UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO ANNUAL REPORT FILED PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-4996
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ALLTEL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 34-0868285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allied Drive, Little Rock, Arkansas 72202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock New York and Pacific
$2.06 No Par Cumulative Convertible
Peferred Stock New York and Pacific
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
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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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Aggregate market value of voting stock held by non-affiliates as of
February 28, 1999 - $16,836,745,818
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Common shares outstanding, February 28, 1999 - 281,198,260
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DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Into
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Proxy statement for the 1999 Annual Meeting
of stockholders Part III
The Exhibit Index is located on pages 69 to 74.
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SIGNATURE
The undersigned registant hereby amends the following items, financial
statements, exhibits or other portions of its 1998 Annual Report on Form 10-K
as set forth in the pages attached hereto;
(list all such items, financial statements, exhibits
or other portions amended)
Part II
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Item 7 Management's Discussion and Analysis of Financial Condition and
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Results Of Operations
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Item 8 Financial Statements and Supplementary Data
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All other items included in this amendment are a originally filed in
ALLTEL's 1998 Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLTEL CORPORATION
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(Registrant)
/s/Dennis J. Ferra
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Dennis J. Ferra
Senior Vice President and Chief Administrative Officer
March 26, 1999
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ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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THE COMPANY
GENERAL
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ALLTEL Corporation ("ALLTEL" or the "Company") is a customer-focused information
technology company that provides wireline and wireless communications and
information services. The Company owns subsidiaries that provide wireline,
long-distance, network access and Internet services, wireless communications,
paging service, information processing management services, and advanced
application software. Telecommunications products are warehoused and sold by the
Company's distribution subsidiary. A subsidiary also publishes telephone
directories for affiliates and other independent telephone companies. The
Company is incorporated in the state of Delaware.
FORWARD LOOKING STATEMENTS
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This Form 10-K and future filings by the Company on 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.
1
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ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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THE COMPANY (continued)
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MERGER AGREEMENT
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On December 18, 1998, ALLTEL announced a definitive merger agreement with Aliant
Communications, Inc. ("Aliant"), a communications company which offers wireless,
wireline, paging, long-distance and Internet services in Nebraska. Under terms
of the agreement, each share of Aliant's common stock will be exchanged for .67
to .75 shares of ALLTEL common stock. The Company expects to account for this
transaction, which is valued at $1.5 billion, as a pooling-of-interests. The
merger is subject to approval by Aliant shareholders, as well as regulatory and
other approvals. The Company expects the merger to be completed by mid-1999.
ACQUISITIONS
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In January 1999, the Company completed its merger with Standard Group, Inc.
("Standard"), a communications company, that served more than 71,000 customer
lines in northeast Georgia. The customer lines acquired are in areas adjacent to
the Company's other wireline exchanges in Georgia and increase ALLTEL's total
wireline customers in the state to approximately 550,000. The transaction also
included Standard's cable television operations, which serve approximately
30,000 customers.
In July 1998, the Company completed its merger with 360 Communications
Company ("360"), a wireless communications company, that served more
than 2.6 million customers in 15 states. Through this merger, ALLTEL
significantly expanded its wireless presence and enhanced its ability to deliver
bundled communications services across its geographically focused markets.
During 1998, the Company acquired a 100 percent ownership interest in two
Georgia Rural Service Areas ("RSAs"), representing approximately 181,000
cellular "pops" or potential customers. In addition, the Company increased its
ownership interest in wireless properties in North Carolina and Texas.
In October 1997, the Company acquired Georgia Telephone Corporation, that served
more than 6,700 customer lines in southwest Georgia. The customer lines acquired
are in areas adjacent to the Company's wireline exchanges in Georgia and are
located within the Company's current wireless service area.
During 1997, the Company increased its ownership to 100 percent in two Alabama
RSAs, representing approximately 260,000 cellular "pops" or potential customers.
In addition, the Company and BellSouth Corporation ("BellSouth") combined their
interests in two partnerships that own and control cellular licenses and
operations in Richmond, Virginia and Orlando, Florida. The resulting partnership
is owned 75 percent by BellSouth and 25 percent by the Company. Also in 1997,
the Company acquired minority interests in 16 of its controlled markets, which
increased its ownership interest to 100 percent in ten of those markets.
In 1996, the Company acquired Independent Cellular Network, Inc. ("ICN"). ICN
owned and operated cellular systems serving more than 140,000 customers in Ohio,
Kentucky, Pennsylvania and West Virginia.
2
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ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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THE COMPANY (continued)
ACQUISITIONS (continued)
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During 1995, ALLTEL entered into a joint venture with BellSouth Mobility, Inc.
involving cellular properties in five states. As a result of this joint venture,
ALLTEL owns a 53.5 percent interest in the Columbia and Florence, South Carolina
market, an 11.1 percent interest in the Greensboro, North Carolina market, an
11.1 percent interest in a North Carolina RSA, and no longer owns a majority
interest in the Jackson, Mississippi market. In addition during 1995, ALLTEL
completed an exchange of certain assets in a West Virginia RSA and an Oklahoma
RSA for certain assets in a Georgia RSA and a North Carolina RSA owned by United
States Cellular Corp. ("U.S. Cellular"). The acquired properties are contiguous
to ALLTEL's Albany, Georgia and Charlotte, North Carolina markets. In January
1995, the Company purchased U.S. Cellular's 20 percent interest in the Fort
Smith, Arkansas MSA, thereby increasing ALLTEL's ownership interest in the Fort
Smith MSA to 100 percent.
In May 1995, ALLTEL Information Services, Inc. ("ALLTEL Information Services")
acquired Vertex Business Systems, Inc. ("Vertex"), a provider of international
banking software products and services. Vertex, headquartered in New York, has
clients located in Europe, Asia and the United States.
In November 1994, the Company completed its acquisition of Medical Data
Technology, Inc. ("MDT"). MDT provided information processing services to 14
hospitals in the northeastern United States. As further discussed below, the
Company sold its healthcare information services business in January 1997.
DISPOSITIONS
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During 1998, the Company sold its 27.9 percent ownership interest in a cellular
partnership serving the Omaha, Nebraska market for approximately $18 million in
cash.
In May 1997, the Company sold its wire and cable subsidiary, HWC Distribution
Corp. ("HWC") to Code, Hennessy & Simmons, Inc., an investment firm, for
approximately $45 million in cash. HWC was one of two companies that comprised
ALLTEL's product distribution operations.
In January 1997, the Company sold the healthcare portion of its information
services business to Integrated Healthcare Solutions, Inc. for approximately
$154 million consisting of cash and a continuing preferred stock interest.
During 1998, the preferred stock was converted into common stock representing a
15 percent interest in a new publicly held company, Eclipsys Corporation.
In November 1994, the Company signed definitive agreements to sell certain
wireline properties serving approximately 117,000 access lines in Arizona,
California, Nevada, New Mexico, Oregon, Tennessee, Utah and West Virginia to
Citizens Utilities Company ("Citizens") in exchange for approximately $250
million in cash, assumed debt and a wireline property serving 3,600 access lines
in Pennsylvania. The sale of all properties except for those in Nevada was
completed during 1995, and the sale of the Nevada properties was completed in
March 1996.
3
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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THE COMPANY (continued)
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DISPOSITIONS (continued)
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In 1995, as part of its agreement to sell certain telephone properties, the
Company also completed the sale of certain of its cable television properties to
Citizens. These cable television properties served approximately 6,800 customers
in Arizona, California, New Mexico and Utah. The Company also completed in 1995
the sale of its cable television properties in Texas, which served approximately
7,200 customers. Upon completion of these property sales, the Company provides
cable television service to approximately 3,600 customers, primarily to
residents of Bolivar and Stockton, Missouri. These remaining cable television
properties are not significant to the ongoing operations of the Company.
In 1995, ALLTEL Information Services sold all of the assets related to its check
processing operations, including substantially all of the customer contracts.
MANAGEMENT
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The Company's staff at its headquarters and regional offices supervise,
coordinate and assist subsidiaries in management activities, investor relations,
acquisitions, corporate planning, insurance, and technical research. They also
coordinate the financing program for the entire corporation.
EMPLOYEES
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At December 31, 1998, the Company had 21,504 employees. Some of the employees of
the Company's wireline subsidiaries are part of collective bargaining units. The
Company maintains good relations with all employee groups.
OPERATING SEGMENTS
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ALLTEL is organized based on the products and services that it offers. Under
this organizational structure, the Company operates in two principal areas:
communications and information services. The Company's communications operations
consist of its wireless, wireline and emerging business segments. Emerging
businesses consist of the Company's key new product offerings and include the
Company's long-distance, competitive local exchange carrier ("CLEC"), Internet
access, Personal Communications Services ("PCS"), and network management
operations. The Company also sells telecommunications products and publishes
telephone directories. For financial information about ALLTEL's operating
segments, refer to pages 58-61 of this Form 10-K.
COMMUNICATIONS SERVICES
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During the past two years, the Company has completed several strategic
initiatives designed to strengthen its communications business and to focus its
operations geographically in markets primarily located in the southeastern
portion of the United States and the eastern Great Lakes. As previously
discussed, the merger with 360 completed in 1998 significantly expanded
ALLTEL's wireless presence and enhanced its ability to provide bundled
communications services to its customers. In 1998, the Company began providing
local competitive access service offerings to business customers in select
markets. By mid-1999, the Company will complete construction of network
facilities to provide communications services in additional areas within its
geographically focused markets that are located outside its traditional
franchised service areas. In 1998, the Company also expanded its product
offerings to include PCS.
4
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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COMMUNICATIONS SERVICES (continued)
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In 1997, ALLTEL participated in the Federal Communications Commission's ("FCC")
"D" and "E" band PCS auctions, and ALLTEL was awarded the PCS licensing rights
for 73 markets in 12 states. The PCS licenses acquired increase the size of the
Company's potential wireless customer base to 50.6 million. Also during 1997,
ALLTEL converged its wireline and wireless businesses into a single operation
capable of delivering to customers one-stop shopping for a full range of
communications products and services including local wireline, long-distance,
wireless, paging and Internet services. Additionally, ALLTEL added wireline
products to its wireless retail stores and combined its wireline and wireless
call centers to better serve customers.
WIRELESS OPERATIONS
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GENERAL
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The Company provides wireless telephone service to more than 4 million customers
in 22 states. One measure of a wireless telephone market's potential is the
market's population times the percent of a company's ownership interest of the
wireless operations in that market ("pops"). At December 31, 1998, ALLTEL's
penetration rate (number of customers as a percentage of the total population in
the Company's service areas) was 12 percent. ALLTEL owns a majority interest in
wireless operations in 62 Metropolitan Statistical Areas ("MSAs"), representing
approximately 20.2 million wireless pops, and the Company owns a majority
interest in 103 RSAs, representing approximately 13.3 million wireless pops. In
addition, ALLTEL owns a minority interest in more than 70 other wireless
telephone markets including the New York, New York; Chicago, Illinois; Houston,
Texas and Orlando, Florida MSAs.
PRODUCT OFFERINGS AND PRICING
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ALLTEL seeks to stimulate additional usage, increase penetration and improve
customer retention rates through creative pricing strategies. The Company
creates local and expanded service territories designed to meet customer needs
and respond to prevailing market and competitive conditions. Airtime rate plans
are designed to attract users from all market segments. These plans typically
consist of a fixed monthly rate for network access, a package of airtime minutes
included in the monthly rate and a per minute rate for airtime used in excess of
the included airtime package. Customers who frequently use wireless service
generally prefer rate plans with a higher than average fixed monthly rate, a
larger package of included minutes and a lower than average per minute airtime
rate. Conversely, customers who use wireless service less frequently prefer a
lower monthly fixed rate and will pay a premium for airtime. The Company also
provides custom calling features to enhance its basic airtime product. These
features include call waiting, call forwarding, three-way calling, no-answer
transfer and voicemail.
ALLTEL has entered into roaming agreements with other domestic wireless
companies. These roaming agreements provide customers with the capability to use
their wireless telephones while traveling outside the Company's service
territories. As a result of these roaming agreements, ALLTEL customers, with few
exceptions, can place and receive calls from anywhere within the United States.
Roaming rates have been decreasing, which has resulted in increased roaming
volumes and overall network usage.
Primarily as a result of increased usage of ALLTEL's network facilities, average
revenue per customer per month increased slightly in 1998 to $48, as compared to
$47 for 1997. ALLTEL expects average monthly revenue per customer to continue to
be affected by decreased roaming rates and continued penetration into lower
market usage segments.
5
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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WIRELESS OPERATIONS (continued)
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DISTRIBUTION AND MARKETING
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ALLTEL utilizes four methods of distributing its wireless products and services
in each of its markets. These methods include Company retail stores, Company
retail kiosks, direct sales representatives, and dealers. The development of
multiple distribution channels in each of its markets enables the Company to
provide effective and extensive marketing of products and services and to reduce
its reliance on any single distribution source. ALLTEL continues to expand its
retail channels. Dealer and direct sales channels remain important components of
the Company's overall distribution strategy, with the primary objective for all
channels being to lower customer acquisition costs and to improve customer
retention rates.
ALLTEL currently conducts its retail operations through over 700 Company retail
locations. Stand-alone stores are strategically located in smaller local and
neighborhood retail centers as well as in large shopping malls to capitalize on
favorable demographics and retail traffic patterns. The Company's retail focus
is to attract new customers and to promote customer retention by providing new
customers with extensive assistance from dedicated sales representatives on the
use of a wireless telephone and on the various services that ALLTEL provides.
Many retail locations provide vehicle installation services and while-you-wait
wireless telephone troubleshooting and repair. For ALLTEL, the incremental cost
of obtaining a customer through a Company retail store is the lowest of any
distribution channel.
ALLTEL also sells wireless service directly through its own kiosks in large
national retail stores. The Company stations retail sales representatives at
kiosks in large retailers to take advantage of high traffic generated by the
retailers, to reduce the cost of the sale, and to ensure customers receive
proper training in the use of wireless equipment and services. Existing
customers can purchase wireless telephone accessories, pay bills or inquire
about ALLTEL's services and features while in retail stores or at kiosks.
Through dedicated customer service at its retail stores and kiosks, the
Company's goal is to build customer loyalty and increase the retention rate of
new and existing customers.
ALLTEL's direct sales force focuses its efforts on business customers with high
wireless telephone usage and multiple lines of service. This channel produces
the lowest churn and highest revenue per customer compared with any other
distribution channel.
The Company has entered into dealer agreements with several large electronics
retailers and discounters in its markets. ALLTEL also contracts with local
dealers who operate on a smaller scale and may offer other wireless services
like paging. In exchange for a commission payment, these dealers solicit
customers for the Company's wireless service. The commission payment is subject
to chargeback provisions if the customer fails to maintain service for a
specified period of time. This arrangement increases store traffic and sales
volume for the dealers, and provides a valuable source of new customers for the
Company. ALLTEL actively supports its dealers with regular training and
promotional support.
Maintaining low customer churn rates is a primary goal of the Company,
particularly as new competitors enter the marketplace. The Company experienced
an average monthly churn rate in its wireless service areas of 2.12 percent and
2.04 percent for the years ended December 31, 1998 and 1997, respectively. These
churn rates were comparable to industry averages.
6
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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WIRELESS OPERATIONS (continued)
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COMPETITION
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Wireless carriers face competition from a second carrier licensed to provide
wireless telephone services in the same geographic area, from resellers who buy
bulk wireless services from one of the two licensees and resell it to their
customers, from providers of PCS and other enhanced mobile services and from
Enhanced Specialized Mobile Radio ("ESMR") providers. PCS services generally
consist of wireless two-way communications services for voice, data and other
transmissions employing digital technology. Generally, in the absence of a
disaggregation of spectrum under FCC rules, there would be a maximum of six
broadband PCS providers in any given area. During the past two years, PCS
providers have begun operations within ALLTEL's wireless markets, and the
Company expects more PCS providers to begin operating within its markets during
1999. ALLTEL has prepared for this competitive environment by enhancing its
networks, expanding its service territories and local calling areas,
restructuring rates, and offering new products and services. ALLTEL intends to
capitalize on its position as an incumbent wireless service provider by
providing high capacity networks, strong distribution channels and superior
customer service.
ALLTEL believes that its networks have sufficient capacity to handle new
customer growth in the near term. In the future, the Company intends to meet any
capacity requirements through frequency planning, network organization and the
deployment of additional network infrastructure. As of December 31, 1998, ALLTEL
was providing digital service in 13 of its largest markets. ALLTEL plans to
continue its transition to digital technology on a market-by-market basis.
Digital technology improves call quality, lengthens the battery life of wireless
telephones and offers improved customer call privacy.
REGULATION
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The Company is subject to regulation by the FCC as a provider of wireless
communications services. The FCC has promulgated rules governing the
construction and operation of wireless communications systems as well as
licensing and technical standards for the provision of wireless telephone
service. Further, the FCC has issued various regulatory mandates requiring
wireless carriers to provide additional services and network functions including
wireless number portability, enhanced E-911 calling and various capabilities
under the Communications Assistance to Law Enforcement Act. The FCC also
regulates wireless service resale practices and the terms under which certain
ancillary services may be provided through wireless facilities. Wireless
carriers are also required to contribute to universal service support
mechanisms.
The Telecommunications Act of 1996 (the "96 Act") provides wireless carriers
numerous opportunities to emerge as full competitors to traditional telephone
companies, including the opportunity to provide local telephone services and to
be compensated by other telecommunications carriers for calls terminated on the
wireless carriers' networks. Wireless carriers are not subject to the enhanced
interconnection, resale, unbundling and other obligations that the 96 Act
imposed on the local exchange companies. The FCC has found that wireless
carriers should not be classified as local exchange carriers unless the FCC
makes a finding that such treatment is warranted. The 96 Act limits the
imposition on wireless carriers of equal access requirements without a detailed
FCC rulemaking. The 1993 Omnibus Budget Reconciliation Act preempted most state
regulation of wireless carriers.
PAGING
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ALLTEL operates wide-area computer-driven paging networks in Arkansas and
Florida. At December 31, 1998, ALLTEL provided paging service to approximately
27,000 customers in Arkansas and Florida through its facilities-based network.
The Company also resells paging services in other ALLTEL wireless service areas
to approximately 146,000 customers.
7
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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WIRELINE OPERATIONS
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LOCAL SERVICE
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General
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The Company's wireline subsidiaries provide local service to nearly 1.9 million
customer lines through 574 exchanges in 14 states. The wireline subsidiaries
also offer facilities for private line, data transmission and other
communications services.
Regulation
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Prior to 1996, the Company's wireline subsidiaries provided local telephone
service under exclusive franchises granted by state regulatory commissions and
have been subject to regulation by those regulatory commissions. These
regulatory commissions have had primary jurisdiction over various matters
including local and intrastate toll rates, quality of service, the issuance of
securities, depreciation rates, the disposition of public utility property, the
issuance of debt, and the accounting systems used by those subsidiaries. The FCC
has historically had primary jurisdiction over the interstate toll and access
rates of these companies and issues related to interstate telephone service.
The 96 Act has substantially modified certain aspects of the states' and the
FCC's jurisdictions in the regulation of local exchange telephone companies. The
96 Act prohibits state legislative or regulatory restrictions or barriers to
entry regarding the provision of local telephone service. The 96 Act also
requires incumbent local exchange carriers ("ILECs") to interconnect with the
networks of other telecommunications carriers, unbundle services into network
elements, offer their telecommunications services at wholesale rates to allow
resale of those services, and allow other telecommunications carriers to locate
their equipment on the premises of the incumbent local exchange carriers. The 96
Act requires all local exchange telephone companies to compensate one another
for the transport and termination of calls on one anothers' networks.
The Company's wireline subsidiaries are rural telephone companies and are exempt
from certain of the foregoing obligations unless, in response to a bona fide
request, a state regulatory commission removes that exemption. The 96 Act
requires the FCC to develop rules necessary to implement certain aspects of the
96 Act, and to revise the current Universal Service Fund in response to the
recommendations of a federal-state joint board.
In August 1996, the FCC issued regulations implementing the local competition
provisions of the 96 Act. These regulations established pricing rules for state
regulatory commissions to follow with respect to entry by competing carriers
into the local, intrastate markets of 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 July 1997,
the U.S. Eighth Circuit Court of Appeals (the "Eighth Circuit Court") issued its
decision and vacated the FCC's pricing rules including the "pick and choose"
provisions, finding, among other matters, that the FCC had exceeded its
jurisdiction in establishing pricing rules for intrastate communication
services. In responding to petitions for rehearing of its earlier decision, the
Eighth Circuit Court ruled in October 1997 that ILECs are not required by the 96
Act to recombine network elements that are purchased by requesting carriers on
an unbundled basis.
8
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ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
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WIRELINE OPERATIONS (continued)
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LOCAL SERVICE (continued)
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Regulation (continued)
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The FCC asked the U.S. Supreme Court to review two interconnection decisions of
the Eighth Circuit Court. In January 1999, the U.S. Supreme Court ruled that the
FCC has 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 and adopting rules relating
to dialing parity and standards for granting exemptions to rural ILECs. As part
of its ruling, the U.S. Supreme Court reinstated the FCC's "pick and choose"
rule. The U.S. Supreme Court remanded a portion of its 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 for further rulemaking.
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 discussed on page 10 within the section entitled
"Network Access Services-Regulation". Material changes in the universal service
funding for the Company's wireline subsidiaries are not currently expected to
occur prior to 2001. In 2001, the universal service subsidy for rural LECs may
change from being based on actual costs to being based on a proxy model. Since
the FCC has not yet defined the content of any proxy model, the impact of this
change, if any, in the universal service funding for the Company's wireline
subsidiaries cannot be determined at this time. The Company's wireline
subsidiaries received approximately $73 million from the current federal
universal service fund in 1998. ALLTEL is continuing to evaluate the impact of
the FCC's universal service order on its other telecommunications operations,
including their obligation for universal service contributions and the level of
those contributions. Appeals of certain aspects of the universal service order
are before the U.S. Fifth Circuit Court of Appeals.
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, the Company cannot predict at
this time the specific effects that the 96 Act will have on its wireline
subsidiaries.
Periodically, the Company's wireline subsidiaries receive requests from wireless
communications providers for renegotiation of existing transport and termination
agreements. The Company's wireline subsidiaries, as requested, renegotiate the
appropriate terms and conditions in compliance with the 96 Act. The Company's
wireline subsidiaries have executed contracts for transport and termination
services with CLECs.
During 1998, wireline operations were affected by certain regulatory commission
orders designed to reduce earnings levels. These orders did not materially
affect the results of operations of the Company's wireline subsidiaries. Certain
states in which the Company's wireline subsidiaries operate have adopted
alternatives to rate-of-return regulation, either through legislative or
regulatory commission actions. The Company has elected to be regulated under
alternative regulation for its Georgia subsidiaries, as well as ALLTEL Alabama,
Inc., ALLTEL Arkansas, Inc., ALLTEL Kentucky, Inc., ALLTEL Carolina, Inc. in
North Carolina and Sugar Land Telephone Company in Texas. The Company also has
an Alternative Regulation application pending in Pennsylvania. As a result of
ALLTEL Carolina, Inc.'s election of alternative regulation, ALLTEL Carolina,
Inc. agreed not to exercise its rural exemption status under the 96 Act. The
Company continues to evaluate alternative regulation for its other wireline
subsidiaries.
9
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
- ------- --------
WIRELINE OPERATIONS (continued)
-------------------
LOCAL SERVICE (continued)
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Competition
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ALLTEL's wireline subsidiaries have not experienced significant competition in
their service areas. As a result of the passage of the 96 Act, the Supreme
Court's decision affirming FCC jurisdiction in the local competition arena, and
state telecommunications reform legislation, the Company's wireline subsidiaries
could begin to experience increased competition from various sources, including,
but not limited to, resellers of their local exchange services, large end users
installing their own networks, interexchange carriers, satellite transmission
services, cellular communications providers, cable television companies,
radio-based personal communications companies, competitive access providers and
other systems capable of completely or partially bypassing the local telephone
facilities. ALLTEL cannot predict the specific effects of competition on its
local telephone business, but is intent on taking advantage of the various
opportunities that competition should provide. The Company is currently
addressing potential competition by focusing on improved customer satisfaction,
reducing its costs, increasing efficiency, restructuring rates, offering new
products, and examining new markets for entry. To date, competition has not had
a significant adverse effect on the operations of the Company's wireline
subsidiaries.
