UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-4996
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ALLTEL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 34-0868285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allied Drive, Little Rock, 72202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
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Number of common shares outstanding as of September 30, 1999:
313,929,652
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The Exhibit Index is located at sequential page 21.
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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The following consolidated financial statements of ALLTEL Corporation
and subsidiaries, included in the interim report of ALLTEL Corporation to its
stockholders for the periods ended September 30, 1999 and 1998, a copy of which
is attached hereto, are incorporated herein by reference:
Consolidated Statements of Income - for the three, nine and twelve
months ended September 30, 1999 and 1998.
Consolidated Balance Sheets - September 30, 1999 and 1998 and
December 31, 1998.
Consolidated Statements of Cash Flows - for the nine and twelve
months ended September 30, 1999 and 1998.
2
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
PART I - FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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GENERAL
The following is a discussion and analysis of the historical results of
operations and financial condition of ALLTEL Corporation ("ALLTEL" or the
"Company"). This discussion should be read in conjunction with the unaudited
consolidated financial statements, including the notes thereto, for the interim
periods ended September 30, 1999 and 1998, and the Company's Annual Report on
Form 10-K, as amended, for the year ended December 31, 1998.
Forward-Looking Statements
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This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes, and future filings by the Company on Form 10-K, Form
10-Q and Form 8-K and future oral and written statements by the Company and its
management may include, certain forward-looking statements, including (without
limitation) statements with respect to anticipated future operating and
financial performance, growth opportunities and growth rates, acquisition and
divestitive opportunities, Year 2000 compliance and other similar forecasts and
statements of expectation. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates", and "should", and variations of these
words and similar expressions, are intended to identify these forward-looking
statements. Forward-looking statements by the Company and its management are
based on estimates, projections, beliefs and assumptions of management and are
not guarantees of future performance. The Company disclaims any obligation to
update or revise any forward-looking statement based on the occurrence of future
events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Representative examples
of these factors include (without limitation) rapid technological developments
and changes in the telecommunications and information services industries;
ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996 and other similar federal and state
legislation and the federal and state rules and regulations enacted pursuant to
that legislation; regulatory limitations on the Company's ability to change its
pricing for communications services; the possible future unavailability of
Statement of Financial Accounting Standards No. 71 to the Company's wireline
subsidiaries; continuing consolidation in certain industries, such as banking,
served by the Company's information services business; the risks associated with
relatively large, multi-year contracts in the Company's information services
business; and higher than anticipated expenditures associated with the Company's
Year 2000 efforts. In addition to these factors, actual future performance,
outcomes and results may differ materially because of other, more general,
factors including (without limitation) general industry and market conditions
and growth rates, domestic and international economic conditions, governmental
and public policy changes and the continued availability of financing in the
amounts, at the terms and on the conditions necessary to support the Company's
future business.
3
<PAGE>
COMPLETION OF MERGERS
On September 30, 1999, the Company completed mergers with Liberty Cellular,
Inc. and its affiliate KINI L.C. ("Liberty") under definitive merger agreements
entered into on June 22, 1999. Under terms of the merger agreements, the
outstanding stock of Liberty, which operates under the name Kansas Cellular, was
exchanged for approximately 7.0 million shares of ALLTEL's common stock. On
July 2, 1999, the Company completed its merger with Aliant Communications, Inc.
("Aliant") under a definitive merger agreement entered into on December 18,
1998. Under terms of the merger agreement, Aliant became a wholly-owned
subsidiary of ALLTEL, and each outstanding share of Aliant common stock was
converted into the right to receive .67 shares of ALLTEL common stock, 23.9
million common shares in the aggregate. Each of these mergers qualified as a
tax-free reorganization and has been accounted for as a pooling-of-interests.
Accordingly, all prior period financial information included in this Form 10-Q
has been restated to include the accounts and results of operations of Aliant
and Liberty. The financial statements presented include certain eliminations and
reclassifications to conform the accounting and financial reporting policies of
ALLTEL, Aliant and Liberty.
In January 1999, the Company completed a merger with Standard Group, Inc.
("Standard"). In September 1999, the Company also completed mergers with
Advanced Information Resources, Limited ("AIR") and Southern Data Systems
("Southern Data"). In connection with these mergers, approximately 6.5 million
shares of ALLTEL common shares were issued. All three mergers qualified as
tax-free reorganizations and were accounted for as poolings-of-interests. Prior
period financial information has not been restated, however, since the
operations of the three acquired companies are not significant to ALLTEL's
consolidated financial statements on either a separate or aggregate basis. The
accompanying consolidated financial statements include the accounts and results
of operations of Standard, AIR and Southern Data from the applicable date of
acquisition. See Note 2 to the unaudited consolidated financial statements
included in Exhibit 19 to this Form 10-Q for additional information regarding
the merger transactions.
<TABLE>
<CAPTION>
OVERVIEW-CONSOLIDATED RESULTS OF OPERATIONS
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Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands, Sept. 30, Sept. 30, Sept. 30,
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except per share amounts) 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C>
Revenues and sales $1,628,395 $1,446,379 $4,705,508 $4,139,767 $6,192,536 $5,416,801
Operating income $ 338,507 $ 51,495 $1,134,678 $ 690,324 $1,470,281 $ 991,193
Net income (loss) $ 150,349 $ (7,405) $ 550,162 $ 429,045 $ 724,244 $ 577,346
Earnings (loss) per share:
Basic $.48 $(.03) $1.76 $1.40 $2.33 $1.89
Diluted $.47 $(.02) $1.74 $1.39 $2.30 $1.87
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</TABLE>
Reported operating income, net income and earnings per share for all periods
of 1999 include the effects of merger and integration expenses and other charges
recorded in the third quarter. Reported operating income, net income (loss) and
earnings (loss) per share for all periods of 1998 also include the effects of
merger and integration expenses, asset write-downs and gains realized from the
sale of certain investments. Adjusted to exclude the effects of the
non-recurring and unusual items in each period, operating income would have
increased $70.5 million or 20 percent, $227.9 million or 23 percent and $262.6
million or 20 percent and net income would have increased $38.4 million or 22
percent, $130.2 million or 27 percent and $156.0 million or 25 percent in the
three, nine and twelve month periods ended September 30, 1999, respectively. In
addition, when excluding the effects of the non-recurring and unusual items,
basic earnings per share would have increased 19 percent, 24 percent and 23
percent and diluted earnings per share would have increased 17 percent, 24
percent and 22 percent in the three, nine and twelve month periods ended
September 30, 1999, respectively.
4
<PAGE>
Operating income, net income (loss) and earnings (loss) per share, adjusted
for the non-extraordinary, non-recurring and unusual items, are summarized in
the following table:
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands, Sept. 30, Sept. 30, Sept. 30,
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except per share amounts) 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C>
Operating income, as reported $338,507 $ 51,495 $1,134,678 $ 690,324 $1,470,281 $ 991,193
Non-recurring and unusual items:
Merger and integration expenses
and other charges 90,520 252,000 90,520 252,000 90,520 252,000
Provision to reduce carrying
value of certain assets - 55,000 - 55,000 - 55,000
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Operating income, as adjusted $429,027 $358,495 $1,225,198 $ 997,324 $1,560,801 $1,298,193
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Net income (loss), as reported $150,349 $ (7,405) $ 550,162 $ 429,045 $ 724,244 $ 577,346
Non-recurring and unusual items,
net of tax:
Merger and integration expenses
and other charges 66,044 200,995 66,044 200,995 66,044 200,995
Provision to reduce carrying
value of certain assets - 33,605 - 33,605 - 33,605
Gain on disposal of assets
and other - (49,233) - (177,673) - (177,673)
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Net income, as adjusted $216,393 $177,962 $ 616,206 $ 485,972 $ 790,288 $ 634,273
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Basic earnings (loss) per share,
as reported $.48 $(.03) $1.76 $1.40 $2.33 $1.89
Non-recurring and unusual items,
net of tax:
Merger and integration expenses
and other charges .21 .66 .21 .66 .21 .65
Provision to reduce carrying
value of certain assets - .11 - .11 - .11
Gain on disposal of assets
and other - (.16) - (.58) - (.58)
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Basic earnings per share, as adjusted $.69 $ .58 $1.97 $1.59 $2.54 $2.07
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Diluted earnings (loss) per share,
as reported $.47 $(.02) $1.74 $1.39 $2.30 $1.87
Non-recurring and unusual items,
net of tax:
Merger and integration expenses
and other charges .21 .65 .21 .65 .21 .65
Provision to reduce carrying
value of certain assets - .11 - .11 - .11
Gain on disposal of assets
and other - (.16) - (.58) - (.57)
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Diluted earnings per share, as adjusted $.68 $ .58 $1.95 $1.57 $2.51 $2.06
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</TABLE>
The operating income, net income and earnings per share impact of the
non-recurring and unusual items has been presented as supplemental information
only. The non-recurring and unusual items reflected in the above table are
discussed in reference to the caption in the consolidated statements of income
in which they are reported.
5
<PAGE>
Merger and Integration Expenses and Other Charges
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During the third quarter of 1999, the Company recorded a pretax charge of
$90.5 million in connection with its mergers with Aliant, Liberty, AIR and
Southern Data and with certain loss contingencies and other restructuring
activities. The merger and integration expenses total $73.4 million and consist
of professional and financial advisors' fees of $24.4 million, severance and
employee-related expenses of $15.4 million and other integration costs of $33.6
million. The other integration costs include $12.5 million of lease termination
costs, $10.2 million of costs associated with the early termination of certain
service obligations, and a $4.6 million write-down in the carrying value of
certain in-process and other software development assets that have no future
alternative use or functionality. The other integration costs also include
branding and signage costs of $4.1 million and other expenses of $2.2 million
incurred in the third quarter. The lease termination costs consist of a
cancellation fee of $7.3 million to terminate the Company's contractual
commitment to lease building space previously occupied by the former 360
Communications Company ("360") operations acquired in 1998, a $4.1 million
write-off of capitalized leasehold improvements and $1.1 million in other
disposal costs. The contract termination fees include $5.2 million related to
long-term contracts with an outside vendor for customer billing services to be
provided to the Aliant and Liberty operations. As part of its integration plan,
ALLTEL will convert both the Aliant and Liberty operations to its own internal
billing system by June 2000. The Company also recorded an additional $5.0
million charge to reflect the actual cost of terminating its contract with
Convergys Corporation ("Convergys") for customer billing services to be provided
to the former 360 operations. In September 1999, ALLTEL and Convergys agreed to
a final contract termination fee of $55.0 million, of which $50.0 million was
recorded in the third quarter of 1998, as discussed below. In September, the
Company paid $5.0 million of the termination fee with the remaining payments due
in installments through 2001. In addition to the termination fee, the Company
will continue to pay Convergys for processing customer accounts until all
customers are switched to ALLTEL's billing system, which is expected to be
completed in 2001. Payments for the continuing processing services will be
expensed as incurred.
In connection with management's plan to reduce costs and improve operating
efficiencies, the Company recorded a restructuring charge of $17.1 million
consisting of $10.8 million in severance and employee benefit costs related to a
planned workforce reduction and $6.3 million in lease termination costs related
to the consolidation of certain operating locations. The lease termination costs
represent the minimum estimated contractual commitments over the next one to
four years for leased facilities that the Company has abandoned.
During the third quarter of 1998, the Company recorded transaction costs and
one-time charges totaling $252.0 million on a pretax basis related to the
closing of its merger with 360. The merger and integration expenses included
professional and financial advisors' fees of $31.5 million, severance and
employee-related expenses of $48.7 million and integration costs of $171.8
million. The integration costs included several adjustments resulting from the
redirection of a number of strategic initiatives based on the merger with
360 and ALLTEL's expanded wireless presence. These adjustments included
a $60.0 million write-down in the carrying value of certain in-process software
development assets, $50.0 million of costs associated with the early termination
of certain service obligations, branding and signage costs of $20.7 million, an
$18.0 million write-down in the carrying value of certain assets resulting from
a revised Personal Communications Services ("PCS") deployment plan, and other
integration costs of $23.1 million. The estimated cost of contract termination
related to a long-term contract with Convergys for billing services to be
provided to the 360 operations. The $50.0 million of costs recorded represented
the present value of the estimated profit to the vendor over the remaining term
of the contract and was the Company's best estimate of the cost of terminating
the contract prior to the expiration of its term. As previously noted, the
Company and Convergys agreed upon a termination fee of $55.0 million. The $18.0
million write-down in the carrying value of certain PCS-related assets
included approximately $15.0 million related to cell site acquisition and
improvement costs and capitalized labor and engineering charges that were
incurred during the initial construction phase of the PCS buildout in three
markets. As a result of the merger with 360, ALLTEL elected not to continue to
complete construction of its PCS network in these three markets. The remaining
$3.0 million of the PCS-related write-down represented cell site lease
termination fees.
6
<PAGE>
At September 30, 1999, the remaining unpaid liability related to the
Company's merger and integration and restructuring activities was $116.2 million
consisting of the Convergys contract termination fees of $50.0 million,
severance and employee-related expenses of $32.8 million, lease cancellation and
termination costs of $17.4 million, other contract termination fees of $5.2
million, professional fees of $5.1 million and other integration costs of $5.7
million. Of the remaining termination fee payable to Convergys, $20.0 million
will be paid by December 31, 1999, $25.0 million in 2000 and $5.0 million in
2001. Cash outlays for the remaining employee-related expenses are expected to
be completed by September 2000. The lease cancellation fee of $7.3 million is
payable to the lessor by December 31, 1999. The Company expects to complete
payment of the remaining fees and other integration and restructuring costs by
September 2000. Funding for the unpaid merger and integration and restructuring
liability will be internally financed from operating cash flows. As a result of
its integration and restructuring efforts, ALLTEL expects to realize synergies
through a reduction in operating expenses of approximately $86 million in 1999
and $128 million in 2000. Of the total synergies expected to be realized each
year, ALLTEL estimates 40 percent of the cost savings will result from a
reduction in duplicative salaries and employee benefits, 20 percent from a
reduction in variable network expenses, 20 percent from volume purchase
discounts, 10 percent from a reduction in branding and advertising costs and
10 percent from a reduction in information technology expenses. (See Note 3 to
the interim unaudited consolidated financial statements for additional
information regarding the merger and integration expenses and other charges).
