UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 30, 1998
ALLTEL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-4996 34-0868285
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or Identification No.)
organization)
One Allied Drive, Little Rock, Arkansas 72202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501)905-8000
------------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
The registrant hereby amends and supplements the following items of
its Current Report on Form 8-K dated June 30, 1998:
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(a) The unaudited balance sheet of 360 Communications Company
("360") as of June 30, 1998 and the unaudited consolidated
statements of operations and cash flows for the three and six
months ended June 30, 1998 and 1997 are attached hereto
as Exhibit 99.2.
The audited consolidated balance sheets of 360 as of
December 31, 1997 and 1996 and the consolidated statements
of operations and cash flows for the fiscal years ended
December 31, 1997, 1996 and 1995 are attached hereto as
Exhibit 99.3.
(b) The pro forma combined condensed statements of income of
ALLTEL and 360 for the six months ended June 30, 1998 and for
the years ended December 31, 1997, 1996 and 1995 and the pro
forma combined condensed balance sheet of ALLTEL and 360 as
of June 30, 1998 are attached hereto as Exhibit 99.4.
The unaudited pro forma combined condensed statements give
effect to the Merger using the pooling-of-interests method of
accounting. The unaudited pro forma combined condensed
financial statements have been prepared from, should be read
in conjunction with and are qualified in their entirety by
reference to the historical consolidated financial statements
and notes thereto of ALLTEL and 360. ALLTEL's historical
consolidated financial statements and notes thereto are
incorporated by reference to ALLTEL's Annual Report on Form
10-K for the year ended December 31, 1997.
The unaudited pro forma combined condensed financial
information gives effect to the Merger as if it had been
consummated, with respect to statements of income, at the
beginning of the periods presented, or, with respect to the
balance sheet, as of the date presented. The unaudited pro
forma combined condensed financial information has been
included for illustrative purposes only and is not
necessarily indicative of the results of operations or
financial position that would have occurred had the Merger
been consummated at the dates indicated, nor is it
necessarily indicative of future results of operations or
financial position of the merged companies.
No adjustment has been included in the pro forma statements for
any anticipated cost savings or other synergies. ALLTEL expects
to incur certain non-recurring expenses related to the merger,
presently estimated to be $120,000,000 ($105,000,000 after
tax). These expenses would include, but not be limited to,
professional fees, fees of financial advisors, retention
compensation expenses, and similar expenses. Although ALLTEL
believes this estimate of non-recurring expenses is
accurate, certain material additional costs may be incurred
in connection with the Merger. Merger related expenses will
be recorded in the third quarter of 1998. In addition, ALLTEL
is developing a plan to integrate the operations of 360 after
the Merger. In connection with that plan, ALLTEL anticipates
that certain non-recurring charges will be incurred in
connection with such integration. ALLTEL cannot identify the
timing, nature and amount of such charges at this time.
(c) 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
September 2, 1998
3
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits Page Number
------ ----------------------- -----------
23.1 Consent of Ernst & Young LLP
(Financial statements of 360 Communications Company) 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/A) 45
23.3 Consent of Arthur Andersen LLP
(Financial statements of Chicago SMSA Limited
Partnership are not included separately in
this Form 8-K/A) 46
23.4 Consent of PricewaterhouseCoopers LLP
(Financial statements of New York SMSA Limited
Partnership are not included separately in
this Form 8-K/A) 47
23.5 Consent of PricewaterhouseCoopers LLP
(Financial statements of Orlando SMSA Limited
Partnership are not included separately in
this Form 8-K/A) 48
99.2 Unaudited financial statements of 360
Communications Company ("360") for the interim
periods as follows:
(i) Unaudited consolidated balance sheet
as of June 30, 1998 6
(ii) Unaudited consolidated statements of
operations for the three and six months
ended June 30, 1998 and 1997 7
(iii) Unaudited consolidated statements of cash
flows for the six months ended June 30,
1998 and 1997 8
(iv) Notes to unaudited interim consolidated
financial statements 9-10
99.3 Audited financial statements of 360
Communications Company for the years ended
December 31, 1997, 1996 and 1995:
(i) Reports of Independent Public Accountants 12-16
(ii) Audited consolidated balance sheets as of
December 31, 1997 and 1996 17
(iii) Audited consolidated statements of operations
for the years ended December 31, 1997, 1996
and 1995 18
(iv) Audited consolidated statements of cash flows
for the years ended December 31, 1997,
1996 and 1995 19
(v) Audited consolidated statements of shareowners'
equity for the years ended December 1997,
1996 and 1995 20
(vi) Notes to audited consolidated financial
statements 21-36
99.4 Unaudited Pro Forma Combined Condensed Financial
Statements:
(i) Pro forma condensed balance sheet of ALLTEL
and 360 as of June 30, 1998 38
(ii) Pro forma combined condensed statements of
income of ALLTEL and 360 for the six months
ended June 30, 1998 and for the years ended
December 31, 1997, 1996 and 1995 39-42
(iii) Notes to unaudited pro forma combined
condensed financial statements 43
4
Exhibit 99.2
360 Communications Company
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS
for the interim periods ended June 30, 1998 and 1997
and
UNAUDITED CONSOLIDATED BALANCE SHEET
as of June 30, 1998
5
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
Current Assets (Unaudited)
Cash and cash equivalents $ 13,235 $ 3,471
Accounts receivable, less allowances
of $5,927 and $6,602, respectively 115,082 100,472
Other receivables 29,120 26,981
Unbilled revenue 39,855 35,618
Inventory 25,219 34,354
Deferred income taxes 16,628 15,220
Prepaid expenses and other 8,592 14,051
----------- -----------
Total current assets 247,731 230,167
----------- -----------
Property, plant and equipment 1,832,269 1,750,097
Less: accumulated depreciation 646,911 561,140
----------- -----------
Property, plant and equipment, net 1,185,358 1,188,957
----------- -----------
Investments in unconsolidated entities 477,661 459,669
Intangibles, net 1,032,024 1,045,007
Other assets 30,700 18,124
----------- -----------
Total assets $ 2,973,474 $ 2,941,924
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 165,952 $ 241,127
Short-term borrowings 7,200 18,150
Advance billings 33,844 31,779
Accrued taxes 36,213 17,846
Accrued agent commissions 10,380 11,923
Other 36,112 46,386
----------- -----------
Total current liabilities 289,701 367,211
----------- -----------
Long-term debt 1,823,342 1,825,347
----------- -----------
Deferred Credits and Other Liabilities
Deferred income taxes 84,772 60,470
Postretirement and other benefit obligations 6,659 6,347
----------- -----------
Total deferred credits and other liabilities 91,431 66,817
----------- -----------
Minority interests in consolidated entities 171,972 173,248
----------- -----------
Shareowners' Equity
Common stock ($.01 par value: 1,000,000,000 shares
authorized; issued and outstanding 121,443,845
shares in 1998 and 121,267,127 shares in 1997) 1,233 1,233
Additional paid-in capital 777,533 774,938
Accumulated deficit (148,199) (229,437)
Treasury Stock, at cost (1,920,303 shares in 1998
and 2,097,021 shares in 1997) (33,539) (37,433)
----------- -----------
Total shareowners' equity 597,028 509,301
----------- -----------
Total liabilities and shareowners' equity $ 2,973,474 $ 2,941,924
=========== ===========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
</TABLE>
6
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------- ------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Operating Revenues
Service revenues $385,072 $328,834 $726,647 $622,804
Equipment sales 13,541 11,428 26,801 24,304
-------- -------- -------- --------
Total operating revenues 398,613 340,262 753,448 647,108
-------- -------- -------- --------
Operating Expenses
Cost of service 43,757 40,283 84,549 81,772
Cost of equipment sales 25,430 24,394 53,864 52,843
Other operations expense 16,947 17,012 34,820 32,005
Sales, marketing and advertising expenses 66,937 55,673 123,323 116,254
General, administrative and other expenses 90,622 80,207 172,295 153,299
Depreciation and amortization 50,729 46,833 100,562 92,362
-------- -------- -------- --------
Total operating expenses 294,422 264,402 569,413 528,535
-------- -------- -------- --------
Operating Income 104,191 75,860 184,035 118,573
Interest expense (33,581) (32,843) (66,840) (64,033)
Minority interests in net income
of consolidated entities (17,911) (16,208) (31,558) (25,917)
Equity in net income of
unconsolidated entities 16,276 14,755 32,450 27,918
Other income (expense), net 1,060 (27) 31,596 2,987
-------- -------- -------- --------
Income before income taxes 70,035 41,537 149,683 59,528
Income tax expense 32,916 19,730 68,444 28,276
-------- -------- -------- --------
Net income $ 37,119 $ 21,807 $ 81,239 $ 31,252
======== ======== ======== ========
Basic and diluted earnings per share $ 0.31 $ 0.18 $ 0.67 $ 0.25
======== ======== ======== ========
Weighted average shares
outstanding 121,399 122,580 121,343 122,943
======== ======== ======== ========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
</TABLE>
7
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
For the Six Months
Ended June 30,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating Activities
Net income $ 81,239 $ 31,252
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 100,562 92,362
Deferred income taxes 32,578 3,431
Gain on sale of cellular investments (31,569) (3,029)
Equity in net income of unconsolidated
entities, net of distributions (3,217) (16,472)
Minority interests in net income of
consolidated entities 31,558 25,917
Changes in operating assets and liabilities,
excluding acquisitions
Receivables, net (18,847) (1,814)
Other current assets 12,470 5,016
Trade accounts and other payables (45,670) (24,770)
Accrued expenses and other
current liabilities (14,479) (1,040)
Noncurrent assets and liabilities, net (11,240) (2,944)
Other, net 3,302 3,084
--------- --------
Net Cash Provided by Operating Activities 136,687 110,993
--------- --------
Investing Activities
Capital expenditures (81,881) (89,520)
Acquisitions of additional interests in
consolidated entities (20,543) (23,845)
Divestitures of cellular investments 17,574 3,888
Investments in unconsolidated entities and other (154) (80,156)
--------- --------
Net Cash Used for Investing Activities (85,004) (189,633)
--------- --------
Financing Activities
Net payments under bank revolving credit facility (105,000) (55,000)
Proceeds from long-term debt 100,000 200,000
Debt issuance costs (856) (1,609)
Net short-term payments (10,950) (32,905)
Purchases of common stock for treasury - (18,878)
Distributions to minority investors (26,905) (8,322)
Other, net 1,792 908
--------- --------
Net Cash (Used for) Provided by Financing Activities (41,919) 84,194
--------- --------
Increase in Cash and Cash Equivalents 9,764 5,554
Cash and Cash Equivalents at Beginning of Period 3,471 2,554
--------- --------
Cash and Cash Equivalents at End of Period $ 13,235 $ 8,108
========= ========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
</TABLE>
8
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Consolidation and Presentation
360 Communications Company and Subsidiaries (the "Company") provide
wireless voice and data telecommunications services. The Company also markets
residential long distance and paging services in the states in which the Company
provides wireless service. The Company operates as a general and limited partner
and majority owner of cellular systems in various metropolitan and rural service
areas and as a limited minority partner or manager in other cellular systems.