NETWORK ACCESS SERVICES
- -----------------------
Long-distance companies pay access charges to the Company's wireline
subsidiaries for the use of their local networks to originate and terminate
their customers' long-distance calls.
Regulation
- ----------
Access charges concerning interstate services are regulated by the FCC. In May
1997, the FCC issued regulations relating to access charge reform that were
applicable mainly to price cap regulated LECs. Since ALLTEL's wireline
subsidiaries are not price cap regulated LECs, the access charge regulations,
with few exceptions, are not currently applicable to them. 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.
The Company's wireline subsidiaries have elected to remain under rate base
rate-of-return regulation with respect to interstate services. For companies
remaining under rate-of-return regulation, the FCC authorizes a rate-of-return
that telephone companies may earn on interstate services they provide. 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. However, ALLTEL and other ILECs
have asked the FCC to address other important issues relating to universal
service, interconnection, and access reform before considering any
represcription of the authorized return. The Company's wireline subsidiaries
currently receive compensation from long-distance companies for intrastate,
intraLATA services through access charges or toll settlements that are subject
to state regulatory commission approval.
10
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
- ------- --------
COMMUNICATIONS-EMERGING BUSINESSES
----------------------------------
LONG-DISTANCE OPERATIONS
- ------------------------
The Company began offering long-distance telecommunications services during
1996. Long-distance services are provided on both a facilities-based and resale
basis by the Company's subsidiary, ALLTEL Communications, Inc. ("ACI"). ALLTEL
provides long-distance service in all of the states in which the Company
provides local exchange service. In addition, ALLTEL offers long-distance
service outside its franchised, local exchange service areas. As of December 31,
1998, ALLTEL provided long-distance service to more than 502,000 customers.
Regulation
- ----------
As a long-distance service provider, ALLTEL's intrastate long-distance business
is subject to limited regulation by state regulatory commissions and its
interstate business is subject to limited regulation by the FCC. State
regulatory commissions currently require long-distance service providers to
obtain a certificate of operating authority and the majority of states also
require long-distance service providers to file tariffs. Most state regulatory
commissions also require such companies to meet certain minimum service
standards.
Competition
- -----------
The long-distance marketplace is extremely competitive and continues to receive
relaxed regulation from both the FCC and state regulatory commissions. To meet
the competitive demands of the long-distance industry, ALLTEL has created
several business and residential service offerings necessary to attract
potential customers, such as volume price discounts, calling cards and
simplified one rate plans, to set itself apart from other competitors within the
long-distance marketplace.
CLEC OPERATIONS
- ---------------
During 1998, ALLTEL began offering local access telecommunications services to
business customers in select markets outside its wireline service areas. The
Company expects to expand this product offering to residential customers in
1999. Currently, ALLTEL has received approval to provide competitive local
access service in the states of Arkansas, Florida, North Carolina, Virginia and
Texas, and has an application pending in eleven other states. ALLTEL has
negotiated interconnection agreements with the appropriate incumbent local
exchange carriers in the states where it is currently offering CLEC service and
is negotiating those arrangements in other states. ALLTEL is installing state-
of-the-art networks that will enable it to provide services on both a
facilities-based and resale basis. ACI will provide local service in combination
with other services provided by subsidiaries of the Company, including long-
distance, wireless and Internet services.
PCS, INTERNET AND NETWORK MANAGEMENT OPERATIONS
- -----------------------------------------------
ALLTEL has offered PCS in Jacksonville, Florida, since March 1998, and in the
Birmingham and Mobile, Alabama service areas, which include Tuscaloosa, Alabama
and Pensacola, Florida, since February 1999. Internet access services are
currently marketed to residential and business customers in the majority of
states in which ALLTEL provides communications services. Network management
services are currently marketed to business customers in select areas. These new
service offerings are start-up operations, and as such, are not yet significant
components of ALLTEL's communications operations.
11
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
- ------- --------
INFORMATION SERVICES
--------------------
GENERAL
- -------
ALLTEL Information Services provides a wide range of information processing
services primarily to the financial services and telecommunications industries
through information processing centers that it staffs, equips and operates.
Information processing contracts are generally for a multi-year period. ALLTEL
Information Services also develops and markets software worldwide to financial
services and telecommunications companies operating their own information
processing departments. The principal operating units of the Company's
information services business consist of the Financial Services Division and the
Telecommunications Division.
The Financial Services Division markets software and services that have been
developed and improved continuously over the last three decades and are designed
to fulfill substantially all of the retail and wholesale information processing
and management information requirements of financial institutions. In addition,
the Financial Services Division also provides data processing and related
computer software and systems to financial institutions originating and/or
servicing single family mortgage loans. This division's software products and
processing services, combined with its team of consultants, are intended to
offer a cost-effective alternative to the extensive technical support staff and
the enlarged group of mortgage bankers which would otherwise have to be
assembled in-house by each customer. The Financial Services Division's on-line
systems automate processing functions required in the origination of mortgage
loans, the management of such loans while in inventory before they are sold in
the secondary market, and their subsequent servicing.
The Telecommunications Division is primarily engaged in the development and
marketing of billing services and customer care software, including its
state-of-the-art Virtuoso II billing and customer care product, to local
telephone, wireless and PCS companies. In addition, the Telecommunications
Division provides data processing and outsourcing services to both wireline and
wireless telecommunications service providers.
CUSTOMERS
- ---------
The Financial Services Division's primary markets for its financial products and
services are the nation's commercial banks and savings institutions and
financial institutions throughout the world. Financial software and services are
also marketed to credit unions and to financial institutions originating or
servicing single family mortgage loans. These financial institutions, which
include many of the largest servicers of residential mortgages, are located
throughout the United States. In total, more than 20 million mortgage loans
representing over $1.8 trillion are processed using the Financial Services
Division's software.
The Telecommunications Division's primary markets for its telecommunications
products and services consist of the top 40 telephone companies and the top 50
cellular companies in the United States, and certain PCS companies in the United
States, and approximately 100 international telecommunications companies. The
roll out of the wireless companies that will operate within the PCS spectrum
bandwidths in the United States has significantly increased the potential
customer base of the Telecommunications Division.
12
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
- ------- --------
INFORMATION SERVICES (continued)
--------------------
COMPETITION
- -----------
The Financial Services Division's competition primarily comes from "in-house"
bank information processing departments and other companies engaged in active
competition for financial institution outsourcing contracts. Numerous large
financial institutions provide information processing for smaller institutions
in their respective geographic areas, along with other companies that perform
such services for small institutions. The Telecommunications Division also faces
strong competition from internal information technology departments. In
addition, there are also other information services companies that provide
information processing and management services to the telecommunications
industry.
ALLTEL Information Services competes in each of its markets by providing a high
level of service and support. ALLTEL Information Services substantially relies
upon and vigorously enforces contract and trade secret laws and internal
non-disclosure safeguards to protect the proprietary nature of its computer
software and service methodologies.
REGULATION AND EXAMINATION
- --------------------------
The Financial Services Division is regulated by the federal agencies that have
supervisory authority over banking, thrift, and credit union operations. The
Financial Services Division is also classified as one of 12 national vendors
that, as a result of their market share, process a significant portion of the
financial industry's assets. These industry leaders are also examined by the
federal Financial Institutions Examination Council on an ongoing basis. ALLTEL
Information Services' management practices, policies, procedures, standards, and
overall financial condition are components of these reviews.
In addition to these corporate examinations, individual processing sites are
subject to examination, as if they were departments of their respective clients,
by federal and state regulators, as well as the clients' internal audit
departments and their independent auditing firms. The same standards of
performance are applied to those information processing centers as are applied
to the client financial institutions. Reports of the individual data center
performance are furnished to the Board of Directors of ALLTEL Information
Services and to the Board of Directors of the examined client. The supervisory
agencies include applicable state banking departments, the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, and the National Credit Union Administration. ALLTEL Information
Services' processing contracts include a commitment to install all necessary
changes in its computer software that are required by changes in regulations.
The Company operates transmitters at the network's information processing
facility hub and operates very small aperture technology ("VSAT") earth stations
at numerous customer locations. Prior to initiation, construction or operation
of the transmitters used in a VSAT satellite network, operators of these
transmitters are required by the Communications Act of 1934 to be authorized by
the FCC. The FCC grants licenses to VSAT operators for a predetermined number of
earth stations that may be placed at unspecified locations in the United States.
The Company holds five VSAT licenses to operate its domestic earth station
satellite network, consisting of one 8.1m license for its VSAT hub located in
Jacksonville, Florida and four other VSAT licenses ranging from 1.0m to 2.4m.
Three of the VSAT licenses, including the 8.1m license, were renewed during 1997
and will expire in 2007, while the remaining two VSAT licenses will expire in
2003.
13
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
- ------- --------
INFORMATION SERVICES (continued)
--------------------
PRODUCT DEVELOPMENT AND SUPPORT
- -------------------------------
In the past five years, ALLTEL Information Services has spent approximately $523
million ($111 million in 1998) on mainframe and client/server software design
and development. ALLTEL Information Services is also developing products that
are utilized in a UNIX based environment, including the Telecommunications
Division's Virtuoso II billing and customer care product. Changes in regulatory
requirements of both state and federal authorities, increasing competition, and
the development of new products and markets create the need to continually
update or modify existing software and systems offered to customers. ALLTEL
Information Services intends to continue to maintain, improve, and expand the
functions and capabilities of its software products over the next several years.
OTHER OPERATIONS
----------------
PRODUCT DISTRIBUTION
- --------------------
ALLTEL Supply, Inc. ("ALLTEL Supply"), with 9 warehouses and 24 counter-sales
showrooms across the United States, is a major distributor of telecommunications
equipment and materials. It supplies equipment to affiliated and non-affiliated
communications companies, business systems suppliers, railroads, governments,
and retail and industrial companies.
Competition
- -----------
ALLTEL Supply experiences substantial competition throughout its sales
territories from other distribution companies and from direct sales by
manufacturers. Competition is based primarily on quality, product availability,
service, price, and technical assistance. Since the products distributed by
ALLTEL Supply are also offered by other competitors, ALLTEL Supply
differentiates itself from competitors by providing value-added services such as
offering expert technical assistance, maintaining extensive inventories in
strategically located warehouses and counter-sales showrooms to facilitate
single supplier sourcing and "just-in-time" delivery, maintaining a full range
of alternative product lines, and by providing staging, assembly and other
services. The Company is continually evaluating and implementing policies and
strategies which will meet customer expectations and position ALLTEL Supply in
the market as a quality customer-focused distributor.
Products
- --------
ALLTEL Supply offers more than 50,000 products for sale. Of these, ALLTEL Supply
inventories single and multi-line telephone sets, local area networks ("LANs"),
switching equipment modules, interior cable, pole line hardware, and various
other telecommunications supply items. ALLTEL Supply has not encountered any
material shortages or delays in delivery of products from their suppliers.
DIRECTORY PUBLISHING
- --------------------
ALLTEL Publishing coordinates advertising, sales, printing, and distribution for
329 telephone directory contracts in 39 states. Under terms of an agreement with
GTE Directories, ALLTEL Publishing provides all directory publishing services
including contract management, production and marketing. As subcontractor, GTE
Directories provides directory sales and printing services through a separate
contract with ALLTEL Publishing.
14
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 1. Business
- ------- --------
INVESTMENTS
-----------
MCI WORLDCOM, INC.
- ------------------
The Company currently owns approximately 12.7 million shares of MCI WorldCom,
Inc. common stock, representing less than a 1 percent ownership interest in this
publicly-held company. MCI WorldCom, Inc. is a large long-distance company in
the United States and is a full service provider of international
telecommunications and specialized broadcasting services. During 1998 and 1997,
the Company sold a portion of its investment in MCI WorldCom, Inc.
APEX GLOBAL INFORMATION SERVICES, INC.
- --------------------------------------
The Company has made an approximate $15 million investment in Apex Global
Information Services, Inc. ("AGIS"), a global provider of Internet access
services. As a result, the Company owns approximately a 9 percent interest in
AGIS.
HORIZON TELECOM, INC.
- ---------------------
The Company owns a 19.8 percent interest in Horizon Telecom, Inc., which serves
approximately 37,000 telephone access lines in Ohio. Frederick G. Griech, Senior
Advisor, and Dennis Mervis, Vice President-Sales and Marketing of ALLTEL
Communications Northeast Market Group, are members of Horizon Telecom, Inc.'s
Board of Directors.
HUGHES ISPAT LIMITED
- --------------------
During 1997, the Company made an approximate $21 million investment in Hughes
Ispat Limited ("HIL"), a start-up, limited liability company in India. HIL has
received a license to provide basic telephone and other enhanced communications
services in the state of Maharashtra, India. Currently, HIL is constructing
network facilities and began operations in late 1998. As a result of its
investment, the Company owns approximately a 13 percent interest in HIL. Francis
X. Frantz, Executive Vice President-External Affairs, General Counsel and
Secretary, is a member of HIL's Board of Directors.
15
<PAGE>
ALLTEL Corporation
Form 10-K, Part I
Item 2. Properties
- ------- ----------
WIRELINE PROPERTY
- -----------------
The Company's wireline subsidiaries own property in their respective operating
territories which consists primarily of land and buildings, central office
equipment, telephone lines, and related equipment. The telephone lines include
aerial and underground cable, conduit, poles and wires. Central office equipment
includes digital switches and peripheral equipment. The gross investment by
category in wireline property as of December 31, 1998, was as follows:
(Thousands)
-----------
Wireline-
Land, buildings and leasehold improvements $ 206,463
Central office equipment 1,432,606
Outside plant 2,196,123
Furniture, fixtures, vehicles and other 255,599
----------
Total $4,090,791
==========
Certain properties of the Company and its wireline subsidiaries are pledged as
collateral for long-term debt.
OTHER PROPERTY
- --------------
Other properties of the Company in service consist primarily of property, plant
and equipment used in providing wireless communications services, information
services and product distribution operations. The total investment by category
for the non-wireline operations of the Company as of December 31, 1998, was as
follows:
(Thousands)
-----------
Land, buildings and leasehold improvements $ 621,320
Wireless plant and equipment 2,031,512
Data processing equipment 436,968
Furniture, fixtures and miscellaneous 429,332
----------
Total $3,519,132
==========
All of the Company's property is considered to be in reasonably sound operating
condition.
16
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 3. Legal Proceedings
- ------- -----------------
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. As
further discussed in Note 14 to the Consolidated Financial Statements
(refer to page 58 of this Form 10-K), the Company appealed the Georgia
PSC order and received a favorable decision from the Superior Court of
Fulton County, Georgia (the "Superior Court"). The Georgia PSC appealed
the Superior Court's decision, and in July 1997, the Georgia Court of
Appeals reversed the Superior Court's decision. In August 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. In October 1998, the Georgia Supreme Court, in a 4-3
decision, upheld the Appellate Court's ruling that the Georgia PSC had
the authority to order the rate reductions. The case has been returned
to the Superior Court for a hearing on the merits which will provide
ALLTEL the opportunity to challenge the Georgia PSC's order by
asserting a number of additional federal and state constitutional and
other legal grounds. At December 31, 1998, the maximum possible
liability to the Company related to this case is $60 million, plus
interest at 7 percent 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.
The Company is not currently involved in any other material pending
legal proceedings, other than routine litigation incidental to its
business, and, to the knowledge of the Company's management, no
material legal proceedings, either private or governmental, are
contemplated or threatened.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to the security holders for a vote during the
fourth quarter of 1998.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------- -----------------------------------------------------------------
Matters
-------
The outstanding shares of the Company's Common Stock are listed and
traded on the New York Stock Exchange and the Pacific Exchange and
trade under the symbol AT. The following table reflects the range of
high, low and closing prices of the Company's Common Stock as reported
by Dow Jones & Company, Inc. for each quarter in 1998 and 1997:
Dividend
Year Qtr. High Low Close Declared
---- ---- ---- --- ----- --------
1998 4th 61 3/8 44 59 13/16 $.305
3rd 48 38 1/4 47 1/8 $.29
2nd 46 1/2 39 7/16 46 1/2 $.29
1st 48 13/16 39 9/16 43 11/16 $.29
1997 4th 41 5/8 33 3/16 41 1/16 $.29
3rd 35 1/2 30 15/16 34 1/2 $.275
2nd 34 3/8 29 3/4 33 7/16 $.275
1st 36 3/4 30 5/8 32 1/2 $.275
As of January 31, 1999, the approximate number of stockholders of
common stock including an estimate for those holding shares in brokers'
accounts was 230,000.
17
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 6. Selected Financial Data
- ------- -----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
(Dollars in thousands,
except per share amounts) 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and Sales:
Service revenues $4,632,615 $4,033,811 $3,588,233 $3,246,666 $2,830,278 $2,202,071
Product sales 561,393 511,329 651,234 651,766 664,242 485,038
---------- ---------- ---------- ---------- ---------- ----------
Total revenues and sales 5,194,008 4,545,140 4,239,467 3,898,432 3,494,520 2,687,109
- ----------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Operating expenses 3,290,853 2,871,936 2,736,761 2,544,536 2,320,678 1,783,440
Depreciation and amortization 707,129 635,464 570,956 524,530 454,398 364,821
Merger and integration expenses 252,000 - - - - -
Provision to reduce carrying
value of certain assets 55,000 16,874 120,280 - - -
---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses 4,304,982 3,524,274 3,427,997 3,069,066 2,775,076 2,148,261
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Income 889,026 1,020,866 811,470 829,366 719,444 538,848
Other income, net 50,832 15,278 6,792 8,043 (7,265) 9,241
Interest expense (263,669) (261,770) (237,196) (272,668) (235,557) (184,155)
Gain on disposal or exchange of assets
write-down of assets and other 296,150 209,651 (2,278) 30,775 (54,157) 27,390
---------- ---------- ----------- ---------- ---------- ----------
Income before income taxes 972,339 984,025 578,788 595,516 422,465 391,324
Income taxes 446,864 394,644 227,532 242,595 170,469 180,791
---------- ---------- ---------- ---------- ---------- ----------
Net income 525,475 589,381 351,256 352,921 251,996 210,533
Preferred dividends 938 1,008 1,071 1,158 1,232 1,578
---------- ---------- ---------- ---------- ---------- ----------
Net income applicable to
common shares $ 524,537 $ 588,373 $ 350,185 $ 351,763 $ 250,764 $ 208,955
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per Share:
Basic $1.91 $2.13 $1.27 $1.28 $.91 $.77
Diluted $1.89 $2.11 $1.26 $1.27 $.91 $.76
Dividends per common share $1.175 $1.115 $1.055 $.98 $.90 $.82
Weighted average common shares:
Basic 274,305,000 276,590,000 276,637,000 275,232,000 274,141,000 272,017,000
Diluted 277,276,000 278,544,000 278,429,000 277,159,000 276,592,000 274,880,000
Total assets $9,374,226 $8,570,405 $8,168,174 $7,054,627 $6,454,239 $5,787,474
Total shareholders' equity $3,270,872 $2,717,807 $2,559,607 $1,937,633 $1,629,132 $1,578,228
Total redeemable preferred
stock and long-term debt $3,496,760 $3,705,144 $3,462,375 $3,286,411 $3,208,095 $2,851,481
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
Notes: A. Net income for 1998 includes pretax gains of $296.2 million from the sale of certain investments, principally consisting
of MCI WorldCom, Inc. common stock. These gains increased net income by $179.8 million or $.65 per share. Net income
also includes $252 million of merger and integration expenses related to the closing of the merger with 360
Communications Company. These merger and integration expenses decreased net income $201 million or $.73 per share. Net
income also includes a pretax charge of $55 million resulting from changes in a customer care and billing contract with
a major customer. This charge decreased net income $33.6 million or $.12 per share. (See Notes 9, 10 and 11.)
B. Net income for 1997 includes pretax gains of $209.6 million from the sale of certain investments, principally consisting
of MCI WorldCom, Inc. common stock and from the sale of the Company's healthcare operations. These gains increased net
income by $121.5 million or $.44 per share. Net income also includes a pretax write-down of $16.9 million to reflect the
fair value less cost to sell the Company's wire and cable operations. This write-down decreased net income $11.7 million
or $.04 per share. (See Notes 10 and 11.)
C. Net income for 1996 includes pretax write-downs of $120.3 million to adjust the carrying value of certain software and
other assets. The write-downs decreased net income $72.7 million or $.25 per share. (See Note 10.)
D. Net income for 1995 includes pretax gains of $49.8 million from the sale of certain wireline properties, partially
offset by termination fees of $14.0 million incurred due to the early retirement of long-term debt and by an additional
pretax write-down of $5.0 million in the carrying value of the Company's check processing operations. These transactions
increased net income $19.8 million or $.07 per share.
E. Net income for 1994 includes a pretax write-down of $54.2 million to reflect the estimated net realizable value of the
Company's community banking and check processing operations. The write-down decreased net income by $32.2 million or
$.12 per share.
F. On November 1, 1993, the Company purchased substantially all of the assets of the wireline operations of GTE Corporation
in the State of Georgia ("GTE Georgia"). This acquisition was accounted for as a purchase, and accordingly, GTE
Georgia's results have been included in the consolidated financial statements from the date of acquisition.
</FN>
</TABLE>
18
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations of ALLTEL Corporation ("ALLTEL" or the "Company") includes, and
future filings by the Company on Form 10-K, Form 10-Q and Form 8-K and future
oral and written statements by the Company and its management may include,
certain forward-looking statements, including (without limitation) statements
with respect to anticipated future operating and financial performance, growth
opportunities and growth rates, acquisition and divestitive opportunities, Year
2000 compliance and other similar forecasts and statements of expectation. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and "should," and variations of these words and similar
expressions, are intended to identify these forward-looking statements.
Forward-looking statements by the Company and its management are based on
estimates, projections, beliefs and assumptions of management and are not
guarantees of future performance. The Company disclaims any obligation to update
or revise any forward-looking statement based on the occurrence of future
events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Representative examples
of these factors include (without limitation) rapid technological developments
and changes in the telecommunications and information services industries;
ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996 and other similar federal and state
legislation and the federal and state rules and regulations enacted pursuant to
that legislation; regulatory limitations on the Company's ability to change its
pricing for communications services; the possible future unavailability of
accounting under Statement of Financial Accounting Standards No. 71 for the
Company's wireline subsidiaries; continuing consolidation in certain industries,
such as banking, served by the Company's information services business; the
risks associated with relatively large, multi-year contracts in the Company's
information services business; and higher than anticipated expenditures
associated with the Company's Year 2000 efforts. In addition to these factors,
actual future performance, outcomes and results may differ materially because of
other, more general, factors including (without limitation) general industry and
market conditions and growth rates, domestic and international economic
conditions, governmental and public policy changes and the continued
availability of financing in the amounts, at the terms and on the conditions
necessary to support the Company's future business.
Results of Operations
Overview
On July 1, 1998, ALLTEL completed its merger with 360 Communications Company
("360"). Through this merger, ALLTEL expanded its wireless presence and enhanced
its ability to deliver bundled communications services across its geographically
focused markets. The merger with 360 was accounted for as a pooling-of-
interests. Accordingly, all prior-period financial information presented has
been restated to include the 360 operations. (See Note 2 to the consolidated
financial statements for additional information regarding the merger
transaction.) As further discussed below, results for 1998 were affected
by merger and integration expenses and by other non-recurring and unusual items.
Revenues and sales increased $648.9 million or 14 percent in 1998, $305.7
million or 7 percent in 1997 and $341.0 million or 9 percent in 1996. Operating
income decreased $131.8 million or 13 percent in 1998, increased $209.4 million
or 26 percent in 1997 and decreased $17.9 million or 2 percent in 1996. Growth
in revenues and sales in all three years was affected by various asset
dispositions. In May 1997, the Company completed the sale of its wire and cable
subsidiary, HWC Distribution Corp. ("HWC"), and in January 1997, the Company
sold its information services' healthcare operations. During 1996 and 1995,
ALLTEL sold certain non-strategic wireline properties. In addition to these
asset dispositions, operating income in each of the three years in the period
ended December 31, 1998, was also affected by charges to write down the carrying
value of certain assets. Operating income for 1998 also reflects merger and
integration expenses related to the merger with 360.