Provision to Reduce Carrying Value of Certain Assets
During the third quarter of 1998, the Company recorded a $55.0 million
non-recurring operating expense related to its contract with GTE Corporation
("GTE"). This expense represents a reduction in the cumulative gross margin
earned under the GTE contract. Due to its pending merger with Bell Atlantic
Corporation, GTE re-evaluated its billing and customer care requirements and
modified its billing conversion plans and is purchasing certain processing
services from ALLTEL for an interim period.
Gain on Disposal of Assets
During the third quarter of 1998, the Company recorded a pretax gain of
$80.9 million from the sale of a portion of its investment in MCI WorldCom, Inc.
("MCI WorldCom") common stock. In addition to including the third quarter gain,
the nine and twelve month periods of 1998 also include additional pretax gains
of $215.3 million consisting of a pretax gain of $184.8 million primarily from
the sale of a portion of ALLTEL's investment in MCI WorldCom common stock and a
pretax gain of $30.5 million from the sale of its ownership interest in a
cellular partnership serving the Omaha, Nebraska market. The gains from these
transactions were partially offset by termination fees of $3.5 million
associated with the early retirement of long-term debt of a subsidiary.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
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<TABLE>
<CAPTION>
Communications-Wireless Operations
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Three Months Ended Nine Months Ended Twelve Months Ended
Sept. 30, Sept. 30, Sept. 30,
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $720,619 $609,549 $2,054,369 $1,723,541 $2,670,584 $2,242,435
Operating income $247,042 $198,580 $ 687,573 $ 508,575 $ 853,604 $ 638,462
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</TABLE>
Wireless revenues and sales increased $111.1 million or 18 percent, $330.8
million or 19 percent and $428.1 million or 19 percent for the three, nine and
twelve month periods ended September 30, 1999, respectively. Operating income
increased $48.5 million or 24 percent, $179.0 million or 35 percent and $215.1
million or 34 percent for the three, nine and twelve month periods of 1999,
respectively.
7
<PAGE>
During the past twelve month period, customer growth remained strong as the
number of wireless customers grew to 4,857,847 from 4,288,077, an increase of
569,770 customers or 13 percent. During the first nine months of 1999, ALLTEL
purchased wireless properties in Alabama and Colorado and acquired a majority
ownership interest in a wireless property in Illinois. In addition, the Company
also increased its ownership interest in the Richmond, Va. market to 100 percent
through the exchange of its minority interest investment in the Orlando, Fl.
market. These transactions accounted for approximately 140,000 of the overall
increase in wireless customers that occurred during the past twelve month
period. Including the effect of acquisitions, ALLTEL placed more than 1,359,000
gross units in service during the first nine months of 1999, compared to
approximately 1,200,000 gross units for the same period of 1998. Overall, the
Company's market penetration rate (number of customers as a percent of the total
population in ALLTEL's service areas) increased to 12.4 percent as of September
30, 1999. Customer churn (average monthly rate of customer disconnects)
increased slightly in all periods of 1999 and was 2.22 percent, 2.14 percent and
2.21 percent for the three, nine and twelve months ended September 30, 1999,
respectively, compared to 1.97 percent, 1.94 percent and 2.01 percent for the
same periods in 1998.
Wireless revenues and sales increased in all periods primarily due to the
growth in wireless customers. Increases in local airtime, roaming and
long-distance revenues, reflecting higher volumes of network usage, also
contributed to the growth in revenues and sales in all periods. The acquisitions
of wireless properties in Alabama and Colorado and the additional ownership
interests acquired in Richmond, Va. and Illinois accounted for approximately
$22.7 million of the increase in revenues and sales in the three month period
and $58.6 million of the increases in revenues and sales in the nine and twelve
month periods of 1999, respectively. The increased usage of the Company's
network facilities boosted the average revenue per customer per month for the
third quarter of 1999 to $50.23 compared to $48.22 for the third quarter of
1998. Average revenue per customer per month were $48.84 and $48.47 for the nine
and twelve months ended September 30, 1999, respectively, compared to $47.27 and
$47.12 for the same two periods of 1998. Average revenue per customer per month
continues to be affected by industry-wide trends of decreased roaming rates and
continued penetration into lower-usage market segments. The Company expects
these trends to continue. In addition, the growth rate of new customers is
expected to decline as the Company's wireless customer base grows. Accordingly,
future revenue growth will be dependent upon ALLTEL's success in maintaining
customer growth in existing markets, increasing customer usage of the Company's
network and providing customers with enhanced products and services.
The growth in operating income for all periods of 1999 primarily reflects
the increases in revenues and sales noted above. Reductions in customer
service-related expenses also contributed to operating income growth in all
periods, while reduced losses realized on the sale of wireless equipment also
contributed to the growth in operating income in the nine and twelve month
periods of 1999. Partially offsetting these increases in operating income in all
periods were increases in selling and marketing costs, including advertising and
sales commissions, consistent with the overall growth in revenues and sales.
Sales and marketing expenses also increased due to expanded competition in
ALLTEL's service areas from other wireless service providers. Increased
depreciation and amortization expense consistent with the growth in wireless
plant in service, and increased data processing charges and other
network-related expenses consistent with the growth in customers and network
traffic also affected operating income growth in all periods. The reduction in
customer service-related expenses reflect cost savings realized as a result of
the merger with 360 and the elimination of certain duplicative salaries and
other employee benefit costs.
The cost to acquire a new wireless customer represents sales, marketing and
advertising costs and the net equipment cost for each new customer added. Cost
to acquire a new wireless customer was $306, $316 and $299 for the three, nine
and twelve month periods ended September 30, 1999, respectively, compared to
$282, $297 and $289 for the same periods of 1998. The increases in the cost to
acquire a new customer in all periods of 1999 reflect increased advertising,
commissions and other selling and marketing costs noted above. Increased
equipment costs consistent with the migration of customers to higher-priced
digital phones also contributed to the increase in cost to acquire a new
customer in the three month period of 1999.
8
<PAGE>
Although ALLTEL intends to continue to utilize its large dealer network, the
Company has expanded its internal sales distribution channels to include its own
retail stores and kiosks located in shopping malls and other retail outlets.
Incremental sales costs at a Company retail store or kiosk are significantly
lower than commissions paid to national dealers. Accordingly, ALLTEL intends to
manage the costs of acquiring new customers by continuing to expand and enhance
its internal distribution channels.
<TABLE>
<CAPTION>
Communications-Wireline Operations
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Three Months Ended Nine Months Ended Twelve Months Ended
Sept. 30, Sept. 30, Sept. 30,
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C>
Local service $195,000 $173,009 $ 571,857 $ 505,749 $ 747,149 $ 668,789
Network access and
long-distance 198,058 174,836 580,992 522,460 757,122 698,826
Miscellaneous 33,601 30,865 97,946 88,117 129,405 116,676
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Total revenues and sales $426,659 $378,710 $1,250,795 $1,116,326 $1,633,676 $1,484,291
Operating income $156,714 $130,052 $ 452,429 $ 391,340 $ 591,662 $ 527,036
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Wireline revenues and sales increased $47.9 million or 13 percent, $134.5
million or 12 percent and $149.4 million or 10 percent for the three, nine and
twelve months ended September 30, 1999, respectively. Wireline operating income
increased $26.7 million or 21 percent, $61.1 million or 16 percent and $64.6
million or 12 percent for the three, nine and twelve month periods of 1999,
respectively.
Local service revenues increased $22.0 million or 13 percent, $66.1 million
or 13 percent and $78.4 million or 12 percent in the three, nine and twelve
month periods ended September 30, 1999, respectively. Customer access lines,
excluding access lines acquired from Standard, increased 6 percent during the
past twelve month period, including the sales of residential and second access
lines. The acquisition of Standard accounted for $8.5 million of the increase in
local service revenues in the three month period of 1999 and accounted for $25.1
million of the increases in local service revenues in both the nine and twelve
month periods of 1999, respectively. Revenues from custom calling and other
enhanced services increased $4.9 million, $13.3 million and $16.3 million in the
three, nine and twelve month periods ended September 30, 1999, respectively,
also contributing to the overall growth in local service revenues in all
periods.
Network access and long-distance revenues increased $23.2 million or 13
percent, $58.5 million or 11 percent and $58.3 million or 8 percent in the
three, nine and twelve month periods ended September 30, 1999, respectively. The
acquisition of Standard accounted for $16.4 million of the increase in network
access and long-distance revenues in the three month period of 1999 and
accounted for $41.6 million of the increases in network access and long-distance
revenues in both the nine and twelve month periods of 1999, respectively. Higher
volumes of access usage and growth in customer access lines also contributed to
the increases in network access and long-distance revenues in all periods of
1999. The increases in network access and long-distance revenues attributable to
the Standard acquisition, growth in customer access lines and increased access
usage were partially offset by a reduction in intrastate toll revenues.
Miscellaneous revenues increased $2.7 million or 9 percent, $9.8 million or
11 percent and $12.7 million or 11 percent for the three, nine and twelve month
periods ended September 30, 1999, respectively. The acquisition of Standard
accounted for $2.0 million of the increase in miscellaneous revenues in the
three month period of 1999 and accounted for $6.0 million of the increases in
miscellaneous revenues in the nine and twelve month periods of 1999. Increases
in directory advertising and equipment sales revenues also contributed to the
growth in miscellaneous revenues for all periods of 1999.
As more fully discussed in Note 7 to the unaudited consolidated financial
statements, the Georgia Public Service Commission ("Georgia PSC") issued an
order requiring that ALLTEL's wireline subsidiaries which operate within its
jurisdiction reduce their annual network access charges by $24 million,
prospectively,
9
<PAGE>
effective July 1, 1996. The Company appealed the Georgia PSC order. In November
1996, the Superior Court of Fulton County, Georgia, (the "Superior Court")
rendered its decision and reversed the Georgia PSC order, finding, among other
matters, that the Georgia PSC had exceeded its authority by ordering the rate
reductions. The Superior Court did not rule on a number of other assertions made
by the Company as grounds for reversal of the Georgia PSC order. The Georgia PSC
appealed the Superior Court's decision, and, in July 1997, the Georgia Court of
Appeals (the "Appellate Court") reversed the Superior Court's decision. The
Company appealed to the Georgia Supreme Court, and on October 5, 1998, the
Georgia Supreme Court, in a 4-3 decision, upheld the Appellate Court's ruling
that the Georgia PSC had the authority to conduct the rate proceeding. The case
was returned to the Superior Court for it to rule on the issues it had not
previously decided. On April 6, 1999, the Superior Court found that, with
respect to the July 1996 order, the Georgia PSC did not provide ALLTEL with
sufficient notice of the charges against the Company, did not provide ALLTEL a
fair opportunity to present its case and respond to the charges, and failed to
satisfy its burden of proving that ALLTEL's rates were unjust and unreasonable.
Further, the Superior Court found that the July 1996 order was an unlawful
attempt to retroactively reduce ALLTEL's rates and certain statutory revenue
recoveries. For each of these independent reasons, the Superior Court vacated
and reversed the July 1996 order and remanded the case with instructions to
dismiss the case. The Georgia PSC appealed the Superior Court's April 1999
decision. The Company remains confident that it will ultimately prevail in this
case, and as such, has not implemented any revenue reductions or established any
reserves for refund related to this matter at this time.
Growth in operating income for all periods of 1999 primarily reflects the
increases in wireline operating revenues and sales, partially offset by
increases in network-related expenses, depreciation and amortization, data
processing charges and other general and administrative expenses. The
acquisition of Standard accounted for $13.1 million of the increase in operating
income in the three month period of 1999 and accounted for $30.9 million of the
increases in operating income in both the nine and twelve month periods of 1999,
respectively. Network-related expenses, data processing charges and other
general and administrative expenses increased in all periods primarily due to
the growth in wireline customers and network usage, while depreciation and
amortization expense increased in all periods primarily due to growth in
wireline plant in service.
Regulatory Matters-Wireline Operations
- --------------------------------------
ALLTEL's wireline subsidiaries, except for the former Aliant operations,
follow the accounting for regulated enterprises prescribed by Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"). If ALLTEL's wireline subsidiaries no longer
qualified for the provisions of SFAS 71, the accounting impact to the Company
would be an extraordinary non-cash charge to operations of an amount that could
be material. Criteria that would give rise to the discontinuance of SFAS 71
include (1) increasing competition that restricts the wireline subsidiaries'
ability to establish prices to recover specific costs and (2) significant change
in the manner in which rates are set by regulators from cost-based regulation to
another form of regulation. The Company periodically reviews these criteria to
ensure the continuing application of SFAS 71 is appropriate. As a result of the
passage of the Telecommunications Act of 1996 (the "96 Act") and state
telecommunications reform legislation, ALLTEL's wireline subsidiaries could
begin to experience increased competition in their local service areas. To date,
competition has not had a significant adverse effect on the operations of
ALLTEL's wireline subsidiaries.
In 1996, the FCC issued regulations implementing the local competition
provisions of the 96 Act. These regulations established pricing rules for state
regulatory commissions to follow with respect to entry by competing carriers
into the local, intrastate markets of incumbent local exchange carriers
("ILECs") and addressed interconnection, unbundled network elements and resale
rates. The FCC's authority to adopt such pricing rules, including permitting new
entrants to "pick and choose" among the terms and conditions of approved
interconnection agreements, was challenged in federal court by various ILECs and
state regulatory commissions. In 1997, the U.S. Eighth Circuit Court of Appeals
(the "Eighth Circuit Court") vacated the
10
<PAGE>
FCC's pricing rules, finding, among other matters, that the FCC had exceeded its
jurisdiction in establishing pricing rules for intrastate communications
services. The Eighth Circuit Court also ruled that ILECs are not required by the
96 Act to recombine network elements purchased by requesting carriers on an
unbundled basis. The FCC asked the U.S. Supreme Court ("Supreme Court") to
review two interconnection decisions of the Eighth Circuit Court. In January
1999, the Supreme Court ruled that the FCC had the jurisdiction to carry out
certain local competition provisions of the 96 Act. These provisions include
designing a pricing methodology for states to follow in determining rates to be
charged by ILECs to competitors for interconnection services and network
elements, adopting rules regarding states' review of pre-existing
interconnection agreements between ILECs and other carriers and adopting rules
relating to dialing parity and standards for granting exemptions to rural ILECs.