The Company operates in four regions in the United States: Mid-Atlantic,
Midwest, Southeast and West.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned and majority-owned subsidiaries. The assets,
liabilities and results of operations of entities (both corporations and
partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company accounts for all other
investees using the equity method of accounting. All significant intercompany
accounts and transactions have been eliminated.
The unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission applicable to interim financial information. In the Company's
opinion, the unaudited consolidated financial statements include all adjustments
necessary to present fairly the financial position and results of operations for
each interim period presented. All such adjustments are of a normal recurring
nature. These financials should be read in conjunction with the consolidated
financial statements, including the notes thereto, included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
2. Earnings Per Share
Basic earnings per share amounts were computed using the weighted average
number of shares outstanding, excluding common stock equivalents, totaling
121,398,933 and 122,579,873 for the three months ended June 30, 1998 and 1997,
respectively, and 121,343,131 and 122,943,476 for the six months ended June 30,
1998 and 1997, respectively. Diluted earnings per share amounts were computed
using the weighted average number of shares outstanding, including common stock
equivalents, totaling 122,299,739 and 122,579,873 for the three months ended
June 30, 1998 and 1997, respectively, and 121,866,090 and 122,995,723 for the
six months ended June 30, 1998 and 1997, respectively. Options to purchase
approximately 1,899,000 and 845,000 shares of common stock for the three and six
months ended June 30, 1997, respectively, were excluded from the computation of
diluted earnings per share because the effect was antidilutive.
3. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement requires that
all items recognized under accounting standards as components of comprehensive
income be reported in a full set of general purpose financial statements. The
Company does not have any components of comprehensive income to report.
4. Acquisitions and Divestitures
During the second quarter of 1998, the Company acquired minority interests
in two of its controlled markets. Also during the quarter, the Company divested
its ownership interest in an unconsolidated entity.
9
<PAGE>
During the first quarter of 1998, the Company divested its 27.9% interest
in the Omaha, Nebraska, cellular market was completed through the sale of its
interest in the Omaha Cellular General Partnership. This divestiture was
initiated by the managing partner's exercise of an option to acquire the
Company's interest pursuant to a preexisting agreement. The Company recognized a
gain of $30.5 million in other income ($18.1 million, net of tax) on this
transaction. Also during the first quarter of 1998, the Company acquired a
minority interest in one of its controlled markets.
During the first and second quarters of 1997, the Company divested
ownership interests in certain unconsolidated entities as well as in one of its
controlled markets. During the second quarter of 1997, the Company and BellSouth
Corporation ("BellSouth") combined their interests in two partnerships that own
and control cellular licenses and operations in Richmond, Virginia, and Orlando,
Florida. The resulting partnership is owned approximately 75% by BellSouth and
25% by the Company, with the Company assuming management responsibilities of the
cellular operations in Richmond. In connection with this transaction, the
Company contributed $80 million to the resulting partnership. In 1997, the
Company acquired minority interests in 15 of its controlled markets, which
increased its ownership interest to 100% in 10 of those markets.
5. Income Taxes
Excluding the tax effects associated with the gain on the sale of a
cellular investment, the estimated annual effective tax rate was 47.0% for the
six months ended June 30, 1998, differing from the statutory rate due to
nondeductible amortization of goodwill and state income tax expense.
6. Subsequent Event
On July 1, 1998, the Company and ALLTEL Corporation ("ALLTEL")
completed the merger of an ALLTEL subsidiary with and into the Company (the
"Merger"). At the effective time of the Merger, each outstanding share of the
Company's common stock (other than shares owned by ALLTEL, ALLTEL's
subsidiaries, the Company's subsidiaries, or held as treasury stock by the
Company) was converted into the right to receive .74 of a share of ALLTEL common
stock, par value $1.00 per share, and the Company became a wholly owned
subsidiary of ALLTEL. Also, at the effective time of the Merger, each issued and
outstanding share of common stock of the ALLTEL subsidiary involved in the
Merger was converted into one validly issued, fully paid and non-assessable
share of common stock of the surviving corporation representing 1,000 shares of
common stock, $0.01 par value.
10
Exhibit 99.3
360 Communications Company
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995
TOGETHER WITH AUDITORS' REPORTS
11
<PAGE>
Item 8. Financial Statements and Supplementary Data.
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
12
<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
13
<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
14
<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
15
<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
16
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
---------------------------
ASSETS 1997 1996
------ ------------ ------------
Current Assets
Cash and cash equivalents $ 3,471 $ 2,554
Accounts receivable, less allowances
of $6,602 and $5,730, respectively 100,472 102,483
Other receivables 26,981 27,090
Unbilled revenue 35,618 35,712
Inventory 34,354 35,908
Deferred income taxes 15,220 8,462
Prepaid expenses and other 14,051 16,634
---------- ----------
Total current assets 230,167 228,843
---------- ----------
Property, plant and equipment 1,750,097 1,499,407
Less: accumulated depreciation 561,140 415,981
---------- ----------
Property, plant and equipment, net 1,188,957 1,083,426
---------- ----------
Investments in unconsolidated entities 459,669 349,231
Intangibles, net 1,045,007 1,136,587
Other assets 18,124 13,982
---------- ----------
Total assets $2,941,924 $2,812,069
========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 241,127 $ 227,654
Short-term borrowings 18,150 43,750
Advance billings 31,779 28,314
Accrued taxes 17,846 17,951
Accrued agent commissions 11,923 12,089
Other 46,386 21,090
---------- ----------
Total current liabilities 367,211 350,848
---------- ----------
Long-term debt 1,825,347 1,699,778
---------- ----------
Deferred Credits and Other Liabilities
Deferred income taxes 60,470 113,005
Postretirement and other benefit obligations 6,347 5,855
---------- ----------
Total deferred credits and other liabilities 66,817 118,860
---------- ----------
Minority interests in consolidated entities 173,248 180,083
---------- ----------
Shareowners' Equity
Common stock ($.01 par value; 1 billion shares
authorized; issued and outstanding shares
121,267,127 in 1997 and 123,308,921 in 1996) 1,233 1,233
Additional paid-in capital 774,938 773,472
Accumulated deficit (229,437) (310,932)
Treasury stock, at cost (2,097,021 shares in
1997 and 55,227 shares in 1996) (37,433) (1,273)
---------- ----------
Total shareowners' equity 509,301 462,500
---------- ----------
Total liabilities and shareowners' equity $2,941,924 $2,812,069
========== ==========
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
17
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Year Ended December 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
OPERATING REVENUES
Service revenues $1,296,669 $1,052,726 $ 789,459
Equipment sales 50,503 43,146 44,956
---------- ---------- ---------
Total operating revenues 1,347,172 1,095,872 834,415
---------- ---------- ---------
OPERATING EXPENSES
Cost of service 158,309 99,745 68,223
Cost of equipment sales 116,456 104,327 109,441
Other operations expense 70,561 55,776 40,591
Sales, marketing and advertising expenses 232,962 206,147 141,505
General, administrative and other expenses 310,340 263,191 214,536
Depreciation and amortization 184,702 146,841 114,731
---------- ---------- ---------
Total operating expenses 1,073,330 876,027 689,027
---------- ---------- ---------
OPERATING INCOME 273,842 219,845 145,388
Interest expense (131,589) (106,364) (127,240)
Minority interests in net income
of consolidated entities (50,880) (46,622) (34,269)
Equity in net income of
unconsolidated entities 60,681 50,234 40,016
Other income (expense), net 3,270 255 (185)
---------- ---------- ---------
Income before income taxes 155,324 117,348 23,710
Income tax expense 73,829 57,829 25,405
---------- ---------- ---------
Net income (loss) $ 81,495 $ 59,519 $ (1,695)
========== ========== =========
Basic and diluted earnings (loss)
per share $ 0.67 $ 0.50 $ (0.01)
========== ========== =========
Weighted average shares
outstanding 122,339 117,917 116,706
========== ========== =========
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
18
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Year Ended December 31,
------------------------------------
1997 1996 1995
---------- ------------ ----------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 81,495 $ 59,519 $ (1,695)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 184,702 146,841 114,731
Deferred income taxes 40,910 36,230 36,267
Gain on the sale of cellular investments (3,029) - -
Equity in net income of unconsolidated
entities, net of distributions (22,903) (27,838) (7,206)
Minority interests in net income of
consolidated entities 50,880 46,622 34,269
Changes in operating assets and liabilities
Receivables, net (2,161) (28,748) (20,610)
Other current assets 5,058 (23,222) 7,592
Trade accounts and other payables 21,301 110,146 3,420
Accrued expenses and other
current liabilities 33,379 (3,984) 6,365
Noncurrent assets and liabilities, net (5,007) (685) 12,007