19
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
Adjusted to exclude the results from operations for the asset dispositions
and the impact of the merger and integration expenses and asset write-downs,
revenues and sales would have increased $691.7 million or 15 percent in 1998,
$534.5 million or 13 percent in 1997 and $450.7 million or 13 percent in 1996,
and operating income would have increased $159.7 million or 15 percent in 1998,
$115.0 million or 12 percent in 1997 and $142.0 million or 18 percent in 1996.
Net income decreased $63.9 million or 11 percent in 1998, increased $238.1
million or 68 percent in 1997 and decreased $1.7 million or less than 1 percent
in 1996. Basic and diluted earnings per share both decreased 10 percent in 1998,
increased 68 percent and 67 percent, respectively, in 1997 and both decreased
1 percent in 1996. Reported net income and earnings per share include the
effects of the asset dispositions, asset write-downs and merger and integration
expenses, as well as several non-recurring and unusual items further discussed
below. Excluding the impact in each year of the asset dispositions and all
non-recurring and unusual items, net income would have increased $101.5 million
or 21 percent in 1998, $59.8 million or 14 percent in 1997 and $117.8 million or
39 percent in 1996, and basic and diluted earnings per share would both have
increased 22 percent in 1998, 15 percent in 1997 and 39 percent in 1996.
Net income and earnings per share adjusted for the asset dispositions and
all non-extraordinary, non-recurring and unusual items are summarized in the
following tables:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income, as reported $525,475 $589,381 $351,256
Disposition of healthcare, wire and cable
and wireline operations - (838) (6,429)
Non-recurring and unusual items, net of tax:
Merger and integration expenses 200,995 - -
Provision to reduce carrying value of certain assets 33,605 11,744 72,716
Gain on disposal of assets (179,770) (121,485) (8,465)
Termination fees on early retirement of long-term debt - - 9,946
-------- -------- --------
Net income, as adjusted $580,305 $478,802 $419,024
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Basic Diluted
----------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings per share, as reported $1.91 $2.13 $1.27 $1.89 $2.11 $1.26
Disposition of healthcare, wire and cable
and wireline operations - - (.02) - - (.02)
Non-recurring and unusual items:
Merger and integration expenses .73 - - .73 - -
Provision to reduce carrying
value of certain assets .12 .04 .25 .12 .04 .25
Gain on disposal of assets (.65) (.44) (.03) (.65) (.43) (.03)
Termination fees on early retirement
of long-term debt - - .04 - - .04
----- ----- ----- ----- ----- -----
Earnings per share, as adjusted $2.11 $1.73 $1.51 $2.09 $1.72 $1.50
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The net income and earnings per share impact of the asset dispositions and
the non-recurring and unusual items have been presented as supplemental
information only. The non-recurring and unusual items reflected in the above
tables are discussed below in reference to the caption in the consolidated
statements of income in which they are reported.
20
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
-------------
Merger and Integration Expenses
In 1998, the Company recorded transaction costs and one-time charges totaling
$252 million on a pretax basis related to the closing of its merger with
360. The merger and integration expenses include professional and financial
advisors' fees of $31.5 million, employee-related expenses of $48.7 million and
integration costs of $171.8 million. The integration costs include several
adjustments resulting from the redirection of a number of strategic initiatives
based on the merger with 360 and ALLTEL's expanded wireless presence. These
adjustments include a $60 million write-down in the carrying value of certain
in-process software development assets related to a customer billing system with
no alternative future use, $50 million of costs associated with the early
termination of certain service obligations, branding and signage costs of $20.7
million, an $18 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 primarily relates to a long-term contract continuing until 2006 with
an outside vendor for customer billing services to be provided to the 360
operations, under which the Company currently is paying approximately $45
million per year. As part of its integration plan, the Company will convert the
360 operations to its own internal billing system during the period of two years
following July 1, 1998. In December 1998, the foregoing vendor filed a
declaratory judgment suit against the Company requesting a ruling that the
Company did not have the right to terminate the contract. The Company is
disputing the vendor's position and has filed a counterclaim against the vendor
for breach of contract. The $50 million of costs recorded represent the
Company's best estimate of the cost of terminating the billing services contract
with the outside vendor prior to the expiration of its term. The $50 million
amount is the present value of the estimated profit to the vendor over the
remaining term of the contract. The $18 million write-down in the carrying value
of certain PCS-related assets include approximately $15 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 million of the PCS-related write-down represents
cell site lease termination fees.
As a result of its integration efforts, ALLTEL expects to realize synergies
through a reduction in operating expenses of $80 million in 1999 and $100
million in 2000. Of the total syngeries 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. At December 31, 1998, the
Company's remaining unpaid liability related to its merger and integration
efforts was $91.3 million, consisting of $50 million of contract termination
fees, $31.9 million of employee-related expenses and $9.4 million of other
integration costs. Cash outlays for the employee-related expenses and other
integration costs are expected to be substantially completed by the end of
the first quarter of 1999. The Company expects to finalize amounts payable with
respect to certain contract termination fees by the end of 1999. Funding for
this liability will be internally financed from operating cash flows.
(See Note 9 to the consolidated financial statements for additional information
regarding the merger and integration expenses.)
Provision to Reduce Carrying Value of Certain Assets
During the third quarter of 1998, the Company recorded a $55 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 has re-evaluated its billing and customer care requirements and
modified its billing conversion plans.
During 1997, ALLTEL recorded a pretax write-down of $16.9 million to
reflect the fair value less cost to sell its wire and cable subsidiary, HWC.
During 1996, the Company incurred non-cash, pretax charges of $120.3 million to
write down the carrying value of certain assets. In accordance with ALLTEL's
plan to dispose of HWC, the Company recorded a pretax write-down of goodwill in
the amount of $45.3 million. In addition, information services recorded a pretax
write-down of $53.0 million in the carrying value of certain assets primarily
consisting of capitalized software development costs. The write-down of software
21
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
resulted from performing a net realizability evaluation of software-related
products that have been impacted by changes in software and hardware
technologies. Information services also recorded a pretax write-down of $22.0
million to adjust the carrying value of its community banking operations to
their estimated fair value based upon projections of future cash flows. (See
Note 10 to the consolidated financial statements for additional information
regarding the asset write-downs discussed in this section.)
Gain on Disposal of Assets and Other
During 1998, the Company recorded pretax gains of $265.7 million, primarily from
the sale of a portion of its investment in MCI WorldCom, Inc. common stock.
The Company also recorded a pretax gain of $30.5 million resulting from the sale
of its ownership interest in an unconsolidated partnership.
During 1997, ALLTEL recorded a pretax gain of $156.0 million from the sale
of a portion of its investment in MCI WorldCom, Inc. common stock. In addition,
the Company recorded a pretax gain of $34.4 million primarily related to the
sale of its investment in a software company, a pretax gain of $16.2 million
from the sale of information services' healthcare operations and a pretax gain
of $3.0 million from the sale of its ownership interests in two unconsolidated
partnerships.
In 1996, the Company recorded a pretax gain of $15.3 million from the sale
of wireline properties in Nevada to Citizens Utilities Company. ALLTEL also
incurred $15.8 million of termination fees related to the early retirement of
$200 million of long-term debt. Additionally, ALLTEL realized a pretax loss of
$1.8 million related to the withdrawal of its investment in GO Communications
Corporation ("GOCC"). (See Note 11 to the consolidated financial statements for
additional information regarding these non-recurring and unusual items recorded
in 1998, 1997 and 1996.)
Results of Operations by Business Segment
As discussed in Note 15 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" in 1998. ALLTEL is organized
based on the products and services that it offers. Under this organizational
structure, the Company operates in two principal areas: communications and
information services. The Company's communications operations consist of its
wireless, wireline and emerging business segments. The Company also sells
telecommunications products and publishes telephone directories.
Communications-Wireless Operations
- ----------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- ----------------------------------------------------------------------------
Revenues and sales $2,137.2 $1,838.5 $1,544.5
Operating income $ 603.6 $ 460.4 $ 370.2
Total customers 4,008,660 3,523,839 2,951,548
Market penetration rate 12.0% 10.7% 9.1%
Churn 2.1% 2.0% 2.0%
- ----------------------------------------------------------------------------
Wireless revenues and sales increased $298.7 million or 16 percent in 1998,
$294.0 million or 19 percent in 1997 and $345.6 million or 29 percent in 1996.
Operating income increased $143.2 million or 31 percent in 1998, $90.2 million
or 24 percent in 1997 and $108.2 million or 41 percent in 1996.
Customer growth continued as the number of customers increased 14 percent
over 1997, compared to annual growth rates in customers of 19 percent in 1997
and 39 percent in 1996. ALLTEL placed more than 1,465,000 gross units in service
in 1998, compared to 1,374,000 units in 1997 and 1,220,000 units in 1996. While
the rate of customer growth has declined, the overall market penetration rate
(number of customers as a percentage of the total population in ALLTEL's service
areas) has increased.
Wireless revenues and sales increased in all periods primarily due to the
growth in ALLTEL's customer base including the acquisition of new wireless
properties and increased ownership interest in existing wireless properties.
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. As a result of increased usage of the Company's network
22
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
facilities, average monthly revenue per customer increased slightly in 1998
to $48. Average monthly revenue per customer was $47 for 1997 and $52 for 1996.
Average monthly revenue per customer declined in 1997 primarily due to the
migration of existing customers to lower rate plans, increased penetration into
lower-usage market segments and a reduction in roaming revenue rates. During
1997, as a result of competition in its service areas, ALLTEL increased its
offering of monthly service plans which had lower base access rates and included
more packaged air time minutes. The Company expects average monthly revenue per
customer to continue to be affected by the industry-wide trends of decreased
roaming revenue rates and continued penetration into lower-usage market
segments. 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.
Operating income increased in all periods primarily due to the growth in
revenues and sales. Improved margins realized on the sale of wireless equipment,
reductions in branding and other advertising costs and declines in losses
sustained from fraud contributed to the increases in operating income for 1998
and 1997. The reduction in branding and other advertising costs in 1998 reflects
savings realized as a result of the merger, as ALLTEL ceased promotion of the
360 brand name. Branding and other advertising costs declined in 1997 due to a
decrease in promotional activities. Losses sustained from fraud decreased in
1998 and 1997 primarily due to the Company's continuing efforts to control
unauthorized usage of its customers' wireless telephone numbers that results in
unbillable fraudulent roaming activity. Operating income in all periods was
affected by increases in sales commissions, customer service-related expenses
and general and administrative expenses consistent with the overall growth in
revenues and sales. Depreciation and amortization expense also increased in all
periods primarily due to growth in wireless plant in service.
The cost to acquire a new wireless customer represents sales, marketing and
advertising costs and losses on equipment sales for each new customer added. The
cost to acquire a new wireless customer was $284, $285 and $295 for the years
ended December 31, 1998, 1997 and 1996, respectively. The decreases in 1998 and
1997 were primarily due to the reductions in branding and other advertising
costs noted above, as well as distributing these costs over a larger number of
customers acquired, as compared to the corresponding prior-year period. Although
the Company intends to continue to utilize its large dealer network, ALLTEL 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.
Communications-Wireline Operations
- -----------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- -----------------------------------------------------------------------------
Local service $ 583.1 $ 535.9 $ 487.1
Network access and long-distance 631.9 609.4 589.9
Miscellaneous 94.1 88.7 90.4
-------- -------- --------
Total revenues and sales $1,309.1 $1,234.0 $1,167.4
Operating income $ 471.6 $ 450.0 $ 409.3
Access lines in service 1,889,506 1,789,317 1,681,395
- -----------------------------------------------------------------------------
Wireline's revenues and sales increased $75.1 million or 6 percent in 1998,
increased $66.6 million or 6 percent in 1997 and decreased $41.3 million or 3
percent in 1996. Operating income increased $21.6 million or 5 percent in 1998,
increased $40.7 million or 10 percent in 1997 and decreased $9.3 million or 2
percent in 1996. ALLTEL sold certain wireline properties in eight states during
1996 and 1995, resulting in decreases in revenues and sales and operating income
in 1996 of $88.4 million and $31.7 million, respectively. Excluding the impact
of the sale of properties, wireline's revenues and sales would have increased
$47.1 million or 4 percent, and operating income would have increased $22.4
million or 6 percent in 1996.
23
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
Local service revenues increased $47.2 million or 9 percent in 1998, $48.8
million or 10 percent in 1997 and $13.1 million or 3 percent in 1996. The
increases in local service revenues in all periods reflect both growth in
customer access lines and growth in custom calling and other enhanced services
revenues. Customer access lines increased 6 percent in both 1998 and 1997
reflecting sales of residential and second access lines. Local service revenues
for 1997 also reflect the expansion of local calling areas in North Carolina and
Georgia, which reclassified certain revenues from network access and
long-distance revenues to local service revenues. Local service revenues for
1996 reflect 4 percent growth in customer access lines and increased revenues
from enhanced services, partially offset by lost revenues due to the property
sales. Future access line growth is expected to result from population growth
in the Company's service areas and sales of second access lines and through
strategic acquisitions.
Network access and long-distance revenues increased $22.5 million or 4
percent in 1998 and $19.5 million or 3 percent in 1997 and decreased $53.7
million or 8 percent in 1996. The increase in network access and long-distance
revenues in 1998 reflects higher volumes of access usage and growth in customer
access lines, partially offset by a reduction in intrastate toll revenues. The
increase in 1997 primarily reflects higher volumes of access usage, partially
offset by the reclassification of certain revenues to local service revenues, as
previously discussed. The decrease in network access and long-distance revenues
in 1996 primarily reflects the sale of properties, partially offset by higher
volumes of access usage.
Total wireline operating expenses increased $53.5 million or 7 percent in
1998 and $25.9 million or 3 percent in 1997 and decreased $32.0 million or 4
percent in 1996. Operating expenses for 1998 and 1997 reflect increases in data
processing charges, network-related expenses, depreciation and amortization and
general administrative expenses. Operating expenses for 1997 also include
additional costs incurred by ALLTEL in consolidating its customer service
operations. Operating expenses decreased in 1996 by approximately $56.7 million
as a result of the sale of properties. The decrease in operating expenses in
1996 attributable to the sale of properties was partially offset by increased
expense for maintenance and repair of cable, digital electronic switching and
circuit equipment and an increase in depreciation expense.
As more fully discussed in Note 14 to the consolidated financial
statements, the Georgia Public Service Commission ("Georgia PSC") issued an
order requiring that ALLTEL's wireline subsidiaries which operate within its
jurisdiction reduce their annual network access charges by $24 million,
prospectively, effective July 1, 1996. The Company appealed the Georgia PSC
order. In November 1996, the Superior Court of Fulton County, Georgia, (the
"Superior Court") rendered its decision and reversed the Georgia PSC order,
finding, among other matters, that the Georgia PSC had exceeded its authority by
ordering the rate reductions. The Superior Court did not rule on a number of
other assertions made by the Company as grounds for reversal of the Georgia PSC
order. The Georgia PSC appealed the Superior Court's decision, and in July 1997,
the Georgia Court of Appeals (the "Appellate Court") reversed the Superior
Court's decision. The Company appealed the Appellate Court's decision to the
Georgia Supreme Court. On October 5, 1998, the Georgia Supreme Court, in a 4-3
decision, upheld the Appellate Court's ruling that the Georgia PSC had the
authority to order the rate reductions. The case has been returned to the
Superior Court for a hearing on the merits, which will provide ALLTEL the
opportunity to challenge the Georgia PSC's order by asserting a number of
additional federal and state constitutional and other legal grounds. Since
ALLTEL believes that it will prevail in this case, the Company has not
implemented any revenue reductions or established any reserves for refund
related to this matter at this time.
ALLTEL's wireline subsidiaries follow the accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). If
ALLTEL's wireline subsidiaries no longer qualified for the provisions of SFAS
71, the accounting impact to the Company would be an extraordinary non-cash
charge to operations of an amount that could be material. Criteria that would
give rise to the discontinuance of SFAS 71 include (1) increasing competition
that restricts the wireline subsidiaries' ability to establish prices to recover
specific costs and (2) significant change in the manner in which rates are set
by regulators from cost-based regulation to another form of regulation. The
Company periodically reviews these criteria to ensure the continuing application
of SFAS 71 is appropriate. As a result of the passage of the Telecommunications
Act of 1996 (the "96 Act") and state telecommunications reform legislation,
ALLTEL's wireline subsidiaries could begin to experience increased competition
24
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
in their local service areas. To date, competition has not had a significant
adverse effect on the operations of ALLTEL's wireline subsidiaries.
In August 1996, the FCC issued regulations implementing the local
competition provisions of the 96 Act. These regulations established pricing
rules for state regulatory commissions to follow with respect to entry by
competing carriers into the local, intrastate markets of incumbent local
exchange carriers ("ILECs") and addressed interconnection, unbundled network
elements and resale rates. The FCC's authority to adopt such pricing rules was
challenged in federal court by variou ILECs and state regulatory commissions.
In July 1997, the U.S. Eighth Circuit Court of Appeals (the "Eighth Circuit
Court") vacated the FCC's pricing rules, finding, among other matters, that the
FCC had exceeded its jurisdiction in establishing pricing rules for intrastate
communications services. In October 1997, the Eighth Circuit Court 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, rather than the
individual states, has the jurisdiction to carry out the local competition
provisions of the 96 Act. These 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.
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. Since ALLTEL's wireline subsidiaries are not price cap
regulated companies, the access charge regulations, with few exceptions, are not
currently applicable to them. However, the FCC instituted a rulemaking in June
1998 in which it proposed to amend the access charge rules for rate-of-return
LECs in a manner similar to that earlier adopted for price cap LECs. The FCC's
proposal involves the modification of the transport rate structure, the
reallocation of costs in the transport interconnection charge and amendments to
reflect changes necessary to implement universal service. The issue of
additional pricing flexibility for rate-of-return LECs is expected to be
addressed in a subsequent phase of the proceeding. Once the access charge rules
for rate-of-return LECs are finalized, ALLTEL will assess the impact, if any,
the new rules will have on its wireline operations. Based upon ALLTEL's review
of the FCC's regulations concerning the universal service subsidy, it is
unlikely that material changes in the universal service funding for ALLTEL's
wireline subsidiaries will occur prior to 2001. In 2001, the universal service
subsidy may change from being based on actual costs to being based on a proxy
model. Since the FCC has not yet determined the content of any such proxy model,
the impact, if any, of this change in the universal service funding for ALLTEL's
wireline subsidiaries cannot be determined at this time. ALLTEL is continuing to
evaluate the impact of the FCC's universal service order on ALLTEL's other
telecommunications operations. Appeals of certain aspects of the universal
service order are before the U.S. Fifth Circuit Court of Appeals.
On October 5, 1998, the FCC began a proceeding to consider a represcription
of the authorized rate-of-return for the interstate access services of
approximately 1,300 ILECs, including ALLTEL's wireline subsidiaries. The
currently prescribed rate-of-return is 11.25 percent. The purpose of the FCC's
proceeding is to determine whether the prescribed rate-of-return corresponds to
current market conditions and whether the rate should be changed. A decision by
the FCC related to this matter may be issued later this year.
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 that the 96 Act and future competition will have
on its wireline operations.
Communications-Emerging Businesses Operations
- ---------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------------------
Revenues and sales $ 99.9 $ 52.0 $10.2
Operating loss $(44.9) $(22.1) $(9.2)
- ---------------------------------------------------------------------------
Emerging businesses consist of the Company's long-distance, competitive local
exchange carrier ("CLEC"), Internet access, network management and PCS
25
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
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. During 1998, ALLTEL began offering its CLEC,
PCS and network management services. Through its CLEC operations, the Company
offers local access services to business customers in select markets outside its
traditional service areas. ALLTEL expects to expand this product offering to
residential customers in the near term. In March 1998, the Company began
providing PCS service in Jacksonville, Fla., and ALLTEL expects to begin
offering PCS service in other markets in the near future. Network management
services are currently marketed to business customers in select areas.
Revenues and sales increased in all periods primarily due to growth in
long-distance operations. Long-distance revenues increased $26.4 million in
1998 primarily due to growth in its customer base. The start-up of the CLEC,
PCS and network management operations also contributed $15.6 million to the
overall growth in revenues and sales from emerging businesses in 1998. The
operating losses sustained by emerging businesses reflect the start-up nature
of these operations.
Information Services Operations
- ------------------------------------------------------------------------------
(Dollar in millions) 1998 1997 1996
- ------------------------------------------------------------------------------
Revenues and sales $1,161.8 $974.2 $960.1
Operating income $ 162.7 $144.9 $140.3
- ------------------------------------------------------------------------------
Information services' revenues and sales increased $187.6 million or 19 percent
in 1998, $14.1 million or 1 percent in 1997 and $30.4 million or 3 percent in
1996. Revenues and sales increased in 1998 primarily due to growth in the
financial services, international and telecommunications outsourcing operations.
Growth in revenues and sales for 1997 was impacted by the sale of healthcare
operations completed in January 1997. Excluding the sold healthcare operations,
information services' revenues and sales would have increased $123.7 million or
15 percent in 1997. Excluding the healthcare operations, revenues and sales
increased in 1997 primarily due to growth in the financial services and
telecommunications businesses, while revenues and sales increased in 1996
primarily due to growth in the telecommunications operations. The increases in
revenues and sales for all periods reflect volume growth in existing data
processing contracts, the addition of new outsourcing agreements and additional
software maintenance and service revenues. Additionally, the increases in
revenues and sales in all periods were partially offset by lost operations from
contract terminations due to merger and consolidation activity in the domestic
financial services market and a reduction in revenues collected for early
termination of facilities management contracts. The domestic financial services
industry continues to experience consolidation due to mergers.
Operating income increased $17.7 million or 12 percent in 1998, $4.6
million or 3 percent in 1997 and $9.7 million or 7 percent in 1996. Excluding
the impact of the sold healthcare operations, operating income would have
increased $6.2 million or 5 percent in 1997 and $16.1 million or 13 percent in
1996. Operating income increased in 1998 primarily due to the growth in revenues
and sales noted above, additional fees collected from the early termination of
contracts and improved profit margins realized from the international financial
services businesses, partially offset by lower margins realized by the
telecommunications operations. Telecommunications' operating margins decreased
due to higher operating costs, including depreciation and amortization expense.
Depreciation and amortization expense increased due to the acquisition of
additional data processing equipment and an increase in amortization of
internally developed software. Operating income for 1997 reflects the growth in
revenues and sales noted above, as well as improved profit margins realized from
the international financial services business, partially offset by the loss of
operations due to the sale of the healthcare business. Growth in operating
income for 1997 was adversely affected by start-up and product development costs
associated with several new business initiatives designed to expand the
Company's service offerings in existing markets. Operating income growth in 1996
primarily reflects the increase in revenues and sales. Growth in operating
income for 1997 and 1996 was affected by the loss of higher-margin operations
due to contract terminations, reductions in fees collected on the early
termination of facilities management contracts and an increase in operating
costs, corresponding with the growth in revenues and sales.
26
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
Other Operations
- ---------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------------
Revenues and sales $601.3 $478.9 $589.9
Operating income $ 25.9 $ 21.9 $ 34.0
- ---------------------------------------------------------------------
Other operations consist of the Company's product distribution and directory
publishing operations. Revenues and sales increased $122.4 million or 26 percent
in 1998, decreased $111.0 million or 19 percent in 1997 and increased $1.8
million or less than 1 percent in 1996. Operating income increased $4.0 million
or 18 percent in 1998, decreased $12.1 million or 35 percent in 1997 and
increased $0.6 million or 2 percent in 1996. Growth in revenues and sales and
operating income for 1998 and 1997 was affected by the sale of the HWC
operations completed in May 1997. Excluding the sold HWC operations, revenues
and sales would have increased $165.3 million or 38 percent in 1998 and $3.2
million or 1 percent in 1997, and operating income would have increased $5.5
million or 27 percent in 1998 and would have decreased $5.8 million or 22
percent in 1997.