As part of its ruling, the Supreme Court reinstated the FCC's "pick and choose"
rule. The Supreme Court remanded a portion of the decision to the Eighth Circuit
Court for it to rule on certain issues that it had not previously decided, such
as whether the FCC's pricing rules are consistent with the 96 Act. Other issues
were remanded to the FCC.
In response to the Supreme Court's decision, the FCC recently completed a
rulemaking outlining how it will interpret the "necessary" and "impair"
standards set forth in the 96 Act and which specific network elements it will
require ILECs to unbundle as a result of its interpretation of those standards.
The FCC reaffirmed that ILECs must provide unbundled access to six of the
original seven network elements that it required to be unbundled. The six
network elements consist of loops, including loops used to provide high-capacity
and advanced telecommunications services, network interface devices, local
circuit switching, dedicated and shared transport, signaling and call-related
databases, and operations support systems. Access to ILEC operator and directory
assistance services was the one network element that the FCC omitted. The FCC
also imposed on ILECs the obligation to unbundle other network elements
including access to sub-loops or portions of sub-loops, fiber optic loops and
transport. At this time, the FCC declined to impose any obligations on ILECs to
provide unbundled access to packet switching or to digital subscriber line
access multiplexers. Finally the FCC began a rulemaking regarding the ability of
carriers to use certain unbundled network elements as a substitute for the
ILEC's special access services.
In May 1997, the FCC issued regulations applicable to local exchange
carriers ("LECs") relating to access charge reform and universal service. The
access charge reform regulations are applicable mainly to price cap regulated
local exchange companies. Aliant, which ALLTEL recently acquired, formerly was
subject to price cap regulation; however, the FCC has granted ALLTEL a waiver to
operate Aliant on a rate-of-return basis. ALLTEL expects to transition Aliant to
rate-of-return regulation by July 2000. ALLTEL's other wireline subsidiaries are
not price cap regulated companies, and, accordingly, the access charge
regulations, with few exceptions, are not currently applicable to them. However,
the FCC instituted a rulemaking in June 1998 in which it proposed to amend the
access charge rules for rate-of-return LECs in a manner similar to that earlier
adopted for price cap LECs. The FCC's proposal involves the modification of the
transport rate structure, the reallocation of costs in the transport
interconnection charge and amendments to reflect changes necessary to implement
universal service. The issue of additional pricing flexibility for
rate-of-return LECs is expected to be addressed in a subsequent phase of the
proceeding. Once the access charge rules for rate-of-return LECs are finalized,
ALLTEL will assess the impact, if any, the new rules will have on its wireline
operations.
On October 21, 1999, the FCC adopted two orders involving universal service.
In the first order, the FCC completed development of the cost model that will be
used to estimate non-rural ILECs' forwarding-looking costs of providing
telephone service. In the second order, the FCC adopted a methodology that uses
the costs generated by the cost model to calculate the appropriate level of
support for non-rural carriers serving rural areas. Under the new funding
mechanism, seven states (Alabama, Kentucky, Maine, Mississippi, Vermont, West
Virginia, and Wyoming) will receive high-cost support of approximately $255
million. The new high-cost support mechanism should ensure that rates are
reasonably comparable on average among states, while the states will continue to
ensure that rates are reasonably comparable within their borders. The FCC also
adopted a "hold-harmless" measure, which is intended to prevent potential rate
shocks and disruptions in state rate designs when the new high cost mechanism
takes effect on January 1, 2000. The FCC reiterated that the high cost support
11
<PAGE>
mechanism for rural carriers is not scheduled to be revised until January 1,
2001, at the earliest. The FCC also clarified its interpretation of the
definition of a "rural telephone company" under the Act to refer to the legal
entity that provides local exchange services.
Based upon ALLTEL's review of the FCC's current regulations concerning the
universal service subsidy, it is unlikely that material changes in the universal
service funding for ALLTEL's rural rate-of-return wireline subsidiaries will
occur prior to 2001. In 2001, the universal service subsidy may change from
being based on actual costs to being based on a proxy model for ALLTEL's rural
rate-of-return subsidiaries.
Certain aspects of the original universal service decision were appealed to
the U.S. Fifth Circuit Court of Appeals ("Fifth Circuit Court"). In July 1999,
the Fifth Circuit Court ruled on these appeals and affirmed most of the FCC's
decision regarding implementation of the high cost support system. The Fifth
Circuit Court, however, reversed both the FCC's requirement that ILECs recover
their universal service contributions from access charges and the blanket
prohibition on additional state eligibility requirements for carriers receiving
high cost support. The Fifth Circuit Court also concluded that the FCC exceeded
its jurisdiction by assessing carrier contributions to the schools and libraries
program based on their combined interstate and intrastate revenues and by
asserting its authority to do the same with respect to carrier contributions to
the high cost fund. The Fifth Circuit Court subsequently denied petitions for
rehearing but granted the FCC a stay until November 1, 1999. The FCC has now
adopted rules to comply with the court's decision. The amended rules provide for
a single contribution base for purposes of funding all of the universal support
mechanisms. Affected carriers' intrastate revenues are eliminated from the
contribution base. The FCC also ruled that ILECs may recover their contributions
through either access charges or through end user charges.
In October 1998, the FCC began a proceeding to consider a represcription of
the authorized rate-of-return for the interstate access services of
approximately 1,300 ILECs, including ALLTEL's wireline subsidiaries. The
currently prescribed rate-of-return is 11.25 percent. The purpose of the FCC's
proceeding is to determine whether the prescribed rate-of-return corresponds to
current market conditions and whether the rate should be changed. A decision by
the FCC related to this matter may be issued later this year.
In March 1999, the FCC released an order designed to facilitate the
development of competition in the advanced services market. The FCC determined
that ILECs must make available to requesting competitive local exchange carriers
("CLECs") the use of shared collocation arrangements. Competitiors must also be
able to collocate all equipment used for interconnection and/or access to
unbundled network elements even when that equipment includes a switching or
enhanced services function. This decision has been appealed by certain ILECs to
the U.S. Court of Appeals, Washington, D.C. Circuit. The FCC also issued a
further rulemaking to determine whether the FCC should mandate line sharing
nationally by ILECs in order that CLECs may provide data or advanced services
over those lines.
Because resolution of the regulatory matters discussed above that are
currently under FCC or judicial review is uncertain and regulations to implement
other provisions of the 96 Act have yet to be issued, ALLTEL cannot predict at
this time the specific effects, if any, that the 96 Act and its implementing
regulations will have on its wireline operations; however, the Company still
believes that it will be able to recover its costs and earn a fair
rate-of-return as provided for through the regulatory process.
12
<PAGE>
<TABLE>
<CAPTION>
Communications-Emerging Businesses Operations
- ------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
Sept. 30, Sept. 30, Sept. 30,
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $ 71,343 $ 46,247 $196,541 $117,307 $246,552 $149,143
Operating loss $(14,588) $(10,764) $(33,127) $(25,711) $(45,393) $(28,593)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Emerging businesses consist of ALLTEL's long-distance, CLEC, Internet
access, network management and PCS operations. Long-distance and Internet access
services are currently marketed to residential and business customers in the
majority of states in which ALLTEL provides communications services. In 1998,
ALLTEL began offering CLEC and network management services to business customers
in select markets. In 1999, ALLTEL expanded its CLEC product offering to include
residential customers in certain areas, including Little Rock, Ark. and
Charlotte, N.C. The Company plans to expand its CLEC operations into additional
markets in North Carolina and Virginia later this year. PCS has been offered in
Jacksonville, Fla., since March 1998 and in the Birmingham and Mobile, Ala.
markets since February 1999.
Emerging businesses' revenues and sales increased $25.1 million or 54
percent, $79.2 million or 68 percent and $97.4 million or 65 percent for the
three, nine and twelve month periods ended September 30, 1999. The increases in
revenues and sales in all periods primarily reflect growth in the long-distance,
Internet and CLEC operations, primarily driven by growth in ALLTEL's customer
base for these services. Long-distance revenues increased $11.8 million, $37.2
million and $42.5 million, Internet revenues increased $4.3 million, $12.2
million and $15.2 million while CLEC revenues increased $3.2 million, $13.2
million and $18.5 million in the three, nine and twelve month periods ended
September 30, 1999, respectively. Operating losses sustained by emerging
businesses increased $3.8 million or 36 percent, $7.4 million or 29 percent and
$16.8 million or 59 percent for the three, nine and twelve month periods of
1999, respectively, primarily due to the PCS operations reflecting the start-up
nature of this business.
<TABLE>
<CAPTION>
Information Services Operations
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
Sept. 30, Sept. 30, Sept. 30,
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $312,855 $292,169 $932,103 $856,221 $1,237,650 $1,120,369
Operating income $ 44,479 $ 40,417 $128,217 $116,609 $ 174,259 $ 157,335
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Information services' revenues and sales increased $20.7 million or 7
percent, $75.9 million or 9 percent and $117.3 million or 10 percent for the
three, nine and twelve month periods ended September 30, 1999, respectively.
Operating income increased $4.1 million or 10 percent, $11.6 million or 10
percent and $16.9 million or 11 percent for the three, nine and twelve month
periods ended September 30, 1999, respectively.
Revenues and sales increased in all periods of 1999, primarily due to growth
in the financial services and telecommunications outsourcing operations,
reflecting volume growth in existing data processing contracts and the addition
of new outsourcing agreements. Financial services, including the residential
lending and international operations, produced revenue increases of $6.0
million, $27.5 million and $61.2 million, while telecommunications revenues
increased $21.0 million, $60.8 million and $69.3 million in the three, nine and
twelve month periods ended September 30, 1999, respectively. Revenues earned
from new contracts accounted for approximately $5 million, $21 million and $42
million of the overall increases in revenues and sales in the three, nine and
twelve month periods of 1999, respectively. The growth in telecommunications
revenues and sales in all periods primarily resulted from additional billings to
affiliates reflecting the Company's recent acquisitions. The increases in
revenues and sales in all periods were partially offset by lost revenues
resulting from contract terminations due primarily to the merger and
consolidation activity in the domestic financial services market. The domestic
financial services industry continues to experience consolidation due to
mergers.
13
<PAGE>
The increases in operating income in all periods primarily reflect the
growth in revenues and sales noted above, partially offset by lower margins
realized by the international financial services business and by the loss of
higher margin operations due to contract terminations. Operating income for the
nine and twelve month periods of 1999 also reflects an unfavorable cumulative
margin adjustment of $4.6 million recorded in the second quarter related to one
outsourcing agreement accounted for under the percentage-of-completion method.
Operating income for all periods of 1999 also reflects increased depreciation
and amortization expense and additional software development costs and other
operating costs. Depreciation and amortization expense increased in all periods
primarily due to the acquisition of additional data processing equipment and due
to an increase in amortization of internally developed software.
<TABLE>
<CAPTION>
Other Operations
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
Sept. 30, Sept. 30, Sept. 30,
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $153,823 $178,593 $414,884 $425,155 $591,079 $532,330
Operating income $ 5,986 $ 6,975 $ 16,300 $ 19,242 $ 22,984 $ 22,994
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other operations consist of the product distribution and directory
publishing operations. Revenues and sales decreased $24.8 million or 14 percent,
decreased $10.3 million or 2 percent and increased $58.7 million or 11 percent
for the three, nine and twelve month periods ended September 30, 1999,
respectively. Operating income decreased $1.0 million or 14 percent and $2.9
million or 15 percent for the three and nine month periods and decreased
slightly in the twelve month period ended September 30, 1999, respectively.
The decreases in revenues and sales in both the three and nine month periods
were primarily due to a reduction in sales of telecommunications and data
products to affiliates. Sales to affiliates decreased $36.4 million and $28.9
million in the three and nine month periods of 1999, respectively. Partially
offsetting the reduction in affiliate sales was growth in directory publishing
revenues reflecting an increase in the number of directory contracts published.
Compared to the corresponding periods of 1998, 13, 20 and 23 additional
directory contracts were published in the three, nine and twelve month periods
ended September 30, 1999, respectively. As a result of these additional
contracts, publishing revenues increased $4.7 million, $8.7 million and $9.8
million in the three, nine and twelve month periods of 1999, respectively. In
addition to the growth in the directory publishing operations, revenues and
sales for the twelve month period of 1999 also reflect increased sales of
telecommunications and data products to affiliated and non-affiliated customers.
In the twelve month period ended September 30, 1999, sales of telecommunications
and data products to affiliates and non-affiliates increased $34.9 million and
$13.4 million, respectively. The increase in affiliate sales was primarily due
to additional purchases made by the Company's wireless subsidiaries, reflecting
the merger with 360 and the expansion of ALLTEL Supply's product lines
to include wireless equipment.
The decreases in other operations' operating income for the three and nine
month periods of 1999 primarily reflect the decreases in revenues and sales
noted above, as well as lower gross profit margins realized by ALLTEL Supply on
affiliated sales.
<TABLE>
<CAPTION>
Corporate Expenses
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
Sept. 30, Sept. 30, Sept. 30,
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate operating expenses $ 10,606 $ 6,765 $ 26,194 $ 12,731 $ 36,315 $ 19,041
Merger and integration expenses
and other charges 90,520 252,000 90,520 252,000 90,520 252,000
Provision to reduce carrying
value of certain assets - 55,000 - 55,000 - 55,000
-------- -------- -------- -------- -------- --------
Total corporate expenses $101,126 $313,765 $116,714 $319,731 $126,835 $326,041
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
As indicated in the above table, corporate expenses for all periods of 1999
include the $90.5 million of merger and integration expenses and other charges
recorded in the third quarter, while corporate expenses for all periods of 1998
include the $252 million of merger and integration expenses and the $55 million
charge related to changes in GTE's customer care and billing contract, as
previously discussed. Excluding the impact of the merger and integration
expenses and other charges and asset write-downs, corporate expenses would have
increased $3.8 million or 57 percent, $13.5 million or 106 percent and $17.3
million or 91 percent for the three, nine and twelve month periods ended
September 30, 1999, respectively. Net of the merger and integration expenses and
other charges and asset write-downs, the increases in corporate expenses in all
periods of 1999 reflect increases in employee benefit costs and depreciation and
amortization expense.
