UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-4996
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ALLTEL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 34-0868285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allied Drive, Little Rock, 72202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
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Number of common shares outstanding as of March 31, 1999:
281,345,630
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The Exhibit Index is located at sequential page 19.
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ALLTEL CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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The following consolidated financial statements of ALLTEL Corporation
and subsidiaries, included in the interim report of ALLTEL Corporation to its
stockholders for periods ended March 31, 1999 and 1998, a copy of which is
attached hereto, are incorporated herein by reference:
Consolidated Statements of Income - for the three and twelve months
ended March 31, 1999 and 1998.
Consolidated Balance Sheets - March 31, 1999 and 1998 and
December 31, 1998.
Consolidated Statements of Cash Flows - for the three and twelve
months ended March 31, 1999 and 1998.
2
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ALLTEL CORPORATION
FORM 10-Q
PART I - FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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GENERAL
The following is a discussion and analysis of the historical results of
operations and financial condition of ALLTEL Corporation ("ALLTEL" or the
"Company"). This discussion should be read in conjunction with the unaudited
consolidated financial statements, including the notes thereto, for the interim
periods ended March 31, 1999 and 1998, and the Company's Annual Report on Form
10-K, as amended for the year ended December 31, 1998.
Forward-Looking Statements
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This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes, and future filings by the Company on Form 10-K, Form
10-Q and Form 8-K and future oral and written statements by the Company and its
management may include, certain forward-looking statements, including (without
limitation) statements with respect to anticipated future operating and
financial performance, growth opportunities and growth rates, acquisition and
divestitive opportunities, Year 2000 compliance and other similar forecasts and
statements of expectation. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates", and "should", and variations of these
words and similar expressions, are intended to identify these forward-looking
statements. Forward-looking statements by the Company and its management are
based on estimates, projections, beliefs and assumptions of management and are
not guarantees of future performance. The Company disclaims any obligation to
update or revise any forward-looking statement based on the occurrence of future
events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Representative examples
of these factors include (without limitation) rapid technological developments
and changes in the telecommunications and information services industries;
ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996 and other similar federal and state
legislation and the federal and state rules and regulations enacted pursuant to
that legislation; regulatory limitations on the Company's ability to change its
pricing for communications services; the possible future unavailability of
Statement of Financial Accounting Standards No. 71 to the Company's wireline
subsidiaries; continuing consolidation in certain industries, such as banking,
served by the Company's information services business; the risks associated with
relatively large, multi-year contracts in the Company's information services
business; and higher than anticipated expenditures associated with the Company's
Year 2000 efforts. In addition to these factors, actual future performance,
outcomes and results may differ materially because of other, more general,
factors including (without limitation) general industry and market conditions
and growth rates, domestic and international economic conditions, governmental
and public policy changes and the continued availability of financing in the
amounts, at the terms and on the conditions necessary to support the Company's
future business.
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COMPLETION OF MERGERS
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In January 1999, ALLTEL completed its merger with Standard Group, Inc.
("Standard"). The merger was accounted for as a pooling of interests; however,
prior period financial information has not been restated, since Standard's
operations are not significant to ALLTEL's consolidated financial statements.
On July 1, 1998, ALLTEL completed its merger with 360 Communications
Company ("360"). The merger was accounted for as a pooling of interests;
and accordingly, all prior period financial information has been restated to
include the 360 operations. See note 2 to the unaudited consolidated
financial statements for additional information regarding the merger
transaction. As further discussed below, results for the twelve months ended
March 31, 1999 were affected by merger and integration expenses and other
non-recurring and unusual items.
OVERVIEW-CONSOLIDATED RESULTS OF OPERATIONS
Revenues and sales increased $184.0 million and $724.2 million in the three
and twelve month periods ended March 31, 1999, respectively, representing a 16
percent increase in each period. Growth in revenues and sales in the twelve
month period of 1999 was impacted by the sale of the Company's wire and cable
subsidiary, HWC Distribution Corp. ("HWC") completed in May 1997. Adjusted to
exclude the sold operations, revenues and sales would have increased $735.6
million or 16 percent in the twelve month period ended March 31, 1999.