Revenues and sales increased in 1998 primarily due to growth in sales of
telecommunications and data products to both affiliated and non-affiliated
customers, including increased retail sales of these products at the Company's
counter showrooms. Sales to affiliates increased $140.0 million in 1998,
including additional purchases by the Company's wireless subsidiaries,
reflecting the merger with 360 and expansion of ALLTEL Supply's product lines to
include wireless equipment. The increase in revenues and sales in 1998
attributable to ALLTEL Supply's operations was partially offset by decreases in
directory publishing revenues, primarily reflecting the loss of one large
directory publishing contract. The decrease in revenues and sales for 1997
primarily reflects the sale of HWC and a decrease in directory publishing
revenues as a result of publishing 43 fewer directory contracts in 1997 as
compared to 1996. Sales of telecommunications and data products increased $21.1
million in 1997, primarily reflecting increased sales to affiliated and
non-affiliated customers and additional retail sales of these products at the
Company's counter showrooms. Revenues and sales increased slightly in 1996, as
growth in sales of telecommunications and data products was partially offset by
a reduction in directory publishing revenues, reflecting the loss of several
large independent directory contracts.
Operating income increased in 1998 primarily due to the increase in
revenues and sales noted above. Growth in operating income for 1998 continued to
be affected by lower gross profit margins realized by ALLTEL Supply, reflecting
a reduction in margins earned on affiliated sales and increased competition from
other distributors and direct sales by manufacturers. Operating income decreased
in 1997 primarily due to the decrease in revenues and sales noted above. Lower
gross profit margins realized on the sale of telecommunications and data
products, reflecting increased competition and a reduction in product cost
rebates received from vendors, also impacted operating income growth in 1997.
Operating income for 1997 also reflects increased selling expenses incurred by
the Company to open several new counter showroom facilities. The increase in
operating income in 1996 primarily reflects reduced expenses for advertising,
sales support, printing and other operating costs related to the directory
publishing operations, partially offset by lower profit margins realized by the
HWC operations. During 1996, HWC's gross profit margins were adversely affected
by sharp declines in copper prices and increased competition from manufacturers.
Interest Expense
Interest expense increased $1.9 million or 1 percent in 1998 and $24.6 million
or 10 percent in 1997 and decreased $35.5 million or 13 percent in 1996. The
increase in interest expense in 1997 reflects the issuance of $200 million of
debentures completed in March 1997 and the issuance of $122 million of
subordinated promissory notes issued in November 1996 in connection with an
acquisition. The decrease in interest expense in 1996 primarily reflects two
debt refinancings completed in March 1996 and October 1995, which resulted in
the retirement of three high-cost debt issues. Interest expense in 1996 also
reflects reduced borrowing rates resulting from the recapitalization of 360 at
the time of its spinoff from Sprint Corporation. (See Note 2 to the consolidated
financial statements for additional information regarding 360's spinoff.)
27
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
Income Taxes
Income tax expense increased $52.2 million or 13 percent in 1998 and
$167.1 million or 73 percent in 1997 and decreased $15.1 million or 6
percent in 1996. The changes in income tax expense for all periods
primarily reflect the tax-related impact of the various non-recurring
and unusual items, previously discussed. Excluding the impact on tax
expense of these items in each year, income tax expense would have
increased $91.3 million or 29 percent in 1998, $35.7 million or 13
percent in 1997 and $44.2 million or 19 percent in 1996, consistent
with the overall growth in ALLTEL's earnings from continuing operations
before non-recurring and unusual items.
Average Common Shares Outstanding
The average number of common shares outstanding decreased 1 percent in
1998, primarily due to the Company's repurchase of its common stock in
1997. During 1998, common shares issued through stock option plans
amounted to 1,703,000 shares, and preferred stock and debentures were
converted into 23,000 shares. The average number of common shares
outstanding decreased slightly in 1997. During 1997, 872,000 shares
were issued in connection with acquisitions, common shares issued
through stock option plans amounted to 618,000 shares, and preferred
stock and debentures were converted into 67,000 shares. These increases
were offset by the Company's repurchase on the open market of 6,594,000
of its common shares. The average number of common shares outstanding
increased slightly in 1996. During 1996, 4,810,000 shares were issued
in connection with acquisitions, common shares issued through stock
option plans amounted to 439,000 shares, and preferred stock and
debentures were converted into 28,000 shares. These increases were
offset by the Company's repurchase on the open market of 2,480,000 of
its common shares.
Financial Condition, Liquidity and Capital Resources
- --------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Cash provided from operations $1,247.1 $1,181.4 $1,189.8
Capital expenditures $ 868.6 $ 826.9 $ 763.8
Total capital structure $6,823.1 $6,471.0 $6,059.8
Percent equity to total capital 48.0% 42.1% 42.4%
Interest coverage ratio 4.73x 3.96x 3.45x
Book value per share $11.86 $9.91 $9.16
- --------------------------------------------------------------------------------
Cash provided from operations continues to be ALLTEL's primary source
of liquidity. The increase in cash provided from operations for 1998
primarily reflects growth in earnings of the Company and changes in
working capital requirements, including the timing of additional income
tax payments associated with gains realized from the sale of MCI
WorldCom, Inc. common stock. Cash provided from operations increased in
1996 primarily due to growth in earnings of the Company and changes in
working capital requirements mainly attributable to timing differences
in the payment of accounts payable.
Capital expenditures increased in 1998, reflecting construction of
additional network facilities and deployment of digital wireless
technology in select markets. Capital expenditures increased in 1997
primarily due to the start-up construction of ALLTEL's PCS network.
Capital expenditures decreased in 1996 primarily as a result of the
sale of wireline properties and a reduction in capital expenditures by
the remaining wireline subsidiaries. The Company financed the majority
of its capital expenditures through the internal generation of funds in
each of the past three years. Capital expenditures were incurred to
continue to modernize and upgrade ALLTEL's telecommunications network
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 $850 million for 1999 and are expected to be funded
primarily from internally generated funds.
28
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
Cash flows from investing activities for 1998 include cash outlays of $55.1
million for the purchase of property, consisting of $34.6 million for the
acquisition of two wireless properties in Georgia and $20.5 million for the
purchase of additional ownership interests in wireless properties in North
Carolina and Texas. Cash flows from investing activities for 1997 include a cash
outlay of $146.5 million related to the acquisition of PCS licensing rights for
73 markets in 12 states. The PCS licenses increase the size of ALLTEL's
potential wireless customer base to 50.6 million. Cash flows from investing
activities for 1997 also include a total cash outlay of $124.3 million for
additional investments in cellular partnerships in which the Company owns a
minority interest, including an $80 million investment in a cellular partnership
serving the Orlando, Fla., and Richmond, Va., markets. Cash flows from investing
activities for 1997 also include total cash outlays of $112.9 million for
various acquisitions, including a wireline property in Georgia, two wireless
properties in Alabama and the purchase of additional ownership interests in 16
wireless properties in which the Company owns a controlling interest. Cash flows
from investing activities for 1996 include a cash outlay of $352.5 million
primarily related to the acquisition of Independent Cellular Network, Inc.
("ICN"). ICN owned and operated cellular systems serving more than 140,000
customers in Ohio, Kentucky, Pennsylvania and West Virginia.
Cash flows from investing activities for 1998 and 1997 include proceeds
from the sale of a portion of ALLTEL's investment in MCI WorldCom, Inc. common
stock of $288.2 million and $185.9 million, respectively. In addition, proceeds
from the sale of investments in 1998 and 1997 include $20.2 million and $3.9
million, respectively, primarily received from the sale of the Company's
ownership interest in wireless partnerships. Cash flows from investing
activities for 1997 include proceeds of $202.3 million received from the sale of
property, principally consisting of three non-strategic operations. In September
1997, the Company received cash proceeds of $48.7 million in connection with the
sale of an investment in a software company. In May 1997, ALLTEL completed the
sale of its wire and cable subsidiary, HWC, for approximately $45.0 million in
cash; and in January 1997, the Company received cash proceeds of $104.9 million
in connection with the sale of its healthcare operations. The proceeds from the
sales of investments and other assets were used primarily to reduce borrowings
under the Company's revolving credit agreement. Cash flows from investing
activities for 1996 include proceeds totaling $38.7 million received principally
from the sale of certain wireline properties in Nevada. Cash flows from
investing activities for 1996 also include proceeds of $30.4 million related to
the withdrawal of ALLTEL's investment in GOCC.
Cash flows from financing activities include dividend payments and the
repurchase by the Company of its common stock. Common and preferred dividend
payments amounted to $240.4 million in 1998, $206.3 million in 1997 and $198.1
million in 1996. The increases in each year primarily reflect growth in the
annual dividend rates on ALLTEL's common stock. Dividend payments on common
shares also increased in 1998 as a result of additional shares outstanding due
to the merger with 360. Under a share repurchase program initiated by the
Company in 1996 and expanded in 1997, the Company repurchased 6.6 million and
2.5 million of its shares at a total cost of $212.0 million and $79.1 million in
1997 and 1996, respectively. Distributions to minority investors were $92.8
million in 1998, $45.1 million in 1997 and $35.4 million in 1996. The increase
in distributions for 1998 reflects the improved operating results of the
wireless properties managed by ALLTEL.
Currently, the Company has a $1 billion line of credit under a revolving
credit agreement. Borrowings outstanding under this agreement at December 31,
1998, were $578.5 million, with a weighted average interest rate of 5.7 percent.
At December 31, 1997, ALLTEL and 360 had separate lines of credit under
revolving credit agreements. Borrowings outstanding under these agreements at
December 31, 1997 and 1996 were $847.9 million and $763.7 million, respectively.
Upon completion of its merger with 360, ALLTEL refinanced borrowings of
approximately $495 million that were outstanding under 360's revolving credit
agreement through ALLTEL's existing credit facilities, and 360's revolving
credit agreement was terminated. Additional borrowings under the revolving
credit agreements in 1997 were incurred primarily to fund the stock repurchase
program and to acquire PCS licensing rights. As previously noted, proceeds from
the sales of MCI WorldCom, Inc. common stock, the HWC and healthcare operations
and the sale of investments in a software company were used primarily to reduce
borrowings outstanding under the revolving credit agreements in 1998 and 1997.
29
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
Long-term debt issued was $107.3 million in 1998, $282.6 million in 1997
and $1,948.9 million in 1996, while retirements of long-term debt amounted to
$312.2 million in 1998, $42.6 million in 1997 and $1,642.5 million in 1996. In
January 1998, the Company issued $100 million of 6.65 percent notes, which
represents substantially all the long-term debt issued in 1998. Long-term debt
issued in 1997 includes the net increase in revolving credit agreement
borrowings from December 31, 1996, and the issuance of $200 million of 7.6
percent notes. In 1996, ALLTEL issued $300 million of 7.0 percent debentures to
refinance $200 million of 9.5 percent debentures and to reduce borrowings under
its revolving credit agreement. Also in 1996, in connection with its spinoff
from Sprint, 360 repaid $1.4 billion of intercompany debt. The repayment was
funded by proceeds from the issuance of $900 million of senior notes and from
$500 million of initial borrowings under 360's revolving credit agreement. In
addition, the Company issued $122 million of subordinated promissory notes in
connection with the ICN acquisition. The net reduction in revolving credit
agreement borrowings from December 31, 1997, represents substantially all the
long-term debt retired in 1998. The repayment of intercompany debt to Sprint and
the refinanced debt issue represent substantially all the long-term debt retired
in 1996. In connection with the debt refinancing completed in 1996, the Company
was required to pay termination fees in the amount of $15.8 million. Following
its merger with 360, ALLTEL's bond ratings with Moody's Investors Service and
Standard & Poor's Corporation were A2 and A-, respectively, compared to A2 and
A+, respectively, prior to the merger. (See Note 5 to the consolidated financial
statements for additional information regarding the Company's long-term debt.)
The Company believes it has adequate internal and external capital
resources available to finance its ongoing operating requirements including
capital expenditures, business development and the payment of dividends. ALLTEL
has access to the capital markets, including the private placement market,
public issuance and the Rural Utilities Service financing programs for wireline
companies. The Company and its subsidiaries expect these sources to continue to
be available for future borrowings.
Other Financial Information
Management is currently not aware of any environmental matters which, in the
aggregate, would have a material adverse effect on the financial condition or
results of operations of the Company.
On December 18, 1998, ALLTEL announced a definitive merger agreement with
Aliant Communications, Inc. ("Aliant"), a communications company which offers
wireless, wireline, paging, long-distance and Internet services in Nebraska.
Under terms of the agreement, each share of Aliant's common stock will be
exchanged for .67 to .75 shares of ALLTEL common stock. The Company expects to
account for this transaction, which is valued at $1.5 billion, as a pooling-of-
interests. The merger is subject to approval by Aliant shareholders, as well as
regulatory and other approvals. The merger is expected to be completed by
mid-1999.
Year 2000 Compliance
The Year 2000 issue affects the Company's internal computer systems and
infrastructure, as well as certain software, systems and services that the
Company provides to its customers. The Company began its Year 2000 efforts
several years ago and plans to be substantially completed with those efforts by
June 30, 1999 and fully completed by August 31, 1999. The Company's Year 2000
plan consists of eight phases: (i) Awareness; (ii) Inventory; (iii) Third-Party
Strategies; (iv) Risk Assessment; (v) Planning; (vi) Remediation; (vii) Testing;
and (viii) Implementation.
For the Company's internal computer systems and software, systems and
services that the Company provides to its customers and for which the Company is
responsible, the Awareness, Inventory and Third-Party Strategies phases have
been completed. For these systems, software and services, the Company has
commenced work on and plans to complete the Risk Assessment Phase by March 15,
1999; the Planning phase by March 31, 1999; the Remediation and Testing phases
by June 30, 1999; and the Implementation phase by June 30, 1999, except the
Implementation phase for the Company's Savannah, Albany and Augusta, Ga., and
Columbia, S.C., wireless markets, which constitute approximately 8 percent of
the Company's wireless customers, which is scheduled to be completed by
August 31, 1999.
30
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
For the Company's facilities infrastructure, the Company has completed the
Awareness phase and has commenced work on and plans to complete the Inventory
phase by January 31, 1999; the Third-Party Strategies, Risk Assessment and
Planning phases by March 31, 1999; and the Remediation, Testing and
Implementation phases by June 30, 1999. For the Company's remaining
infrastructure, the Company has completed the Awareness, Inventory, Third-Party
Strategies and Risk Assessment phases and has commenced work on and plans to
complete the Planning phase by March 31, 1999; and the Remediation, Testing and
Implementation phases by June 30, 1999.
As part of its Year 2000 plan, the Company has implemented a third-party
management process and is continuing to contact its vendors, suppliers and other
third parties upon which the Company depends regarding their plans for making
their products, services and systems Year 2000 compliant. The Company's ability
to meet its target completion dates is dependent upon the timely provision of
upgrades or other solutions from its vendors and suppliers. Some third-party
upgrades and other solutions are not yet available, resulting in delays in the
Company's completion of the Risk Assessment and Planning phases and potential
delays in completion of the Remediation, Testing and Implementation phases. 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 is working to
leverage this experience in the development and implementation of its Year 2000
contingency plans, which assess the potential for business disruption in various
scenarios. 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. The Company has developed high-level contingency plans
for its critical systems and plans to augment, modify and test those contingency
plans throughout 1999, as appropriate.
The Company estimates the total cost of its Year 2000 efforts to be
approximately $80 million. As of December 31, 1998, the Company has incurred
approximately $58 million of that 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.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," ("SFAS 133"). This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. SFAS 133 requires that changes in a derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after
June 15, 1999, and cannot be applied retroactively. Because 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.
31
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations, (continued):
--------------
Market Risk
The Company is exposed to market risk from changes in marketable equity
security prices and from changes in interest rates on its credit
facility and long-term debt obligations that affect the fair value of
these obligations. The Company's financial instruments are described
further in Notes 3 and 5 to the consolidated financial statements. The
Company has estimated its market risk using sensitivity analysis.
Market risk has been defined as the potential loss in fair value of a
financial instrument due to a hypothetical adverse change in market
prices or interest rates. Fair value for investments was determined
using quoted market prices, if available, or the carrying amount of the
investment if no quoted market price was available. Fair value of
long-term debt obligations was determined based on a discounted cash
flows analysis, using the overall weighted rates and maturities of
these obligations compared to terms and rates currently available in
the long-term markets. The results of the sensitivity analysis are
presented below. Actual results may differ.
At December 31, 1998 and 1997, investments of the Company are
recorded at fair value of $1,668.2 million and $1,228.7 million,
respectively. Marketable equity securities, consisting principally of
MCI WorldCom, Inc. common stock, amounted to $965.7 million and $575.5
million and included unrealized holding gains of $551.6 million and
$300.7 million at December 31, 1998 and 1997, respectively. A
hypothetical 10 percent decrease in quoted market prices would result
in a $90.6 million and $57.6 million decrease in the fair value of
these securities at December 31, 1998 and 1997, respectively.
The Company has no material future earnings or cash flow exposures
from changes in interest rates on its long-term debt obligations, as
substantially all the Company's long-term debt obligations are fixed
rate obligations. At December 31, 1998 and 1997, the fair value of the
Company's long-term debt was estimated to be $3,723.8 million and
$3,804.6 million, respectively. A hypothetical increase of 70 basis
points (10 percent of the Company's overall weighted average borrowing
rate) would result in approximately a $133.3 million and $113.7 million
decrease in the fair value of the Company's long-term debt at December 31,
1998 and 1997, respectively.
Although the Company conducts business in foreign countries,
international operations are not material to the Company's operations,
financial condition and liquidity. Additionally, the foreign currency
translation gains and losses were not material to the Company's results
of operations for the years ended December 31, 1998 and 1997. Accordingly,
the Company is not currently subject to material foreign currency exchange
rate risk from the effects that exchange rate movements of foreign currency
would have on the Company's future costs or on future cash flows it would
receive from its foreign subsidiaries. To date, the Company has not entered
into any significant foreign currency forward exchange contracts or other
derivative financial instruments to hedge the effects of adverse fluctuations
in foreign currency exchange rates. The Company is evaluating the future use of
such financial instruments.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
- -------- ----------------------------------------------------------
See the discussion above included in Management's Discussion and
Analysis of Financial Condition and Results of Operation for
information pertaining to the Company's market risk disclosures.
32
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
Report of Independent Public Accountants
To the Shareholders of ALLTEL Corporation:
We have audited the accompanying consolidated balance sheets
of ALLTEL Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the years in
the period ended December 31, 1998. We did not audit the financial
statements of 360 Communications Company, a company acquired
during 1998 in a transaction accounted for as a pooling-of-interests,
as discussed in Note 2, as of December 31, 1997, and for each of the
two years in the period ended December 31, 1997. Such statements are
included in the consolidated financial statements of ALLTEL Corporation
and reflect total assets and total revenues of 34 percent and 30
percent, respectively, of the related consolidated totals in 1997; and
26 percent of total revenues for the year ended December 31, 1996.
These statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts
included for 360 Communications Company, is based solely upon
the report of the other auditors. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other
auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of ALLTEL Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
January 28, 1999
33
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
360 Communications Company
We have audited the accompanying consolidated balance sheets of
360 Communications Company and Subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
shareowners' equity, and cash flows for each of the three years in the
period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14 (a). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit
the financial statements of GTE Mobilnet of South Texas Limited
Partnership, New York SMSA Limited Partnership, Orlando SMSA Limited
Partnership and Chicago MSA Limited Partnership, equity investees of
the Company, for which the Company's investment in these partnerships
is $191,275,000 and $121,654,000 at December 31, 1997 and 1996,
respectively, and the Company's equity in the net income of these
partnerships is $48,344,000, $39,644,000 and $32,753,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Those financial
statements were audited by other auditors whose reports have been
furnished to us. Our opinion, insofar as it relates to data included
for such partnerships, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
our audits and the reports of other auditors provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
360 Communications Company and Subsidiaries at December 31,
1997 and 1996, and the consolidated results of its operations and cash
flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
/s/Ernst & Young LLP
Chicago, Illinois
March 6, 1998
34
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To GTE Mobilnet of South Texas Limited Partnership:
We have audited the accompanying balance sheets of the GTE Mobilnet of
South Texas Limited Partnership (a Delaware limited partnership) as of
December 31, 1997 and 1996, and the related statements of operations,
changes in partners' capital, and cash flows for the years then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of GTE
Mobilnet of South Texas Limited Partnership as of December 31, 1997,
and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting
principles.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 13, 1998
35
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of the
Chicago SMSA Limited Partnership:
We have audited the balance sheets of the CHICAGO SMSA LIMITED
PARTNERSHIP (an Illinois partnership) as of December 31, 1997 and 1996,
and the related statements of income, partners' capital and cash flows
for the years then ended; such financial statements are not included
separately herein. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Chicago
SMSA Limited Partnership as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Chicago, Illinois
January 16, 1998
36
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of the New York SMSA Limited Partnership
We have audited the accompanying balance sheets of the New York SMSA
Limited Partnership (the Partnership) as of December 31, 1997 and 1996, and
the related statements of income, changes in partners' capital and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the New York SMSA Limited
Partnership as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
New York, New York
February 13, 1998
37
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of the Orlando SMSA Limited Partnership
We have audited the accompanying consolidated balance sheet of the Orlando SMSA
Limited Partnership as of December 31, 1997, and the related consolidated
statements of income, changes in partners' capital and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Orlando SMSA
Limited Partnership as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 6, 1998
38
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
For the years ended December 31,
(Dollars in thousands)
- ------------------------------------------------------------------------------
ASSETS 1998 1997
- ------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and short-term investments $ 55,472 $ 19,683
Accounts receivable (less allowance
for doubtful accounts of $29,121
and $25,164, respectively) 776,720 723,999
Materials and supplies 10,539 14,237
Inventories 88,467 85,631
Prepaid expenses and other 49,633 37,241
---------- ----------
Total current assets 980,831 880,791
- ------------------------------------------------------------------------------
Investments 1,668,171 1,228,712
Goodwill and other intangibles 1,625,617 1,637,393
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Wireline 4,090,791 3,909,756
Wireless 2,658,822 2,303,215
Information services 678,244 608,953
Other 182,066 169,754
Under construction 623,415 398,063
---------- ----------
Total property, plant and equipment 8,233,338 7,389,741
Less accumulated depreciation 3,405,270 2,904,507
---------- ----------
Net property, plant and equipment 4,828,068 4,485,234
- ------------------------------------------------------------------------------
Other assets 271,539 338,275
- ------------------------------------------------------------------------------
TOTAL ASSETS $9,374,226 $8,570,405
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 55,484 $ 48,028
Accounts and notes payable 486,047 497,142
Advance payments and customer deposits 129,092 115,994
Accrued taxes 130,675 92,527
Accrued dividends 84,388 55,012
Other current liabilities 320,822 195,789
---------- ----------
Total current liabilities 1,206,508 1,004,492
- ------------------------------------------------------------------------------
Long-term debt 3,491,755 3,699,519
Deferred income taxes 933,485 710,723
Other liabilities 466,601 432,239
Preferred stock, redeemable 5,005 5,625
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 9,121 9,155
Common stock 275,137 273,411
Additional capital 846,647 801,936
Unrealized holding gain on investments 551,615 300,671
Retained earnings 1,588,352 1,332,634
---------- ----------
Total shareholders' equity 3,270,872 2,717,807
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,374,226 $8,570,405
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance
sheets.