OTHER FINANCIAL STATEMENT ITEMS
Interest Expense
- ----------------
Interest expense increased $1.2 million or 2 percent and decreased $3.4
million or 1 percent in the three and twelve month periods ended September 30,
1999, respectively. Interest expense also decreased slightly in the nine month
period of 1999. The changes in interest expense in all periods reflect the
issuance in April 1999 of $300 million of 6.8 percent debentures due 2029. The
increases in interest expense attributable to this debt issuance were partially
offset in the three month period and more than offset in the nine and twelve
month periods by decreases in the average amount of borrowings outstanding and
the weighted average borrowing rates applicable to ALLTEL's revolving credit
agreement.
Income Taxes
- ------------
Income tax expense increased $37.6 million or 43 percent, $32.0 million or 9
percent and $69.2 million or 15 percent for the three, nine and twelve month
periods ended September 30, 1999, respectively. The increases in income tax
expense in each period primarily reflects the tax-related impact of the merger
and integration expenses and the other non-recurring and unusual items recorded
in each period as previously discussed. Excluding the impact on tax expense of
these items in each period, income tax expense would have increased $21.4
million or 17 percent, $99.0 million or 30 percent and $136.3 million or 32
percent in the three, nine and twelve month periods ended September 30, 1999,
respectively, consistent with the overall growth in the Company's earnings from
continuing operations before non-recurring and unusual items.
Average Common Shares Outstanding
- ---------------------------------
The average number of common shares outstanding increased 3 percent in the
three month period and increased 2 percent in both the nine and twelve month
periods ended September 30, 1999, respectively. The increases in all periods
primarily reflect the additional shares issued in January 1999 in connection
with the Standard acquisition, as well as the additional shares issued in
September 1999 to complete the AIR and Southern Data acquisitions.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
ALLTEL's total capital structure was $7.9 billion at September 30, 1999,
reflecting 51 percent common and preferred equity and 49 percent debt. This
compares to a capital structure of $7.4 billion at December 31, 1998, reflecting
49 percent common and preferred equity and 51 percent debt. The Company has
adequate internal and external resources available to finance its ongoing
operating requirements, including capital expenditures, business development and
the payment of dividends.
15
<PAGE>
Cash Flows from Operations
- --------------------------
Cash provided from operations continues to be the Company's primary source
of liquidity. Cash provided from operations was $993.2 million and $1,443.7
million for the nine and twelve month periods ended September 30, 1999,
respectively, compared to $955.4 million and $1,360.7 million for the same
periods in 1998. The increases in both the nine and twelve month periods reflect
changes in working capital requirements, including the timing of payment of
accounts payable, partially offset by growth in the earnings of the Company,
excluding the effects of all non-recurring and unusual items.
Cash Flows from Investing Activities
- ------------------------------------
Capital expenditures continued to be ALLTEL's primary use of capital
resources. Capital expenditures for the nine and twelve month periods of 1999
were $677.3 million and $1,017.6 million, respectively, compared to $657.6
million and $980.4 million for the same periods in 1998. During the past
two-year period, the Company funded the majority of its capital expenditures
through internally generated funds. Capital expenditures were incurred to
continue to modernize and upgrade ALLTEL's telecommunications network and to
expand into existing information services markets. In addition, capital
expenditures were incurred to construct additional network facilities to provide
PCS and digital wireless service and to offer other communications services,
including long-distance, Internet and local competitive access services. Capital
expenditures are forecast at approximately $900 million for 1999, which are
expected to be funded primarily from internally generated funds.
Cash outlays for the acquisition of property for the nine and twelve month
periods of 1999 were $93.8 million and $95.4 million, respectively. These
amounts are net of cash acquired of approximately $24.1 million received in the
Standard acquisition and principally consist of cash outlays of $46.5 million
for a wireless property in Colorado, $30.6 million for a wireless property in
Illinois, and $20.0 million for a wireless property in Alabama. In addition to
these acquisitions, the nine and twelve months ended September 30, 1999, include
a cash outlay of $12.1 million for the purchase of the remaining ownership
interest in a wireless property in Nebraska in which the Company already owned a
controlling interest. The nine and twelve month periods of 1998 include cash
outlays of $34.6 million for the purchase of two wireless properties in Georgia
and $43.6 million for the purchase of additional ownership interests in wireless
properties in which the Company previously owned a controlling interest.
Cash flows from investing activities for the nine and twelve month periods
ended September 30, 1999 include proceeds from the return on investments of
$68.9 million and $113.6 million, respectively, principally consisting of cash
distributions received from ALLTEL's wireless minority investments. Cash flows
from investing activities for the nine and twelve month periods ended September
30, 1998 also include proceeds from the sale of investments of $312.1 million
and $315.7 million, respectively. These proceeds principally consist of $288.2
million received from the sale of a portion of the Company's investment in MCI
WorldCom common stock. In addition, the Company also received proceeds of $20.2
million from the sale of ALLTEL's minority ownership interest in various
wireless properties. The proceeds received from these investment sales were used
primarily to reduce borrowings under the Company's revolving credit agreement.
Cash Flows from Financing Activities
- ------------------------------------
Dividend payments remain a significant use of capital resources for the
Company. Common and preferred dividend payments for the nine and twelve month
periods ended September 30, 1999 were $284.2 million and $372.2 million,
respectively, compared to $184.1 million and $244.3 million for the same periods
in 1998. The increases in dividend payments in both periods primarily reflect
the additional ALLTEL common shares issued and outstanding due to the mergers
with 360, Aliant, Liberty and Standard, as well as growth in the annual
dividend rate on ALLTEL's common stock. In October 1999, the Company's Board of
Directors approved a 5 percent increase in the quarterly common stock dividend
rate from $.305 to
16
<PAGE>
$.32 per share. This action raised the annual dividend rate to $1.28 per share
and marked the 39th consecutive year in which ALLTEL has increased its common
stock dividend. Distributions to minority investors were $75.5 million and
$120.2 million for the nine and twelve months ended September 30, 1999,
respectively, compared to $58.1 million and $74.3 million for the same periods
in 1998. The increases in distributions for both periods reflect the improved
operating results of the wireless properties managed by the Company. Cash flows
from financing activities for the twelve months ended September 30, 1998 include
a cash outlay of $110.3 million for the repurchase by the Company of 3.1 million
of its common shares.
The Company has a $1 billion line of credit under a revolving credit
agreement. Borrowings outstanding under this agreement at September 30, 1999
were $366.1 million, compared to $578.5 million that were outstanding at
December 31, 1998. Borrowings outstanding under this agreement at September 30,
1998 were $633.6 million. The weighted average interest rate on borrowings
outstanding under the revolving credit agreement at September 30, 1999, was 5.7
percent. In March 1999, ALLTEL filed a shelf registration statement with the
Securities and Exchange Commission providing for the issuance of up to $500
million in aggregate initial offering price of unsecured debt securities. In
April 1999, ALLTEL issued $300 million of 6.8 percent debentures due May 1,
2029, under this shelf registration statement. The net proceeds of $298.2
million were used to reduce borrowings outstanding under the revolving credit
agreement. The $300 million debentures, net of issuance costs, represents all of
the long-term debt issued in the first nine months of 1999, and substantially
all of the long-term debt issued in the twelve month period ended September 30,
1999. The net decreases in revolving credit borrowings from both December 31,
1998 and September 30, 1998 represent the majority of long-term debt retired
during the nine and twelve months ended September 30, 1999, respectively.
Scheduled long-term debt retirements, net of the revolving credit agreement
activity, amounted to $64.8 million and $84.1 million for the nine and twelve
month periods of 1999, respectively.
Year 2000 Compliance
- --------------------
The Year 2000 issue affects the Company's internal computer systems and
certain software, systems and services that the Company provides to its
customers, as well as the Company's infrastructure. The Company's Year 2000 plan
consists of eight phases: (i) Awareness; (ii) Inventory; (iii) Third-Party
Strategies; (iv) Risk Assessment; (v) Planning; (vi) Remediation; (vii) Testing;
and (viii) Implementation. Except with regard to the recent acquisition of
Liberty discussed below, as of the date of this filing, the Company has
completed all of the phases of the Year 2000 plan for the Company's critical
internal computer systems and software, systems and services that the Company
provides to its customers and for which the Company is responsible.
Additionally, the Company has completed all phases of the Year 2000 plan for the
Company's critical infrastructure, except for critical infrastructure acquired
in the recent acquisition of Liberty.
During the first quarter of 1999, the Company acquired Standard and Durango
Cellular Telephone Company ("Durango"). In July 1999, the Company completed its
acquisition of Aliant. The Company applied its Year 2000 methodology described
above to these companies and completed all of the Year 2000 plan phases listed
above for the critical internal computer systems and software, systems and
services that Standard, Durango and Aliant provide to its customers and for
which these companies are responsible, as well as for the infrastructure
acquired in the Standard, Durango and Aliant acquisitions.
On September 30, 1999, ALLTEL acquired Liberty. The Company continues to
apply its Year 2000 methodology to Liberty's critical internal computer systems
and software, systems and services that Liberty provides to its customers and
for which Liberty is responsible, as well as the infrastructure acquired in the
Liberty acquisition. For those critical internal computer systems, software,
systems, services and infrastructure, the Awareness, Inventory, Risk Assessment,
and Planning phases have been completed and, with the exception of Liberty's
customer care and billing system, the Third-Party Strategies, Remediation,
Testing and Implementation phases have been completed. The Company plans to
complete the Third-Party Strategies, Remediation, Testing and Implementation
phases for Liberty's customer care and billing system
17
<PAGE>
by November 30, 1999. Liberty's wireless customers constitute approximately 3
percent of the Company's wireless customers.
As part of its Year 2000 plan, the Company implemented a third party
management process and contacted its critical vendors and suppliers and other
third parties upon which the Company depends regarding their plans for making
their products, services and systems Year 2000 compliant. The Company's ability
to achieve Year 2000 compliance and meet its target completion dates is
dependent upon Year 2000 efforts of its vendors and suppliers. The Company is
also dependent upon other third parties who provide essential services (such as
utilities, interexchange carriers, etc.) to make their critical systems Year
2000 compliant in a timely manner. Generally, the Company does not have the
ability to test those systems for Year 2000 compliance and, instead, must rely
on the third parties' representations.
Contingency planning to maintain and restore service in the event of a
natural disaster, power failure, or software related interruption has long been
part of the Company's standard business practices. The Company has leveraged
this experience in the development and implementation of its Year 2000
contingency plans that assess the potential for business disruption in various
scenarios. Those contingency plans address possible, but unlikely, "worst case"
scenarios involving the interruption of telecommunications and information
technology services and/or interruption of customer billing, operating and other
information systems, and provide for key-operation back-up and alternative
solutions for recovery. With the exception of Liberty, the Company has developed
contingency plans for its critical systems and plans to augment, modify and test
those contingency plans throughout the end of the year, as appropriate.
Contingency plans consistent with the Company's Year 2000 methodology will be
developed for Liberty prior to the end of the year.
The Company estimates the total cost of its Year 2000 efforts to be
approximately $80 million. As of September 30, 1999, ALLTEL has incurred
approximately $73 million of the total amount. The Company has and will
capitalize and subsequently amortize approximately one-half of the total Year
2000 cost, including costs relating to the remediation of the Company's software
products. Some of the Company's Year 2000 costs are not incremental, but rather
represent the redeployment of existing resources. As for the estimated costs
associated with making the Company's customers' systems Year 2000 compliant in
those situations where the Company is obligated to do so, the Company has
treated those costs as contract costs and has not included them in the Company's
Year 2000 costs. The Company continues to evaluate the estimated costs
associated with its Year 2000 efforts based on actual experience. The Company
believes, based on available information, that its Year 2000 costs will not have
a material adverse effect on its results of operations. The above information is
based on the Company's current best estimates using numerous assumptions of
future events. Given the complexity of the Year 2000 issues and possible
unidentified risks, actual results may vary from those anticipated and discussed
above.
Other Financial Information and Recently Issued Accounting Pronouncements
- -------------------------------------------------------------------------
During the first nine months of 1999, there were no material changes in the
market risks discussed in the Company's Annual Report on Form 10-K, as amended
for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities", ("SFAS 133"). This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. SFAS 133 requires that changes in a derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. The FASB recently issued SFAS No. 137, which deferred the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000. As
ALLTEL does not have significant derivative financial instruments, the Company
does not expect the adoption of SFAS 133 to have a material impact on its
reported earnings and/or other comprehensive income.
18
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to security holders for a vote during
the third quarter of 1999.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) See the exhibits specified on the Index of Exhibits located at
Page 21.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated October 12, 1999, reporting
under Item 5, Other Events, the Company refiled its audited
consolidated financial statements for the years ended December
31, 1998, 1997 and 1996 to include supplemental financial
information related to the Company's completed merger with
Liberty Cellular, Inc.
Current Report on Form 8-K dated August 13, 1999, reporting
under Item 5, Other Events, the Company refiled its audited
consolidated financial statements for the years ended December
31, 1998, 1997 and 1996. The refiled consolidated financial
statements included Arthur Andersen LLP's reissued unqualified
audit opinion which excluded any reference to the report of
other auditors. In addition, the refiled consolidated financial
statements included supplemental financial information related
to the Company's completed merger with Aliant Communications,
Inc. ("Aliant").
Current Report on Form 8-K dated July 2, 1999, reporting under
Item 2, Acquisition or Disposition of Assets, the Company's
Press Release announcing that ALLTEL and Aliant had completed
their merger. Historical financial statements of Aliant are not
required to be filed pursuant to Rule 3-05 of Regulation S-X. In
addition, pro forma financial information is not required to be
filed pursuant to Article 11 of Regulation S-X.
No other reports on Form 8-K have been filed during the quarter
for which this report is filed.