Operating income increased $65.3 million or 24 percent in the three month
period and decreased $114.5 million or 11 percent in the twelve month period
ended March 31, 1999, respectively. Operating income for the twelve month period
of 1999 was affected by merger and integration expenses and other non-recurring
charges to reduce the carrying value of certain assets. The sale of HWC also
impacted operating income growth in the twelve month period of 1999. Adjusted to
exclude the results from operations for the asset dispositions, merger and
integration expenses and asset write-downs, operating income would have
increased $176.0 million or 16 percent in the twelve month period ended
March 31, 1999.
Net income decreased $1.0 million or 1 percent and $121.4 million or 19
percent in the three and twelve months ended March 31, 1999, respectively. Basic
and diluted earnings per share both decreased 3 percent and 19 percent in the
three and twelve month periods ended March 31, 1999, respectively. Reported net
income and earnings per share include the effects of the merger and integration
expenses, asset write-downs, asset dispositions and gains realized from the sale
of certain investments. Excluding the impact in each period of the merger and
integration expenses, asset write-downs, asset dispositions and non-recurring
and unusual items, net income would have increased $39.4 million or 31 percent
and $113.2 million or 22 percent, while basic and diluted earnings per share
would have increased 26 percent and 22 percent and 28 percent and 22 percent in
the three and twelve month periods ended March 31, 1999, respectively.
4
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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 table:
<TABLE>
<CAPTION>
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Three Months Ended Twelve Months Ended
March 31, March 31,
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net income (loss), as reported $166,682 $167,671 $524,486 $645,899
Disposition of HWC operations - - - (181)
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
Gain on disposal of assets - (40,348) (139,422) (151,022)
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Net income, as adjusted $166,682 $127,323 $619,664 $506,440
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Basic earnings per share, as reported $.59 $.61 $1.90 $2.34
Disposition of HWC operations - - - -
Non-recurring and unusual items, net of tax:
Merger and integration expenses - - .73 -
Provision to reduce carrying value of certain assets - - .12 .04
Gain on disposal of assets - (.14) (.51) (.54)
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Basic earnings per share, as adjusted $.59 $.47 $2.24 $1.84
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Diluted earnings per share, as reported $.59 $.61 $1.88 $2.32
Disposition of HWC operations - - - -
Non-recurring and unusual items, net of tax:
Merger and integration expenses - - .73 -
Provision to reduce carrying value of certain assets - - .12 .04
Gain on disposal of assets - (.15) (.51) (.54)
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Diluted earnings per share, as adjusted $.59 $.46 $2.22 $1.82
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</TABLE>
The net income and basic earnings per share impact of the asset dispositions and
the non-recurring and unusual items has been presented as supplemental
information only. The non-recurring items reflected in the above table are
discussed in reference to the caption in the consolidated statements of income
in which they are reported.
Merger and Integration Expenses
During the third quarter of 1998, the Company recorded on a pretax basis
transaction costs and one-time charges totaling $252 million 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 Communication 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 through 2006 with an
outside vendor for customer billing services to be provided to the 360
operations, under which the Company is currently 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
5
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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 synergies expected to be realized each year,
ALLTEL estimates 40 percent of the cost savings will result from a reduction in
duplicative salaries and employee benefits, 20 percent from a reduction in
variable network expenses, 20 percent from volume purchase discounts, 10 percent
from a reduction in branding and advertising costs and 10 percent from a
reduction in information technology expenses. At March 31, 1999, the Company's
remaining unpaid liability related to its merger and integration efforts was
$75.1 million, consisting of $50 million of contract termination fees, $20.2
million of employee-related expenses and $4.9 million of other integration
costs. Cash outlays for the remaining employee-related expenses and other
integration costs are expected to be completed by the end of 1999. The Company
also expects to finalize amounts payable with respect to certain contract
termination fees by the end of 1999. Funding for the unpaid merger and
integration liability will be internally financed from operating cash flows.
(See Note 3 to the interim unaudited consolidated financial statements for
additional information regarding the merger and integration expenses).