Other, net 3,080 4,392 (1,847)
--------- ----------- ---------
Net Cash Provided by Operating Activities 387,705 319,273 183,293
--------- ----------- ---------
Investing Activities
Capital expenditures (281,313) (300,123) (323,651)
Acquisitions and divestitures (56,629) (352,533) (1,142)
Investments in unconsolidated entities and other (80,928) (14,890) (3,743)
--------- ----------- ---------
Net Cash Used for Investing Activities (418,870) (667,546) (328,536)
--------- ----------- ---------
Financing Activities
Net borrowings (payments) under bank revolving
credit facility (80,000) 680,000 -
Proceeds from long-term debt 200,000 900,000 -
Debt issuance costs (1,609) (15,229) -
Net short-term borrowings (payments) (25,600) 43,750 -
Purchases of common stock for treasury (36,401) (3,427) -
Increase in advances from affiliates - 135,892 158,482
Contributions from minority investors 100 5,636 7,228
Distributions to minority investors (25,358) (14,849) (6,971)
Repayment of advances from affiliates - (1,400,000) -
Other, net 950 31 -
--------- ----------- ---------
Net Cash Provided by Financing Activities 32,082 331,804 158,739
--------- ----------- ---------
Increase (Decrease) in Cash and Cash Equivalents 917 (16,469) 13,496
Cash and Cash Equivalents at Beginning of Year 2,554 19,023 5,527
--------- ----------- ---------
Cash and Cash Equivalents at End of Year $ 3,471 $ 2,554 $ 19,023
========= =========== =========
</TABLE>
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
19
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(In thousands, except share amounts)
<CAPTION>
Common Stock Treasury Stock Additional Total
----------------------- --------------------- Paid-In Accumulated Shareowners'
Shares Amount Shares Amount Capital Deficit Equity
------------- --------- ----------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 10 $ 11,541 - $ - $ 360,978 $ (368,756) $ 3,763
Net loss - - - - - (1,695) (1,695)
------------ -------- ---------- -------- --------- ----------- -----------
Balance at December 31, 1995 10 11,541 - - 360,978 (370,451) 2,068
Net income - - - - - 59,519 59,519
Capital contributions by Sprint
Corporation in conjunction
with spinoff - - - - 253,160 - 253,160
Recapitalization of stock
pursuant to spinoff from
Sprint Corporation 116,733,973 (10,374) - - 10,374 - -
Shares issued for acquisition 6,500,000 65 - - 150,248 - 150,313
Treasury stock, net (55,227) - 55,227 (1,273) - - (1,273)
Other, net 130,165 1 - - (1,288) - (1,287)
------------ -------- ---------- -------- --------- ----------- -----------
Balance at December 31, 1996 123,308,921 1,233 55,227 (1,273) 773,472 (310,932) 462,500
Net income - - - - - 81,495 81,495
Treasury stock, net (2,041,794) - 2,041,794 (36,160) (69) - (36,229)
Other, net - - - - 1,535 - 1,535
------------ -------- ---------- -------- --------- ----------- -----------
Balance at December 31, 1997 121,267,127 $ 1,233 2,097,021 $(37,433) $ 774,938 $ (229,437) $ 509,301
============ ======== ========== ======== ========= =========== ===========
</TABLE>
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
20
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
360 Communications Company and its subsidiaries (the "Company") provide
wireless voice and data telecommunications services. The Company also markets
residential long distance and paging services in the states in which the Company
provides wireless service. The Company operates as a general and limited partner
and majority owner of cellular systems in various metropolitan and rural service
areas and as a limited minority partner or manager in other cellular systems.The
Company operates in four regions in the United States: Mid-Atlantic, Midwest,
Southeast and West.
The Company was a wholly owned subsidiary of Centel Corporation, a wholly
owned subsidiary of Sprint Corporation ("Sprint"). On March 7, 1996, Sprint
completed the spinoff of the Company to Sprint shareholders through a pro rata
distribution of all of the common stock of the Company ("spinoff"). For further
discussion of the spinoff, see Note 2.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned and majority-owned subsidiaries. The assets,
liabilities and results of operations of entities (both corporations and
partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company accounts for all other
investees using the equity method of accounting. All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share." SFAS No. 128 requires companies to
disclose basic and diluted earnings per share. Basic earnings per share amounts
were calculated based on the weighted average number of common shares
outstanding and excludes common stock equivalents from the calculation. Because
of the relative insignificance of the Company's common stock equivalents,
diluted earnings per share amounts were not affected.
Basic earnings per share amounts were computed using the weighted average
number of shares outstanding, excluding common stock equivalents, totaling
122,338,741 and 117,917,484 for the years ended December 31, 1997 and 1996,
respectively. Diluted earnings per share amounts were computed using the
weighted average number of shares outstanding, including common stock
equivalents, totaling 122,398,834 and 118,135,881 for the years ended December
31, 1997 and 1996, respectively. Options to purchase approximately 1,991,000 and
1,363,000 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. In 1995, loss per share amounts were based on the
weighted average number of Sprint shares outstanding, adjusted for a conversion
ratio of one share of the Company's common stock to three shares of Sprint
common stock.
21
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company earns revenues by providing access to its cellular system
("access revenue"), for usage of its cellular system ("airtime revenue"), for
long distance calls placed by the Company's customers and those of other
carriers within the Company's service area ("long distance"), and for providing
service to customers from other cellular systems who are traveling through the
service area ("roaming revenue"). Access revenue is billed one month in advance
and is recognized when earned. Airtime revenue, roaming revenue and long
distance revenue are recognized when the service is rendered. Other service
revenues are recognized after services are performed and include connection and
installation revenues. Equipment sales are recognized on delivery of the
equipment to the customer.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997, 1996 and 1995 was $53,726,000,
$55,491,000 and $27,337,000, respectively.
Cash
As part of its cash management program, the Company utilizes controlled
disbursement banking arrangements. Outstanding checks in excess of cash balances
totaled $41,384,000 and $34,924,000 at December 31, 1997 and 1996, respectively,
and are classified as trade accounts and other payables in the accompanying
Consolidated Balance Sheets. Sufficient funds were available to fund these
outstanding checks when presented for payment.
Inventory
Inventory consists of cellular telephone and certain accessory equipment
held for resale and is stated at the lower of cost (principally first in, first
out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, including labor and
overhead expenses associated with construction. Cost includes capitalized
interest on funds borrowed to finance construction and is amortized over the
lives of the related assets. Capitalized interest for the years ended December
31, 1997, 1996 and 1995 was $2,425,000, $2,234,000 and $1,553,000, respectively.
Depreciation is computed by applying the straight-line method over the estimated
service lives for depreciable plant and equipment.
Investments in Unconsolidated Entities
Minority partnership investments include the excess of the purchase price
over the underlying net book value of cellular partnerships of $284,553,000 and
$232,014,000 as of December 31, 1997 and 1996, respectively. Such excess, which
relates to Federal Communications Commission ("FCC") licenses or goodwill, is
generally being amortized on a straight-line basis over 40 years. Accumulated
amortization aggregated $48,089,000 and $46,295,000 as of December 31, 1997 and
1996, respectively.
Amortization expense for the years ended December 31, 1997, 1996 and 1995
was $6,480,000, $5,798,000 and $5,770,000, respectively, and is included in
equity in net income of unconsolidated entities in the accompanying Consolidated
Statements of Operations.
22
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Intangibles
The Company has acquired identifiable intangible assets, as well as
goodwill, through its acquisitions of interests in various cellular systems. 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 entities.
The FCC issues licenses that enable cellular carriers to provide service in
specific cellular geographic service areas. The FCC grants licenses for terms of
up to 10 years and generally grants renewals if the licensee has complied with
its obligations under the Communications Act of 1934. In 1993, the FCC adopted
specific standards to apply to cellular renewals, concluding that it would award
a renewal expectancy to a cellular licensee that meets certain standards of past
performance. Historically, the FCC has granted license renewals routinely. The
Company believes that it has met and will continue to meet all requirements
necessary to secure renewal of its cellular licenses.
Intangible assets are being amortized over 40 years. Accumulated
amortization related to acquisitions of controlling interests in cellular
systems aggregated $183,375,000 and $153,908,000 as of December 31, 1997 and
1996, respectively. Amortization expense for the years ended December 31, 1997,
1996 and 1995 was $29,576,000, $22,817,000 and $19,191,000, respectively.
The ongoing value and remaining useful life of intangible assets are
subject to periodic evaluation and the Company currently expects the carrying
amounts to be fully recoverable. Should events and circumstances indicate that
intangible assets might be impaired, an undiscounted cash flow methodology would
be used to determine whether an impairment loss would be recognized.