19
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLTEL CORPORATION
-----------------------------
(Registrant)
/s/ Jeffery R. Gardner
-----------------------------
Jeffery R. Gardner
Senior Vice President - Finance and Treasurer
(Principal Accounting Officer)
November 12, 1999
20
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
INDEX OF EXHIBITS
Form 10-Q Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
(10)(k)(8) Amendment No. 13 to ALLTEL Corporation 33
Pension Plan (January 1, 1994 Restatement)
(10)(l)(9) Amendment No. 12 to ALLTEL Corporation 39
Profit-Sharing Plan (January 1, 1994 Restatement)
(10)(o)(9) Amendments No. 13 and 14 to ALLTEL Corporation 42
Thrift Plan (January 1, 1994 Restatement)
(19) Interim Report to Stockholders and 22 - 32
Notes to Unaudited Consolidated Financial
Statements for the periods ended
September 30, 1999 and 1998
(27) Financial Data Schedule 47
for the nine months ended September 30, 1999
21
Exhibit 19
1999 Third Quarter Interim Report
September 30, 1999
The Power to Simplify
To ALLTEL Stockholders:
ALLTEL recently announced record third quarter results from current businesses,
which exclude one-time adjustments.
Revenues and earnings per share grew 13 percent and 19 percent,
respectively, to $1.6 billion and 69 cents per share. Among the highlights from
current businesses in the third quarter:
o Net income and operating income grew 22 percent and 20 percent,
respectively, from a year ago, to $216 million and $429 million.
o Communications revenue and operating income grew 18 percent and 22
percent, respectively, to $1.2 billion and $389 million.
o Wireless operations added more than 90,000 customers in the quarter as
revenue and operating income from this business grew 18 percent and 24
percent, respectively to $721 million and $247 million.
o Revenues and operating income from ALLTEL's wireline business grew 13
percent and 21 percent, respectively, to $427 million and $157 million.
o ALLTEL completed mergers with Aliant Communications in Nebraska and
Liberty Cellular, Inc., in Kansas. ALLTEL now has more than 8 million
communications customers and operates in 25 states.
o ALLTEL Information Services reported its seventh consecutive quarter of
double digit operating income growth. Operating income grew 10 percent
from a year ago to $44.5 million.
We are pleased to report record revenues, net income and earnings per share
from current businesses. Our communications business continued its successful
strategy of expanding into geographically focused markets. With the Nebraska and
Kansas mergers, ALLTEL now operates in 25 states.
In the quarter, we added competitive local exchange service (CLEC) to our
bundled offerings to customers in Little Rock, Ark. We will extend CLEC to other
markets in North Carolina, Virginia and other areas later this year.
Our information services business continued to advance its leadership
position in the financial services and telecommunications industries. We signed
a number of key contracts during the quarter, including a three-year renewal
with Norwest Mortgage, Inc., and continue to demonstrate that we are a leader in
the information services industry.
Third quarter results include approximately $90.5 million in one-time,
pre-tax charges primarily related to the Aliant and Liberty mergers. The merger
and integration expenses, which total $73.4 million, include professional and
financial advisors' fees, employee-related expenses and other integration costs.
This amount also includes a restructuring charge of $17.1 million related to a
planned workforce reduction and lease termination costs related to the
consolidation of certain operating locations.
The one-time charges reduced third quarter earnings per share by 21 cents.
The record third quarter results from current businesses were outstanding,
both from a strategic and financial standpoint, and show we are delivering on
our commitment to deliver value to customers, shareholders and employees.
Board Declares Dividends, Selects New Director
ALLTEL's Board of Directors increased the regular quarterly common dividend from
30.5 cents to 32 cents per share. The new indicated annual dividend rate will be
$1.28 per common share, an increase of 6 cents or 4.9 percent over the previous
rate. This is the 39th consecutive annual dividend increase since ALLTEL was
founded.
The 32 cent dividend is payable Jan. 3, 2000 to stockholders of record as
of Dec. 9, 1999.
Dividends were also declared on all series of ALLTEL's preferred stock.
Preferred dividends are payable Dec. 15, 1999 to stockholders of record as
of Nov. 29, 1999.
Fred W. Smith, chairman of the board of the Donald W. Reynolds Foundation
in Las Vegas, was named to the ALLTEL Board of Directors in September.
/s/ Joe Ford
Joe T. Ford,
Chairman and Chief Executive Officer
October 28, 1999
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Nine Months Twelve Months
Ended Sept. 30, Ended Sept. 30, Ended Sept. 30,
(Dollars in thousands,
except per share amounts) 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND SALES:
Service revenues $1,460,294 $1,314,832 $4,254,139 $3,734,185 $5,571,223 $4,890,271
Product sales 168,101 131,547 451,369 405,582 621,313 526,530
---------- ---------- ---------- ---------- ---------- ----------
Total revenues and sales 1,628,395 1,446,379 4,705,508 4,139,767 6,192,536 5,416,801
- -----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Operations 816,487 752,353 2,407,083 2,180,758 3,184,285 2,851,704
Cost of products sold 163,867 141,418 432,258 388,676 604,941 510,554
Depreciation and amortization 219,014 194,113 640,969 573,009 842,509 756,350
Merger and integration expenses
and other charges 90,520 252,000 90,520 252,000 90,520 252,000
Provision to reduce carrying
value of certain assets - 55,000 - 55,000 - 55,000
---------- ---------- ---------- --------- ---------- ----------
Total costs and expenses 1,289,888 1,394,884 3,570,830 3,449,443 4,722,255 4,425,608
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 338,507 51,495 1,134,678 690,324 1,470,281 991,193
Equity earnings in unconsolidated
partnerships 23,327 31,423 83,298 81,550 116,607 106,627
Minority interest in consolidated
partnerships (26,301) (29,682) (91,142) (79,091) (116,536) (100,118)
Other income, net 10,621 15,493 38,316 27,016 65,583 32,854
Interest expense (71,297) (70,135) (209,913) (210,302) (277,986) (281,385)
Gain on disposal of assets and other - 80,901 - 292,672 - 292,672
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 274,857 79,495 955,237 802,169 1,257,949 1,041,843
Income taxes 124,508 86,900 405,075 373,124 533,705 464,497
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) 150,349 (7,405) 550,162 429,045 724,244 577,346
Preferred dividends 215 239 674 1,020 902 1,319
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to
common shares $ 150,134 $ (7,644) $ 549,488 $ 428,025 $ 723,342 $ 576,027
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Basic $.48 $(.03) $1.76 $1.40 $2.33 $1.89
Diluted $.47 $(.02) $1.74 $1.39 $2.30 $1.87
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
Nine Months Twelve Months
Ended Sept. 30, Ended Sept. 30,
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED FROM OPERATIONS $ 993,239 $ 955,359 $ 1,443,728 $1,360,699
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (677,270) (657,647) (1,017,627) (980,424)
Purchase of property, net of cash acquired (93,845) (79,558) (95,389) (88,762)
Additions to capitalized software development costs (30,901) (69,059) (51,978) (88,893)
Additions to investments (8,698) (21,679) (21,644) (29,334)
Proceeds from the sale of investments - 312,078 13,988 315,685
Proceeds from the return on investments 68,935 13,640 113,619 43,143
Other, net 468 (81,721) 37,074 (116,678)
---------- ----------- ----------- ----------
Net cash used in investing activities (741,311) (583,946) (1,021,957) (945,263)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on preferred and common stock (284,154) (184,091) (372,154) (244,254)
Reductions in long-term debt (277,277) (340,604) (351,549) (266,638)
Purchase of common stock - (14,827) (286) (110,267)
Preferred stock redemptions and purchases (540) (5,136) (448) (5,216)
Distributions to minority investors (75,509) (58,056) (120,241) (74,263)
Contributions from minority investors - 10,000 - 10,000
Long term debt issued 298,174 221,304 321,941 234,304
Common stock issued 35,312 19,430 63,107 24,086
---------- ---------- ----------- ----------
Net cash used in financing activities (303,994) (351,980) (459,630) (432,248)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and short-term investments (52,066) 19,433 (37,859) (16,812)
CASH AND SHORT-TERM INVESTMENTS:
Beginning of the period 89,065 55,425 74,858 91,670
---------- ---------- ----------- ----------
End of the period $ 36,999 $ 74,858 $ 36,999 $ 74,858
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
ASSETS 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 36,999 $ 89,065 $ 74,858
Accounts receivable (less allowance for doubtful
accounts of $37,301, $30,207 and $31,886, respectively) 939,679 843,129 840,073
Materials and supplies 17,919 20,067 43,838
Inventories 112,558 98,443 89,478
Prepaid expenses and other 63,784 51,857 63,310
----------- ------------ -----------
Total current assets 1,170,939 1,102,561 1,111,557
- -----------------------------------------------------------------------------------------------------------------------
Investments 1,500,460 1,675,792 1,374,872
Goodwill and other intangibles 2,009,960 1,824,225 1,840,304
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Wireline 5,138,871 4,629,308 4,579,226
Wireless 3,399,950 2,935,172 2,801,753
Information services 776,760 678,244 683,741
Other 181,671 182,066 180,487
Under construction 488,602 652,726 537,877
------------ ------------ -----------
Total property, plant and equipment 9,985,854 9,077,516 8,783,084
Less accumulated depreciation 4,404,424 3,814,390 3,703,422
------------ ------------ -----------
Net property, plant and equipment 5,581,430 5,263,126 5,079,662
- -----------------------------------------------------------------------------------------------------------------------
Other assets 307,569 289,750 275,784
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,570,358 $10,155,454 $9,682,179
- -----------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 73,127 $ 81,012 $ 71,682
Accounts and notes payable 437,436 564,399 493,617
Advance payments and customer deposits 132,141 143,573 145,187
Accrued taxes 103,630 136,382 122,342
Accrued dividends 94,794 90,804 86,239
Other current liabilities 338,222 330,518 315,424
------------ ----------- ----------
Total current liabilities 1,179,350 1,346,688 1,234,491
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt 3,812,688 3,678,626 3,738,149
Deferred income taxes 1,004,677 956,296 828,380
Other liabilities 557,872 536,807 513,185
Preferred stock, redeemable 4,409 5,005 5,018
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 9,102 9,121 9,125
Common stock 313,930 306,015 305,303
Additional capital 969,311 919,021 909,109
Unrealized holding gain on investments 527,285 548,723 368,176
Retained earnings 2,191,734 1,849,152 1,771,243
------------ ----------- -----------
Total shareholders' equity 4,011,362 3,632,032 3,362,956
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,570,358 $10,155,454 $9,682,179
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
HIGHLIGHTS (UNAUDITED)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, Twelve Months Ended Sept. 30,
--------------------------------- -------------------------------- ------------------------------
(Dollars in thousands, %Increase %Increase %Increase
except per share amounts) 1999 1998 (Decrease) 1999 1998 (Decrease) 1999 1998 (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM CURRENT BUSINESSES:
Revenues and sales:
Wireless $ 720,619 $ 609,549 18 $2,054,369 $1,723,541 19 $2,670,584 $2,242,435 19
Wireline 426,659 378,710 13 1,250,795 1,116,326 12 1,633,676 1,484,291 10
Emerging businesses 71,343 46,247 54 196,541 117,307 68 246,552 149,143 65
---------- ---------- ---------- ---------- ---------- ----------
Total communications 1,218,621 1,034,506 18 3,501,705 2,957,174 18 4,550,812 3,875,869 17
Information services 312,855 292,169 7 932,103 856,221 9 1,237,650 1,120,369 10
Other operations 153,823 178,593 (14) 414,884 425,155 (2) 591,079 532,330 11
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 1,685,299 1,505,268 12 4,848,692 4,238,550 14 6,379,541 5,528,568 15
Less: intercompany
eliminations 56,904 58,889 (3) 143,184 98,783 45 187,005 111,767 67
---------- ---------- ---------- ---------- ---------- ----------
Total revenues and sales $1,628,395 $1,446,379 13 $4,705,508 $4,139,767 14 $6,192,536 $5,416,801 14
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Wireless $ 247,042 $ 198,580 24 $ 687,573 $ 508,575 35 $ 853,604 $ 638,462 34
Wireline 156,714 130,052 21 452,429 391,340 16 591,662 527,036 12
Emerging businesses (14,588) (10,764) (36) (33,127) (25,711) (29) (45,393) (28,593) (59)
---------- ---------- ---------- ---------- ---------- ----------
Total communications 389,168 317,868 22 1,106,875 874,204 27 1,399,873 1,136,905 23
Information services 44,479 40,417 10 128,217 116,609 10 174,259 157,335 11
Other operations 5,986 6,975 (14) 16,300 19,242 (15) 22,984 22,994 -
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 439,633 365,260 20 1,251,392 1,010,055 24 1,597,116 1,317,234 21
Corporate expenses 10,606 6,765 57 26,194 12,731 106 36,315 19,041 91
---------- ---------- ---------- ---------- ---------- ----------
Total operating income $ 429,027 $ 358,495 20 $1,225,198 $ 997,324 23 $1,560,801 $1,298,193 20
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 216,393 $ 177,962 22 $ 616,206 $ 485,972 27 $ 790,288 $ 634,273 25
Basic earnings per share $.69 $.58 19 $1.97 $1.59 24 $2.54 $2.07 23
Diluted earnings per share $.68 $.58 17 $1.95 $1.57 24 $2.51 $2.06 22
- ------------------------------------------------------------------------------------------------------------------------------------
AS REPORTED:
Revenues and sales $1,628,395 $1,446,379 13 $4,705,508 $4,139,767 14 $6,192,536 $5,416,801 14
Operating income $ 338,507 $ 51,495 557 $1,134,678 $ 690,324 64 $1,470,281 $ 991,193 48
Net income (loss) $ 150,349 $ (7,405) 2,130 $ 550,162 $ 429,045 28 $ 724,244 $ 577,346 25
Basic earnings (loss)
per share $.48 $(.03) 1,700 $1.76 $1.40 26 $2.33 $1.89 23
Diluted earnings (loss)
per share $.47 $(.02) 2,450 $1.74 $1.39 25 $2.30 $1.87 23
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares 313,112,000 305,170,000 3 312,396,000 305,221,000 2 310,727,000 305,283,000 2
Current annual dividend rate
per common share $1.22 $1.16 5
Capital expenditures $ 242,613 $ 253,847 (4) $ 677,270 $ 657,647 3 $1,017,627 $ 980,424 4
Total assets $10,570,358 $9,682,179 9
Wireless customers 4,857,847 4,288,077 13
Wireline customers 2,393,450 2,158,286 11
Long-distance customers 812,030 536,606 51
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
Current businesses excludes the merger and integration expenses and other charges, provision to reduce carrying value of certain
assets, and gain on disposal of assets.