Provision to Reduce Carrying Value of Certain Assets
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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 and will purchase certain software usage
rights and processing services from ALLTEL for an interim period.
During the second quarter of 1997, the Company recorded a pretax write-down
of $16.9 million to reflect the fair value less cost to sell its wire and cable
subsidiary, HWC.
Gain on Disposal of Assets
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During the second and third quarters of 1998, the Company recorded pretax
gains totaling $229.1 million from the sale of a portion of its investment in
MCI WorldCom, Inc. ("MCI WorldCom") common stock. These gains increased net
income $139.4 million in the twelve month period ended March 31, 1999.
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 common stock. In addition, the Company recorded a pretax gain of $30.5
million from the sale of its ownership interest in a cellular partnership
serving the Omaha, Nebraska market. The gains from the transactions increased
net income $40.3 million in the three month period ended March 31, 1998. In
addition to including the first quarter 1998 gains, the twelve month period of
1998 also includes a pretax gain of $34.4 million primarily related to the sale
of ALLTEL's investment in a software company and a pretax gain of $156.0 million
related to the sale of MCI WorldCom common stock. These gains increased net
income $151.0 million in the twelve month period ended March 31, 1998.
6
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RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Communications-Wireless Operations
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Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
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1999 1998 1999 1998
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Revenues and sales $582,822 $481,638 $2,238,345 $1,900,428
Operating income $180,402 $121,215 $ 662,800 $ 497,152
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Wireless revenues and sales increased $101.2 million or 21 percent and
$337.9 million or 18 percent for the three and twelve month periods ended
March 31, 1999, respectively. Operating income increased $59.2 million or
49 percent and $165.6 million or 33 percent for the three and twelve month
periods ended March 31, 1999, respectively. During the past twelve month period,
customer growth remained strong as the number of wireless customers grew to
4,182,601 from 3,620,842, an increase of 561,759 customers or 16 percent. In the
first quarter of 1999, ALLTEL increased its ownership interest in the
Richmond, Va. market to 50.1 percent. This transaction accounted for
approximately 85,000 of the overall increase in wireless customers. During the
first three months of 1999, the Company placed more than 385,000 gross units in
service, compared to approximately 323,000 gross units for the same period of
1998. Overall, the Company's market penetration rate (number of customers as a
percent of the total population in ALLTEL's service areas) increased to
12.0 percent as of March 31, 1999. Customer churn (average monthly rate of
customer disconnects) increased slightly and was 2.3 percent and 2.2 percent for
the three and twelve months ended March 31, 1999, respectively, compared to 2.1
percent and 2.0 percent for the same periods in 1998.
Wireless revenues and sales increased in all periods primarily due to the
growth in wireless customers. Increases in local airtime, roaming and
long-distance revenues, reflecting higher volumes of network usage, also
contributed to the growth in revenues and sales in all periods. The additional
ownership interest in the Richmond, Va. market accounted for approximately $14.5
million of the increase in revenues and sales in the first quarter of 1999. The
increased usage of the Company's network facilities boosted the average revenue
per customer per month for the first quarter of 1999 to $47 compared to $45 for
the first quarter of 1998. Average revenue per customer per month was $48 for
the twelve months ended March 31, 1999, compared to $47 for the twelve month
period ended March 31, 1998. Growth in average revenue per customer per month
continues to be affected by decreased roaming rates and continued penetration
into lower-usage market segments. The Company expects these industry-wide trends
to continue. In addition, the growth rate of new customers is expected to
decline as the Company's wireless customer base grows. Accordingly, future
revenue growth will be dependent upon ALLTEL's success in maintaining customer
growth in existing markets, increasing customer usage of the Company's network
and providing customers with enhanced products and services.