Supplemental Cash Flow Information
The Company paid interest of $124,798,000, $78,124,000 and $127,240,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. Income taxes of
$27,392,000, $25,707,000 and $(5,500,000) were paid (received) by the Company in
1997, 1996 and 1995, respectively.
Income Taxes and Tax Sharing Arrangement
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes. The Company was included in the consolidated
federal income tax return of Sprint through March 7, 1996. Under a tax sharing
arrangement in effect prior to the spinoff, Sprint paid the Company for the
utilization of net operating losses included in the consolidated tax return,
even if such losses and credits could not have been used if the Company had
filed on a separate return basis.
Stock Option Plans
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." However, in accordance with the provisions of SFAS No. 123, the
Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for its stock option
plans and, accordingly, does not recognize compensation cost. See Note 8 for a
summary of the pro forma effects to reported net income and earnings per share
if the Company had elected to recognize compensation cost based on the fair
value of the options granted at the date of grant, as prescribed by SFAS No.
123.
23
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
To the extent that the Company's customers become delinquent, collection
activities commence. No single customer is large enough to pose a significant
financial risk to the Company. The Company maintains an allowance for losses
based on the expected collectibility of accounts receivable. Credit losses have
been within management's expectations.
Impact of Recently Issued Accounting Standards
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
This statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in a full set of general purpose
financial statements. The Company will adopt SFAS No. 130 in the first quarter
of 1998 and does not believe the effect of adoption will be material.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. This statement requires companies to
report financial and descriptive information about their reportable operating
segments. Generally, companies are required to report financial information on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The Company will adopt SFAS No.
131 for financial statements as of and for the year ended December 31, 1998, and
does not believe the effect of adoption will be material.
2. Spinoff
On July 26, 1995, Sprint announced that its Board of Directors had decided
to pursue a tax-free spinoff of the Company to Sprint shareholders. In the FCC
auction of wireless Personal Communications Services ("PCS") licenses, Sprint
Spectrum LP won the rights to several markets that overlap service territories
operated by the Company. Under FCC rules, Sprint was required to divest or
reduce its cellular holdings in certain markets to clear conflicts with the PCS
licenses awarded to Sprint Spectrum LP. For these reasons, Sprint and its Board
of Directors decided to pursue a spinoff of the cellular operations.
On March 7, 1996, the spinoff was consummated. In conjunction with the
spinoff, the Company repaid $1.4 billion of intercompany debt to Sprint. The
remaining intercompany debt, net of receivables from affiliates, was contributed
to the Company by Sprint 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 ("Credit Facility") with a number of banks and
institutional lenders. In addition, a recapitalization of the Company's common
stock was effected pursuant to which the Company split the 10 shares of issued
and outstanding common stock into 116,733,983 new shares of common stock to
allow for the pro rata distribution of such stock to the common shareholders of
Sprint. This distribution was effected as a tax-free dividend.
3. Acquisitions and Divestitures
During the first and second quarters of 1997, the Company divested
ownership interests in certain unconsolidated entities as well as in one of its
controlled markets. During the second quarter of 1997, the Company and BellSouth
Corporation ("BellSouth") combined their interests in two partnerships that own
and control cellular licenses and operations in Richmond, Virginia, and Orlando,
Florida. The resulting partnership is owned approximately 75% by BellSouth and
25% by the Company, with the Company assuming management responsibilities of the
cellular operations in Richmond. In connection with this transaction, the
Company contributed $80 million to the resulting partnership. In 1997, the
Company acquired minority interests in 15 of its controlled markets, which
increased its ownership interest to 100% in 10 of those markets.
24
<PAGE>
3. Acquisitions and Divestitures (continued)
On January 31, 1996, the Company purchased additional partnership interests
in 360 Communications Company of Ft. Walton Beach Limited Partnership and 360
Communications Company of Tallahassee Limited Partnership. Also on January 31,
1996, the Company purchased an operating license and related cellular assets in
the North Carolina RSA No. 14 market. On February 23, 1996, the Company acquired
an operating license and related assets in the Ohio RSA No. 1 market. In
addition, on February 29, 1996, the Company purchased a 50% interest in South
Carolina RSA No. 4 Cellular General Partnership, a 50% interest in South
Carolina RSA No. 5 Cellular General Partnership and a 50% interest in South
Carolina RSA No. 6 Cellular General Partnership. These acquisitions were
accounted for as purchases, and the aggregate purchase price was approximately
$110 million. The effects of these acquisitions on the operating results of the
Company were not significant.
On November 1, 1996, the Company completed its acquisition of Independent
Cellular Network, Inc. and affiliated companies (the "ICN Acquisition") which
own and operate cellular licenses and related systems and assets in Kentucky,
Ohio, Pennsylvania and West Virginia, providing cellular service to
approximately 140,000 customers in 20 markets, representing an estimated 3.3
million potential customers. The Company acquired the licenses from Independent
Cellular Network Partners and certain of its affiliates for approximately $519
million, comprising 6,500,000 shares of the Company's common stock, $122 million
in aggregate principal amount of the Company's subordinated promissory notes and
the Company's assumption of $240 million of Independent Cellular Network
Partners' senior debt, which was immediately refinanced with borrowings under
the Credit Facility. The remaining portion of the purchase price was paid in
cash. The ICN Acquisition was accounted for as a purchase and its results of
operations are included in the consolidated financial statements from the date
of acquisition. Assets and liabilities have been recorded at estimated fair
value based on an allocation of the purchase price.
On December 17, 1997, the Company signed a definitive agreement to divest
its 27.9% interest in the Omaha, Nebraska, cellular market through the sale of
its interest in the Omaha Cellular General Partnership. The proposed transaction
is subject to the receipt of all necessary consents and government approvals.
The Company expects to complete this transaction in the first quarter of 1998.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
Depreciable
lives December 31,
------------- --------------------------
1997 1996
------------ ------------
Switching, base site controller and
radio frequency equipment 8-10 years $ 964,389 $ 847,214
Cell site towers and shelters 5-20 years 456,464 404,094
Office furniture and other equipment 2-5 years 189,872 162,255
---------- ----------
Plant in service 1,610,725 1,413,563
Construction work in progress 139,372 85,844
---------- ----------
1,750,097 1,499,407
Less: accumulated depreciation 561,140 415,981
---------- ----------
$1,188,957 $1,083,426
========== ==========
Depreciation expense charged to operations for the years ended December 31,
1997, 1996 and 1995 was $155,126,000, $124,024,000 and $95,540,000,
respectively.
25
<PAGE>
5. Investments in Unconsolidated Entities
Interests Owned
Interests owned in cellular systems of unconsolidated entities were as
follows:
December 31,
-------------------
1997 1996
------- -------
Florida 9 RSA Limited Partnership 49.00% 49.00%
Illinois Valley Cellular RSA 2-II Partnership 40.00% 40.00%
Pennsylvania RSA No. 5 General Partnership 40.00% 40.00%
Virginia 10 RSA Limited Partnership 33.00% 33.00%
Texas RSA No. 11B Limited Partnership 28.00% 28.00%
Omaha MSA Limited Partnership 27.90% 27.59%
GTE Mobilnet of Fort Wayne Limited Partnership 25.00% 25.00%
Texas RSA 7B1 Limited Partnership 25.00% 25.00%
Orlando SMSA Limited Partnership 24.59% 15.00%
RCTC Wholesale Company (Richmond) 24.59% 27.27%
Allentown SMSA Limited Partnership 20.77% 20.77%
GTE Mobilnet of Indiana RSA #3 Limited Partnership 20.00% 20.00%
St. Joseph SMSA Limited Partnership 20.00% 20.00%
Missouri RSA 9B1 Limited Partnership 19.60% 19.60%
Kansas City SMSA Limited Partnership 19.00% 19.00%
Illinois Independent RSA No. 3 General Partnership 18.13% 18.13%
Reading SMSA Limited Partnership 15.85% 15.85%
Missouri 1--Atchison RSA Limited Partnership 14.28% 14.28%
Missouri RSA 4 Partnership 12.50% 12.50%
New York SMSA Limited Partnership 10.00% 10.00%
GTE Mobilnet of South Texas Limited Partnership 8.77% 8.77%
Iowa 16--Lyon Limited Partnership 8.33% 8.33%
Iowa RSA 5 Limited Partnership 7.14% 7.14%
Iowa 15--Dickinson Limited Partnership 6.67% 6.67%
Iowa RSA No. 14 Limited Partnership 5.56% 5.56%
Chicago SMSA Limited Partnership 5.00% 5.00%
RSA 1 Limited Partnership (IA) 3.90% 3.90%
GTE Mobilnet of Ohio Limited Partnership 3.50% 3.50%
Iowa 8--Monona Limited Partnership 2.30% 2.30%
Cincinnati SMSA Limited Partnership 1.20% 1.20%
GTE Mobilnet of Austin Limited Partnership .82% .82%
Georgia RSA No. 1 Limited Partnership -- 20.00%
Iowa RSA No. 13 Limited Partnership -- 30.00%
Pennsylvania 3 Wireline Settlement Limited Partnership -- 44.44%
Pennsylvania 4 Wireline Settlement Limited Partnership -- 33.33%
RSA 11 Limited Partnership (IA) -- 14.14%
26
<PAGE>
5. Investments in Unconsolidated Entities (continued)
Financial Information
Condensed combined financial information, a portion of which is unaudited,
for investments in entities accounted for under the equity method (in
thousands):
For the Year Ended December 31,
----------------------------------
1997 1996 1995
----------- ----------- ----------
Results of Operations
Cellular service revenues $2,207,922 $2,187,202 $1,796,895
Equipment sales 111,358 109,314 97,727
---------- ---------- ----------
Total operating revenues 2,319,280 2,296,516 1,894,622
---------- ---------- ----------
Cost of equipment sales 185,239 209,895 151,334
Operating, selling, general,
administrative and other expenses 1,304,689 1,266,353 1,049,117
Depreciation and amortization 230,224 227,480 201,459
---------- ---------- ----------
Total operating expenses 1,720,152 1,703,728 1,401,910
---------- ---------- ----------
Operating income 599,128 592,788 492,712
Non-operating income (expenses) 8,230 (642) (12,903)
Minority interests in net income
of consolidated entities -- -- (1,513)
---------- ---------- ----------
Income before cumulative effects of
changes in accounting principles 607,358 592,146 478,296
Cumulative effects of changes in
accounting principles, net (6,523) -- --
---------- ---------- ----------
Net income $ 600,835 $ 592,146 $ 478,296
========== ========== ==========
December 31,
-----------------------------
1997 1996
-------------- -------------
Assets
Current assets $ 473,253 $ 514,788
Noncurrent assets 1,786,617 1,702,668
------------- -------------
$ 2,259,870 $ 2,217,456
============= =============
Liabilities and equity
Current liabilities $ 188,656 $ 337,465
Long-term liabilities 12,634 8,911
Minority interests -- 3,384
Equity 2,058,580 1,867,696
------------- -------------
$ 2,259,870 $ 2,217,456
============= =============
Additional Disclosures
Accumulated deficit at December 31, 1997, included $178,765,000 related to
undistributed earnings of unconsolidated entities.