39
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
For the years ended December 31,
(Dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Revenues and Sales:
Service revenues $4,632,615 $4,033,811 $3,588,233
Product sales 561,393 511,329 651,234
---------- ---------- ----------
Total revenues and sales 5,194,008 4,545,140 4,239,467
- -------------------------------------------------------------------------------
Costs and Expenses:
Operations 2,740,273 2,377,399 2,150,110
Cost of products sold 550,580 494,537 586,651
Depreciation and amortization 707,129 635,464 570,956
Merger and integration expenses 252,000 - -
Provision to reduce carrying
value of certain assets 55,000 16,874 120,280
--------- ---------- ----------
Total costs and expenses 4,304,982 3,524,274 3,427,997
- -------------------------------------------------------------------------------
Operating Income 889,026 1,020,866 811,470
Equity earnings in unconsolidated
partnerships 114,859 92,087 77,500
Minority interest in consolidated
partnerships (102,177) (87,966) (80,073)
Other income, net 38,150 11,157 9,365
Interest expense (263,669) (261,770) (237,196)
Gain on disposal of assets and other 296,150 209,651 (2,278)
---------- ---------- ----------
Income before income taxes 972,339 984,025 578,788
Income taxes 446,864 394,644 227,532
---------- ---------- ----------
Net income 525,475 589,381 351,256
Preferred dividends 938 1,008 1,071
---------- ---------- ----------
Net income applicable to common shares $ 524,537 $ 588,373 $ 350,185
- -------------------------------------------------------------------------------
Earnings per Share:
Basic $1.91 $2.13 $1.27
Diluted $1.89 $2.11 $1.26
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- -------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------
For the years ended December 31,
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided from Operations:
Net income $ 525,475 $ 589,381 $ 351,256
Adjustments to reconcile net income to
net cash provided from operations:
Depreciation and amortization 707,129 635,464 570,956
Merger and integration expenses and
provision to reduce carrying value
of certain assets, gain on disposal
of assets and other 54,830 (109,741) 74,197
Other, net (20,980) 93,887 85,268
Increase in deferred income taxes 72,828 41,523 83,386
Changes in operating assets and liabilities:
Accounts receivable (95,479) (137,077) (76,841)
Inventories and materials and supplies 1,062 6,558 (15,225)
Accounts payable (11,283) 13,297 181,939
Other current liabilities (441) 45,288 (24,765)
Other, net 13,953 2,837 (40,358)
---------- ---------- ----------
Net cash provided from operations 1,247,094 1,181,417 1,189,813
- ----------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (868,578) (826,886) (763,824)
Additions to capitalized software
development costs (90,136) (74,225) (78,319)
Additions to other intangible assets - (146,526) -
Additions to investments (17,254) (124,295) (44,263)
Purchase of property, net of cash acquired (55,073) (112,852) (352,533)
Proceeds from the sale of investments 308,443 189,759 30,371
Proceeds from the return on investments 58,324 13,878 16,786
Proceeds from the sale of assets - 202,300 38,687
Other, net (54,790) (86,707) (63,044)
---------- ---------- ----------
Net cash used in investing activities (719,064) (965,554) (1,216,139)
- ----------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Dividends on preferred and common stock (240,384) (206,312) (198,095)
Reductions in long-term debt (312,156) (42,647) (1,642,468)
Purchase of common stock - (212,012) (79,126)
Preferred stock redemptions and purchases (545) (873) (704)
Distributions to minority investors (92,788) (45,063) (35,426)
Contributions from minority investors - - 5,636
Long-term debt issued 107,304 282,611 1,948,874
Common stock issued 46,328 11,688 3,619
---------- ---------- ----------
Net cash (used in) provided from
financing activities (492,241) (212,608) 2,310
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash and
short-term investments 35,789 3,255 (24,016)
Cash and Short-term Investments:
Beginning of the year 19,683 16,428 40,444
---------- ---------- ----------
End of the year $ 5,472 $ 19,683 $ 16,428
- ----------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosures:
Interest paid $ 250,079 $ 250,360 $ 202,478
Income taxes paid $ 294,911 $ 270,635 $ 206,282
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
41
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Preferred Common Additional Holding Gain Retained
Stock Stock Capital on Investments Earnings Total
--------- -------- ---------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $9,241 $275,651 $641,799 $208,681 $ 802,261 $1,937,633
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 351,256 351,256
Other comprehensive income, net of tax:
Unrealized holding gains on investments
arising during the period (See Note 13) - - - 143,186 - 143,186
------ -------- --------- --------- --------- ----------
Comprehensive income - - - 143,186 351,256 494,442
------ -------- --------- --------- --------- ----------
Acquisition of subsidiaries - 4,810 145,503 - - 150,313
Employee plans, net - 439 3,180 - - 3,619
Conversion of preferred stock and debentures (43) 28 100 - - 85
Repurchase of stock - (2,480) (76,646) - - (79,126)
Capital contributions by Sprint Corporation
in connection with spinoff of a subsidiary - - 253,160 - - 253,160
Other, net - - 867 - - 867
Dividends:
Common - - - - (200,315) (200,315)
Preferred - - - - (1,071) (1,071)
------ -------- --------- --------- --------- ----------
Balance at December 31, 1996 $9,198 $278,448 $967,963 $351,867 $ 952,131 $2,559,607
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 589,381 589,381
Other comprehensive loss, net of tax:
Unrealized holding gains on investments,
net of reclassification
adjustments (See Note 13) - - - (51,196) - (51,196)
------ -------- --------- --------- --------- ----------
Comprehensive income - - - (51,196) 589,381 538,185
------ -------- --------- --------- --------- ----------
Acquisition of subsidiaries - 872 26,348 - - 27,220
Employee plans, net - 618 11,070 - - 11,688
Conversion of preferred stock and
debentures (43) 67 266 - - 290
Repurchase of stock - (6,594) (205,418) - - (212,012)
Other, net - - 1,707 - - 1,707
Dividends:
Common - - - - (207,870) (207,870)
Preferred - - - - (1,008) (1,008)
------ -------- --------- --------- ---------- ----------
Balance at December 31, 1997 $9,155 $273,411 $801,936 $300,671 $1,332,634 $2,717,807
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 525,475 525,475
Other comprehensive income, net of tax:
Unrealized holding gains on investments,
net of reclassification
adjustments (See Note 13) - - - 250,944 - 250,944
------ -------- --------- --------- --------- -----------
Comprehensive income - - - 250,944 525,475 776,419
------ -------- --------- --------- --------- -----------
Employee plans, net - 1,703 44,625 - - 46,328
Conversion of preferred stock and debentures (34) 23 86 - - 75
Dividends:
Common - - - - (268,819) (268,819)
Preferred - - - - (938) (938)
------ -------- --------- --------- --------- ----------
Balance at December 31, 1998 $9,121 $275,137 $846,647 $551,615 $1,588,352 $3,270,872
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
42
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Description of Business - ALLTEL Corporation ("ALLTEL" or the "Company") is
a customer-focused information technology company that provides wireline and
wireless communications and information services. The Company owns
subsidiaries that provide wireline local, long-distance, network access and
Internet services, wireless communications and information processing
management services and advanced application software. (See Note 15 for
information regarding ALLTEL's business segments.)
Basis of Presentation - ALLTEL prepares its consolidated financial
statements in accordance with generally accepted accounting principles, which
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure
of contingent assets and liabilities. The estimates and assumptions used in
the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the
date of the financial statements. Actual results may differ from the
estimates and assumptions used in preparing the accompanying consolidated
financial statements.
The consolidated financial statements include the accounts of ALLTEL, its
subsidiary companies and majority-owned partnerships. Investments in 20% to
50% owned entities and all unconsolidated partnerships are accounted for
using the equity method. Investments in less than 20% owned entities and in
which the Company does not exercise significant influence over operating and
financial policies are accounted for under the cost method. All intercompany
transactions, except those with certain affiliates described below, have been
eliminated in the consolidated financial statements. Certain prior-year
amounts have been reclassified to conform with the 1998 financial statement
presentation.
Service revenues consist of local service, network access, long-distance
and miscellaneous wireline operating revenues, wireless access and network
usage revenues, information services' data processing and software
maintenance revenues. Product sales primarily consist of the product
distribution and directory publishing operations and information services'
software licensing revenues and equipment sales.
Transactions with Certain Affiliates - ALLTEL Supply, Inc. sells equipment
and materials to wireline subsidiaries of the Company ($185.7 million in
1998, $115.8 million in 1997 and $109.2 million in 1996) as well as to other
affiliated and non-affiliated communications companies and related
industries. The cost of equipment and materials sold to the wireline
subsidiaries is included, principally, in wireline plant in the consolidated
financial statements. ALLTEL Information Services, Inc. provides the data
processing services for the Company's wireline operations ($118.9 million in
1998, $103.9 million in 1997 and $103.2 million in 1996) in addition to other
affiliated and non-affiliated companies. Directory publishing services are
provided to the wireline subsidiaries by ALLTEL Publishing Corporation
("Publishing"). Wireline revenues and sales include directory royalties
received from Publishing ($34.5 million in 1998, $33.5 million in 1997 and
$32.2 million in 1996). These intercompany transactions have not been
eliminated because the directory royalties received from Publishing and the
prices charged by the supply and information services subsidiaries are
included in the wireline subsidiaries' rate base and/or are recovered through
the regulatory process.
Regulatory Accounting - The Company's wireline subsidiaries follow the
accounting for regulated enterprises prescribed by Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("SFAS 71"). This accounting recognizes the economic effects of
rate regulation by recording costs and a return on investment as such amounts
are recovered through rates authorized by regulatory authorities. Accordingly,
SFAS 71 requires the Company's wireline subsidiaries to depreciate wireline
plant over useful lives as approved by regulators, which could be longer than
the useful lives that would otherwise be determined by management. SFAS 71
also requires deferral of certain costs and obligations based upon approvals
received from regulators to permit recovery of such amounts in future years.
The Company's wireline subsidiaries periodically review the applicability
of SFAS 71 based on the developments in their current regulatory and
competitive environments.
43
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- -------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- -------------------------------------------
Cash and Short-term Investments - Cash and short-term investments consist
of highly liquid investments with original maturities of three months or less.
Inventories - Inventories are stated at the lower of cost or market value.
Cost is determined using the first-in, first-out method of valuation.
Investments - Investments in equity securities are recorded at fair value
in accordance with Statement of Financial Accounting Standards No. 115 (See
Note 3.) Investments in unconsolidated partnerships are accounted for using
the equity method (See Note 4.) All other investments are accounted for using
the cost method. Investments were as follows at December 31:
- --------------------------------------------------------------------------------
(Thousands)
-------------------------
1998 1997
- --------------------------------------------------------------------------------
Equity securities $ 965,738 $ 575,501
Investments in unconsolidated partnerships 633,989 580,029
Other cost investments 68,444 73,182
---------- ----------
$1,668,171 $1,228,712
- --------------------------------------------------------------------------------
Investments in unconsolidated partnerships include the excess of the purchase
price over the underlying net book value of wireless partnerships of $299.9
million and $300.7 million as of December 31, 1998 and 1997, respectively.
Amortization expense for the years ended December 31, 1998, 1997 and 1996 was
$7.2 million, $6.5 million and $5.8 million, respectively, and is included in
equity earnings in unconsolidated partnerships in the accompanying consolidated
statements of income.
Goodwill and Other Intangibles - Goodwill represents the excess of cost
over the fair value of net assets acquired and is amortized on a straight-line
basis for periods up to 40 years. The Company has acquired identifiable
intangible assets through its acquisitions of interests in various wireless
systems and acquisitions of wireline properties. The cost of acquired entities
is allocated to identifiable assets at the date of the acquisition, and the
excess of the total purchase price over the amounts assigned to identifiable
assets is recorded as goodwill. Intangible assets related to the acquisition of
entities in which the Company does not have a controlling interest are included
in investments in unconsolidated partnerships. At December 31, 1998 and 1997,
goodwill, net of amortization, was $1,462.8 million and $1,483.4 million,
respectively. Amortization expense amounted to $44.4 million in 1998,
$44.7 million in 1997 and $39.6 million in 1996.
Other intangibles consist of the cost of Personal Communications Services
("PCS") licenses and capitalized interest. The PCS licenses are amortized
upon commencement of operations on a straight-line basis over 40 years. At
December 31, 1998 and 1997, other intangibles, net of amortization, were
$162.8 million and $153.9 million, respectively. Amortization expense amounted
to $260,000 in 1998. The carrying value of goodwill and other intangibles is
periodically evaluated by the Company for the existence of impairment on the
basis of whether the intangible assets are fully recoverable from projected,
undiscounted net cash flows of the related business unit. If not fully
recoverable from projected undiscounted cash flows, an impairment loss would be
recognized for the difference between the carrying value of the intangible asset
and its estimated fair value based on discounted net future cash flows.
Property, Plant and Equipment - Property, plant and equipment are stated at
original cost. Depreciation is computed using the straight-line method for
financial reporting purposes. Depreciation expense amounted to $620.1 million
in 1998, $565.7 million in 1997 and $503.3 million in 1996. The composite
depreciation rates by class of property as a percent of average depreciable
plant and equipment were:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Wireline 6.4% 6.3% 6.2%
Wireless 10.6% 10.2% 10.1%
Information services 17.4% 17.0% 16.8%
Other 5.5% 6.2% 6.8%
- --------------------------------------------------------------------------------
44
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company capitalizes interest during periods of construction. Capitalized
interest during construction amounted to $23.1 million in 1998, $14.0 million
in 1997 and $7.4 million in 1996 and is included in other income, net in the
accompanying consolidated statements of income.
Revenue Recognition - Communications revenues are recognized when billed as
determined by contractual arrangements with customers and are primarily derived
from usage of the Company's networks and facilities or under revenue-sharing
arrangements with other telecommunications carriers. Information services
revenues consist of data processing revenue recognized as services are
performed, software licensing revenue recognized when delivery of the software
occurs, and software maintenance revenue recognized ratably over the maintenance
period. Certain long-term contracts are accounted for using the percentage-of-
completion method. Under this method, revenue and profit are recognized
throughout the term of the contract, based upon estimates of the total costs to
be incurred and revenues to be generated throughout the term of the contract.
Changes in estimates for revenues, costs and profits are recognized in the
period in which they are determinable. For all other operations, revenue is
recognized when products are delivered or services are rendered to customers.
Included in accounts receivable and other assets are unbilled receivables
primarily related to the information services segment totaling $91.6 million
and $185.9 million at December 31, 1998 and 1997, respectively. Included in
these unbilled receivables are amounts totaling $55.0 million and $94.5
million at December 31, 1998 and 1997, respectively, which represent costs and
estimated earnings in excess of billings related to long-term contracts
accounted for under the percentage-of-completion method.
Computer Software Development Costs - For the Company's information services
operations, research and development expenditures related to internally
developed computer software are charged to expense as incurred. The development
costs of software to be marketed are charged to expense until technological
feasibility is established. After that time, the remaining software development
costs are capitalized and recorded in plant and other assets in the accompanying
consolidated balance sheets. As of December 31, 1998 and 1997, capitalized
software development costs, net of amortization, were $259.5 million and $206.6
million, respectively. Amortization of the capitalized amounts is computed on a
product-by-product basis using the straight-line method over the remaining
estimated economic life of the product, not exceeding six years. Amortization
expense amounted to $36.5 million in 1998, $25.1 million in 1997 and $28.1
million in 1996.
The carrying value of capitalized software development costs is periodically
evaluated by the Company. If the net realizable value of the capitalized
software development costs is less than its carrying value, an impairment loss
is recognized for the difference. The determination of net realizable value
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future revenues generated
by the software, the estimated economic life of the software and changes in
software and hardware technologies. Accordingly, it is reasonably possible that
estimates of anticipated future revenues generated by the software, the
remaining economic life of the software, or both, could be reduced in the near
term, materially impacting the carrying value of capitalized software
development costs. As a result of this periodic evaluation, the Company recorded
a write-down of software in 1996. (See Note 9.)
Earnings Per Share - Basic earnings per share of common stock was determined
by dividing net income applicable to common shares by the weighted average
number of common shares outstanding during each year. Diluted earnings per
share reflects the potential dilution that could occur assuming conversion or
exercise of all outstanding preferred stocks and issued and unexercised stock
options. No options were excluded from the computation of diluted earnings per
share at December 31, 1998, while options to purchase approximately 2,447,000
and 1,326,000 shares of common stock at December 31, 1997 and 1996,
respectively, were excluded from the computation of diluted earnings per share
because the effect was anti-dilutive.
45
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
A reconciliation of the net income and numbers of shares used in computing basic
and diluted earnings per share was as follows:
- --------------------------------------------------------------------------------
(Thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Basic earnings per share:
Net income applicable to common shares $524,537 $588,373 $350,185
Weighted average common shares outstanding
for the year 274,305 276,590 276,637
- --------------------------------------------------------------------------------
Basic earnings per share of common stock $1.91 $2.13 $1.27
- --------------------------------------------------------------------------------
Diluted earnings per share:
Net income applicable to common shares $524,537 $588,373 $350,185
Adjustments for convertible securities:
Preferred stocks 174 206 220
Net income applicable to common shares, -------- -------- --------
assuming conversion of above securities $524,711 $588,579 $350,405
- --------------------------------------------------------------------------------
Weighted average common shares outstanding
for the year 274,305 276,590 276,637
Increase in shares which would result from:
Exercise of stock options 2,503 1,431 1,233
Conversion of convertible preferred stocks 468 523 559
Weighted average common shares, ------- ------- -------
assuming conversion of above securities 277,276 278,544 278,429
- --------------------------------------------------------------------------------
Diluted earnings per share of common stock $1.89 $2.11 $1.26
- --------------------------------------------------------------------------------
2. Merger:
On July 1, 1998, the Company completed its merger with 360
Communications Company ("360") under a definitive merger agreement
entered into on March 16, 1998. Under the terms of the merger agreement,
360 became a wholly-owned subsidiary of the Company. In connection with
the merger, each outstanding share of 360 common stock was converted
into the right to receive .74 shares of the Company's common stock, 92.1 million
common shares in the aggregate. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling-of-interests.
Accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and results of operations of 360 for
all periods presented. The combined results include certain eliminations and
reclassification adjustments to conform the accounting and financial reporting
policies of ALLTEL and 360. Separate and combined results of operations
are as follows:
- --------------------------------------------------------------------------------
(Unaudited)
Six Months For the Years Ended
Ended June 30, December 31,
-------------- ------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues and sales:
ALLTEL $1,781,454 $3,263,563 $3,192,418
360 753,448 1,347,172 1,095,872
Eliminations and
reclassifications (46,454) (65,595) (48,823)
---------- ---------- ----------
Combined $2,488,448 $4,545,140 $4,239,467
- --------------------------------------------------------------------------------
Net income:
ALLTEL $ 320,449 $ 507,886 $ 291,737
360 81,239 81,495 59,519
---------- ---------- ----------
Combined $ 401,688 $ 589,381 $ 351,256
- --------------------------------------------------------------------------------
46
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- -------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Summarized financial information for 360 was as follows for the
years ended December 31:
- ----------------------------------------------------------------------------
(Thousands)
-----------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Revenues and sales $1,602,095 $1,347,172 $1,095,872
---------- ---------- ----------
Operations 846,929 772,172 624,859
Cost of products sold 104,929 116,456 104,327
Depreciation and amortization 205,284 184,702 146,841
Merger and integration expenses 136,579 - -
---------- ---------- ----------
Total operating expenses 1,293,721 1,073,330 876,027
---------- ---------- ---------
Operating income 308,374 273,842 219,845
Interest expense (132,517 (131,589) (106,364)
Other income, net 41,750 13,071 3,867
---------- ---------- ----------
Income before income taxes 217,607 155,324 117,348
Income taxes 136,870 73,829 57,829
---------- ---------- ----------
Net income $ 80,737 $ 81,495 $ 59,519
- ----------------------------------------------------------------------------
December 31,
------------------------
1998 1997
- ----------------------------------------------------------------------------
Assets:
Current assets $ 248,519 $ 230,167
Non-current assets 2,789,432 2,711,757
---------- ----------
Total assets $3,037,951 $2,941,924
- ----------------------------------------------------------------------------
Liabilities and equity:
Current liabilities $ 868,723 $ 367,211
Long-term liabilities 1,478,277 1,892,164
Minority interests in consolidated partnerships 165,718 173,248
Equity 525,233 509,301
---------- ----------
Total liabilities and equity $3,037,951 $2,941,924
- ----------------------------------------------------------------------------
Prior to March 7, 1996, 360 was a subsidiary of Sprint Corporation ("Sprint").
On March 7, 1996, Sprint effected a tax-free spinoff of 360 to Sprint
shareholders. In conjunction with the spinoff, 360 repaid $1.4 billion of
intercompany debt to Sprint, and Sprint contributed the remaining intercompany
debt, net of receivables from affiliates, to 360 as additional paid-in capital.
In addition, a recapitalization of 360's common stock was effected pursuant to
which 360 split its 10 shares of issued and outstanding common stock into 116.7
million new shares of common stock to allow for the pro rata distribution of
360 stock to Sprint shareholders. This distribution was effected as a tax-free
dividend.
3. Financial Instruments and Investment Securities:
The carrying amount of cash and short-term investments approximates fair value
due to the short maturity of the instruments. The fair value of investments was
$1,668.2 million in 1998 and $1,228.7 million in 1997 based on quoted market
prices and the carrying value of investments for which there were no quoted
market prices. The fair value of the Company's long-term debt, after deducting
current maturities, was estimated to be $3,723.8 million in 1998 and $3,804.6
million in 1997 compared to a carrying value of $3,491.8 million in 1998 and
$3,699.5 million in 1997. The fair value estimates were based on the overall
weighted rates and maturities of the Company's long-term debt compared to rates
and terms currently available in the long-term financing markets. The fair value
of the Company's redeemable preferred stock was estimated to be $22.3 million in
1998 and $17.5 million in 1997 compared to a carrying amount of $5.0 million in
47
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
1998 and $5.6 million in 1997. The fair value estimates were based on the
conversion of the Series D convertible redeemable preferred stock to common
stock of the Company and the carrying value of the Series A redeemable preferred
stock for which there is no quoted market price. The fair value of all other
financial instruments was estimated by management to approximate the carrying
value.
Equity securities owned by the Company have been classified as available-
for-sale and are reported at fair value, with unrealized gains and losses
reported, net of tax, as a separate component of shareholders' equity. The
Company had unrealized gains, net of tax, on investments in equity securities of
$551.6 million, $300.7 million and $351.9 million at December 31, 1998, 1997 and
1996, respectively, principally derived from ALLTEL's investment in MCI
WorldCom, Inc. common stock. The unrealized gains, including the related tax
impact, are non-cash items and accordingly have been excluded from the
accompanying consolidated statements of cash flows. During 1998 and 1997, the
Company sold a portion of its investment in MCI WorldCom, Inc. common stock.
(See Note 11.)
4. Investments in Unconsolidated Partnerships:
The Company has investments in 52 wireless partnerships in which it holds a
minority ownership interest. The interest owned in each unconsolidated
partnership ranges from approximately 1% to 49%. Unaudited condensed combined
financial information for investments in unconsolidated partnerships was as
follows for the years ended December 31:
- ----------------------------------------------------------------------------
(Thousands)
--------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Revenues and sales $3,120,715 $2,779,253 $2,706,525
---------- ---------- ----------
Operations 1,664,365 1,660,192 1,603,794
Cost of products sold 152,128 81,234 97,691
Depreciation and amortization 358,850 298,653 281,126
---------- ---------- ----------
Total operating expenses 2,175,343 2,040,079 1,982,611
---------- ---------- ----------
Operating income 945,372 739,174 723,914
Non-operating income (expense) (18,414) 12,622 883
---------- ---------- ----------
Income before cumulative effects
of changes in accounting
principles 926,958 751,796 724,797
Cumulative effects of changes in
accounting principles, net - (19,278) -
---------- ---------- ----------
Net income $ 926,958 $ 732,518 $ 724,797
- ----------------------------------------------------------------------------
December 31,
------------------------
1998 1997
- ----------------------------------------------------------------------------
Assets:
Current assets $ 634,073 $ 609,737
Non-current assets 2,432,535 2,287,621
---------- ----------
Total assets $3,066,608 $2,897,358
- ----------------------------------------------------------------------------
Liabilities and equity:
Current liabilities $ 49,602 $ 276,276
Long-term liabilities 19,166 15,025
Equity 2,997,840 2,606,057
---------- ----------
Total liabilities and equity $3,066,608 $2,897,358
- ----------------------------------------------------------------------------
48
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
5. Debt:
Long-term debt, after deducting current maturities, was as follows at
December 31:
- -------------------------------------------------------------------------------
(Thousands)
------------------------
1998 1997
---- ----
Debentures and notes, without collateral,
Weighted rate 7.3% in 1998 and 1997
Weighted maturity 9 years in 1998 and 10
years in 1997 $2,584,869 $2,512,312
Revolving credit agreements,
Weighted rate 5.7% in 1998 and 6.5% in 1997
Weighted maturity 5 years in 1998 and 1997 578,520 847,920
Rural Telephone Bank and Federal Financing Bank notes,
Weighted rate 7.7% in 1998 and 1997
Weighted maturity 16 years in 1998 and 1997 252,240 255,006
Rural Utilities Service notes,
Weighted rate 4.6% in 1998 and 4.5% in 1997
Weighted maturity 16 years in 1998 and 1997 57,498 61,917
First mortgage bonds and collateralized notes,
Weighted rate 8.0% in 1998 and 8.4% in 1997
Weighted maturity 4 years in 1998 and 1997 12,778 15,864
Industrial revenue bonds,
Weighted rate 5.4% in 1998 and 1997
Weighted maturity 9 years in 1998 and 10
years in 1997 5,850 6,500
---------- ----------
Total long-term debt $3,491,755 $3,699,519
- -------------------------------------------------------------------------------
Weighted rate 7.0% 7.1%
Weighted maturity 9.0 years 9.5 years
- -------------------------------------------------------------------------------
The Company has a $1 billion revolving credit agreement, which has a
termination date of October 1, 2003, with provision for annual extensions. It
is the Company's intention to continue to renew this agreement. The revolving
credit agreement provides for a variety of pricing options. In connection with
its merger with 360, in July 1998, the Company repaid all borrowings outstanding
under a separate $1 billion revolving credit facility of 360.