The growth in operating income for all periods of 1998 primarily reflects
the increases in revenues and sales noted above. Improved margins realized on
the sale of wireless equipment, a reduction in branding and other advertising
costs, decreases in customer service-related expenses and other general and
administrative expenses, and declines in losses sustained from fraud also
contributed to the growth in operating income in all periods. Partially
offsetting these increases in operating income in all periods were increases in
sales commissions, consistent with the overall growth in revenues and sales, and
increased depreciation and amortization expense consistent with the growth in
wireless plant in service. The reductions in branding and other advertising
costs, customer service-related expenses and other general and administrative
expenses reflect cost savings realized as a result of the merger, as the Company
ceased promotion of the 360 brand name and eliminated certain duplicative
salaries and other employee benefit costs. The decline in losses sustained from
fraud reflects the Company's continuing efforts to control unauthorized usage of
its customers' wireless telephone numbers that results in unbillable fraudulent
roaming activity.
7
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The cost to acquire a new wireless customer represents sales, marketing and
advertising costs and losses on equipment sales for each new customer added.
Cost to acquire a new wireless customer was $291 and $276 for the three and
twelve month periods ended March 31, 1999, respectively, compared to $295 and
$282 for the same periods of 1998. The decreases in the cost to acquire a new
customer in both periods reflect reduced losses on equipment sales, reductions
in branding, advertising and other customer service-related costs noted above,
as well as distributing costs over a larger number of customers acquired when
compared to the corresponding prior year period. Although ALLTEL intends to
continue to utilize its large dealer network, the Company has expanded its
internal sales distribution channels to include its own retail stores and kiosks
located in shopping malls and other retail outlets. Incremental sales costs at a
Company retail store or kiosk are significantly lower than commissions paid to
national dealers. Accordingly, ALLTEL intends to manage the costs of acquiring
new customers by continuing to expand and enhance its internal distribution
channels.
Communications-Wireline Operations
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Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
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1999 1998 1999 1998
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Local service $156,764 $140,258 $ 599,595 $ 549,196
Network access and
long-distance 172,961 156,329 648,542 618,015
Miscellaneous 27,806 23,289 98,582 89,896
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Total revenues
and sales $357,531 $319,876 $1,346,719 $1,257,107
Operating income $129,986 $117,904 $ 483,646 $ 461,860
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Wireline revenues and sales increased $37.7 million or 12 percent and $89.6
million or 7 percent for the three and twelve months ended March 31, 1999,
respectively. Wireline operating income increased $12.1 million or 10 percent
and $21.8 million or 5 percent for the three and twelve month periods ended
March 31, 1999, respectively.
Local service revenues increased $16.5 million or 12 percent and $50.4
million or 9 percent in the three and twelve month periods ended March 31, 1999,
respectively. Customer access lines, net of the access lines acquired from
Standard, increased 6 percent during the past twelve month period, including the
sales of residential and second access lines. The acquisition of Standard
accounted for $4.8 million of the increase in local service revenues in both
periods of 1999. Growth in custom calling and other enhanced services revenues
also contributed to the increases in local service revenues in both periods of
1999.
Network access and long-distance revenues increased $16.6 million or 11
percent and $30.5 million or 5 percent for the three and twelve month periods
ended March 31, 1999, respectively. The acquisition of Standard accounted for
$14.1 million of the increase in network access and long-distance revenues in
both periods of 1999. Higher volumes of access usage and growth in customer
access lines also contributed to the increases in network access and
long-distance revenues in both periods of 1999. The increases in network access
and long-distance revenues attributable to the Standard acquisition, growth in
customer access lines and increased access usage were partially offset by a
reduction in intrastate toll revenues.
Miscellaneous revenues increased $4.5 million or 19 percent and $8.7 million
or 10 percent for the three and twelve month periods ended March 31, 1999,
respectively. The acquisition of Standard accounted for $5.1 million of the
increase in miscellaneous revenues in both periods of 1999. Increases in
directory advertising and equipment rental revenues also contributed to the
growth in miscellaneous revenues for the twelve month period of 1999.