The Company has guaranteed 50% of a discounted note held by an
unconsolidated entity with a carrying value of $47,728,000 and $42,502,000 at
December 31, 1997 and 1996, respectively.
27
<PAGE>
6. Borrowings
Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
------------------------
1997 1996
---------- ----------
Credit facility borrowings, due 2002 $ 600,000 $ 680,000
Senior notes
due 2003, 7.125%, net of unamortized discount of
$1,077 in 1997 and $1,242 in 1996 (7.2%)(1) 448,923 448,758
due 2006, 7.5%, net of unamortized discount of
$903 in 1997 and $980 in 1996 (7.5%)(1) 449,097 449,020
due 2009, 7.6%, net of unamortized discount
of $311 in 1997 (7.4%)(2) 199,689 --
Subordinated promissory notes, due 2006, 9% 127,638 122,000
---------- ----------
Total long-term debt(3) $1,825,347 $1,699,778
========== ==========
- --------------------
(1) Weighted average annual effective interest rate at December 31, 1997 and
1996.
(2) Weighted average annual effective interest rate at December 31, 1997.
(3) Estimated fair value of $1,873,075 and $1,690,677 at December 31, 1997 and
1996, respectively, based on public quotations and discounted cash flow
analyses.
The Company has a revolving credit facility with a number of banks and
institutional lenders, with interest rates currently based on the London
Interbank Offered Rate plus 50 basis points. On October 31, 1996, the Credit
Facility was amended and restated to permit, among other things, the ICN
Acquisition and to increase the Company's borrowing capacity thereunder from
$800 million to $1 billion. A commitment fee of .15% per annum is charged on the
unused portion of the Credit Facility. Commitment fees totaled $562,000 and
$390,000 in 1997 and 1996, respectively. Such fees may range from .15% to .5%
depending on the Company's public debt rating. At December 31, 1997, the Company
had additional borrowing capacity under the Credit Facility of $308 million.
As part of its interest rate risk management program, the Company utilizes
interest rate swap agreements to hedge variable interest rate risk under the
Credit Facility to a fixed rate. Interest rate swap agreements are designated
with all or a portion of the principal balances and terms of specific debt
obligations. The related amount payable to or receivable from counterparties is
included in other current liabilities or assets. Net interest paid or received
related to such agreements is recorded using the accrual method and as an
adjustment to interest expense. At December 31, 1997 and 1996, the Company had
interest rate swap agreements with an aggregate notional amount of $200 million
and $100 million outstanding, respectively. The Company has not incurred any
gains or losses on terminations of interest rate swap agreements.
The Credit Facility has general and financial covenants that place certain
restrictions on the Company. On December 5, 1997, the Company entered into a
second amended and restated Credit Facility which relaxed the restrictions on
certain covenants, while extending the term of the Credit Facility to
December 5, 2002. The Company is limited with respect to: the making of
payments (dividends and distributions); the incurrence of certain liens; the
sale of assets under certain circumstances; entering into or otherwise
permitting any subsidiary distribution restrictions; certain transactions
with affiliates; certain consolidations, mergers and transfers; and the use of
loan proceeds.
28
<PAGE>
6. Borrowings (continued)
The senior notes have general and financial covenants similar to the Credit
Facility. However, these covenants, except for the limitation on liens, have
been suspended while the Company's public debt is rated investment grade (BBB-)
by Standard & Poor's and Duff & Phelps.
In conjunction with the ICN Acquisition, the Company issued subordinated
promissory notes with an annual interest rate of 9.5%, which was reduced to 9.0%
on February 10, 1997. Fifty percent of the interest due and owing is paid on
each interest payment date and the remaining 50% is capitalized and becomes part
of the principal amount owed thereunder. The subordinated promissory notes have
general and financial covenants that are suspended while the Company's public
debt is rated investment grade (BBB-) by Standard & Poor's and Duff & Phelps.
On February 13, 1997, a shelf registration filed with the Securities and
Exchange Commission became effective, providing 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 ("Debt Securities").
The net proceeds to be received by the Company will be available for general
corporate purposes and may be used for the repayment of short-term debt and
borrowings under the Credit Facility and for the funding of future acquisitions,
capital expenditures and working capital requirements.
On March 17, 1997, the Company issued $200 million in aggregate principal
amount of its 7.6% senior notes due 2009. The net proceeds from the sale of
these Debt Securities were used to repay a portion of the Company's long-term
indebtedness outstanding under the Credit Facility.
Short-Term Debt
As part of its cash management program, the Company incurs short-term
borrowings based on market interest rates to support its daily cash
requirements. At December 31, 1997 and 1996, the Company had short-term
borrowings of $18,150,000 and $43,750,000, respectively. The weighted average
interest rates on these borrowings were 5.77% and 5.62% for the years ended
December 31, 1997 and 1996, respectively.
7. Employee Benefit Plans
Defined Contribution Plans
Substantially all employees of the Company are covered by defined
contribution employee savings plans. Participants may contribute portions of
their compensation to the plans and the Company makes matching contributions up
to specified levels. The Company's matching contributions aggregated $5,287,000,
$5,283,000 and $2,030,000 in 1997, 1996 and 1995, respectively.
Effective with the spinoff, the Company discontinued its participation in
Sprint's defined contribution employee savings plans. The Company established
its own defined contribution plan, the terms and conditions of which have been
revised to reflect increased matching contribution levels. Balances held by
Sprint's defined contribution 401(k) plan on the behalf of the Company's
employees have been transferred to the Company's new defined contribution 401(k)
plan.
Postretirement Benefits
Effective with the spinoff, the Company discontinued its participation in
Sprint's postretirement benefits arrangements and established its own
arrangements. Terms and conditions of the Company's arrangements and related
cost levels do not differ significantly from those under Sprint's arrangements.
29
<PAGE>
7. Employee Benefit Plans (continued)
The Company sponsors postretirement benefits arrangements (principally
providing health care benefits) covering substantially all employees. 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
net postretirement benefits costs for 1997, 1996 and 1995 were $495,000,
$474,000 and $176,000, respectively.
The Company's accrued postretirement benefits costs were $4,544,000 and
$4,049,000 as of December 31, 1997 and 1996, respectively.
Postemployment Benefits
Postemployment benefits offered by the Company include severance,
disability and workers compensation, including the continuation of other
benefits such as health care and life insurance coverage. Effective with the
spinoff, the Company discontinued its participation in Sprint's postemployment
benefits arrangements. Terms and conditions of the Company's arrangements and
related cost levels do not differ significantly from those under Sprint's
arrangements.
8. Stock-Based Compensation
Under various stock option plans, shares of common stock are reserved for
issuance to officers, outside directors and certain employees. Generally,
options are granted at 100% of the market price at the date of grant. Options
under these plans vest over one, three or four years. All options expire 10
years from the date of grant. Approximately 1.0% of these options outstanding
provide for the granting of stock appreciation rights as an alternative method
of settlement upon exercise. Shares authorized for grants of stock options
totaled 4,801,000 at December 31, 1997. Under the Company's various stock option
plans, 2,665,000 shares were available for the granting of options at December
31, 1997. In addition, non-vested stock is issued to certain officers and
outside directors and vests from one to five years after the date of grant. The
cost of shares of non-vested stock are amortized over their vesting period.