The indentures and agreements, as amended, provide, among other things,
for various restrictions on the payment of dividends by the Company. Retained
earnings unrestricted as to payment of dividends by the Company amounted to
$1,634.0 million at December 31, 1998. Certain properties have been pledged as
collateral on $328.4 million of obligations.
Interest expense on long-term debt amounted to $262.9 million in 1998,
$260.6 million in 1997 and $235.8 million in 1996. Maturities and sinking fund
requirements for the four years after 1999 for long-term debt outstanding,
excluding the revolving credit agreement, as of December 31, 1998, were $45.5
million, $48.5 million, $48.4 million and $490.4 million for the years 2000
through 2003, respectively.
49
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
6. Common Stock:
There are 1 billion shares of $1 par value common stock authorized of which
275,136,743 and 273,410,553 shares were outstanding at December 31, 1998 and
1997, respectively. At December 31, 1998, the Company had 26,030,940 common
shares reserved for issuance in connection with convertible preferred stock
(828,812) and stock options (25,202,128).
The Company has stock-based compensation plans. Under these plans, the
Company may grant fixed and performance-based incentive and non-qualified stock
options to officers and other key employees. The maximum number of shares of the
Company's common stock that may be issued to officers and other key employees
under all stock options plans in effect at December 31, 1998 is 26,736,688
shares. Fixed options granted under the stock option plans generally become
exercisable in one to five years from the date of grant. Certain fixed options
granted in 1997 become exercisable in equal increments over a six-year period
beginning three years from the date of grant. Performance-based options were
granted in 1997, and such options become exercisable one year from the date in
which certain performance goals related to operating income growth and return on
invested capital are achieved for the four most recent consecutive calendar
quarters. Four separate levels of performance goal targets have been
established, each specifying different minimum growth and return rates.
Depending upon which of the four performance goal target levels is attained,
25%, 50%, 75% or 100% of the option award will vest and become exercisable.
Under the 1994 Stock Option Plan for Non-employee Directors (the Directors'
Plan), the Company grants fixed, non-qualified stock options to directors for
up to 1,000,000 shares of common stock. Under the Directors' Plan, directors
receive a one-time grant to purchase 10,000 shares of common stock. Directors
are also granted each year, on the date of the annual meeting of stockholders,
an option to purchase a specified number of shares of common stock (currently
3,500 shares). Options granted under the Directors' Plan become exercisable the
day immediately preceding the date of the first annual meeting of stockholders
following the date of grant.
For all plans, the exercise price of the option equals the market value of
the Company's common stock on the date of grant. For fixed stock options, the
maximum term for each option granted is 10 years. Any performance-based option
that remains unvested as of January 29, 2003, will expire.
For stock options granted subsequent to January 1, 1995, the fair value
of each option was estimated on the grant date using the Black-Scholes
option-pricing model and the following weighted average assumptions:
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Expected life 5.2 years 5.6 years 5.5 years
Expected volatility 23.8% 21.6% 23.8%
Dividend yield 1.9% 2.9% 2.0%
Risk-free interest rate 5.5% 6.2% 6.1%
- ------------------------------------------------------------------------------
50
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following is a summary of stock options outstanding, granted, exercised,
forfeited and expired under the Company's stock-based compensation plans:
- --------------------------------------------------------------------------------
Weighted Average Price
Shares Per Share
--------------------- -------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
Outstanding at beginning
of period 9,645,180 6,526,562 5,659,152 $28.68 $24.75 $22.28
Granted 2,842,420 4,411,398 1,459,214 40.50 32.75 31.75
Exercised (1,827,967) (892,854) (436,588) 24.00 20.30 14.95
Forfeited (566,343) (354,892) (155,216) 33.90 28.67 27.93
Expired (10,553) (45,034) - 38.99 25.79 -
---------- --------- --------- ------ ------ ------
Outstanding at end
of period 10,082,737 9,645,180 6,526,562 $32.55 $28.68 $24.75
- --------------------------------------------------------------------------------
Exercisable at end
of period 3,637,202 3,814,026 3,628,833 $26.24 $23.56 $21.55
Non-vested at end
of period:
Fixed 6,189,035 5,544,654 2,897,729
Performance-based 256,500 286,500 -
Weighted average fair
value of stock options
granted during
the year $10.21 $7.56 $8.93
- --------------------------------------------------------------------------------
The following is a summary of stock options outstanding as of December 31,
1998:
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ----------------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Number of Contractual Price Number of Price
Exercise Prices Options Life Per Share Options Per Share
- --------------- --------- ----------- --------- --------- ---------
$11.41 - $16.12 294,446 1.8 years $13.95 294,446 $13.95
$20.00 - $26.94 1,649,428 5.1 years 23.64 1,308,957 22.83
$27.12 - $32.52 3,945,482 5.6 years 30.99 1,979,918 30.02
$33.88 - $41.81 2,252,041 8.8 years 34.62 42,041 35.41
$43.13 - $52.94 1,941,340 9.2 years 43.75 11,840 45.27
--------- --------- ----- --------- ------
10,082,737 6.8 years $32.55 3,637,202 $26.24
- -------------------------------------------------------------------------------
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 and related Interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized by the
Company in the accompanying consolidated statements of income for any of the
fixed stock options granted. Compensation cost for performance-based options is
recognized as expense over the expected vesting period and is adjusted for
changes in the market value of the Company's common stock. Compensation cost for
the performance-based options amounted to $2.8 million in 1998 and $547,000 in
1997. Had compensation cost for options granted been determined on the basis of
the fair value of the awards at the date of grant, consistent with the
methodology prescribed by Statement of Financial Accounting Standards No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts for the years ended December 31:
51
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $525,475 $589,381 $351,256
Pro forma $516,798 $583,749 $346,985
Basic earnings per share:
As reported $1.91 $2.13 $1.27
Pro forma $1.88 $2.11 $1.25
Diluted earnings per share:
As reported $1.89 $2.11 $1.26
Pro forma $1.86 $2.09 $1.24
- --------------------------------------------------------------------------------
The pro forma net income and earnings per share amounts reflect only the
effect of stock options granted subsequent to January 1, 1995. Accordingly, the
pro forma amounts may not be representative of the future effects on reported
net income and earnings per share that will result from the future granting of
stock options, since the pro forma compensation expense is allocated over the
periods in which options become exercisable, and new option awards may be
granted each year.
7. Employee Benefit Plans and Postretirement Benefits Other Than Pensions:
The Company has a trusteed, non-contributory defined benefit pension plan which
provides retirement benefits for eligible employees of the Company. Assets of
the plan include common stock of the Company amounting to $37.7 million and
$25.3 million at December 31, 1998 and 1997, respectively. Pension (credit)
expense, including provision for executive compensation agreements, totaled
$(8.1) million in 1998, $(5.3) million in 1997 and $0.6 million in 1996.
The Company provides postretirement healthcare and life insurance benefits
for eligible employees. Employees share in the cost of these benefits. The
Company funds the accrued costs of these plans as benefits are paid.
Postretirement expense totaled $4.2 million in 1998, $4.1 million in 1997 and
$4.3 million in 1996.
The components of the pension and postretirement expense (credit) were
as follows for the years ended December 31:
- --------------------------------------------------------------------------------
(Thousands)
----------------------------------------------------
Postretirement
Pension Benefits Benefits
------------------------- -----------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
Benefits earned during
the year $11,263 $10,415 $12,589 $ 70 $ 387 $ 427
Interest cost on benefit
obligation 25,655 24,401 23,597 3,023 2,817 2,868
Amortization of transition
(asset) obligation (1,183) (1,183) (1,183) 976 976 976
Amortization of prior
service (credit) cost (1,117) (1,117) (1,117) 40 40 40
Recognized net actuarial
(gain) loss (3,378) (2,979) (702) 111 (155) -
Expected return on plan
assets (39,303) (34,864) (32,607) - - -
------- ------- ------- ------ ------ ------
Net periodic (credit)
expense $(8,063) $(5,327) $ 577 $4,220 $4,065 $4,311
- --------------------------------------------------------------------------------
52
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following table presents a summary of plan assets, projected benefit
obligation and funded status of the plans at December 31:
- --------------------------------------------------------------------------------
(Thousands)
------------------------------------------------
Pension Benefits Postretirement Benefits
--------------------- -----------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $444,326 $394,533 $ - $ -
Employer contributions - - 4,549 5,675
Participant contributions - - 2,354 2,500
Actual return on plan assets 61,572 65,702 - -
Benefits paid (17,561) (15,909) (6,903) (8,175)
-------- ------- ------- -------
Fair value of plan assets
at end of year 488,337 444,326 - -
- --------------------------------------------------------------------------------
Projected benefit obligation
at beginning of year 352,405 313,878 46,646 38,392
Benefits earned 11,263 10,415 70 387
Interest cost on projected
benefit obligation 25,655 24,401 3,023 2,817
Participant contributions - - 2,354 2,500
Actuarial loss 25,823 19,620 6,644 10,725
Benefits paid (17,561) (15,909) (6,903) (8,175)
-------- ------- ------- --------
Projected benefit obligation
at end of year 397,585 352,405 51,834 46,646
- --------------------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation 90,752 91,921 (51,834) (46,646)
Unrecognized actuarial
(gain) loss (41,581) (50,665) 9,573 4,333
Unrecognized prior service
(credit) cost (2,081) (3,198) 633 235
Unrecognized net transition
(asset) obligation (5,917) (7,100) 13,662 14,638
-------- ------- -------- --------
Prepaid (accrued) benefit cost $ 41,173 $ 30,958 $(27,966) $(27,440)
- --------------------------------------------------------------------------------
Actuarial assumptions used to calculate the projected benefit obligations
were as follows for the years ended December 31:
- --------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
--------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 8.50% 9.00% - -
Rate of compensation increase 5.00% 5.00% - -
Healthcare cost trend rate - - 8.00% 9.00%
- --------------------------------------------------------------------------------
The healthcare cost trend rate is expected to decrease on a graduated basis
to an ultimate rate of 6 percent in the year 2000. A one percent change in
the assumed healthcare cost trend rate for each future year would affect the
postretirement benefit cost by approximately $190,000 for the year ended
December 31, 1998, and the postretirement benefit obligation as of December 31,
1998, by approximately $3.5 million.
The Company has a non-contributory defined contribution plan in the form
of profit-sharing arrangements for eligible employees, except bargaining unit
employees. The amount of profit-sharing contributions to the plan is determined
annually by the Company's Board of Directors. Profit-sharing expense amounted
to $19.4 million in 1998, $22.8 million in 1997 and $20.4 million in 1996.
The Company also sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees,
except bargaining unit employees. Employees may elect to contribute to the plans
a portion of their eligible pretax compensation up to certain limits as
specified by the plans. The Company also makes annual contributions to the
plans. Amounts contributed by the Company to the plans amounted to $10.5 million
in 1998, $14.4 million in 1997 and $14.7 million in 1996.
53
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
8. Lease Commitments:
Minimum rental commitments for all non-cancelable operating leases, consisting
principally of leases for office space, office equipment, real estate and tower
space, were as follows as of December 31, 1998:
- --------------------------------------------------------------------------------
(Thousands)
-----------
Year Amount
- --------------------------------------------------------------------------------
1999 $ 54,234
2000 43,812
2001 37,466
2002 30,164
2003 20,912
Thereafter 76,525
--------
Total $263,113
- --------------------------------------------------------------------------------
Rental expense totaled $54.9 million in 1998, $47.3 million in 1997 and $44.4
million in 1996.
9. Merger and Integration Expenses:
During the third quarter of 1998, the Company recorded transaction costs and
one-time charges totaling $252 million on a pretax basis related to the closing
of its merger with 360. The merger and integration expenses include
professional and financial advisors' fees of $31.5 million, severance and
employee-related expenses of $48.7 million and integration costs of $171.8
million. The Company's merger and integration plan, as approved by ALLTEL's
Board of Directors, provides for a reduction of 521 employees, primarily in the
corporate support functions, to be substantially completed by the first quarter
of 1999. As of December 31, 1998, the Company had paid $16.8 million in
severance and employee-related expenses and 144 out of the total 521 employee
reductions had been completed. The integration costs include several adjustments
resulting from the redirection of a number of strategic initiatives based on the
merger with 360 and ALLTEL's expanded wireless presence. These adjustments
include a $60 million write-down in the carrying value of certain in-process
software development assets, $50 million of costs associated with the early
termination of certain service obligations, branding and signage costs of $20.7
million, a $18 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 primarily relate to a long-term
contract continuing until 2006 with an outside vendor for customer billing
services to be provided to the 360 operations, under which the Company currently
is paying approximately $45 million per year. As part of its integration plan,
the Company will convert the 360 operations to its own internal billing system
during the period of two years following July 1, 1998. In December 1998, the
foregoing vendor filed a declaratory judgment suit against the Company
requesting a ruling that the Company did not have the right to terminate the
contract. The Company is disputing the vendor's position and has filed a
counterclaim against the vendor for breach of contract. The $50 million of costs
recorded represent the Company best estimated cost of terminating the billing
services contract with the outside vendor prior to the expiration of its term.
The $50 million amount is the present value of the estimated profit to the
vendor over the remaining term of the contract. The $18 million write-down in
the carrying value of certain PCS-related assets include approximately $15
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 million of the PCS-related write-down
represents cell site lease termination fees.
The Company expects to complete its integration plan by the end of 1999. The
major actions steps of the plan include: (1) the immediate stoppage of further
development of a customer billing system which has 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.
54
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following is a summary of activity related to the Company's merger and
integration accrual:
- --------------------------------------------------------------------------------
(Millions)
- --------------------------------------------------------------------------------
Total merger and integration costs $252.0
Cash outlays (85.9)
Non-cash write-down of assets (74.8)
------
Accrued reserve balance at December 31, 1998 $ 91.3
- --------------------------------------------------------------------------------
The merger and integration expenses decreased net income $201.0 million.
10. Provision to Reduce Carrying Value of Certain Assets:
During the third quarter, the Company recorded a non-recurring operating expense
associated with a contingency reserve on an unbilled receivable of $55 million
related to its contract with GTE Corporation ("GTE"). 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 has re-evaluated its
billing and customer care requirements and modified its billing conversion
plans. This charge decreased net income $33.6 million.
During the second quarter of 1997, the Company recorded a pretax write-down
of $16.9 million to reflect the fair value less cost to sell its product
distribution segment's wire and cable subsidiary, HWC Distribution Corp. (HWC).
The sale of HWC was completed in May 1997. This write-down resulted in a
decrease in net income of $11.7 million for the year ended December 31, 1997.
In 1996, the Company incurred non-cash, pretax charges of $120.3 million to
write down the carrying value of certain assets. In accordance with the
Company's plan to dispose of its wire and cable subsidiary, the Company
recorded a pretax write-down of $45.3 million in the carrying value of goodwill
related to HWC. In addition, the information services segment recorded a pretax
write-down of $53.0 million, primarily consisting of an adjustment to the
carrying value of certain capitalized software development costs. The write-down
of software resulted from performing a net realizability evaluation of
software-related products that have been impacted by changes in software and
hardware technologies. Finally, due to current and projected future operating
losses sustained by its community banking operations, information services also
recorded a pretax write-down of $22.0 million to adjust the carrying value of
these operations to their estimated fair value based upon projections of future
cash flows. These write-downs resulted in a decrease in net income of $72.7
million for the year ended December 31, 1996.
11. Gain on Disposal of Assets and Other:
During the third quarter of 1998, the Company recorded a pretax gain of $80.9
million from the sale of a portion of its investment in MCI WorldCom, Inc.
common stock. Proceeds from this sale amounted to $87.6 million. This
transaction increased net income $49.2 million. During the second quarter of
1998, the Company recorded a pretax gain of $148.2 million from the sale of a
portion of its investment in MCI WorldCom, Inc. common stock. Proceeds from this
sale amounted to $162.6 million. This transaction increased net income $90.2
million. During the first quarter of 1998, the Company recorded a pretax gain of
$36.6 million primarily from the sale of a portion of its investment in MCI
WorldCom, Inc. common stock. Proceeds from the sale of stock amounted to $40.7
million. In addition, the Company recorded a pretax gain of $30.5 million from
the sale of its ownership interest in a cellular partnership serving the Omaha,
Neb. market. The gains from these first quarter transactions resulted in an
increase of $40.4 million in net income.
During the third quarter of 1997, the Company recorded a pretax gain of
$34.4 million primarily related to the sale of its investment in a software
company. During the second quarter of 1997, the Company recorded a pretax gain
of $156.0 million from the sale of a portion of its investment in MCI WorldCom,
Inc. common stock. Proceeds from the sale of this stock amounted to $185.9
million. During the first quarter of 1997, the Company recorded a pretax gain of
55
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
$16.2 million from the sale of information services' healthcare operations; and
the Company recorded a pretax gain of $3.0 million from the divestiture of its
ownership interests in two unconsolidated partnerships. These transactions
resulted in an increase of $121.5 million in net income for the year ended
December 31, 1997.
In 1996, the Company recorded a pretax gain of $15.3 million from the
sale of wireline properties in Nevada to Citizens Utilities Company. The Company
also incurred $15.8 million of termination fees related to the early retirement
of $200 million of long-term debt, and the Company realized a pretax loss of
$1.8 million related to the withdrawal of its investment in GO Communications
Corporation. These transactions resulted in a decrease in net income of $1.5
million for the year ended December 31, 1996.
12. Income Taxes:
Income tax expense was as follows:
- ----------------------------------------------------------------------------
(Thousands)
------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Federal $394,303 $343,460 $181,246
State and other 52,561 51,184 46,286
-------- -------- --------
$446,864 $394,644 $227,532
- ----------------------------------------------------------------------------
The federal income tax expense consists of the following:
- ----------------------------------------------------------------------------
(Thousands)
-------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Currently payable $373,176 $242,809 $158,089
Deferred 24,887 105,574 32,090
Investment tax credit amortized (3,760) (4,923) (8,933)
-------- -------- --------
$394,303 $343,460 $181,246
- ----------------------------------------------------------------------------
Deferred income tax expense results principally from temporary differences
between depreciation expense for income tax purposes and depreciation expense
recorded in the financial statements. Deferred tax balances are adjusted to
reflect tax rates, based on currently enacted tax laws, that will be in effect
in the years in which the temporary differences are expected to reverse. For
the Company's regulated operations, the adjustment in deferred tax balances for
the change in tax rates is reflected as a regulatory asset or liability. These
regulatory assets and liabilities are amortized over the lives of the related
depreciable asset or liability concurrent with recovery in rates.
Differences between the federal income tax statutory rates and effective
income tax rates, which include both federal and state income taxes, were as
follows:
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Statutory income tax rates 35.0% 35.0% 35.0%
Increase (decrease):
Investment tax credit (0.4) (0.5) (1.5)
State income taxes, net of federal benefit 3.5 3.4 5.2
Amortization of intangibles 1.4 1.3 1.9
Merger and integration expenses 4.5 - -
Other items 2.0 0.9 (1.3)
---- ----- -----
Effective income tax rates 46.0% 40.1% 39.3%
- ----------------------------------------------------------------------------
56
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The significant components of the Company's net deferred income tax
liability were as follows at December 31:
- --------------------------------------------------------------------------------
(Thousands)
-------------------
1998 1997
- -------------------------------------------------------------------------------
Property, plant and equipment $558,312 $539,856
Capitalized computer software 110,547 80,466
Unrealized holding gain on investments 335,871 196,634
Operating loss carryforwards (20,805) (39,200)
Other, net (65,787) (86,595)
-------- --------
918,138 691,161
Valuation allowance 15,347 19,562
-------- --------
Total $933,485 $710,723
- --------------------------------------------------------------------------------
At December 31, 1998 and 1997, total deferred tax assets were $216.8
million and $275.8 million, respectively, and total deferred tax liabilities
were $1,150.3 million and $986.5 million, respectively.
As of December 31, 1998 and 1997, the Company had available tax benefits
associated with federal and state operating loss carryforwards of $20.8
million and $39.2 million, respectively, which expire annually in varying
amounts to 2012. The valuation allowance primarily represents tax benefits of
certain state operating loss carryforwards and other deferred tax assets which
may expire unutilized.
13. Other Comprehensive Income:
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). As required, the Company adopted the provisions of SFAS 130 in its
year-end 1998 financial statements and has reclassified its prior-year financial
statements to conform to SFAS 130's presentation requirements. For the Company,
other comprehensive income consists of unrealized holding gains on its
investments in equity securities, principally consisting of its investment in
MCI WorldCom, Inc. common stock. The components of other comprehensive income
were as follows for the years ended December 31:
- --------------------------------------------------------------------------------
(Thousands)
--------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Unrealized holding gains arising in
the period $ 679,262 $ 69,449 $225,008
Income tax expense 266,873 32,540 81,822
--------- --------- --------
412,389 36,909 143,186
--------- --------- --------
Less: reclassification adjustments
for gains included in net
income for the period (265,644) (155,993) -
Income tax expense 104,199 67,888 -
--------- -------- --------
(161,445) (88,105) -
--------- -------- --------
Other comprehensive income (loss) before tax 413,618 (86,544) 225,008
Income tax expense (benefit) 162,674 (35,348) 81,822
--------- -------- --------
Other comprehensive income (loss) $ 250,944 $(51,196) $143,186
- --------------------------------------------------------------------------------
57
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 8. Financial Statements and Supplementary Data, (continued):
- ------- --------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
14. 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 (the "Appellate Court") reversed the Superior Court's decision. On
August 5, 1997, the Company filed with the Georgia Supreme Court a petition for
writ of certiorari requesting that the Appellate Court's decision be reversed.
On October 5, 1998, the Georgia Supreme Court, in a 4-3 decision, upheld the
Appellate Court's ruling that the Georgia PSC had the authority to order the
rate reductions. The case has been returned to the Superior Court for a hearing
on the merits, which will provide ALLTEL the opportunity to challenge the
Georgia PSC's order by asserting a number of additional federal and state
constitutional and other legal grounds.
At December 31, 1998, the maximum possible liability to the Company
related to this case is $60 million plus interest at 7 percent 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.
15. Business Segments:
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which requires reporting segment information consistent with the way
management internally disaggregates an entity's operations to assess performance
and to allocate resources. As required, the Company adopted the provisions of
SFAS 131 in its year-end 1998 financial statements and has restated its
prior-year segment information to conform to SFAS 131's requirements.
ALLTEL disaggregates its business operations based upon differences in
products and services. The Company's communications operations consist of its
wireless, wireline and emerging businesses segments. Wireless communications and
paging services are provided in 22 states in four major markets: Southeast,
Mid-Atlantic, Midwest and West. The Company's wireline subsidiaries provide
primary local service and network access in 14 states. Emerging businesses
include the Company's long-distance, local competitive access, Internet access,
network management and PCS operations. Long-distance and Internet access
services are marketed in 22 states. The Company is currently providing local
competitive access, PCS and network management services in select areas within
its geographically focused communications markets. Information services provides
information processing, outsourcing services and application software primarily
to financial and telecommunications customers. The principal markets for
information services' products and services are commercial banks, financial
institutions and telecommunications companies in the United States and major
international markets. Other operations consist of the Company's product
distribution and directory publishing operations. Corporate items represent
general corporate expenses, headquarters facilities and equipment, investments,
goodwill and other non-recurring and unusual items not allocated to the
segments.
The accounting policies used in measuring segment assets and operating
results are the same as those described in Note 1. The non-recurring and unusual
items discussed in Notes 9, 10 and 11 are not allocated to the segments and are
included in corporate operations. The Company evaluates performance of the
segments based on segment operating income, excluding non-recurring and unusual
items. The Company accounts for intersegment sales at current market prices or
in accordance with regulatory requirements.