As more fully discussed in note 7 to the unaudited consolidated financial
statements, the Georgia Public Service Commission ("Georgia PSC") issued an
order requiring that ALLTEL's wireline subsidiaries which operate within its
jurisdiction reduce their annual network access charges by $24 million,
prospectively, effective July 1, 1996. The Company appealed the Georgia PSC
8
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order. In November 1996, the Superior Court of Fulton County, Georgia,
(the "Superior Court") rendered its decision and reversed the Georgia PSC order,
finding, among other matters, that the Georgia PSC had exceeded its authority by
ordering the rate reductions. The Superior Court did not rule on a number of
other assertions made by the Company as grounds for reversal of the Georgia PSC
order. The Georgia PSC appealed the Superior Court's decision, and in July 1997,
the Georgia Court of Appeals (the "Appellate Court") reversed the Superior
Court's decision. The Company appealed to the Georgia Supreme Court, and on
October 5, 1998, the Georgia Supreme Court, in a 4-3 decision, upheld the
Appellate Court's ruling that the Georgia PSC had the authority to conduct the
rate proceeding. The case was returned to the Superior Court for it to rule on
the issues it had not previously decided. On April 6, 1999, the Superior Court
found that with respect to the July 1996 order, the Georgia PSC did not provide
ALLTEL with sufficient notice of the charges against the Company, did not
provide ALLTEL a fair opportunity to present its case and respond to the
charges, and failed to satisfy its burden of proving that ALLTEL's rates were
unjust and unreasonable. Further, the Superior Court found that the July 1996
order was an unlawful attempt to retroactively reduce ALLTEL's rates and certain
statutory revenue recoveries. For each of these independent reasons, the
Superior Court vacated and reversed the July 1996 order and remanded the case
with instructions to dismiss the case. The Georgia PSC has thirty days from
April 23, 1999 to appeal. The Company is confident that it will ultimately
prevail in this case, and as such, has not implemented any revenue reductions or
established any reserves for refund related to this matter at this time.
Growth in operating income for the three and twelve month periods reflect
the increases in wireline operating revenues and sales, partially offset by
increases in data processing charges, network-related expenses, depreciation and
amortization, and other general administrative expenses. The acquisition of
Standard accounted for $9.8 million of the increase in operating income in both
periods of 1999. Depreciation and amortization expense increased in both periods
primarily due to growth in wireline plant in service.
ALLTEL's wireline subsidiaries follow the accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). If
ALLTEL's wireline subsidiaries no longer qualified for the provisions of SFAS
71, the accounting impact to the Company would be an extraordinary non-cash
charge to operations of an amount that could be material. Criteria that would
give rise to the discontinuance of SFAS 71 include (1) increasing competition
that restricts the wireline subsidiaries' ability to establish prices to recover
specific costs and (2) significant change in the manner in which rates are set
by regulators from cost-based regulation to another form of regulation. The
Company periodically reviews these criteria to ensure the continuing application
of SFAS 71 is appropriate. As a result of the passage of the Telecommunications
Act of 1996 (the "96 Act") and state telecommunications reform legislation,
ALLTEL's wireline subsidiaries could begin to experience increased competition
in their local service areas. To date, competition has not had a significant
adverse effect on the operations of ALLTEL's wireline subsidiaries.
In August 1996, the FCC issued regulations implementing the local
competition provisions of the 96 Act. These regulations established pricing
rules for state regulatory commissions to follow with respect to entry by
competing carriers into the local, intrastate markets of incumbent local
exchange carriers ("ILECs") and addressed interconnection, unbundled network
elements and resale rates. The FCC's authority to adopt such pricing rules,
including permitting new entrants to "pick and choose" among the terms and
conditions of approved interconnection agreements, was challenged in federal
court by various ILECs and state regulatory commissions. 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 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
9
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interconnection agreements between ILECs and other carriers and adopting rules
relating to dialing parity and standards for granting exemptions to rural ILECs.
As part of its ruling, the Supreme Court reinstated the FCC's "pick and choose"
rule. The U.S. Supreme Court remanded a portion of the decision to the Eighth
Circuit Court for it to rule on certain issues that it had not previously
decided, such as whether the FCC's pricing rules are consistent with the 96 Act.
Other issues were remanded to the FCC for further rulemaking.