Stock option activity for the years 1997, 1996 and 1995 was as follows:
1997 1996 1995
--------------------- --------- ---------
Weighted
average
exercise
Shares price Shares Shares
--------- ---------- --------- ---------
Options outstanding,
beginning of year 1,365,397 $20.16 611,680 454,976
Options granted 709,050 $19.88 816,505 162,659
Options exercised 4,948 $15.44 22,783 5,955
Options canceled 78,267 $22.03 40,005 -
--------- --------- ---------
Options outstanding,
end of year 1,991,232 $20.01 1,365,397 611,680
========= ========= =========
Exercisable, end of year 733,592 $18.15
Weighted average fair value
of options granted during 1997 $7.55
30
<PAGE>
8. Stock-Based Compensation (continued)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices at 12/31/97 life price at 12/31/97 price
---------------- ------------ ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 7.56 - $12.57 167,859 2.9 $10.00 167,859 $10.00
$14.91 - $19.94 1,083,164 8.1 $18.86 246,935 $16.83
$22.63 - $26.00 692,209 8.2 $23.39 318,798 $23.46
$29.00 - $32.00 32,000 8.3 $30.50 - -
$35.00 - $35.00 16,000 8.3 $35.00 - -
---------- -------
$ 7.56 - $35.00 1,991,232 7.7 $20.01 733,592 $18.15
========== =======
</TABLE>
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1997, 1996 and 1995,
consistent with the provisions of SFAS No. 123, the Company's net income and per
share amount would have been decreased by approximately $3,027,000 or $.03 per
share in 1997 and by $3,546,000 or $.03 per share in 1996. The Company's net
loss would have been increased by $576,000 or $.01 per share in 1995. The fair
value of options at date of grant was estimated using the Black-Scholes
valuation model with the following weighted average assumptions:
1997 1996 1995
-------------- -------------- ---------------
Expected life (years) 4.8 6.0 5.9
Expected volatility 31.6% 29.8% 29.8%
Dividend yield - - -
Interest rate 6.19% 7.15% 7.08%
The pro forma effect on net income for 1997, 1996 and 1995 is not
representative of the pro forma effect on net income for future years because it
does not take into account pro forma compensation expense related to grants made
prior to 1995 or the potential for issuance of additional stock options in
future years.
Employees Stock Purchase Plan
Under the 1994 offering of the Sprint Employees Stock Purchase Plan,
Company employees held elections to purchase shares of Sprint's common stock as
of December 31, 1995. In connection with the spinoff, elections made by
employees of the Company to purchase shares of Sprint common stock were replaced
by elections to purchase 99,000 shares of the Company's common stock. The
purchase price under the offering could not exceed $16.90 per share or fall
below $6.27 per share. Aggregate fair market value of stock underlying the
elections was maintained by adjusting the per share purchase price of elections
as well as the number of shares under election. The 1994 offering terminated on
June 30, 1996.
In March 1997, the Company began offering a new Employee Stock Purchase
Plan ("ESPP"). The Company reserved 500,000 common shares for issuance under the
ESPP. The ESPP permits eligible employees to purchase shares of common stock,
not to exceed 1,000 shares in a 12-month period, through payroll deductions. The
purchase price of the offering is the lower of 85% of the fair market value of
the Company's common stock on the first or last day of the defined period. As of
December 31, 1997, the Company had issued approximately 69,000 common shares
under the ESPP.
31
<PAGE>
8. Stock-Based Compensation (continued)
Had compensation cost for the Company's ESPP been determined based on the
fair value of the employees' rights to purchase common stock, consistent with
the provisions of SFAS No. 123, the Company's net income would have decreased by
approximately $326,000 and would have no effect on the Company's earnings per
share in 1997. The fair value of the employees' rights to purchase common stock
was estimated using the Black-Scholes valuation model assuming a weighted
average expected life of .496 years and an interest rate of 5.47%. The weighted
average fair value of the Company's ESPP was $4.12 for the 1997 plan year.
9. Income Taxes
The components of the income tax expense were as follows (in thousands):
For the Year Ended December 31,
---------------------------------------
1997 1996 1995
---------- ---------- ----------
Current income tax expense (benefit)
Federal $ 28,606 $ 17,054 $ (14,485)
State 4,313 4,545 3,623
Deferred income tax expense
Federal 38,684 22,872 27,158
State 2,226 13,358 9,109
--------- --------- ---------
Total income tax expense $ 73,829 $ 57,829 $ 25,405
========= ========= =========
A reconciliation from the statutory income tax rate (35%) to the effective
income tax rate (income tax expense divided by income (loss) before income
taxes) follows (in thousands):
For The Year Ended December 31,
--------------------------------
1997 1996 1995
-------- ---------- --------
Income tax expense at the statutory rate $54,363 $41,072 $ 8,299
Effect of
State income tax expense, net of federal
income tax effect 4,250 11,637 8,276
Amortization of intangibles 10,344 7,556 8,736
Amounts relating to prior year's taxes 5,028 (2,753) -
Other, net (156) 317 94
------- ------- -------
Income tax expense $73,829 $57,829 $25,405
======= ======= =======
Effective income tax rate 47.5% 49.3% 107.1%
======= ======= =======
32
<PAGE>
9. Income Taxes (continued)
The sources of the differences that gave rise to the deferred income tax
assets and liabilities as of December 31, 1997 and 1996, along with the income
tax effect of each, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 Deferred 1996 Deferred
Income Taxes Income Taxes
------------------------------- -----------------------------
Current Noncurrent Current Noncurrent
assets assets (liabilities) assets assets (liabilities)
------- -------------------- ------ --------------------
<S> <C> <C> <C> <C>
Property, plant and equipment $ - $(113,152) $ - $(108,832)
Postretirement and other benefits - 1,396 - 1,341
Accrued liabilities 9,570 - 9,384 -
Intangibles - 27,155 - (40,467)
Alternative minimum tax credit
carry forwards - 9,716 - -
Operating loss carryforwards 8,634 30,566 2,951 40,758
Other, net - 427 - 471
Less: valuation allowance (2,984) (16,578) (3,873) (6,276)
------- --------- ------ ---------
Total $15,220 $ (60,470) $8,462 $(113,005)
======= ========= ====== =========
</TABLE>
During 1997, the valuation allowance related to deferred income tax assets
increased by $9,413,000. The increase was attributable to purchase accounting
for the ICN Acquisition. Federal operating loss carryforwards remaining from the
ICN Acquisition totaled $24,705,000 with expiration dates from 2004 through
2011.
As of December 31, 1997, the Company had available tax benefits associated
with federal and state operating loss carryforwards of $24,705,000 and
$14,495,000, respectively, which expire in varying amounts annually from 1998
through 2012.
10. Commitments and Contingencies
Litigation, Claims and Assessments
On or about March 29, 1996, a lawsuit was brought in the Chancery Court of
Washington County, Jonesborough, Tennessee (the "Tennessee Action"), on behalf
of all customers in the Company's Tennessee markets regarding customer
notification of the Company's practice with respect to billing for fractional
minutes of service. In April 1996, the original complaint was amended to enlarge
the class of plaintiffs to include all customers in all of the Company's service
areas. In late April 1996, the Tennessee Action was removed to the United States
District Court for the Eastern District of Tennessee, Northern Division. The
Company moved to dismiss the action and the plaintiff filed a motion to remand.
On July 16, 1996, the Tennessee District Court granted the plaintiff's motion to
remand and returned the case to the Chancery Court of Washington County. The
Company's Motion to Dismiss is currently pending before the Chancery Court.
On or about May 28, 1996, a lawsuit was brought in the Common Pleas Court
of Erie County, Ohio (the "Ohio Action"), on behalf of all customers in all of
the Company's service areas regarding notification of the Company's practice
with respect to billing for fractional minutes of service. On June 25, 1996, the
Ohio Action was removed to the United States District Court for the Northern
District of Ohio, Western Division. Thereafter, the Company filed a Motion to
Dismiss Or In The Alternative, Stay pending resolution of the Tennessee Action
and the plaintiff filed a Motion to Remand. By Order dated December 17, 1996,
the Ohio District Court granted plaintiff's motion to remand and the Ohio Action
was returned to the Common Pleas Court. Plaintiff has recently commenced
discovery by serving a document request and interrogatories. On January 17,
1997, the Company filed a Motion to Stay This Action And For A Protective Order
seeking to stay the Ohio Action, including all discovery, pending resolution of
the Tennessee Action. The basis for the Motion to Stay, which is currently
pending before the Common Pleas Court, is the duplicity of the Ohio Action and
the Tennessee Action.
33
<PAGE>
10. Commitments and Contingencies (continued)
The Company believes that both lawsuits are without merit; however, the
ultimate outcome of these matters and the potential effect on the financial
condition and results of operations of the Company cannot be determined at this
time.
In August 1995, four independent dealers filed a lawsuit in the Court of
Common Pleas of Greenville County, South Carolina, alleging that the Company
breached its dealer agreements with the plaintiffs and engaged in unfair trade
practices. In particular, the plaintiffs alleged that the Company discontinued
the practice of allowing the plaintiffs to sell cellular telephones out of the
Company's inventory, and instead required the plaintiffs to maintain their own
inventories and sold cellular telephones to the public at prices lower than the
prices that the Company charged to the plaintiffs. On November 21, 1997, a jury
awarded the plaintiffs $1.9 million in compensatory damages and $10 million in
punitive damages. The Company has filed an appeal with the South Carolina
Supreme Court seeking to reverse the decision. The Company believes that it
acted in accordance with the dealer agreements and that the decision is wholly
unwarranted by the facts.