Emerging businesses includes the long-distance, local competitive access, Internet access, network management and PCS operations.
</FN>
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation:
The consolidated financial statements at September 30, 1999 and 1998 and
for the three, nine and twelve month periods then ended are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation
of the financial position and operating results for the interim periods.
2. Mergers:
On September 30, 1999, the Company completed mergers with Liberty
Cellular, Inc. and its affiliate, KINI L.C., ("Liberty") under definitive
merger agreements entered into on June 22, 1999. Under terms of the merger
agreements, the outstanding stock of Liberty, which operates under the
name Kansas Cellular, was exchanged for approximately 7.0 million shares
of ALLTEL's common stock. On July 2, 1999, the Company completed its
merger with Aliant Communications, Inc. ("Aliant") under a definitive
merger agreement entered into on December 18, 1998. Under the terms of the
merger agreement, Aliant became a wholly-owned subsidiary of ALLTEL, and
each outstanding share of Aliant common stock was converted into the right
to receive .67 shares of ALLTEL common stock, 23.9 million common shares
in the aggregate. Each of these mergers qualified as a tax-free
reorganization and has been accounted for as a pooling-of-interests. The
accompanying consolidated financial statements have been restated to
include the accounts and results of operations of Aliant and Liberty for
all periods prior to the mergers. The combined operating results of
ALLTEL, Aliant and Liberty include certain eliminations and
reclassification adjustments to conform the accounting and financial
reporting policies of the three companies. Separate and combined results
of operations for certain interim periods are as follows:
<TABLE>
Six Months Three Months Nine Months Twelve Months
Ended Ended Ended Ended
June 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands, except per share amounts) 1999 1998 1998 1998
---------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and sales:
ALLTEL, as reported $2,837,950 $1,332,167 $3,820,615 $5,002,884
Aliant 182,892 89,106 250,260 324,198
Liberty 59,526 28,545 78,167 102,077
Eliminations and reclassifications (3,255) (3,439) (9,275) (12,358)
---------- ---------- ---------- ----------
Combined $3,077,113 $1,446,379 $4,139,767 $5,416,801
========== ========== ========== ==========
Net income:
ALLTEL, as reported $ 356,830 $ (27,975) $ 373,713 $ 505,301
Aliant 32,955 15,085 40,482 54,360
Liberty 10,028 5,485 14,850 17,685
---------- ----------- ---------- ----------
Combined $ 399,813 $ (7,405) $ 429,045 $ 577,346
=========== =========== ========== ==========
Combined earnings per share:
Basic $1.28 $(.03) $1.40 $1.89
Diluted $1.26 $(.02) $1.39 $1.87
</TABLE>
In January 1999, the Company completed a merger with Standard Group, Inc.
("Standard"). In September 1999, the Company also completed mergers with
Advanced Information Resources, Limited ("AIR") and Southern Data Systems
("Southern Data"). In connection with the mergers, approximately 6.5
million shares of ALLTEL common shares were issued. All three mergers
qualified as tax-free reorganizations and were accounted for as
poolings-of-interests. Prior period financial information has not been
restated, however, since the operations of the three acquired companies
are not significant to ALLTEL's consolidated financial statements on
either a separate or aggregate basis. The accompanying consolidated
financial statements include the accounts and results of operations of
Standard, AIR and Southern Data from the applicable date of acquisition.
27
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Merger and Integration Expenses and Other Charges:
During the third quarter of 1999, the Company recorded a pretax charge in
connection with its mergers with Aliant, Liberty, AIR and Southern Data
and with certain loss contingencies and other restructuring activities.
The following is a summary of the significant components included in this
charge:
(In Thousands)
Merger and integration costs $73,410
Restructuring charge 17,110
-------
Total pretax charge $90,520
=======
The merger and integration expenses include professional and financial
advisors' fees of $24.4 million, severance and employee-related expenses
of $15.4 million and other integration costs of $33.6 million. The
Company's merger and integration plan, as approved by ALLTEL's Board of
Directors, provides for a reduction of approximately 200 employees of
Aliant and Liberty, primarily in the corporate support functions, to be
substantially completed by the third quarter of 2000. As of September 30,
1999, the Company had paid $3.7 million in severance and employee-related
expenses and 24 out of the total 200 employee reductions had been
completed. The other integration costs include $12.5 million of lease
termination costs, $10.2 million of costs associated with the early
termination of certain service obligations, and a $4.6 million write-down
in the carrying value of certain in-process and other software development
assets that have no future alternative use or functionality. Also included
are other integration costs incurred in the third quarter consisting of
branding and signage costs of $4.1 million and other expenses of $2.2
million.
The lease termination costs include a cancellation fee of $7.3 million
representing the negotiated settlement to terminate the Company's
contractual commitment to lease building space previously occupied by the
former 360 operations. The lease termination costs also include a
$4.1 million write-off of capitalized leasehold improvements and $1.1
million in other disposal costs. The lease cancellation fee is payable to
the lessor by December 31, 1999.
The contract termination fees include $5.2 million related to long-term
contracts with an outside vendor for customer billing services to be
provided to the Aliant and Liberty operations. As part of its integration
plan, the Company will convert both the Aliant and Liberty operations to
its own internal billing system by June 2000. The $5.2 million amount is
the termination fee specified in the contracts and will be paid by June
2000. The Company also recorded an additional $5.0 million charge to
reflect the actual cost of terminating its contract with Convergys
Corporation ("Convergys") for customer billing services to be provided to
the former 360 operations. On September 14, 1999, the Company and
Convergys agreed to a final contract termination fee of $55.0 million, of
which $50.0 million of termination costs were recorded in the third
quarter of 1998, as discussed below. The two companies had been in
litigation since late last year over ALLTEL's claimed right to seek early
termination of its multi-year contract with Convergys, so that ALLTEL
could transition all of the customers processed by Convergys to its own
billing system. In addition to the termination fee, the Company will
continue to pay Convergys for processing customer accounts until all
customers are switched to ALLTEL's billing system, which is expected to be
completed in 2001. Payments for the continuing processing services will be
expensed as incurred.
In connection with management's plan to reduce costs and improve operating
efficiencies, the Company recorded a restructuring charge consisting of
$10.8 million in severance and employee benefit costs related to a planned
workforce reduction and $6.3 million in lease termination costs related to
the consolidation of certain operating locations. The restructuring plan,
which will result in the elimination of approximately 308 employees in the
Company's wireline operations support functions, will be completed by
September 2000. As of September 30, 1999, none of the employee reductions
had occurred. The lease termination costs represent the estimated minimum
contractual commitments over the next one to four years for leased
facilities that the Company had abandoned by November 1, 1999.
28
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Merger and Integration Expenses (continued):
During the third quarter of 1998, the Company recorded transaction costs
and one-time charges totaling $252.0 million on a pretax basis related to
the closing of its merger with 360. The merger and integration
expenses included professional and financial advisors' fees of $31.5
million, severance and employee-related expenses of $48.7 million and
integration costs of $171.8 million. The Company's merger and integration
plan, as approved by ALLTEL's Board of Directors, provided for a reduction
of 521 employees, primarily in the corporate support functions. As of
September 30, 1999, the Company had paid $38.4 million in severance and
employee-related expenses and 474 out of the total 521 employee reductions
had been completed. The integration costs included several adjustments
resulting from the redirection of a number of strategic initiatives based
on the merger with 360 and ALLTEL's expanded wireless presence.
These adjustments included a $60.0 million write-down in the carrying
value of certain in-process software development assets, $50.0 million of
costs associated with the early termination of certain service
obligations, branding and signage costs of $20.7 million, an $18.0 million
write-down in the carrying value of certain assets resulting from a
revised PCS deployment plan, and other integration costs of $23.1 million.
The estimated cost of contract termination related to a long-term contract
continuing through 2006 with Convergys for customer billing services to be
provided to the 360 operations. The $50.0 million of costs recorded
represented the present value of the estimated profit to the vendor over
the remaining term of the contract and was the Company's best estimate of
the cost of terminating the billing services contract prior to the
expiration of its term. As previously noted, in September 1999, the
Company and Convergys agreed upon a termination fee of $55.0 million. The
$18.0 million write-down in the carrying value of certain PCS-related
assets include approximately $15.0 million related to cell site
acquisition and improvement costs and capitalized labor and engineering
charges that were incurred during the initial construction phase of the
PCS buildout in three markets. As a result of the merger with 360, the
Company elected not to continue to complete construction of its PCS
network in these three markets. The remaining $3.0 million of the
PCS-related write-down represents cell site lease termination fees.
The major action steps of the 360 merger and integration plan
included: (1) the immediate stoppage of further development of a customer
billing system which had no alternative use or functionality, (2) the
immediate negotiation with a vendor of an early termination of a customer
billing contract, and (3) the immediate abandonment of the PCS buildout in
three markets.
The following is a summary of activity related to the liabilities
associated with the Company's merger and integration expenses and other
charges at September 30:
(Thousands)
1999 1998
---- ----
Balance, beginning of period $108,509 $ -
Merger and integration expenses and
other charges 90,520 252,000
Non-cash write-down of assets (8,696) (74,800)
Cash outlays (74,161) (68,691)
-------- --------
Balance, end of period $116,172 $108,509
======== ========
At September 30, 1999, the remaining unpaid liability related to the
Company's merger and integration and restructuring activities consists of
the Convergys contract termination fees of $50.0 million, severance and
employee-related expenses of $32.8 million, lease cancellation and
termination costs of $17.4 million, other contract termination fees of
$5.2 million, professional fees of $5.1 million and other integration
costs of $5.7 million.
The merger and integration expenses and other charges decreased net income
$66.0 million and $201.0 million for the periods ended September 30, 1999
and 1998, respectively.