58
<PAGE>
Information about the Company's business segments was as follows for the year
ended December 31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Communications
-------------------------------------------
(Dollars in Emerging Information Other Total Corporate Intercompany Consolidated
thousands) Wireless Wireline Businesses Total Services Operations Segments Operations Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and sales
from unaffiliated
customers:
Domestic $2,137,161 $1,274,597 $ 99,947 $3,511,705 $ 850,841 $338,115 $4,700,661 $ - $ - $4,700,661
International - - - - 154,300 - 154,300 - - 154,300
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ----------
2,137,161 1,274,597 99,947 3,511,705 1,005,141 338,115 4,854,961 - - 4,854,961
Intersegment
revenues
and sales - 34,467 - 34,467 156,627 263,235 454,329 - (115,282)a 339,047
---------- --------- -------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Total revenues
and sales 2,137,161 1,309,064 99,947 3,546,172 1,161,768 601,350 5,309,290 - (115,282) 5,194,008
---------- --------- -------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Operating
expenses 1,241,443 583,217 135,337 1,959,997 860,385 573,685 3,394,067 12,068 (115,282)a 3,290,853
Depreciation and
amortization 292,105 254,283 9,486 555,874 138,732 1,739 696,345 10,784 - 707,129
Merger and
integration
expenses - - - - - - - 252,000 - 252,000
Provision to
reduce carrying
value of
certain assets - - - - - - - 55,000 - 55,000
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Total costs
and expenses 1,533,548 837,500 144,823 2,515,871 999,117 575,424 4,090,412 329,852 (115,282) 4,304,982
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Operating income
(loss) 603,613 471,564 (44,876) 1,030,301 162,651 25,926 1,218,878 (329,852) - 889,026
Equity earnings in
unconsolidated
partnerships 114,859 - - 114,859 - - 114,859 - - 114,859
Minority interest
in consolidated
partnerships (102,177) - - (102,177) - - (102,177) - - (102,177)
Other income, net 20,099 4,374 2,331 26,804 10,646 235 37,685 465 - 38,150
Interest expense (158,262) (54,598) (10,941) (223,801) (12,268) (1,259) (237,328) (26,341) - (263,669)
Gain on disposal
of assets
and other - - - - - - - 296,150 - 296,150
---------- ---------- --------- ----------- ---------- -------- ---------- ---------- ---------- ----------
Income before
income taxes 478,132 421,340 (53,486) 845,986 161,029 24,902 1,031,917 (59,578) - 972,339
Income tax
expense
(benefit) 214,054 152,138 (20,637) 345,555 67,602 9,631 422,788 24,076 - 446,864
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Net income
(loss) $ 264,078 $ 269,202 $(32,849) $ 500,431 $ 93,427 $ 15,271 $ 609,129 $ (83,654) $ - $ 525,475
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $4,193,579 $2,784,218 $132,112 $7,109,909 $ 872,845 $179,850 $8,162,604 $1,258,385b $ (46,763)c $9,374,226
Investments in
unconsolidated
partnerships $ 633,989 $ - $ - $ 633,989 $ - $ - $ 633,989 $ - $ - $ 633,989
Capital
expenditures $ 303,567 $ 280,782 $143,332 $ 727,681 $ 111,257 $ 1,489 $ 840,427 $ 28,151 $ - $ 868,578
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
Notes:
a)Elimination of intersegment revenues and sales. See "Transactions with Certain Affiliates" in Note 1 for a discussion of
intersegment revenues and sales not eliminated in preparing the consolidated financial statements.
b)Corporate assets consist of headquarters fixed assets ($141,432), investments ($954,601), goodwill ($104,259) and other assets
($58,093) not allocated to the segments.
c)Elimination of intersegment receivables.
</FN>
</TABLE>
59
<PAGE>
Information about the Company's business segments was as follows for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Communications
-------------------------------------------
(Dollars in Emerging Information Other Total Corporate Intercompany Consolidated
thousands) Wireless Wireline Businesses Total Services Operations Segments Operations Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and
sales from
unaffiliated
customers:
Domestic $1,838,544 $1,200,472 $ 52,002 $3,091,018 $ 730,386 $355,605 $4,177,009 $ - $ - $4,177,009
International - - - - 114,918 - 114,918 - - 114,918
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
1,838,544 1,200,472 52,002 3,091,018 845,304 355,605 4,291,927 - - 4,291,927
Intersegment
revenues
and sales - 33,496 - 33,496 128,847 123,317 285,660 - (32,447)a 253,213
---------- --------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Total revenues
and sales 1,838,544 1,233,968 52,002 3,124,514 974,151 478,922 4,577,587 - (32,447) 4,545,140
---------- --------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Operating
expenses 1,111,042 542,144 72,856 1,726,042 716,907 454,922 2,897,871 6,512 (32,447)a 2,871,936
Depreciation and
amortization 267,049 241,839 1,295 510,183 112,316 2,068 624,567 10,897 - 635,464
Provision to
reduce carrying
value of
certain assets - - - - - - - 16,874 - 16,874
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Total costs
and expenses 1,378,091 783,983 74,151 2,236,225 829,223 456,990 3,522,438 34,283 (32,447) 3,524,274
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Operating income
(loss) 460,453 449,985 (22,149) 888,289 144,928 21,932 1,055,149 (34,283) - 1,020,866
Equity earnings in
unconsolidated
partnerships 92,087 - - 92,087 - - 92,087 - - 92,087
Minority interest
in consolidated
partnerships (87,966) - - (87,966) - - (87,966) - - (87,966)
Other income
expense 6,751 2,557 865 10,173 (1,152) (21) 9,000 2,157 - 11,157
Interest expense (155,436) (54,626) (1,702) (211,764) (12,330) (782) (224,876) (36,894) - (261,770)
Gain on disposal
of assets
and other - - - - - - - 209,651 - 209,651
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Income before
income taxes 315,889 397,916 (22,986) 690,819 131,446 21,129 843,394 140,631 - 984,025
Income tax
expense
(benefit) 130,737 141,087 (3,317) 268,507 55,400 7,530 331,437 63,207 - 394,644
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Net income
(loss) $ 185,152 $ 256,829 $(19,669) $ 422,312 $ 76,046 $ 13,599 $ 511,957 $ 77,424 $ - $ 589,381
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $3,990,529 $2,744,745 $ 39,343 $6,774,617 $ 809,242 $129,973 $7,713,832 $ 874,718b $ (18,145)c $8,570,405
Investments in
unconsolidated
partnerships $ 580,029 $ - $ - $ 580,029 $ - $ - $ 580,029 $ - $ - $ 580,029
Capital
expenditures $ 372,975 $ 271,305 $ 66,915 $ 711,195 $ 87,937 $ 1,620 $ 800,752 $ 26,134 $ - $ 826,886
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
Notes:
a)Elimination of intersegment revenues and sales. See "Transactions with Certain Affiliates" in Note 1 for a discussion of
intersegment revenues and sales not eliminated in preparing the consolidated financial statements.
b)Corporate assets consist of headquarters fixed assets ($116,532), investments ($628,912), goodwill ($107,930) and other assets
($21,344) not allocated to the segments.
c)Elimination of intersegment receivables.
</FN>
</TABLE>
60
<PAGE>
Information about the Company's business segments was as follows for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Communications
-------------------------------------------
(Dollars in Emerging Information Other Total Corporate Intercompany Consolidated
thousands) Wireless Wireline Businesses Total Services Operations Segments Operations Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and
sales
from unaffiliated
customers:
Domestic $1,544,537 $1,135,231 $ 10,221 $2,689,989 $ 741,476 $470,066 $3,901,531 $ - $ - $3,901,531
International - - - - 93,338 - 93,338 - - 93,338
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
1,544,537 1,135,231 10,221 2,689,989 834,814 470,066 3,994,869 - - 3,994,869
Intersegment
revenues
and sales - 32,177 - 32,177 125,261 119,874 277,312 - (32,714)a 244,598
---------- --------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Total revenues
and sales 1,544,537 1,167,408 10,221 2,722,166 960,075 589,940 4,272,181 - (32,714) 4,239,467
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Operating
expenses 958,869 530,037 19,403 1,508,309 706,817 552,626 2,767,752 1,723 (32,714)a 2,736,761
Depreciation and
amortization 215,440 228,054 15 443,509 112,911 3,347 559,767 11,189 - 570,956
Provision to
reduce carrying
value of
certain assets - - - - - - - 120,280 - 120,280
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Total costs
and expenses 1,174,309 758,091 19,418 1,951,818 819,728 555,973 3,327,519 133,192 (32,714) 3,427,997
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Operating income
(loss) 370,228 409,317 (9,197) 770,348 140,347 33,967 944,662 (133,192) - 811,470
Equity earnings in
unconsolidated
partnerships 77,500 - - 77,500 - - 77,500 - - 77,500
Minority interest
in consolidated
partnerships (80,073) - - (80,073) - - (80,073) - - (80,073)
Other income
expense 1,232 3,857 - 5,089 (1,132) (153) 3,804 5,561 - 9,365
Interest expense (123,030) (55,025) (138) (178,193) (17,728) (1,027) (196,948) (40,248) - (237,196)
Gain on disposal
of assets
and other - - - - - - - (2,278) - (2,278)
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Income before
income taxes 245,857 358,149 (9,335) 594,671 121,487 32,787 748,945 (170,157) - 578,788
Income tax
expense
(benefit) 108,011 125,862 (2,023) 231,850 50,666 11,864 294,380 (66,848) - 227,532
---------- ---------- -------- ---------- ---------- -------- ---------- ----------- ---------- ----------
Net income
(loss) $ 137,846 $ 232,287 $ (7,312) $ 362,821 $ 70,821 $ 20,923 $ 454,565 $ (103,309) $ - $ 351,256
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $3,581,312 $2,680,116 $ 1,505 $6,262,933 $ 786,662 $192,513 $7,242,108 $ 939,503b $ (13,437)c $8,168,174
Investments in
unconsolidated
partnerships $ 449,184 $ - $ - $ 449,184 $ - $ - $ 449,184 $ - $ - $ 449,184
Capital
expenditures $ 395,055 $ 278,119 $ 1,503 $ 674,677 $ 83,530 $ 1,066 $ 759,273 $ 4,551 $ - $ 763,824
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
Notes:
a)Elimination of intersegment revenues and sales. See "Transactions with Certain Affiliates" in Note 1 for a discussion of
intersegment revenues and sales not eliminated in preparing the consolidated financial statements.
b)Corporate assets consist of headquarters fixed assets ($95,615), investments ($715,440), goodwill ($96,161) and other assets
($32,287) not allocated to the segments.
c)Elimination of intersegment receivables.
</FN>
</TABLE>
61
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION - (Unaudited):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, 1998 1997
----------------------------------------------------------------- -------------------------------------------
except for per
- ------------------
share amounts) Total 4th 3rd 2nd 1st Total 4th 3rd 2nd 1st
- ------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and sales $5,194,008 $1,373,393 $1,332,167 $1,304,130 $1,184,318 $4,545,140 $1,182,269 $1,145,509 $1,141,717 $1,075,645
Operating income $ 889,026 $ 302,784 $ 13,644 $ 300,693 $ 271,905 $1,020,866 $ 272,682 $ 276,227 $ 248,019 $ 223,938
Net income (loss) $ 525,475 $ 151,762 $ (27,975) $ 234,017 $ 167,671 $ 589,381 $ 131,588 $ 150,943 $ 195,697 $ 111,153
Preferred dividends 938 228 239 231 240 1,008 243 251 256 258
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Net income (loss)
applicable to
common shares $ 524,537 $ 151,534 $ (28,214) $ 233,786 $ 167,431 $ 588,373 $ 131,345 $ 150,692 $ 195,441 $ 110,895
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $1.91 $.55 $(.10) $.85 $.61 $2.13 $.48 $.55 $.70 $.40
Diluted $1.89 $.55 $(.10) $.84 $.61 $2.11 $.47 $.54 $.70 $.40
- ------------------------------------------------------------------------------------------------------------------------------------
From current
businesses(1):
Revenues and sales $5,194,008 $1,373,393 $1,332,167 $1,304,130 $1,184,318 $4,502,293 $1,182,269 $1,145,509 $1,130,400 $1,044,115
Operating income $1,196,026 $ 302,784 $ 320,644 $ 300,693 $ 271,905 $1,036,324 $ 272,682 $ 276,227 $ 264,573 $ 222,842
Net income $ 580,305 $ 151,762 $ 157,392 $ 143,828 $ 127,323 $ 478,802 $ 131,588 $ 128,374 $ 119,155 $ 99,685
Basic earnings
per share $2.11 $.55 $.57 $.52 $.47 $1.73 $.48 $.46 $.43 $.36
Diluted earnings
per share $2.09 $.55 $.57 $.52 $.46 $1.72 $.47 $.46 $.43 $.36
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
1)Excludes the sold wire and cable operations, merger and integration expenses and provision to reduce carrying value of certain
assets, gain on disposal of assets and other.
Notes: A. Third quarter 1998 operating income includes transaction costs and one-time charges totaling $252 million related to the
closing of the merger with 360. These transaction and one-time charges decreased net income $201.0 million or $.73 per
share. The Company also recorded a pretax charge of $55 million resulting from changes in a customer care and billing
contract with a major customer. This charge decreased net income $33.6 million or $.12 per share. In addition, the Company
recorded a pretax gain of $80.9 million from the sale of a portion of its investment in MCI WorldCom, Inc. common stock.
This gain increased net income by $49.2 million or $.18 per share. (See Notes 9, 10 and 11.)
B. Second quarter 1998 net income includes a pretax gain of $148.2 million from the sale of a portion of the Company's
investment in MCI WorldCom, Inc. common stock. This gain increased net income $90.2 million or $.33 per share.
(See Note 11.)
C. First quarter 1998 net income includes a pretax gain of $36.6 million primarily from the sale of a portion of the
Company's investment in MCI WorldCom, Inc. common stock. In addition, the Company recorded a pretax gain of $30.5 million
from the sale of its ownership interest in one unconsolidated partnership. These gains increased net income by
$40.4 million or $.14 per share. (See Note 11.)
D. Third quarter 1997 net income includes a pretax gain of $34.4 million primarily related to the sale of the Company's
investment in a software company. This gain increased net income by $22.6 million or approximately $.09 per share.
(See Note 11.)
E. Second quarter 1997 operating income includes a pretax write-down of $16.9 million to reflect the fair value less cost to
sell the Company's wire and cable operations. This write-down decreased net income $11.7 million or $.04 per share. In
addition, the Company recorded a pretax gain of $156.0 million from the sale of a portion of its investment in MCI
WorldCom, Inc. common stock. This gain increased net income by $88.1 million or $.31 per share. (See Notes 10 and 11.)
F. First quarter 1997 net income includes a pretax gain of $16.2 million from the sale of information services' healthcare
operations. In addition, the Company recorded a pretax gain of $3.0 million from the divestiture of its ownership
interests in two unconsolidated partnerships. These transactions increased net income by $10.8 million or $.04 per share.
(See Note 11.)
G. In the opinion of management, all adjustments necessary for a fair presentation of results for each period have been
included.
62
</FN>
</TABLE>
<PAGE>
ALLTEL Corporation
Form 10-K, Part II
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
During the two most recent fiscal years or the subsequent interim
period up to the date of this Form 10-K, there were no disagreements
with the Company's independent certified public accountants on any
matter of accounting principles or practices, financial statement
disclosures or auditing scope or procedures. In addition, none of the
"kinds of events" described in item 304(a)(1)(v)(A), (B), (C) and (D)
of Regulation S-K have occurred.
Part III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
For information pertaining to Directors of ALLTEL Corporation refer to
"Election of Directors" in ALLTEL's Proxy Statement for its 1999 Annual
Meeting of Stockholders, which is incorporated herein by reference.
Executive officers of the Company are as follows:
Name Age Position
---- --- --------
Joe T. Ford 61 Chairman and Chief Executive Officer
Dennis E. Foster 58 Vice Chairman
Scott T. Ford 36 President and Chief Operating Officer
Kevin L. Beebe 39 Group President - Communications
Michael T. Flynn 50 Group President - Communications
Jeffrey H. Fox 36 Group President - Information Services
Francis X. Frantz 45 Executive Vice President - External Affairs,
General Counsel and Secretary
Dennis J. Ferra 45 Senior Vice President and Chief
Administrative Officer
Jeffery R. Gardner 39 Senior Vice President - Finance and Treasurer
John S. Haley 43 Senior Vice President and Chief Technology
Officer
John L. Comparin 46 Vice President - Human Resources
John M. Mueller 48 Controller
Jerry M. Green 51 Assistant Treasurer
Laura S. Hall 36 Assistant Treasurer
There are no arrangements between any officer and any other person
pursuant to which he was selected as an officer. Except for Dennis E.
Foster, Scott T. Ford, Kevin L. Beebe, Jeffrey H. Fox, and Jeffrey R.
Gardner, each of the officers named above has been employed by ALLTEL
or a subsidiary for the last five years.
Prior to joining ALLTEL, Messrs. Foster, Beebe and Gardner were
executive officers of 360. Mr. Foster was President and Chief
Executive Officer of 360 since February 1996. Mr. Foster had
been elected President of 360 in March 1993. Mr. Foster also
served as President and Chief Operating Officer of the Cellular and
Wireless Division of Sprint Corporation from March 1993 to January
1996. Mr. Beebe was Executive Vice President-Operations of 360
since February 1996. Mr. Beebe joined 360 in February 1994 as
Vice President-Marketing and Administration, and in February 1995, he
became Vice President-Operations. Mr. Gardner was Senior Vice
President-Finance of 360 since July 1997. Mr. Gardner served
as President of 360's Mid-Atlantic regional operations from
February 1994 to June 1997.
Prior to joining ALLTEL, Scott T. Ford served as Assistant to the
Chairman of Stephens Group, Inc. of Little Rock, Arkansas. Scott T.
Ford is the son of Joe T. Ford. Prior to joining ALLTEL, Mr. Fox
served as Vice President at Stephens Group, Inc. of Little Rock,
Arkansas.
63
<PAGE>
ALLTEL Corporation
Form 10-K, Part III
Item 11. Executive Compensation
- -------- ----------------------
For information pertaining to Executive Compensation, refer to
"Management Compensation" in ALLTEL's Proxy Statement for its 1999
Annual Meeting of Stockholders, which is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
For information pertaining to beneficial ownership of ALLTEL
securities, refer to "Security Ownership of Certain Beneficial Owners
and Management" in ALLTEL's Proxy Statement for its 1999 Annual
Meeting of Stockholders, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
For information pertaining to Certain Relationships and Related
Transactions, refer to "Certain Transactions" in ALLTEL's Proxy
Statement for its 1999 Annual Meeting of Stockholders, which is
incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Financial Statements:
--------------------
The following Consolidated Financial Statements of
ALLTEL Corporation and subsidiaries for the year ended
December 31, 1998:
Form 10-K
Page Number
-----------
Reports of Independent Public Accountants 33-38
Consolidated Balance Sheets - December 31,
1998 and 1997 39
Consolidated Statements of Income -
for the years ended December 31, 1998,
1997 and 1996 40
Consolidated Statements of Cash Flows -
for the years ended December 31, 1998,
1997 and 1996 41
Consolidated Statements of Shareholders'
Equity - for the years ended December 31,
1998, 1997 and 1996 42
Notes to Consolidated Financial Statements 43-62
Form 10-K
Page Number
-----------
2. Financial Statement Schedules:
-----------------------------
Report of Independent Public Accountants 67
Schedule II. Valuation and Qualifying
Accounts 68
3. Exhibits:
--------
See "Exhibit Index" located on page 69-74
of this document.
64
<PAGE>
ALLTEL Corporation
Form 10-K, Part III
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
- -------- ---------------------------------------------------------------
(continued):
(b) Reports on Form 8-K:
Current Report on Form 8-K dated December 2, 1998, reporting under
Item 7, Financial Statements and Exhibits, ALLTEL filed restated
audited financial statements for the three years in the period
ended December 31, 1997, to reflect the Company's July 1, 1998
merger with 360 Communications Company. The merger had been
accounted for as a pooling-of-interests.
On January 29, 1999, ALLTEL filed under Form 8-K/A, Amendment
No. 1 to its Current Report on Form 8-K dated December 2, 1998,
reporting under Item 7, Financial Statements and Exhibits. This
amendment included certain revisions to the restated audited
financial statements previously filed with the Securities and
Exchange Commission.
On March 2, 1999, ALLTEL filed under Form 8-K/A, Amendment No. 2 to
its Current Report on Form 8-K dated December 2, 1998, reporting
under Item 7, Financial Statements and Exhibits. This amendment
included certain additional revisions to the restated audited
financial statements previously filed with the Securities and
Exchange Commission.
No other reports on Form 8-K were filed during the fourth quarter of
1998.
Separate condensed financial statements of ALLTEL Corporation have been
omitted since the Company meets the tests set forth in Regulation S-X
Rule 4-08(e)(3). All other schedules are omitted since the required
information is not present or is not present in amounts sufficient to
require submission of the schedule, or because the information required
is included in the consolidated financial statements and notes thereto.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Joe T. Ford Date: March 24, 1999
-------------------------------------------------
Joe T. Ford, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Dennis J. Ferra Date: March 24, 1999
-------------------------------------------------
Dennis J. Ferra, Senior Vice President and
Chief Administrative Officer
(Principal Financial Officer)
By /s/ Jeffery R. Gardner Date: March 24, 1999
-------------------------------------------------
Jeffery R. Gardner, Senior Vice President
Finance and Treasurer
(Principal Accounting Officer)
* Joe T. Ford, Chairman, Chief Executive Officer and
Director
* Dennis E. Foster, Vice Chairman and Director
* Scott T. Ford, President, Chief Operating
Officer and Director By /s/ Dennis J. Ferra
--------------------
* John R. Belk, Director * (Dennis J. Ferra,
Attorney-in-fact)
* Lawrence L. Gellerstedt III, Director
Date: March 24, 1999
* Charles H. Goodman, Director
* Michael Hooker, Director
* W. W. Johnson, Director
* Emon A. Mahony, Jr., Director
* John P. McConnell, Director
* Josie C. Natori, Director
* Frank E. Reed, Director
* Ronald Townsend, Director
* William H. Zimmer, Jr., Director
66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in this Form 10-K, and have issued our report
thereon dated January 28, 1999. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule on page 68 is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
January 28, 1999.
67
<PAGE>
ALLTEL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------------------
Balance at Charged Charged Balance at
Beginning to Cost and to Other Deductions End of
Description of Period Expenses Accounts Describe Period
----------- --------- ----------- -------- ---------- ----------
Allowance for
doubtful accounts,
subscribers and
others:
For the years ended:
December 31, 1998 $25,164 $ 72,879 $ - $68,922(A) $29,121
December 31, 1997 $27,001 $ 59,258 $ (227) $60,868(A) $25,164
December 31, 1996 $20,809 $ 62,723 $ 845 $57,376(A) $27,001
Valuation allowance for deferred tax assets:
For the years ended:
December 31, 1998 $19,562 $ (4,215) $ - $ - $15,347
December 31, 1997 $10,149 $ (1,478) $10,891 $ - $19,562
December 31, 1996 $ 5,305 $ (276) $ 5,120 $ - $10,149
Merger and integration expense accrual:
For the year ended:
December 31, 1998 $ - $252,000(B) $ - $160,663(C) $91,337
Notes:
(A) Accounts charged off less recoveries of amounts previously charged
off.
(B) During the third quarter of 1998, the Company recorded merger and
integration expenses related to the closing of its merger with
360 Communications Company. See Note 9 on page 35 of ALLTEL's
1998 Annual Report to Stockholders, which is incorporated herein by
reference, for additional information regarding the merger and
integration expenses recorded by the Company.
(C) Includes cash outlay of $85,863 for expenses paid for as of December 31,
1998 and a non-cash charge of $74,800 resulting from the write-down in
the carrying value of certain in-process software development assets
with no alternative future use or functionality and a write-down in the
carrying value of certain assets resulting from the immediate
abandonment of the buildout of three PCS markets.