The Company is party to various other legal proceedings in the ordinary
course of business. Although the ultimate resolution of these various
proceedings cannot be ascertained, management of the Company does not believe
that such proceedings, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
In addition, various lawsuits arising in the normal course of business are
pending against the cellular system entities in which the Company does not have
a controlling interest. Because the outcomes of such legal proceedings have not
been determined, no provision for any liability that may result upon
adjudication of such litigation has been made in the consolidated financial
statements of the cellular system entity or the Company. In view of the
uncertainty regarding such litigation, there can be no assurance that the
outcome of these lawsuits will not have a material adverse effect on the
Company's investment in these entities or in its equity in the net income of
each entity.
Operating Leases
Minimum rental commitments as of December 31, 1997, for all non-cancelable
operating leases, consisting principally of leases for office space, real estate
and tower space, were as follows (in thousands):
1998 $ 27,693
1999 23,626
2000 21,222
2001 19,467
2002 17,529
Thereafter 94,771
--------
Total $204,308
========
Rental expense aggregated $28,356,000, $20,259,000 and $17,605,000 in 1997,
1996 and 1995, respectively. The amount of rental commitments applicable to
subleases, contingent rentals and executory costs is not significant.
11. Related Party Transactions
Management believes that the pre-spinoff consolidated financial statements
of the Company, presented herein, reasonably reflect the historical
relationships with Sprint and its affiliates and reflect all of the Company's
costs of doing business. Management believes that there would not have been any
material difference from the amounts presented in the historical financial
statements had the Company operated on a stand-alone basis.
34
<PAGE>
11. Related Party Transactions (continued)
Prior to the spinoff, the Company reimbursed Sprint for certain data
processing services, other data-related costs and certain management and
administrative support services that were incurred for the Company's benefit.
Total charges for such services aggregated $22,754,000 in 1995. The terms of the
arrangements determining such charges by Sprint were reasonable, although there
was no assurance that these terms were comparable to those that would have been
obtained from unaffiliated third parties or on a stand-alone basis. Subsequent
to the spinoff, Sprint continued to provide certain administrative support
services to assure an orderly transition. Total charges reimbursed to Sprint
aggregated $15,820,000 in 1996.
Charges for long distance telecommunications and operator services provided
by interexchange carriers to cellular customers are based on terms and
conditions of contracts governing such charges. In March 1996 and May 1997, the
Company renegotiated agreements entered into between the Company and Sprint for
long distance service on an exclusive basis (provided that Sprint is able to
provide such services at competitive terms and conditions) which replaced the
existing long distance service agreement on terms that are believed to be
comparable to those that could be obtained from unaffiliated third parties.
The Company received local telephone, interconnection and toll services
from subsidiaries of Sprint pursuant to agreements between the subsidiaries and
the Company. Prior to the spinoff, related payments amounted to $43,601,000 in
1995.
As discussed in Note 2, in conjunction with the spinoff, the Company repaid
$1.4 billion of intercompany debt with proceeds from the issuance of the senior
notes and borrowings under the Credit Facility, with the remaining intercompany
debt contributed to the Company by Sprint as additional paid-in capital. Prior
to the spinoff, the Company borrowed from Sprint to the extent cash requirements
were not met through cash flows from operations and capital contributions from
minority partners. The Company entered into cash advance and borrowing
transactions with Sprint and certain affiliates. Interest expense on
intercompany debt was $23,463,000 and $127,240,000 in 1996 and 1995,
respectively.
The Company advances funds to unconsolidated entities to which it provides
management services for use in these entities' current operations and
construction activity. In turn, these entities advance excess cash to the
Company for cash management and investment. Minority investments receivable
totaled $82,000 and $733,000 at December 31, 1997 and 1996, respectively, and
are included in prepaid expenses and other on the Consolidated Balance Sheets.
Minority investments payable totaled $20,267,000 and $1,068,000 at December 31,
1997 and 1996, respectively, and are included in other current liabilities on
the Consolidated Balance Sheets.
Tax Sharing Agreement
In connection with the spinoff, Sprint and the Company entered into a Tax
Sharing and Indemnification Agreement (the "Tax Sharing Agreement") that
allocated the responsibility for taxes between Sprint and the Company. The Tax
Sharing Agreement is only applicable to taxes for 1996 and earlier years.
Tax Assurance Agreement
In connection with the spinoff, Sprint and the Company entered into an
agreement (the "Tax Assurance Agreement") pursuant to which certain limitations
designed to preserve the tax-free status of the spinoff were imposed on the
Company for a period of two years after the completion of the spinoff. The Tax
Assurance Agreement expires on March 7, 1998.
12. Subsequent Event
On January 13, 1998, the Company issued $100 million in aggregate principal
amount of its 6.65% senior notes due 2008. The net proceeds from the sale of
these Debt Securities were used to repay a portion of the Company's long-term
indebtedness outstanding under the Credit Facility.
35
<PAGE>
<TABLE>
Quarterly Financial Data
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1996 1997 1996 1997 1996 1997 1996
---------- --------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues
Service revenues $293,970 $230,754 $328,834 $263,560 $335,245 $271,819 $338,620 $286,593
Equipment sales 12,876 8,941 11,428 10,613 12,264 9,857 13,935 13,735
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating revenues $306,846 $239,695 $340,262 $274,173 $347,509 $281,676 $352,555 $300,328
========= ========= ========= ========= ========= ========= ========= =========
Operating Expenses
Cost of service $ 41,489 $ 22,139 $ 40,283 $ 22,205 $ 37,127 $ 24,148 $ 39,410 $ 31,253
Cost of equipment sales 28,449 20,609 24,394 25,355 28,486 25,046 35,127 33,317
Selling, general,
administrative
and other expenses 148,666 117,527 152,892 123,675 151,014 132,055 161,291 151,857
Depreciation and
amortization 45,529 32,997 46,833 35,157 45,376 36,833 46,964 41,854
---------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses $ 264,133 $193,272 $264,402 $206,392 $262,003 $218,082 $282,792 $258,281
========== ========= ========= ========= ========= ========= ========= =========
Net Income $ 9,445 $ 6,980 $ 21,807 $ 24,284 $ 28,879 $ 22,887 $ 21,364 $ 5,369
========== ========= ========= ========= ========= ========= ========= =========
Earnings Per Share $ 0.08 $ 0.06 $ 0.18 $ 0.21 $ 0.24 $ 0.20 $ 0.18 $ 0.04
========== ========= ========= ========= ========= ========= ========= =========
</TABLE>
36
Exhibit 99.4
ALLTEL Corporation and Subsidiaries
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
as of and for the six months ended June 30, 1998
and
for the years ended December 31, 1997, 1996 and 1995
37
<PAGE>
<TABLE>
ALLTEL CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
<CAPTION>
As Reported
(Dollars in thousands) June 30, 1998 Pro Forma
---------------------------------- ----------------------------------
360
Communications Add (Deduct)
ALLTEL Company Adjustments Combined
------------- -------------- ----------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 702,106 $ 247,731 $ - $ 949,837
Investments 907,939 477,661 - 1,385,600
Goodwill and other intangible assets 606,196 1,032,024 - 1,638,220
Property, plant and equipment: -
Wireline 4,168,128 - - 4,168,128
Wireless 747,175 1,515,028 - 2,262,203
Information services 591,004 - - 591,004
Other 11,589 200,292 - 211,881
Under construction 202,354 116,949 - 319,303
----------- ----------- -------- -----------
Total property, plant and equipment 5,720,250 1,832,269 - 7,552,519
Less accumulated depreciation 2,503,608 646,911 - 3,150,519
----------- ----------- -------- -----------
Net property, plant and equipment 3,216,642 1,185,358 - 4,402,000
Other assets 443,972 30,700 - 474,672
----------- ----------- -------- -----------
Total assets $ 5,876,855 $ 2,973,474 $ - $ 8,850,329
=========== =========== ======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 662,522 $ 289,701 $ - $ 952,223
Long-term debt 1,694,434 1,823,342 - 3,517,776
Deferred income taxes 755,215 84,772 (15,000) (2) 824,987
Other liabilities 245,364 178,631 120,000 (2) 543,995
Preferred stock, redeemable 5,128 - - 5,128
Shareholders' equity:
Preferred stock 9,134 - - 9,134
Common stock 184,355 1,233 88,636 (3) 274,224
Additional capital 164,376 777,533 (122,175) (3) 819,734
Unrealized holding gain on investments 381,556 - - 381,556
Retained earnings (deficit) 1,774,771 (148,199) (105,000) (2) 1,521,572
Treasury stock - (33,539) 33,539 (3) -
----------- ----------- --------- -----------
Total shareholders' equity 2,514,192 597,028 (105,000) 3,006,220
----------- ----------- --------- -----------
Total liabilities and shareholders' equity $ 5,876,855 $ 2,973,474 $ - $ 8,850,329
=========== =========== ========= ===========
</TABLE>
38
<PAGE>
<TABLE>
ALLTEL CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
<CAPTION>
As Reported
Six Months Ended
(Dollars in thousands, except per share amounts) June 30, 1998 Pro Forma
---------------------------------- --------------------------------
360
Communications Add (Deduct)
ALLTEL Company Adjustments Combined
-------------- -------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Revenues and sales:
Service revenues $1,485,641 $ 726,647 $(4,168) (4) $2,208,120
Product sales 295,813 26,801 - 322,614
---------- --------- ------- ----------
Total revenues and sales 1,781,454 753,448 (4,168) 2,530,734
---------- --------- ------- ---------
Costs and expenses:
Operations 949,746 414,987 (4,168) (4) 1,360,565
Cost of products sold 197,444 53,864 - 251,308
Depreciation and amortization 246,215 100,562 - 346,777
---------- --------- ------- ----------
Total costs and expenses 1,393,405 569,413 (4,168) 1,958,650
---------- --------- ------- ----------
Operating income 388,049 184,035 - 572,084
Other income, net 9,280 1,982 - 11,262
Interest expense (65,916) (66,840) - (132,756)
Gain on disposal of assets and other 184,743 30,506 - 215,249
---------- --------- ------- ----------
Income before taxes 516,156 149,683 - 665,839
Income taxes 195,707 68,444 - 264,151
---------- --------- ------- ----------
Net income 320,449 81,239 - 401,688
Preferred dividends 471 - - 471
---------- --------- ------- ----------
Net income applicable to common shares $ 319,978 $ 81,239 $ - $ 401,217
========== ========= ======= ==========
Earnings per Share of Common Stock: (5)
Basic $1.74 $.67 $1.46
Diluted $1.72 $.67 $1.45
Average common shares outstanding-basic 184,208,000 121,343,000 274,002,000
Average common shares outstanding-diluted 186,422,000 121,866,000 276,938,000
</TABLE>
39
<PAGE>
<TABLE>
ALLTEL CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
<CAPTION>
As Reported
(Dollars in thousands, except per share amounts) December 31, 1997 Pro Forma
----------------------------- -------------------------------
360
Communications Add (Deduct)
ALLTEL Company Adjustments Combined
----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues and sales:
Service revenues $ 2,700,907 $ 1,296,669 $ (7,028) (4) $ 3,990,548
Product sales 562,656 50,503 - 613,159
----------- ----------- -------- -----------
Total revenues and sales 3,263,563 1,347,172 (7,028) 4,603,707
----------- ----------- -------- -----------
Costs and expenses:
Operations 1,686,739 772,172 (7,028) (4) 2,451,883
Cost of products sold 362,164 116,456 - 478,620
Depreciation and amortization 450,762 184,702 - 635,464
Provision to reduce carrying value of certain assets 16,874 - - 16,874
----------- ----------- -------- -----------
Total costs and expenses 2,516,539 1,073,330 (7,028) 3,582,841
----------- ----------- -------- -----------
Operating income 747,024 273,842 - 1,020,866
Other income, net 5,236 13,071 - 18,307
Interest expense (130,181) (131,589) - (261,770)
Gain on disposal of assets and other 206,622 - - 206,622
----------- ----------- -------- -----------
Income before taxes 828,701 155,324 - 984,025
Income taxes 320,815 73,829 - 394,644
----------- ----------- -------- -----------
Net income 507,886 81,495 - 589,381
Preferred dividends 1,008 - - 1,008
----------- ----------- -------- -----------
Net income applicable to common shares $ 506,878 $ 81,495 $ - $ 588,373
=========== =========== ======== ===========
Earnings per Share of Common Stock: (5)
Basic $2.72 $.67 $2.13
Diluted $2.70 $.67 $2.11
Average common shares outstanding-basic 186,059,000 122,339,000 276,590,000
Average common shares outstanding-diluted 187,689,000 122,399,000 278,531,000
</TABLE>
40
<PAGE>
<TABLE>
ALLTEL CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
<CAPTION>
As Reported
(Dollars in thousands, except per share amounts) December 31, 1996 Pro Forma
------------------------------ --------------------------------
360
Communications Add (Deduct)
ALLTEL Company Adjustments Combined
----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues and sales:
Service revenues $ 2,524,845 $ 1,052,726 $ (6,507) (4) $ 3,571,064
Product sales 667,573 43,146 - 710,719
----------- ----------- -------- -----------
Total revenues and sales 3,192,418 1,095,872 (6,507) 4,281,783
----------- ----------- -------- -----------
Costs and expenses:
Operations 1,607,942 624,859 (6,705) (4) 2,226,294
Cost of products sold 448,456 104,327 - 552,783
Depreciation and amortization 424,115 146,841 - 570,956
Provision to reduce carrying value of certain assets 120,280 - - 120,280
----------- ----------- -------- -----------
Total costs and expenses 2,600,793 876,027 (6,705) 3,470,313
----------- ----------- -------- -----------
Operating income 591,625 219,845 - 811,470
Other income, net 2,925 3,867 - 6,792
Interest expense (130,832) (106,364) - (237,196)
Gain on disposal of assets and other (2,278) - - (2,278)
----------- ----------- -------- -----------
Income before taxes 461,440 117,348 - 578,788
Income taxes 169,703 57,829 - 227,532
----------- ----------- -------- -----------
Net income 291,737 59,519 - 351,256
Preferred dividends 1,071 - - 1,071
----------- ----------- -------- -----------
Net income applicable to common shares $ 290,666 $ 59,519 $ - $ 350,185
=========== =========== ======== ===========
Earnings per Share of Common Stock: (5)
Basic $1.53 $.50 $1.27
Diluted $1.52 $.50 $1.26
Average common shares outstanding-basic 189,378,000 117,917,000 276,637,000
Average common shares outstanding-diluted 191,026,000 118,136,000 278,415,000
</TABLE>
41
<PAGE>
<TABLE>
ALLTEL CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
<CAPTION>
As Reported
(Dollars in thousands, except per share amounts) December 31, 1995 Pro Forma
----------------------------- ---------------------------------
360
Communications Add (Deduct)
ALLTEL Company Adjustments Combined
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues and sales:
Service revenues $ 2,441,826 $ 789,459 $ (5,992) (4) $ 3,225,293
Product sales 667,899 44,956 - 712,855
----------- ----------- -------- -----------
Total revenues and sales 3,109,725 834,415 (5,992) 3,938,148
----------- ----------- -------- -----------
Costs and expenses:
Operations 1,566,829 464,855 (5,992) (4) 2,025,692
Cost of products sold 449,119 109,441 - 558,560
Depreciation and amortization 409,799 114,731 - 524,530
----------- ----------- -------- -----------
Total costs and expenses 2,425,747 689,027 (5,992) 3,108,782
----------- ----------- -------- -----------
Operating income 683,978 145,388 - 829,366
Other income, net 2,481 5,562 - 8,043
Interest expense (145,428) (127,240) - (272,668)
Gain on disposal of assets and other 30,775 - - 30,775
----------- ----------- -------- -----------
Income before taxes 571,806 23,710 - 595,516
Income taxes 217,190 25,405 - 242,595
----------- ----------- -------- -----------
Net income 354,616 (1,695) - 352,921
Preferred dividends 1,158 - - 1,158
----------- ----------- -------- -----------
Net income applicable to common shares $ 353,458 $ (1,695) $ - $ 351,763
=========== =========== ======== ===========
Earnings per Share of Common Stock: (5)
Basic $1.87 $(.01) $1.28
Diluted $1.85 $(.01) $1.27
Average common shares outstanding-basic 188,870,000 116,706,000 275,232,000
Average common shares outstanding-diluted 190,675,000 116,706,000 277,037,000
</TABLE>
42
<PAGE>
ALLTEL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. Pro Forma Financial Statement Presentation
The unaudited pro forma financial data do not give effect to any potential
cost savings or other synergies that could result from the Merger. The pro
forma data are not necessarily indicative of the operating results or
financial position that would have occurred had the Merger been consummated
at the dates indicated, nor necessarily indicative of future operating
results or financial position.
2. Merger and Integration Expenses
ALLTEL expects to incur certain non-recurring expenses related to the
Merger, presently estimated to be $120,000,000 ($105,000,000 after tax).
These expenses would include, but would not be limited to, professional
fees, fees of financial advisors, retention compensation expenses,
relocation expenses, and similar expenses. Although ALLTEL believes this
estimate of non-recurring expenses is accurate, certain material additional
costs may be incurred in connection with the Merger. Merger related
expenses will be recorded in the third quarter of 1998. In addition, ALLTEL
is developing a plan to integrate the operations of ALLTEL and 360 after
the Merger. In connection with that plan, ALLTEL anticipates that certain
non-recurring charges will be incurred in connection with such integration.
ALLTEL cannot identify the timing, nature and amount of such charges at
this time. However, any such charge could affect ALLTEL's results of
operations in the period in which such charges are recorded. The unaudited
pro forma combined condensed financial statements do not reflect any such
charges.
3. Other Pro Forma Adjustments
The excess of par value of the ALLTEL Common Stock issued in this
transaction over the par value of the 360's Common Stock outstanding on the
Effective Date will be transferred from Additional Capital.
4. Elimination of Intercompany Transactions
To eliminate the revenues and corresponding operating costs attributable to
the intercompany transactions between ALLTEL and 360.
5. Conversion Fraction
Pro forma combined earnings per share amounts as presented in the
accompanying Unaudited Pro Forma Combined Condensed Statements of Income
are based upon the combined average number of shares outstanding of ALLTEL
Common Stock and 360's Common Stock for each period, adjusted, in the case
of 360's Common Stock, to reflect the conversion of each share of 360's
Common Stock into .74 shares of ALLTEL Common Stock.
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 Amendment No. 1
to Current Report (Form 8-K/A) for the year ended December 31, 1997.
/s/ERNST & YOUNG LLP
Chicago, Illinois
September 2, 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/A, 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/A.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 2, 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/A, 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/A.
/s/ARTHUR ANDERSEN LLP
Chicago, Illinois
September 2, 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 360 Communications Company's Annual Report on Form 10-K.
/s/PricewaterhouseCoopers LLP
New York, New York
September 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/A.
/s/PricewaterhouseCoopers LLP
Atlanta, Georgia
September 2, 1998
48
