount of $15.8 million and $14.0 million, respectively. The remaining
borrowings for 1996 and 1995 were used for investments, acquisitions and other
general corporate requirements. The loans were obtained through the private
placement market, public issuance and the Rural Utilities Service financing
programs for wireline companies. The Company and its subsidiaries expect these
sources to continue to be available for future borrowings. Following its merger
with 360, ALLTEL's bond ratings with Moody's Investors Service and
Standard & Poor's Corporation were A2 and A-, respectively, compared to A2 and
A+, respectively, prior to the merger. (See note 5 to the consolidated financial
statements for additional information regarding the Company's long-term debt.)
Other Financial Information
- ---------------------------
Management is currently not aware of any environmental matters which in the
aggregate would have a material adverse effect on the financial condition or
results of operations of the Company.
42
<PAGE>
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
("SFAS 130"). This pronouncement, effective for calendar year 1998 financial
statements, requires comprehensive income and its components to be reported
either in a separate financial statement, combined and included with the
statement of income or included in a statement of changes in stockholders'
equity. Comprehensive income equals the total of net income and all other
non-owner changes in equity. For ALLTEL, comprehensive income will equal its
reported consolidated net income plus the change from the previously reported
period in the unrealized holding gain on its investment in MCI WorldCom, Inc.
common stock. Currently, this unrealized holding gain, net of tax, is reported
in the Company's consolidated balance sheets as a separate component of
stockholders' equity. Accordingly, the adoption of SFAS 130 will require the
Company to modify the presentation of information already disclosed in the
consolidated financial statements.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"). This pronouncement, also effective for calendar year
1998 financial statements, requires reporting segment information consistent
with the way executive management of an entity disaggregates its operations
internally to assess performance and make decisions regarding resource
allocations. Among information to be disclosed, SFAS 131 requires an entity to
report a measure of segment profit or loss, certain specific revenue and expense
items and segment assets. SFAS 131 also requires reconciliations of total
segment revenues, total segment profit or loss and total segment assets to the
corresponding amounts shown in the entity's consolidated financial statements.
The Company does not expect that the adoption of SFAS 131 will significantly
change the number or designation of the reportable segments currently disclosed
in its consolidated financial statements.
Market Risk
- -----------
The Company is exposed to market risk from changes in marketable equity security
prices and from changes in interest rates on its credit facility and long-term
debt obligations that impact the fair value of these obligations.
At December 31, 1997, investments of the Company are recorded at fair
value of $1,228.7 million. The fair value of investments is based on the quoted
market prices and the carrying value of investments for which there is no quoted
market price. Of the total investments, marketable equity securities, consisting
principally of the Company's investment in MCI WorldCom, Inc. common stock,
amounted to $575.5 million and included unrealized holding gains of $300.7
million. These marketable equity securities held by the Company have exposure to
price risk, which is estimated as the potential loss in fair value due to a
hypothetical 10 percent adverse change in quoted market prices, and would amount
to a decrease in the recorded value of the investments of approximately $57.6
million.
The Company has no material future earnings or cash flow exposures from
changes in interest rates on its long-term debt obligations, as substantially
all of the Company's long-term debt obligations are fixed rate obligations. At
December 31, 1997 the fair value of the Company's long-term debt was estimated
to be $3,804.6 million based on the overall weighted rate of debt of 7.1 percent
and an overall weighted maturity of 9.5 years compared to terms and rates
currently available in the long-term markets. Such fair value exceeded the
carrying value of long-term debt by $105.1 million. Market risk is estimated as
the potential decrease in the fair value of the Company's long-term debt
resulting from a hypothetical increase of 71 basis points (10 percent of the
Company's overall weighted average borrowing rate). Such an increase in interest
rates would result in approximately a $114 million decrease in the fair value of
the Company's long-term debt.
Although the Company conducts business in foreign countries, the
international operations are not material to the Company's operations, financial
condition and liquidity. Additionally, the foreign currency translation gains
and losses were not material to the Company's results of operations for the year
ended December 31, 1997. Accordingly, the Company is not currently subject to
material foreign currency exchange rate risk from the effects that exchange rate
movements of foreign currency would have on the Company's future costs or on
future cash flows it would receive from its foreign subsidiaries. To date, the
Company has not entered into any significant foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange rates. The Company is
evaluating the future use of such financial instruments.