68
<PAGE>
EXHIBIT INDEX
-------------
Number and Name Page
- --------------- ----
(3)(a) Amended and Restated Certificate of Incorporation *
of ALLTEL Corporation (incorporated herein by
reference to Exhibit B to Proxy Statement,
dated March 9, l990).
(a)(1) Amendment No. 1 to Amended and Restated Certificate of *
Incorporation of ALLTEL Corporation (incorporated
herein by reference to Annex F of ALLTEL Corporation
Registration Statement (File No. 333-51915) on Form S-4
dated May 6, 1998).
(b) By-Laws of ALLTEL Corporation (As amended as of January 29, *
1998) (incorporated herein by reference to Exhibit 3(b)
to Form 10-K for the fiscal year ended December 31, 1997).
(4)(a) Rights Agreement dated as of January 30, l997, between ALLTEL *
Corporation and First Union National Bank of North Carolina
(incorporated herein by reference to Form 8-K dated
February 3, l997, filed with the Commission on
February 4, l997).
(b) The Company agrees to provide to the Commission, upon --
request, copies of any agreement defining rights of
long-term debt holders.
(10)(a)(1) Executive Compensation Agreement and amendments thereto *
by and between the Company and Joe T. Ford
(incorporated herein by reference to Exhibit 10(b)
to Form 10-K for the fiscal year ended December 31, 1983).
(a)(2) Modification to Executive Compensation Agreement by and *
between the Company and Joe T. Ford effective as of
January 1, 1987 (incorporated herein by reference
to Exhibit 10(b)(2) to Form 10-K for the fiscal year ended
December 31, 1986).
(a)(3) Modification to Executive Compensation Agreement by and *
between ALLTEL Corporation and Joe T. Ford, effective as
of January 1, 1991 (incorporated herein by reference to
Exhibit 10 of ALLTEL Corporation Registration Statement
(File No. 33-44736) on Form S-4 dated December 23, 1991).
(a)(4) Split-dollar Life Insurance Agreement by and between the *
Corporation and Joe T. Ford effective as of March 1, 1994
(incorporated herein by reference to Exhibit 10(a)(4) to
Form 10-K for the fiscal year ended December 31, 1994).
(b) Amended and Restated Employment Agreement by and between the ***
Company and Dennis E. Foster.
(c)(1) Change in Control Agreement by and between the Company and *
Scott T. Ford effective as of April 25, 1996 (incorporated
herein by reference to Exhibit 10(c)(6) to Form 10-Q for the
period ended June 30, 1996).
(c)(2) Change in Control Agreement by and between the Company and ***
Kevin L. Beebe effective as of July 23, 1998.
* Incorporated herein by reference as indicated.
*** Previously filed in 1998 Annual Report on Form 10-K.
69
<PAGE>
EXHIBIT INDEX, Continued
Number and Name Page
- --------------- ----
(10)(c)(3) Change in Control Agreement by and between the Company and ***
Michael T. Flynn effective as of July 23, 1998.
(c)(4) Change in Control Agreement by and between the Company and ***
Jeffrey H. Fox effective as of January 30, 1997.
(c)(5) Change in Control Agreement by and between the Company and *
Francis X. Frantz effective as of October 24, 1994
(incorporated herein by reference to Exhibit 10(c)(4)
to Form 10-K for the fiscal year ended December 31, 1994).
(c)(6) Change in Control Agreement by and between the Company and *
Tom T. Orsini effective as of October 24, 1994 (incorporated
herein by reference to Exhibit 10(c)(5) to Form 10-K for the
fiscal year ended December 31, 1994).
(c)(7) Change in Control Agreement by and between the Company and *
Dennis J. Ferra effective as of October 24, 1994
(incorporated herein by reference to Exhibit 10(c)(3) to
Form 10-K for the fiscal year ended December 31, 1994).
(c)(8) Change in Control Agreement by and between the Company and ***
Jeffrey R. Gardner effective as of January 28, 1999.
(c)(9) Change in Control Agreement by and between the Company and *
John L. Comparin effective as of October 24, 1994
(incorporated herein by reference to Exhibit 10(c)(2) to
Form 10-K for the fiscal year ended December 31, 1994).
(d)(1) Split-dollar Life Insurance Agreement by and between the *
Corporation and Francis X. Frantz effective as of March 1,
1994 (incorporated herein by reference to Exhibit 10(d)(2)
to Form 10-K for the fiscal year ended December 31, 1994).
(d)(2) Split-dollar Life Insurance Agreement by and between the *
Corporation and Tom T. Orsini effective as of March 1, 1994
(incorporated herein by reference to Exhibit 10(d)(3) to
Form 10-K for the fiscal year ended December 31, 1994).
(d)(3) Split-dollar Life Insurance Agreement by and between the *
Corporation and Dennis J. Ferra effective as of March 1,
1994 (incorporated herein by reference to Exhibit 10(d)(1)
to Form 10-K for the fiscal year ended December 31, 1994).
(e)(1) ALLTEL Corporation Supplemental Executive Retirement Plan, *
effective October 24, 1994 (incorporated herein by reference
to Exhibit 10(e)(1) to Form 10-K for the fiscal year ended
December 31, 1994).
(f)(1) ALLTEL Corporation 1998 Management Deferred Compensation *
Plan, effective June 23, 1998 (incorporated herein by
reference to Exhibit 10(f)(5) to Form 10-Q for the
period ended June 30, 1998).
* Incorporated herein by reference as indicated.
*** Previously filed in 1998 Annual Report on Form 10-K.
70
<PAGE>
EXHIBIT INDEX, Continued
- -------------
Number and Name Page
- --------------- ----
(10)(f)(2) ALLTEL Corporation 1998 Directors' Deferred Compensation *
Plan, effective June 23, 1998 (incorporated herein by
reference to Exhibit 10(f)(6) to Form 10-Q for the period
ended June 30, 1998).
(g)(1) ALLTEL Corporation 1975 Incentive Stock Option Plan (as *
amended and restated effective July 26, 1988) (incorporated
herein by reference to Exhibit 10(i) to Form 10-K for the
fiscal year ended December 31, 1988).
(g)(2) ALLTEL Corporation 1991 Stock Option Plan (incorporated *
herein by reference to Exhibit A to Proxy Statement, dated
March 8, 1991).
(g)(3) ALLTEL Corporation l994 Stock Option Plan for Employees *
(incorporated herein by reference to Exhibit A to Proxy
Statement dated March 4, l994).
(g)(4) ALLTEL Corporation l994 Stock Option Plan for Nonemployee *
Directors incorporated herein by reference to Exhibit B to
Proxy Statement dated March 4, l994).
(g)(5) First Amendment to ALLTEL Corporation l994 Stock Option Plan *
for Nonemployee Directors (incorporated herein by reference
to Exhibit 10(g)(5) to Form 10-K for the fiscal year ended
December 31, 1996).
(g)(6) ALLTEL Corporation l998 Equity Incentive Plan (incorporated *
herein by reference to Annex G of ALLTEL Corporation
Registration Statement (File No. 333-51915) on Form S-4
dated May 6, 1998).
(h) Systematics, Inc. 1981 Incentive Stock Option Plan and *
Amendment No. 1 thereto (incorporated herein by reference
to Form S-8 (File No. 33-35343) of ALLTEL Corporation filed
with the Commission on June 11, 1990).
(i) ALLTEL Corporation Performance Incentive Compensation Plan *
as amended, effective January 1, 1993 (Exhibit 10(i) to Form SE
dated February 17, 1993).
(i)(1) Amendment No. 1 to ALLTEL Corporation Performance Incentive *
Compensation Plan (January 1, 1993 Restatement), amendment
effective January 29, 1998, (incorporated herein by reference
to Exhibit 10(i)(1) to Form 10-K for the fiscal year ended
December 31, 1997).
(j) ALLTEL Corporation Long-Term Performance Incentive *
Compensation Plan, as amended and restated effective January 1,
1993 (Exhibit 10(j) to Form SE dated February 17, 1993).
(j)(1) Amendment No. 1 to ALLTEL Corporation Long-Term Performance *
Incentive Compensation Plan as amended and restated effective
January 1, 1993, (incorporated herein by reference to Exhibit
10(j)(1) to Amendment No. 1 to Form 10-K for the fiscal year
ended December 31, 1993).
* Incorporated herein by reference as indicated.
*** Previously filed in 1998 Annual Report on Form 10-K.
71
<PAGE>
EXHIBIT INDEX, Continued
- -------------
Number and Name Page
- --------------- ----
(10)(j)(2) Amendment No. 2 to ALLTEL Corporation Long-Term Performance *
Incentive Compensation Plan (January 1, 1993 Restatement),
effective January 29, 1998, (incorporated herein by reference
to Exhibit 10(j)(2) to Form 10-K for the fiscal year ended
December 31, 1997).
(k) ALLTEL Corporation Pension Plan (January 1, 1994 Restatement) *
(incorporated herein by reference to Exhibit 10(k) to Form 10-K
for the fiscal year ended December 31, 1994).
(k)(1) Amendment No. 1 to ALLTEL Corporation Pension Plan *
(January 1, 1994 Restatement) (incorporated herein by reference
to Exhibit 10(k)(1) to Form 10-Q for the period ended
March 31, 1995).
(k)(2) Amendments No. 2 and 3 to ALLTEL Corporation Pension Plan *
(January 1, 1994 Restatement) (incorporated herein by reference
to Exhibit 10(k)(2) to Form 10-Q for the period ended
June 30, 1995).
(k)(3) Amendments No. 4 and 5 to ALLTEL Corporation Pension Plan *
(January 1, 1994 Restatement) (incorporated herein by reference
to Exhibit 10(k)(3) to Form 10-K for the fiscal year ended
December 31, 1995).
(k)(4) Amendments No. 6 and 7 to ALLTEL Corporation Pension Plan *
(January 1, 1994 Restatement) (incorporated herein by reference
to Exhibit 10(k)(4) to Form 10-Q for the period ended
September 30, 1996).
(k)(5) Amendments No. 8 and 9 to ALLTEL Corporation Pension Plan *
(January 1, 1994 Restatement) (incorporated herein by reference
to Exhibit 10(k)(5) to Form 10-Q for the period ended
March 31, 1997).
(k)(6) Amendment No. 10 to ALLTEL Corporation Pension Plan *
(January 1, 1994 Restatement) (incorporated herein by reference
to Exhibit 10(k)(6) to Form 10-K for the fiscal year ended
December 31, 1997).
(k)(7) Amendments No. 11 and 12 to ALLTEL Corporation Pension Plan ***
(January 1, 1994 Restatement).
(l) ALLTEL Corporation Profit-Sharing Plan (January 1, 1994 *
Restatement) (incorporated herein by reference to Exhibit 10(l)
to Form 10-K for the fiscal year ended December 31, 1994).
(l)(1) Amendments No. 1 and 2 to ALLTEL Corporation Profit-Sharing *
Plan (January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(l)(1) to Form 10-Q for the period
ended June 30, 1995).
(l)(2) Amendments No. 3 and 4 to ALLTEL Corporation Profit-Sharing *
Plan (January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(l)(2) to Form 10-K for the fiscal year
ended December 31, 1995).
* Incorporated herein by reference as indicated.
*** Previously filed in 1998 Annual Report on Form 10-K.
72
<PAGE>
EXHIBIT INDEX, Continued
- -------------
Number and Name Page
- --------------- ----
(10)(l)(3) Amendment No. 5 to ALLTEL Corporation Profit-Sharing Plan *
(January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(l)(3) to Form 10-Q for the period
ended September 30, 1996).
(l)(4) Amendment No. 6 to ALLTEL Corporation Profit-Sharing Plan *
(January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(l)(4) to Form 10-Q for the period
ended March 31, 1997).
(l)(5) Amendment No. 7 to ALLTEL Corporation Profit-Sharing Plan *
(January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(l)(5) to Form 10-K for the fiscal
year ended December 31, 1997).
(l)(6) Amendment No. 8 to ALLTEL Corporation Profit-Sharing Plan *
(January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(l)(6) to Form 10-Q for the period
ended March 31, 1998).
(l)(7) Amendments No. 9 and 10 to ALLTEL Corporation Profit-Sharing ***
Plan (January 1, 1994 Restatement).
(m) ALLTEL Corporation Benefit Restoration Plan (January 1, 1996 *
Restatement) (incorporated herein by reference to Exhibit 10(m)
to Form 10-K for the fiscal year ended December 31, 1995).
(n) Amended and Restated ALLTEL Corporation Supplemental Medical *
Expense Reimbursement Plan (incorporated herein by reference
to Exhibit 10(p) to Form 10-K for the fiscal year ended
December 31, 1990).
(o) ALLTEL Corporation Thrift Plan (January 1, 1994 Restatement) *
(incorporated herein by reference to Exhibit 10(p) to Form
10-K for the fiscal year ended December 31, 1994).
(o)(1) Amendments No. 1 and 2 to ALLTEL Corporation Thrift Plan *
(January 1, 1994 Restatement) (incorporated herein by reference
to Exhibit 10(p)(1) to Form 10-Q for the period ended
June 30, 1995).
(o)(2) Amendment No. 3 ALLTEL Corporation Thrift Plan (January 1, *
1994 Restatement) (incorporated herein by reference to
Exhibit 10(o)(2) to Form 10-K for the fiscal year ended
December 31, 1995).
(o)(3) Amended and Restated Amendment No. 4 and Amendment No. 5 to *
ALLTEL Corporation Thrift Plan (January 1, 1994 Restatement)
(incorporated herein by reference to Exhibit 10(o)(3) to
Form 10-K for the fiscal year ended December 31, 1996).
(o)(4) Amendment No. 6 to ALLTEL Corporation Thrift Plan *
(January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(o)(4) to Form 10-Q for the period
ended March 31, 1997).
* Incorporated herein by reference as indicated.
*** Previously filed in 1998 Annual Report on Form 10-K.
73
<PAGE>
EXHIBIT INDEX, Continued
- -------------
Number and Name Page
- --------------- ----
(10)(o)(5) Amendment No. 7 to ALLTEL Corporation Thrift Plan (January *
1, 1994 Restatement) (incorporated herein by reference to
Exhibit 10(o)(5) to Form 10-K for the fiscal year ended
December 31, 1997).
(o)(6) Amendments No. 8 and 9 to ALLTEL Corporation Thrift Plan *
(January 1, 1994 Restatement) (incorporated herein by
reference to Exhibit 10(o)(6) to Form 10-Q for the period
ended March 31, 1998).
(o)(7) Amendments No. 10, 11 and 12 to ALLTEL Corporation Thrift ***
Plan (January 1, 1994 Restatement).
(11) Statement re computation of per share earnings. 75
(21) Subsidiaries of the ALLTEL Corporation. 76
(23)(a) Consent of Arthur Andersen LLP. 79
(23)(b) Consent of Ernst & Young LLP. (Financial statements of ***
360 Communications Company are not included
separately in this Form 10-K)
(23)(c) Consent of Arthur Andersen LLP. (Financial statements of ***
GTE Moblinet of South Texas Limited Partnership are not
included separately in this Form 10-K)
(23)(d) Consent of Arthur Andersen LLP. (Financial statements of ***
Chicago SMSA Limited Partnership are not included separately
in this Form 10-K)
(23)(e) Consent of PricewaterhouseCoopers LLP. (Financial statements ***
of New York SMSA Limited Partnership are not included
separately in this Form 10-K)
(23)(f) Consent of PricewaterhouseCoopers LLP. (Financial statements ***
of Orlando SMSA Limited Partnership are not included
separately in this Form 10-K)
(24) Powers of attorney. ***
(27) Financial Data Schedule for the year ended December 31, 1998. 80
(99)(a) Annual report on Form 11-K for the ALLTEL Corporation Thrift --
Plan for the year ended December 31, 1998, will be filed by
amendment.
* Incorporated herein by reference as indicated.
*** Previously filed in 1998 Annual Report on Form 10-K.
74
<TABLE>
<CAPTION>
EXHIBIT 11
ALLTEL CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(Dollars and Shares in Thousands, except per share amounts)
For the Years Ended December 31, 1998 1997 1996 1995 1994
------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income applicable to common shares $524,537 $588,373 $350,185 $351,763 $250,764
Adjustments for convertible securities:
preferred stocks 174 206 220 236 258
-------- -------- -------- -------- --------
Net income applicable to common
shares, assuming conversion
of above securities $524,711 $588,579 $350,405 $351,999 $251,022
======== ======== ======== ======== ========
Average common shares outstanding
for the year 274,305 276,590 276,637 275,232 274,141
Increase in shares which would
result from:
exercise of stock options 2,503 1,431 1,233 1,324 1,781
conversion of convertible preferred stocks 468 523 559 603 670
------- ------- ------- -------- -------
Average common shares, assuming
conversion of the above securities 277,276 278,544 278,429 277,159 276,592
======= ======= ======= ======== =======
Earnings per share of common stock:
Basic $1.91 $2.13 $1.27 $1.28 $.91
===== ===== ===== ===== ====
Diluted $1.89 $2.11 $1.26 $1.27 $.91
===== ===== ===== ===== ====
</TABLE>
75
EXHIBIT 21
ALLTEL Corporation
Subsidiaries of the Registrant
State of
Incorporation
COMMUNICATIONS COMPANIES: --------------
ALLTEL Alabama, Inc. Alabama
ALLTEL Arkansas, Inc. Arkansas
ALLTEL Carolina, Inc. North Carolina
ALLTEL Florida, Inc. Florida
ALLTEL Georgia, Inc. Georgia
ALLTEL Georgia Communications Corp. Georgia
ALLTEL Kentucky, Inc. Kentucky
ALLTEL Mississippi, Inc. Mississippi
ALLTEL Missouri, Inc. Missouri
ALLTEL New York, Inc. New York
ALLTEL Ohio, Inc. Ohio
ALLTEL Oklahoma, Inc. Arkansas
ALLTEL Pennsylvania, Inc. Pennsylvania
ALLTEL South Carolina, Inc. South Carolina
Georgia ALLTEL Communicon Co. Illinois
Georgia ALLTELCOM Co. Indiana
Georgia ALLTEL Telecom Inc. Michigan
Georgia Telephone Corporation Georgia
Missouri Telephone Cellular Systems, Inc. Missouri
Oklahoma ALLTEL, Inc. Oklahoma
Sugar Land Telephone Company Texas
Texas ALLTEL, Inc. Texas
The Western Reserve Telephone Company Ohio
ALLTEL Communications, Inc. Delaware
ALLTEL Communications Group, Inc. Delaware
ALLTEL Communications Services Corporation Ohio
ALLTEL Mobile Communications, Inc. Delaware
ALLTEL Mobile Communications of the Carolinas, Inc. North Carolina
360 Communications Company Delaware
360 Communications Company Investment Company Delaware
360 Communications Company Investment Company of Delaware Delaware
360 Communications Company Investment Company of Florida Delaware
360 Communications Company Investment Company of Greensboro North Carolina
76
<PAGE>
EXHIBIT 21
ALLTEL Corporation
Subsidiaries of the Registrant, continued
State of
Incorporation
COMMUNICATIONS COMPANIES: (continued) --------------
360 Communications Company of Alabama Delaware
360 Communications Company of Charlottsville Virginia
360 Communications Company of Florida Delaware
360 Communications Company of Hickory No. 1 Delaware
360 Communications Company of Indiana No. 1 Delaware
360 Communications Company of Iowa Delaware
360 Communications Company of Missouri No. 1 Delaware
360 Communications Company of Nebraska Delaware
360 Communications Company of New Mexico Delaware
360 Communications Company of North Carolina No. 1 Delaware
360 Communications Company of Ohio No. 1 Delaware
360 Communications Company of Ohio No. 2 Delaware
360 Communications Company of Ohio No. 3 Delaware
360 Communications Company of Ohio No. 4 Delaware
360 Communications Company of Peoria Illinois
360 Communications Company of Pennsylvania No. 1 Delaware
360 Communications Company of Pennsylvania No. 2 Delaware
360 Communications Company of Pennsylvania No. 3 Delaware
360 Communications Company of South Carolina No. 1 Delaware
360 Communications Company of South Carolina No. 2 Delaware
360 Communications Company of Tennessee No. 1 Delaware
360 Communications Company of Tennessee No. 2 Delaware
360 Communications Company of Texas No. 1 Delaware
360 Communications Company of Texas No. 2 Delaware
360 Communications Company of Texas No. 3 Delaware
360 Communications Company of Virginia Virginia
360 Communications Company of Lynchburg Virginia
360 Communications Company of Petersburg Virginia
360 Long Distance, Inc. Iowa
360 Paging, Inc. Delaware
Centel Cellular Company of Laredo Delaware
Empire Cellular, Inc. Kansas
Petersburg Cellular Telephone Company, Inc. Virginia
TeleSpectrum, Inc. Kansas
TeleSpectrum of Virginia, Inc. Virginia
Virginia Metronet, Inc. Delaware
77
<PAGE>
EXHIBIT 21
ALLTEL Corporation
Subsidiaries of the Registrant, continued
Country or
State of
Incorporation
OTHER COMPANIES: --------------
ALLTEL Business Services, Inc. Delaware
ALLTEL Corporate Services, Inc. Delaware
ALLTEL Distribution, Inc. Delaware
ALLTEL Holding, Inc. Delaware
ALLTEL International Holdings, Inc. Delaware
ALLTEL Mauritius Holdings, Inc. Delaware
ALLTEL Publishing Corporation Ohio
ALLTEL Publishing Listing Management Corporation Pennsylvania
ALLTEL Supply, Inc. Ohio
ALLTEL Supply International, Inc. Ohio
CP National Corporation California
Control Communications Industries, Inc. Delaware
Dynalex, Inc. California
FC Paramount, Inc. Arkansas
Ocean Technology, Inc. California
OTI International, Inc. California
Sygnis, Inc. Arkansas
ALLTEL Information Services, Inc. Arkansas
ALLTEL Information Services International, Ltd. Delaware
ALLTEL Information Services International Holdings, Inc. Delaware
ALLTEL Information Services, Limited United Kingdom
ALLTEL Information Services Canada Limited Canada
ALLTEL Information Services (France) SARL France
ALLTEL Information Services (Germany) GmbH Germany
ALLTEL Information Services (Greece) S.A. Greece
ALLTEL Information Services (Hong Kong) Limited Hong Kong
ALLTEL Information (India) Private Limited India
ALLTEL Information (Mauritius) Inc. Mauritius
ALLTEL Information Services (Netherlands) B.V. Amsterdam
ALLTEL Information Services (New Zealand) Limited New Zealand
ALLTEL Information Services (Poland) Sp.z.o.o. Poland
ALLTEL Information Services (Thailand) Limited Thailand
ALLTEL International, Limited Jamaica
ALLTEL International Resource Management, Inc. Delaware
ALLTEL Servicios de Informacion (Costa Rica) S.A. Costa Rica
ALLTEL Wholesale Banking Solutions, Inc. New York
Computer Power, Inc. Florida
Vertex Banking Systems, Limited United Kingdom
78
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
As independent public accountants, we hereby consent to the use of our report
dated January 28, 1999 included in this Amendment No. 1 to Form 10-K/A, into
ALLTEL Corporation's previously filed Registration Statements, File Nos.
2-99523, 33-35343, 33-48476, 33-54175, 33-56291 and 33-65199.
/s/ARTHUR ANDERSEN LLP
Little Rock, Arkansas
March 26, 1999
79
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA
FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONTAINED IN THE COMPANY'S FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000065873
<NAME> ALLTEL CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 55,472
<SECURITIES> 0
<RECEIVABLES> 776,720
<ALLOWANCES> 29,121
<INVENTORY> 88,467
<CURRENT-ASSETS> 980,831
<PP&E> 8,233,338
<DEPRECIATION> 3,405,270
<TOTAL-ASSETS> 9,374,226
<CURRENT-LIABILITIES> 1,206,508
<BONDS> 3,491,755
5,005
9,121
<COMMON> 275,137
<OTHER-SE> 2,986,614
<TOTAL-LIABILITY-AND-EQUITY> 9,374,226
<SALES> 561,393
<TOTAL-REVENUES> 5,194,008
<CGS> 550,580
<TOTAL-COSTS> 4,304,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 55,000
<INTEREST-EXPENSE> 263,669
<INCOME-PRETAX> 972,339
<INCOME-TAX> 446,864
<INCOME-CONTINUING> 525,475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524,537
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.89
</TABLE>