As a result of the Supreme Court's decision upholding the FCC's jurisdiction
over interstate and intrastate toll dialing parity requirements, the FCC
established a revised schedule for ILEC submission of intraLATA dialing parity
plans. The Company's ILECs have submitted their plans or requested suspension by
the states of those requirements. The FCC also began a further rulemaking on
how, in lieu of the Supreme Court's decision, it should interpret the
"necessary" and "impair" standards set forth in the 96 Act and which specific
network elements it should require ILECs to unbundle as a result of its
interpretation of those standards.
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 continues to
evaluate the impact of the FCC's universal service order on its 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.
On March 31, 1999, the FCC released an order designed to facilitate the
development of competition in the advanced services market. The FCC determined
that ILECs must make available to requesting competitive local exchange carriers
("CLECs") the use of shared collocation arrangements. Competitiors must also be
able to collocate all equipment used for interconnection and/or access to
unbundled network elements even when that equipment includes a switching or
enhanced services function. The FCC also issued a further rulemaking to
determine whether the FCC should mandate line sharing nationally by ILECs in
order that CLECs may provide data or advanced services over those lines.
Because resolution of the regulatory matters discussed above that are
currently under FCC or judicial review is uncertain and regulations to implement
other provisions of the 96 Act have yet to be issued, ALLTEL cannot predict at
this time the specific effects, if any, that the 96 Act and future competition
will have on its wireline operations.
10
<PAGE>
Communications-Emerging Businesses Operations
- ----------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- ----------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues and sales $ 39,049 $19,094 $119,902 $ 62,868
Operating loss $(12,129) $(5,729) $(51,276) $(23,074)
- ----------------------------------------------------------------------------
Emerging businesses consist of the Company's long-distance, Internet access,
CLEC, network management and Personal Communications Services ("PCS")
operations. Long-distance and Internet access services are currently marketed to
residential and business customers in the majority of states in which ALLTEL
provides communications services. During 1998, ALLTEL began offering its CLEC
and network management services to business customers in select markets. ALLTEL
expects to expand its CLEC product offering to residential customers in the near
term. ALLTEL has offered PCS in Jacksonville, Fla., since March 1998, and in the
Birmingham and Mobile, Ala. service areas since February 1999.
Emerging businesses' revenues and sales increased $20.0 million or 105
percent and $57.0 million or 91 percent for the three and twelve month periods
ended March 31, 1999. The increases in revenues and sales in both periods
primarily reflect growth in the long-distance operations. Long-distance revenues
increased $11.1 million and $29.6 million in the three and twelve month periods,
respectively, primarily due to growth in its customer base. Operating losses
sustained by emerging businesses increased $6.4 million or 112 percent and $28.2
million or 122 percent for the three and twelve month periods of 1999,
respectively, primarily due to the start-up nature of these operations.
Information Services Operations
- -------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- -------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues and sales $305,398 $266,861 $1,200,305 $1,023,317
Operating income $ 40,452 $ 36,825 $ 166,278 $ 148,161
- -------------------------------------------------------------------------------
Information services' revenues and sales increased $38.5 million or 14
percent and $177.0 million or 17 percent for the three and twelve month periods
ended March 31, 1999, respectively. Revenues and sales increased in all periods
of 1999, primarily due to growth in the financial services and
telecommunications outsourcing operations, reflecting volume growth in existing
data processing contracts and the addition of new outsourcing agreements.
Revenues earned from new contracts accounted for approximately $17 million and
$82 million of the overall increases in revenues and sales for the three and
twelve month periods, respectively. The increases in revenues and sales in both
periods were partially offset by lost operations from contract terminations due
primarily to the merger and consolidation activity in the domestic financial
services market. The domestic financial services industry continues to
experience consolidation due to mergers.
Operating income increased $3.6 million or 10 percent and $18.1 million or
12 percent for the three and twelve month periods ended March 31, 1999,
respectively. The increase in operating income in the three month period
primarily reflects the growth in revenues and sales noted above, partially
offset by lost operations due to contract terminations. The increase in
operating income for the twelve month period reflects the growth in revenues and
sales noted above, additional fees collected from the early termination of
contracts and improved profit margins realized from the international financial
services business, partially offset by lower margins realized by the
telecommunications operations. The decrease in telecommunications operating
margins reflects increases in depreciation and amortization expense and
increases in software maintenance and other operating costs. Depreciation and
amortization expense increased in both periods primarily due to the acquisition
of additional data processing equipment and due to an increase in amortization
of internally developed software.