43
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
We consent to the incorporation by reference in the Post-Effective Amendment
No. 2 to Form S-8 Registration Statement for the ALLTEL Corporation Incentive
Stock Option Plan (No. 2-99523); Form S-8 Registration Statement for
Systematics, Inc. 1981 Incentive Stock Option Plan (No. 33-35343); Form S-8
Registration Statement for the ALLTEL Corporation 1991 Stock Option Plan (No.
33-48476); Form S-8 Registration Statement for the ALLTEL Corporation 1994 Stock
Option Plan (No. 33-54175); Form S-8 Registration Statement for the ALLTEL
Corporation Thrift Plan (No. 33-56291); and Form S-8 Registration Statement
for the ALLTEL Corporation 1994 Stock Option Plan for Employees (No. 33-65199)
of our report dated March 6, 1998, with respect to the consolidated financial
statements of 360 Communications Company included in the ALLTEL Corporation
Current Report (Form 8-K) for the year ended December 31, 1997.
/s/ERNST & YOUNG LLP
Chicago, Illinois
December 1, 1998
44
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
We hereby consent to the incorporation by reference of our report dated
February 13, 1998, with respect to the GTE Mobilnet of South Texas Limited
Partnership, included in this Form 8-K, into ALLTEL Corporation's
previously filed Registration Statements, File Nos. 2-99523, 33-35343,
33-48476, 33-54175, 33-56291 and 33-65199. Such GTE Mobilnet of South Texas
Limited Partnership financial statements are not included separately in this
Form 8-K.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 1, 1998
45
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
We hereby consent to the incorporation by reference of our report dated
January 16, 1998, with respect to the Chicago SMSA Limited Partnership, included
in this Form 8-K, into ALLTEL Corporation's previously filed Registration
Statements, File Nos. 2-99523, 33-35343, 33-48476, 33-54175, 33-56291 and
33-65199. Such Chicago SMSA Limited Partnership financial statements are not
included separately in this Form 8-K.
/s/ARTHUR ANDERSEN LLP
Chicago, Illinois
December 1, 1998
46
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
We consent to the incorporation by reference in the registration statements of
ALLTEL Corporation on Forms S-8 (File Nos. 2-99523, 33-35343, 33-48476,
33-54175, 33-56291 and 33-65199) of our report dated February 13, 1998, on our
audits of the financial statements of the New York SMSA Limited Partnership (the
"Partnership") as of and for the years ended December 31, 1997 and 1996, which
report is included in this current report on Form 8K dated December 2, 1998.
/s/PricewaterhouseCoopers LLP
New York, New York
December 2, 1998
47
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
We consent to the incorporation by reference in the registration statements of
ALLTEL Corporation on Form S-8 (File Nos. 2-99523, 33-35343, 33-48476, 33-54175,
33-56291 and 33-65199) of our report dated March 6, 1998, on our audit of the
consolidated financial statements of the Orlando SMSA Limited Partnership as of
December 31, 1997 and for the year then ended, which report is included in this
Form 8-K.
/s/PricewaterhouseCoopers LLP
Atlanta, Georgia
December 1, 1998
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FILED IN THIS FORM 8-K.
</LEGEND>
<CIK> 0000065873
<NAME> ALLTEL CORPORATION
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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<RECEIVABLES> 723,999
<ALLOWANCES> 25,164
<INVENTORY> 85,631
<CURRENT-ASSETS> 880,791
<PP&E> 7,280,791
<DEPRECIATION> 2,901,382
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<CURRENT-LIABILITIES> 1,004,492
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5,625
9,155
<COMMON> 273,411
<OTHER-SE> 2,435,241
<TOTAL-LIABILITY-AND-EQUITY> 8,570,405
<SALES> 511,329
<TOTAL-REVENUES> 4,545,140
<CGS> 494,537
<TOTAL-COSTS> 3,524,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16,874
<INTEREST-EXPENSE> 261,770
<INCOME-PRETAX> 984,025
<INCOME-TAX> 394,644
<INCOME-CONTINUING> 589,381
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<EXTRAORDINARY> 0
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<NET-INCOME> 589,381
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