29
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Comprehensive Income (Loss):
Comprehensive income (loss) was as follows for the three, nine and twelve
month periods ended September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
---------------------- ---------------------- ---------------------
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
---------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 150,349 $ (7,405) $550,162 $ 429,045 $724,244 $ 577,346
--------- -------- -------- --------- -------- ---------
Other comprehensive income (loss):
Unrealized holding gains (losses)
on investments arising during
the period (197,990) 57,068 (35,104) 377,675 261,683 276,744
Income tax expense (benefit) (77,380) 22,624 (13,666) 148,725 102,574 110,480
--------- -------- -------- --------- -------- --------
(120,610) 34,444 (21,438) 228,950 159,109 166,264
--------- -------- -------- --------- -------- --------
Less: reclassification adjustments
for gains included in net income - (80,901) - (265,644) - (265,644)
Income tax expense - 31,733 - 104,199 - 104,199
--------- -------- -------- --------- -------- ---------
- (49,168) - (161,445) - (161,445)
--------- -------- -------- --------- -------- ---------
Other comprehensive income
(loss) before tax (197,990) (23,833) (35,104) 112,031 261,683 11,100
Income tax expense (benefit) (77,380) (9,109) (13,666) 44,526 102,574 6,281
--------- -------- -------- --------- -------- ---------
Other comprehensive income (120,610) (14,724) (21,438) 67,505 159,109 4,819
--------- -------- -------- --------- -------- ---------
Comprehensive income (loss) $ 29,739 $(22,129) $528,724 $ 496,550 $883,353 $ 582,165
========= ======== ======== ========= ======== =========
5. Earnings per Share:
A reconciliation of the net income (loss) and number of shares used in
computing basic and diluted earnings (loss) per share for the three, nine
and twelve month periods ended September 30, 1999 and 1998 was as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
---------------------- ---------------------- ---------------------
(In thousands, except per share amounts) 1999 1998 1999 1998 1999 1998
---------------------------------------- ---- ---- ---- ---- ---- ----
Basic earnings per share:
Net income (loss) applicable to
common shares $ 150,134 $ (7,644) $549,488 $ 428,025 $723,342 $ 576,027
Weighted average common shares
outstanding for the period 313,112 305,170 312,396 305,221 310,727 305,283
--------- -------- -------- --------- -------- ---------
Basic earnings (loss) per share $.48 $.(03) $1.76 $1.40 $2.33 $1.89
==== ===== ===== ===== ===== =====
Diluted earnings per share:
Net income (loss) applicable to
common shares $ 150,134 $ (7,644) $549,488 $ 428,025 $723,342 $ 576,027
Adjustments for convertible securities:
Preferred stock dividends 43 45 131 129 176 178
--------- -------- -------- --------- -------- ---------
Net income applicable to common
shares assuming conversion $ 150,177 $ (7,599) $549,619 $ 428,154 $723,518 $ 576,205
--------- -------- -------- --------- -------- ---------
Weighted average common shares
outstanding for the period 313,112 305,170 312,396 305,221 310,727 305,283
Increase in shares resulting from:
Exercise of stock options 3,415 2,348 3,474 2,426 3,283 2,233
Conversion of preferred stocks 443 465 449 471 452 473
--------- -------- -------- --------- -------- ---------
Weighted average common shares
outstanding assuming conversion 316,970 307,983 316,319 308,118 314,462 307,989
--------- -------- -------- --------- -------- ---------
Diluted earnings (loss) per share $.47 $.(02) $1.74 $1.39 $2.30 $1.87
==== ===== ===== ===== ===== =====
</TABLE>
30
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Business Segment Information:
ALLTEL disaggregates its business operations based on differences in
products and services. The Company evaluates performance based on segment
operating income, excluding non-recurring and unusual items. Segment
operating results for the three, nine and twelve month periods ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
(Dollars in thousands) 1999 1998 1999 1998 1999 1998
---------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues and Sales from
External Customers:
Wireless $ 720,619 $ 609,549 $2,054,369 $1,723,541 $2,670,584 $2,242,435
Wireline 412,804 366,181 1,207,436 1,079,057 1,577,195 1,435,279
Emerging businesses 68,101 44,265 188,714 111,281 233,352 141,384
---------- ---------- ---------- ---------- ---------- ----------
Total communications 1,201,524 1,019,995 3,450,519 2,913,879 4,481,131 3,819,098
Information services 246,305 254,662 735,127 740,626 999,643 972,458
Other operations 102,673 91,072 274,589 255,937 356,767 332,923
---------- ---------- ---------- ---------- ---------- ----------
Total business segments $1,550,502 $1,365,729 $4,460,235 $3,910,442 $5,837,541 $5,124,479
========== ========== ========== ========== ========== ==========
Intersegment Revenues
and Sales:
Wireless $ - $ - $ - $ - $ - $ -
Wireline 13,855 12,529 43,359 37,269 56,481 49,012
Emerging businesses 3,242 1,982 7,827 6,026 13,200 7,759
---------- ---------- ---------- ---------- ---------- ----------
Total communications 17,097 14,511 51,186 43,295 69,681 56,771
Information services 66,550 37,507 196,976 115,595 238,007 147,911
Other operations 51,150 87,521 140,295 169,218 234,312 199,407
---------- ---------- ---------- ---------- ---------- ----------
Total business segments $ 134,797 $ 139,539 $ 388,457 $ 328,108 $ 542,000 $ 404,089
========== ========== ========== ========== ========== ==========
Total Revenues and Sales:
Wireless $ 720,619 $ 609,549 $2,054,369 $1,723,541 $2,670,584 $2,242,435
Wireline 426,659 378,710 1,250,795 1,116,326 1,633,676 1,484,291
Emerging businesses 71,343 46,247 196,541 117,307 246,552 149,143
---------- ---------- ---------- ---------- ---------- ----------
Total communications 1,218,621 1,034,506 3,501,705 2,957,174 4,550,812 3,875,869
Information services 312,855 292,169 932,103 856,221 1,237,650 1,120,369
Other operations 153,823 178,593 414,884 425,155 591,079 532,330
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 1,685,299 1,505,268 4,848,692 4,238,550 6,379,541 5,528,568
Less: intercompany
eliminations 56,904 58,889 143,184 98,783 187,005 111,767
---------- ---------- ---------- ---------- ---------- ----------
Total revenues and sales $1,628,395 $1,446,379 $4,705,508 $4,139,767 $6,192,536 $5,416,801
========== ========== ========== ========== ========== ==========
Operating Income (Loss):
Wireless $ 247,042 $ 198,580 $ 687,573 $ 508,575 $ 853,604 $ 638,462
Wireline 156,714 130,052 452,429 391,340 591,662 527,036
Emerging businesses (14,588) (10,764) (33,127) (25,711) (45,393) (28,593)
---------- ---------- ---------- ---------- ---------- ----------
Total communications 389,168 317,868 1,160,875 874,204 1,399,873 1,136,905
Information services 44,479 40,417 128,217 116,609 174,259 157,335
Other operations 5,986 6,975 16,300 19,242 22,984 22,994
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 439,633 365,260 1,251,392 1,010,055 1,597,116 1,317,234
---------- ---------- ---------- ---------- ---------- ----------
Corporate operations (10,606) (6,765) (26,194) (12,731) (36,315) (19,041)
Merger and integration
expenses and other charges (90,520) (252,000) (90,520) (252,000) (90,520) (252,000)
Provision to reduce carrying
value of certain assets - (55,000) - (55,000) - (55,000)
---------- ---------- ---------- ---------- ---------- ----------
Total corporate expenses (101,126) (313,765) (116,714) (319,731) (126,835) (326,041)
---------- ---------- ---------- ---------- ---------- ----------
Total operating income $ 338,507 $ 51,495 $1,134,678 $ 690,324 $1,470,281 $ 991,193
========== ========== ========== ========== ========== ==========
</TABLE>
31
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Business Segment Information, (continued):
Segment assets as of September 30, 1999 and 1998 were as follows:
(In thousands)
--------------------------
1999 1998
---- ----
Wireless $ 4,621,026 $4,541,836
Wireline 3,233,621 3,038,822
Emerging businesses 408,550 151,572
----------- ------------
Total communications 8,263,197 7,732,230
Information services 870,992 865,975
Other operations 236,198 193,173
----------- ------------
Total business segments 9,370,387 8,791,378
----------- ------------
Add: Corporate assets not
allocated to segments:
Headquarters fixed assets,
net of accumulated depreciation 202,541 129,860
Investments 975,792 680,627
Goodwill, net of amortization 102,819 105,679
Other assets 18,170 58,352
----------- ------------
Total corporate assets 1,299,322 974,518
----------- ------------
Less: elimination of intersegment
receivables (99,351) (83,717)
----------- ------------
Consolidated assets $10,570,358 $9,682,179
=========== ==========
7. Litigation-Claims and Assessments:
On July 12, 1996, the Georgia Public Service Commission ("Georgia PSC")
issued an order requiring that ALLTEL's wireline subsidiaries which
operate within its jurisdiction reduce their annual network access charges
by $24 million, prospectively, effective July 1, 1996. The Georgia PSC's
action was in response to the Company's election to move from a
rate-of-return method of pricing to an incentive rate structure, as
provided by a 1995 Georgia telecommunications law. The Company appealed
the Georgia PSC order. On November 6, 1996, the Superior Court of Fulton
County, Georgia, (the "Superior Court") rendered its decision and reversed
the Georgia PSC order, finding, among other matters, that the Georgia PSC
had exceeded its authority by conducting a rate proceeding after the
Company's election of alternative regulation.
The Superior Court did not rule on a number of other assertions made by
the Company as grounds for reversal of the Georgia PSC order. The Georgia
PSC appealed the Superior Court's decision, and on July 3, 1997, the
Georgia Court of Appeals reversed the Superior Court's decision. On August
5, 1997, the Company filed with the Georgia Supreme Court a petition for
writ of certiorari requesting that the Georgia Court of Appeals' decision
be reversed. On October 5, 1998, the Georgia Supreme Court, in a 4-3
decision, upheld the Georgia Court of Appeals' ruling that the Georgia PSC
had the authority to conduct the rate proceeding. The case was returned to
the Superior Court for it to rule on the issues it had not previously
decided. On April 6, 1999, the Superior Court found that with respect to
the July 1996 order, the Georgia PSC did not provide ALLTEL with
sufficient notice of the charges against the Company, did not provide
ALLTEL a fair opportunity to present its case and respond to the charges,
and failed to satisfy its burden of proving that ALLTEL's rates were
unjust and unreasonable. Further, the Superior Court found that the July
1996 order was an unlawful attempt to retroactively reduce ALLTEL's rates
and certain statutory revenue recoveries. For each of these independent
reasons, the Superior Court vacated and reversed the July 1996 order and
remanded the case with instructions to dismiss the case. The Georgia PSC
appealed the Superior Court's April 1999 decision.
At September 30, 1999, the maximum possible liability to the Company
related to this case is $78 million, plus interest at 7 percent accruing
from July 1, 1996. Since the Company believes that it will prevail in this
case, the Company has not implemented any revenue reductions or
established any reserves for refund related to this matter at this time.
32
AMENDMENT NO. 13
TO
ALLTEL CORPORATION PENSION PLAN
(January 1, 1994 Restatement)
WHEREAS, ALLTEL Corporation (the "Company") maintains the
ALLTEL Corporation Pension Plan, as amended and restated effective January 1,
1994, and as subsequently further amended (the "Plan"); and
WHEREAS, the Company desires further to amend the Plan;
NOW THEREFORE, BE IT RESOLVED, that the Company hereby amends
the Plan, effective as set forth herein, in the respects hereinafter set forth.
1. Effective as of January 6, 1999, Section 13 of the Plan is
amended by adding the following Section 13.29 thereto:
13.29 Employees of Standard Group, Inc.
---------------------------------
(a) Effective Date - January 6, 1999.
--------------
(b) Account - None.
-------
(c) Minimum Normal Retirement Pension - None.
---------------------------------
(d) Minimum Early Retirement Pension - None.
--------------------------------
(e) Minimum Disability Retirement Pension - None.
-------------------------------------
(f) Minimum Deferred Vested Pension - None.
-------------------------------
(g) Minimum Death Benefit - None.
---------------------
(h) Prior Plan Offset - Not Applicable.
-----------------
(i) Provision Relative to Section 401(a)(12) of the Code - Not
----------------------------------------------------
Applicable.
(j) Miscellaneous - See APPENDIX DD - SPECIAL PROVISIONS
-------------
APPLICABLE TO CERTAIN EMPLOYEES OF STANDARD GROUP, INC.
which follows immediately hereafter.
1
33
<PAGE>
APPENDIX DD
SPECIAL PROVISIONS APPLICABLE TO CERTAIN EMPLOYEES
OF
STANDARD GROUP, INC.
Effective as of January 6, 1999, certain employees of Standard Group, Inc.
became employees of the Controlled Group.
Notwithstanding any other provision of the Plan, the Plan is modified as set
forth below with respect to active employees of Standard Group, Inc. who became
employees of the Controlled Group on January 6, 1999.
A. Section 1.07 is modified by adding to the definition thereof the
following:
1.07DD "Basic Compensation" shall include only amounts
earned after January 5, 1999.
B. Section 1.14 is modified by adding to the definition thereof the
following:
1.14DD "Compensation" shall include only amounts earned
after January 5, 1999.
C. Section 1.37(g) is modified as follows:
1.37(g)DD Vesting Service
(a) A Participant's eligibility for benefits under the
Plan shall be determined by his period of Vesting
Service, in accordance with the following:
(i) Service Prior to January 6, 1999: An Employee's
period(s) of employment with Standard Group, Inc.
prior to January 6, 1999, shall be counted as
Vesting Service to the extent that such periods
would have counted under the Plan if such
employment had been with the Company.
(ii) Service From and After January 6, 1999: In
accordance with the provisions of Section 1.37(g).
(iii) Notwithstanding any other provision of the Plan,
2
34
<PAGE>
there shall be no duplication of Vesting Service
(or Vesting Years of Service) by reason of any
restoration of, crediting of, or granting of
service in respect of any single period or
otherwise.
D. Section 1.37(d) is modified as follows:
1.37(d)DD Benefit Service
---------------
(a) The amount of the benefit payable to or on behalf
of a Participant shall be determined on the basis
of his Benefit Service, in accordance with the
following:
(i) Benefit Service Prior to January 6, 1999:
None.
(ii) Benefit Service From and After January 6,
1999: In accordance with the provisions of
Section 1.37(d).
E. Section 1.37(f) is modified as follows:
1.37(f)DD Eligibility Year of Service
---------------------------
(a) A Participant's Eligibility Years of Service under
the Plan shall be determined in accordance with the
following:
(i) Service Prior to January 6, 1999: An
Employee's period(s) of employment with
Standard Group, Inc. prior to January 6,
1999, shall be counted as Eligibility Years
of Service to the extent that such periods
would have counted under the Plan if such
employment had been with the Company.
(ii) Service From and After January 6, 1999: In
accordance with the provisions of
Section 1.37(f).
(iii) Notwithstanding any other provision of the
Plan, there shall be no duplication of
Eligibility Years of Service under the Plan
by reason of any restoration of, crediting
of, or granting of service in respect of any
single period or otherwise.
3
35
<PAGE>
2. Effective as of March 31, 1999, Section 13 of the Plan is
amended by adding the following Section 13.30 thereto:
13.30 Employees of Durango Cellular Telephone Company
-----------------------------------------------
(a) Effective Date - March 31, 1999.
--------------
(b) Account - None.
-------
(c) Minimum Normal Retirement Pension - None.
---------------------------------
(d) Minimum Early Retirement Pension - None.
--------------------------------
(e) Minimum Disability Retirement Pension - None.
-------------------------------------
(f) Minimum Deferred Vested Pension - None.
-------------------------------
(g) Minimum Death Benefit - None.
---------------------
(h) Prior Plan Offset - Not Applicable.
-----------------
(i) Provision Relative to Section 401(a)(12) of the Code - Not
--------------------------------------------------------
Applicable.
(j) Miscellaneous - See APPENDIX EE - SPECIAL PROVISIONS
-------------
APPLICABLE TO CERTAIN EMPLOYEES OF DURANGO CELLULAR TELEPHONE
COMPANY which follows immediately hereafter.
APPENDIX EE
SPECIAL PROVISIONS APPLICABLE TO CERTAIN EMPLOYEES
OF
DURANGO CELLULAR TELEPHONE COMPANY
Effective as of March 31, 1999, certain employees of Durango Cellular Telephone
Company became employees of the Controlled Group.
Notwithstanding any other provision of the Plan, the Plan is modified as set
forth below with respect to active employees of Durango Cellular Telephone
Company who became employees of the Controlled Group on March 31, 1999.
4
36
<PAGE>
A. Section 1.07 is modified by adding to the definition thereof the
following:
1.07EE "Basic Compensation" shall include only amounts earned
after March 30, 1999.
B. Section 1.14 is modified by adding to the definition thereof the
following:
1.14EE "Compensation" shall include only amounts earned after
March 30, 1999.
C. Section 1.37(g) is modified as follows:
1.37(g)EE Vesting Service
(a) A Participant's eligibility for benefits under the Plan
shall be determined by his period of Vesting Service, in
accordance with the following:
(i) Service Prior to March 31, 1999: An Employee's
period(s) of employment with Durango Cellular
Telephone Company prior to March 31, 1999, shall
be counted as Vesting Service to the extent that
such periods would have counted under the Plan
if such employment had been with the Company.
(iv) Service From and After March 31, 1999: In
accordance with the provisions of
Section 1.37(g).
(v) Notwithstanding any other provision of the Plan,
there shall be no duplication of Vesting Service
(or Vesting Years of Service) by reason of any
restoration of, crediting of, or granting of
service in respect of any single period or
otherwise.
D. Section 1.37(d) is modified as follows:
1.37(d)EE Benefit Service
---------------
(a) The amount of the benefit payable to or on behalf
of a Participant shall be determined on the basis
of his Benefit Service, in accordance with the
following:
5
37
<PAGE>
(i) Benefit Service Prior to March 31, 1999:
None.
(ii) Benefit Service From and After March 31,
1999: In accordance with the provisions
of Section 1.37(d).