11
<PAGE>
Other Operations
- -------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- -------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues and sales $117,064 $105,115 $613,299 $442,129
Operating income $ 4,250 $ 5,137 $ 25,039 $ 19,918
- -------------------------------------------------------------------------------
Other operations consist of the Company's product distribution and directory
publishing operations. Revenues and sales increased $11.9 million or 11 percent
and $171.2 million or 39 percent for the three and twelve month periods ended
March 31, 1999, respectively. Operating income decreased $0.9 million or 17
percent and increased $5.1 million or 26 percent for the three and twelve month
periods ended March 31, 1999, respectively. Revenues and sales and operating
income for the twelve month period of 1998 include the operating results of HWC,
which was sold in May 1997, as previously discussed. Excluding the impact of the
HWC operations, revenues and sales would have increased $182.5 million or 42
percent, while operating income would have increased $5.4 million or 28 percent
for the twelve month period ended March 31, 1998.
Revenues and sales increased in both periods of 1999 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 $9.6 million and
$153.4 million in the three and twelve month periods ended March 31, 1999. The
increases in affiliate sales in all periods was primarily due to additional
purchases made by the Company's wireless subsidiaries, reflecting the merger
with 360 and the expansion of ALLTEL Supply's product lines to include
wireless equipment. Directory publishing revenues increased $1.4 million and
$6.3 million in the three and twelve month periods of 1999, respectively,
primarily due to additional directory publishing contracts.
The decrease in other operations' operating income for the three month
period of 1999 primarily reflects lower gross profit margins realized by ALLTEL
Supply due to a reduction in margins earned on affiliated sales and increased
competition from other distributors and from direct sales by manufacturers. The
increase in other operations' operating income for the twelve month period of
1999 primarily reflects the growth in revenues and sales noted above, partially
offset by the lower gross profit margins realized by ALLTEL Supply on its
revenues and sales, as previously discussed.
Corporate Expenses
- --------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- --------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Corporate operating expenses $5,737 $3,447 $ 25,142 $18,310
Merger and integration expenses - - 252,000 -
Provision to reduce carrying
value of certain assets - - 55,000 16,874
------ ------ -------- -------
Total corporate expenses $5,737 $3,447 $332,142 $35,184
- --------------------------------------------------------------------------------
As indicated in the above table, corporate expenses for the twelve month
period of 1999 include the $252 million of merger and integration expenses and
the $55 million charge related to changes in GTE's customer care and billing
contract, as previously discussed. Corporate expenses for the twelve month
period ended March 31, 1998 include the write-down of $16.9 million to reflect
the fair value less cost to sell the HWC operations recorded in the second
quarter of 1997. Excluding the impact of the merger and integration expenses and
asset write-downs in each period, corporate expenses would have increased $2.3
million or 66 percent and $6.8 million or 37 percent for the three and twelve
month periods ended March 31, 1999. Net of the merger and integration expenses
and asset write-downs, the increases in corporate expenses in both periods of
1999 reflect increases in employee benefit costs and depreciation and
amortization expense.
12
<PAGE>
OTHER FINANCIAL STATEMENT ITEMS
Interest Expense
- ----------------
Interest expense decreased $1.9 million or 3 percent and $3.5 million or 1
percent for the three and twelve month periods ended March 31, 1999,
respectively. The decreases in interest expense in both periods reflect
decreases in the weighted average borrowing rates applicable to ALLTEL's
revolving credit agreement.
Income Taxes
- ------------
Income tax expense increased $7.0 million or 6 percent and $19.2 million or
4 percent for the three and twelve month periods ended March 31, 1999,
respectively. Income tax expense for all periods includes the tax-related impact
of the merger and integration expenses and the other non-recurring and unusual
items previously discussed. Excluding the impact on tax expense of these items
in each period, income tax expense would have increased $33.8 million or 40
percent and $103.3 million or 31 percent in the three and twelve month periods
ended March 31, 1999, respectively, consistent with the overall growth in the
Company's earnings from continuing operations before non-recurring and unusual
items.