E. Section 1.37(f) is modified as follows:
1.37(f)EE Eligibility Year of Service
---------------------------
(a) A Participant's Eligibility Years of Service
under the Plan shall be determined in accordance
with the following:
(i) Service Prior to March 31, 1999: An
Employee's period(s) of employment with
Durango Cellular Telephone Company prior
to March 31, 1999, shall be counted as
Eligibility Years of Service to the extent
that such periods would have counted
under the Plan if such employment had been
with the Company.
(iv) Service From and After March 31, 1999: In
accordance with the provisions of
Section 1.37(f).
(v) Notwithstanding any other provision of the
Plan, there shall be no duplication of
Eligibility Years of Service under the
Plan by reason of any restoration of,
crediting of, or granting of service in
respect of any single period or otherwise.
IN WITNESS WHEREOF, the Company, by its duly authorized officer,
has caused this Amendment to be executed on this 5th day of August, 1999.
ALLTEL CORPORATION
By:/s/John L. Comparin
-------------------------------
Title: Sr. V.P. Human Resources
6
38
AMENDMENT NO. 12
TO
ALLTEL CORPORATION PROFIT-SHARING PLAN
(January 1, 1994 Restatement)
WHEREAS, ALLTEL Corporation (the "Company") maintains
the ALLTEL Corporation Profit-Sharing Plan, as amended and restated effective
January 1, 1994, and subsequently further amended, (the "Plan"); and
WHEREAS, the Company desires further to amend the Plan;
NOW, THEREFORE, the Company hereby amends the Plan in
the respects hereinafter set forth.
1. Effective as of April 1, 1999, Section 9.04 of the
Plan is amended by adding a new subsection (y) at the end thereof to provide as
follows:
(y) In determining Years of Eligibility Service for an
Employee who was an employee of Corporate Solutions
International, Inc. ("CSI") immediately prior to April
1, 1999, and became an Employee on April 1, 1999, the
Employee's period or periods of employment with CSI
prior to April 1, 1999 that would have been taken into
account under the Plan if such period or periods of
employment were service with a member of the Controlled
Group, shall be counted as Years of Eligibility Service.
Notwithstanding any other provision of the Plan, there
shall be no duplication of Years of Eligibility Service
under the Plan by reason of service (or hours of
service) in respect of any single period or otherwise.
2. Effective as of April 1, 1999, Section 9.05 of the
Plan is amended by adding a new subsection (y) at the end thereof to provide as
follows:
(y) In determining Years of Vesting Service for an Employee
who was an employee of Corporate Solutions International,
Inc. ("CSI") immediately prior to April 1, 1999, and
became an Employee on April 1, 1999, the Employee's
period or periods of employment with CSI prior to
April 1, 1999 that would have been taken into account
under the Plan if such period or periods of employment
were service with a member of the Controlled Group, shall
be counted as Years of Vesting Service. Notwithstanding
any other provision of the Plan, there shall be no
duplication of Years of Vesting Service under the Plan by
reason of service (or hours of service) in respect of
any single period or otherwise.
39
<PAGE>
3. Effective as of August 1, 1999, Section 13.05 of
the Plan is amended by adding a new subsection (jj) at the end thereof to
provide as follows:
(jj) Each person who
(i) was an active employee of BancWest Corporation
of Honolulu, Hawaii and became an Employee on
August 1, 1999;
(ii) met the eligibility requirements to become a
Participant on or before the last day of the
1999 Plan Year; and
(iii) is not otherwise eligible for an allocation of
Employer Contribution for the 1999 Plan Year
under Section 13.04;
shall receive an allocation of Employer Contribution for
the 1999 Plan Year as provided in this subsection (jj),
if the Participant is credited with at least such number
of Hours of Service as the number determined by
multiplying 1,000 by a fraction the numerator of which is
the number of days of employment with the Controlled
Group completed by the Participant in the 1999 Plan Year
and the denominator of which is three hundred sixty-five
(365). Subject to the last sentence of Section 13.01, the
portion of Employer Contribution assigned to the Region
including such Participants shall be specified on the
Schedule for the 1999 Plan Year and shall be allocated
among the Participants in such Region as provided in
Section 13.04, but without regard to the requirement that
a Participant have a Year of Participation.
Notwithstanding the provisions of Section 13.04, any
Participant who would receive an allocation of Employer
Contribution under this subsection (jj) but for his
transfer of employment prior to December 31, 1999, shall
be deemed to be in the Region including the Participants
eligible under this subsection (jj) for the 1999 Plan
Year.
4. Effective as of February 22, 1999, Article XXIII of
the Plan is amended by adding a new section 23.03 at the end thereof to
provide as follows:
23.03 Extension of Coverage to Certain Georgia Exchange Employees
-----------------------------------------------------------
Effective beginning February 22, 1999, and as more
specifically hereinafter provided, the proviso to paragraph
(a)(1) of Section 1.12 shall not apply to and coverage
under the Plan shall be extended to a person who on or
after February 22, 1999 is an Employee and who on or before
February 22, 1999 was in the bargaining unit described in
National Labor Relations Board Case 10-RD-1320 (a
"Decertified Employee"): For purposes of Sections 13.01,
13.02, 13.03, 13.04, and 13.06, for the Plan Year ending
December 31, 1999, a Decertified Employee who would have
been an Eligible Employee at relevant times during the Plan
2
40
<PAGE>
Year ending December 31, 1999 but for paragraph (a)(1) of
Section 1.12 shall be treated as an Eligible Employee at
such relevant times during the Plan Year ending December
31, 1999.
IN WITNESS WHEREOF, the Company, by its duly authorized
officer, has caused this Amendment to be executed on this 5th day of August,
1999.
ALLTEL CORPORATION
By:/s/John L. Comparin
-------------------------------
Title: Sr. V.P. Human Resources
3
41
AMENDMENT NO. 13
TO
ALLTEL CORPORATION THRIFT PLAN
(January 1, 1994 Restatement)
WHEREAS, ALLTEL Corporation (the "Company") maintains the
ALLTEL Corporation Thrift Plan, as amended and restated effective January 1,
1994, and subsequently further amended, (the "Plan"); and
WHEREAS, the Company desires further to amend the Plan;
NOW, THEREFORE, BE IT RESOLVED, that the Company hereby amends
the Plan, effective as of July 31, 1999, in the respects hereinafter set forth:
The Plan is amended by adding a new Section 20.07, to provide
as follows:
20.07 Merger of 360 Communications Company Retirement
Savings Plan
(a) Effective as of the beginning of
business on August 1, 1999, the 360 Communications
Company Retirement Savings Plan (the "360 Plan")
shall be merged into and made a part of the Plan, and
the trust fund maintained in connection with the 360
Plan shall be added to the assets of the Trust Fund
to be disposed of under the terms, conditions, and
provisions of the Plan and the Trust. On and after
August 1, 1999, except as otherwise expressly
provided in this Section 20.07, the general
provisions of the Plan shall govern with respect to
the interests under the 360 Plan of all persons, to
the extent not inconsistent with any provisions of
the 360 Plan that may not be eliminated under Section
411(d)(6) of the Code (and the regulations
thereunder).
(b) As of August 1, 1999, Separate Accounts
shall be established in accordance with the
provisions of Section 11.08 in the name of each
person who as of the close of business on July 31,
1999 was a participant or beneficiary with an
interest under the 360 Plan. In addition to any
credits or debits to the Separate Account of the
persons described in the immediately preceding
sentence on or after August 1, 1999, in accordance
with the Plan's general provisions, as of the date
the assets of the trust fund of the 360 Plan are
received by the Trustee and deposited in the Trust
Fund there shall be credited to each such Separate
Account or Sub-Account, as applicable, the value of
such person's prior separate account or sub-account
of the corresponding type under the 360 Plan as
certified to the Plan Administrator by the plan
administrator of the 360 Plan.
42
<PAGE>
(c) If a person who was a participant under
the 360 Plan incurred a forfeiture under Section 13.4
of the 360 Plan prior to September 11, 1998 and
resumes employment covered under the Plan such that
restoration of that forfeiture would be required
under the 360 Plan as in effect on July 31, 1999,
such forfeiture shall be restored under the Plan in
the same manner and under the same conditions as such
forfeiture would have been restored under the 360
Plan as in effect on July 31, 1999.
(d) Notwithstanding any other provision of
the Plan to the contrary, any outstanding participant
loan under the 360 Plan shall be repaid under the
Plan and otherwise continue to be administered in
accordance with its terms and the applicable
provisions of the 360 Plan in effect at the time the
loan was granted.
(e) Notwithstanding any other provision of
the Plan to the contrary, each beneficiary
designation under the 360 Plan prior to August 1,
1999 shall apply to the Separate Accounts or
Sub-Accounts established under Section 20.07(b) of
the Plan, unless or until the applicable Participant
designates a new beneficiary in which case Article
XVII of the Plan shall apply.
IN WITNESS WHEREOF, the Company, by its duly authorized
officer, has caused this Amendment to be executed as of this 21st day of
July, 1999, to be effective as provided herein.
ALLTEL CORPORATION
By:/s/John L. Comparin
-------------------------------
Title: Sr. V.P. Human Resources
2
43
<PAGE>
AMENDMENT NO. 14
TO
ALLTEL CORPORATION THRIFT PLAN
(January 1, 1994 Restatement)
WHEREAS, ALLTEL Corporation (the "Company") maintains the
ALLTEL Corporation Thrift Plan, as amended and restated effective January 1,
1994, and subsequently further amended, (the "Plan"); and
WHEREAS, the Company desires further to amend the Plan;
NOW, THEREFORE, the Company hereby amends the Plan in the
respects hereinafter set forth:
1. Effective as of April 1, 1999, Section 9.04 of the Plan is
amended by adding a new subsection (v) at the end thereof to provide as follows:
(v) In determining Years of Eligibility Service for an Employee
who was an employee of Corporate Solutions International,
Inc. ("CSI") immediately prior to April 1, 1999, and became
an Employee on April 1, 1999, the Employee's period or
periods of employment with CSI prior to April 1, 1999 that
would have been taken into account under the Plan if such
period or periods of employment were service with a member
of the Controlled Group, shall be counted as Years of
Eligibility Service. Notwithstanding any other provision of
the Plan, there shall be no duplication of Years of
Eligibility Service under the Plan by reason of service (or
hours of service) in respect of any single period or
otherwise.
2. Effective as of August 1, 1999, Section 13.11 of the Plan
is amended by adding a new subsection (bb) at the end of thereof to provide as
follows:
(bb) Each person who
(i) was an active employee
(i) was an active employee of BancWest Corporation of
Honolulu, Hawaii and became an Employee on August 1,
1999;
(ii) met the eligibility requirements to become a
Participant as provided in subsection (b) of Section
10.01 on or before the last day of the 1999 Plan
Year; and
(iii) is not otherwise eligible for an allocation of the
Employer Qualified Nonelective Contribution for the
1999 Plan Year under Section 13.04;
44
<PAGE>
shall receive an allocation of the Employer Qualified
Nonelective Contribution for the 1999 Plan Year, as provided
in this subsection (cc) if the Participant is credited with at
least such number of Hours of Service as the number determined
by multiplying 1,000 by a fraction the numerator of which is
the number of days of employment with the Controlled Group
completed by the Participant in the 1999 Plan Year and the
denominator of which is three hundred sixty-five (365). Such a
Participant shall receive an allocation of the Employer
Qualified Nonelective Contribution as provided in Section
13.04, but without regard to the requirement that a
Participant have a Year of Participation.
3. Effective as of February 22, 1999, Article XXVIII
of the Plan is amended by addition a new section 28.03 at the end thereof to
provide as follows:
29.03 Extension of Coverage to Certain Georgia Exchange Employees
-----------------------------------------------------------
Effective beginning February 22, 1999 and as more
specifically hereinafter provided, the proviso to paragraph
(1) of Section 1.11 shall not apply to and coverage under
the Plan shall be extended to a person who on or after
February 22, 1999 is an Employee and who on or before
February 22, 1999 was in the bargaining unit described in
National Labor Relations Board Case 10-RD-1320 (a
"Decertified Employee"): Effective for payroll periods
commencing after February 22, 1999, a Decertified Employee
who on or after February 22, 1999 would be an Eligible
Employee but for the proviso to paragraph (1) of Section
1.11 may elect to become an Electing Participant and to
have Salary Deferral Contributions made to the Plan on his
behalf by his Employer as provided under Article XII. For
purposes of the provisions of the Plan relating to the
Employer Qualified Nonelective Contribution for the Plan
Year ending December 31, 1999, the Compensation for the
Plan Year ending December 31, 1999 of a Decertified
Employee who would have been an Eligible Employee at
relevant times during the Plan Year ending December 31,
1999 but for paragraph (1) of Section 1.11 shall be
determined as though such Decertified Employee had been an
Eligible Employee at such relevant times during the Plan
Year ending December 31, 1999.
2
45
<PAGE>
IN WITNESS WHEREOF, the Company, by its duly authorized
officer, has caused this Amendment to be executed on this 5th day of August,
1999.
ALLTEL CORPORATION
By:/s/John L. Comparin
-------------------------------
Title: Sr. V.P. Human Resources
3
46
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER REPORT TO STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH REPORT.
</LEGEND>
<CIK> 0000065873
<NAME> ALLTEL CORPORATION
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 36,999
<SECURITIES> 0
<RECEIVABLES> 939,679
<ALLOWANCES> 37,301
<INVENTORY> 112,558
<CURRENT-ASSETS> 1,170,939
<PP&E> 9,985,854
<DEPRECIATION> 4,404,424
<TOTAL-ASSETS> 10,570,358
<CURRENT-LIABILITIES> 1,179,350
<BONDS> 3,812,688
4,409
9,102
<COMMON> 313,930
<OTHER-SE> 3,688,330
<TOTAL-LIABILITY-AND-EQUITY> 10,570,358
<SALES> 451,369
<TOTAL-REVENUES> 4,705,508
<CGS> 432,258
<TOTAL-COSTS> 3,570,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 90,520
<INTEREST-EXPENSE> 209,913
<INCOME-PRETAX> 955,237
<INCOME-TAX> 405,075
<INCOME-CONTINUING> 550,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550,162
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.74
</TABLE>