Average Common Shares Outstanding
- ---------------------------------
The average number of common shares outstanding increased 3 percent and less
than 1 percent in the three and twelve month periods ended March 31, 1999,
respectively. The increases in both periods primarily reflect the additional
shares issued in January 1999 in connection with the Standard acquisition.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
ALLTEL's total capital structure was $7.3 billion at March 31, 1999,
reflecting 49 percent common and preferred equity and 51 percent debt. This
compares to a capital structure of $6.8 billion at December 31, 1998, reflecting
48 percent common and preferred equity and 52 percent debt. The Company has
adequate internal and external resources available to finance its ongoing
operating requirements, including capital expenditures, business development and
the payment of dividends.
Cash provided from operations continues to be ALLTEL's primary source of
liquidity. Cash provided from operations was $250.6 million and $1,202.5 million
for the three and twelve month periods ended March 31, 1999, respectively,
compared to $295.3 million and $1,275.2 million for the same periods in 1998.
The decreases in the three and twelve month periods reflect changes in working
capital requirements, including the timing of payment of accounts payable,
partially offset by growth in the earnings of the Company, excluding the effects
of all non-recurring and unusual items.
Capital expenditures for the three and twelve month periods of 1999 were
$181.7 million and $917.4 million, respectively, compared to $132.9 million and
$791.2 million for the same periods in 1998. During the past two-year period,
the Company funded the majority of its capital expenditures through internally
generated funds. Capital expenditures were incurred to continue to modernize and
upgrade ALLTEL's telecommunications network and to expand into existing
information services markets. In addition, capital expenditures were incurred to
construct additional network facilities to provide PCS and digital wireless
service and to offer other communications services, including long-distance,
Internet and local competitive access services. Capital expenditures are
forecast at approximately $850 million for 1999, which are expected to be funded
primarily from internally generated funds.
Cash flows from investing activities for the three and twelve month periods
of 1999 include cash outlays for the acquisition of property of $32.5 million
and $73.3 million, respectively. These amounts are net of cash acquired of
approximately $24.1 million received in the Standard acquisition and principally
13
<PAGE>
consist of a cash outlay of $46.5 million for the acquisition of a wireless
property in Colorado. In addition to this acquisition, cash outlays for the
twelve months ended March 31, 1999, include $34.6 million related to the
purchase of two wireless properties in Georgia. Cash flows from investing
activities for the twelve month period of 1998 include a cash outlay of $146.5
million related to the acquisition of PCS licensing rights. Cash flows from
investing activities for the twelve month period of 1998 also include cash
outlays of $94.2 million for the purchase of additional ownership interests in
wireless properties in which the Company owns a controlling interest. In
addition, the twelve month period of 1998 includes cash outlays of $106.1
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 the twelve month period ended
March 31, 1999 include proceeds of $252.5 million primarily from the sale of a
portion of the Company's investment in MCI WorldCom common stock. Cash flows
from investing activities for the three and twelve month periods ended March 31,
1998 also include proceeds of $40.7 million and $226.6 million primarily from
the sale of MCI WorldCom common stock. In addition, cash flows from investing
activities for the twelve month period of 1998 includes proceeds of $96.9
million from the sale of property, principally consisting of two non-strategic
operations. In September 1997, ALLTEL received cash proceeds of $48.7 million
from the sale of an investment in a software company. In May 1997, the Company
completed the sale of HWC for approximately $45.0 million in cash. The proceeds
from these asset sales were used primarily to reduce borrowings under the
Company's revolving credit agreement.
Included in cash flows from financing activities are common and preferred
dividend payments, which amounted to $84.0 million and $270.7 million for the
three and twelve month periods ended March 31, 1999, respectively, compared to
$53.6 million and $207.9 million for the same periods in 1998. The increases in
dividend payments in both periods primarily reflect the additional shares
outstanding due to the mergers with 360 and Standard, as well as growth
in the annual dividend rate on ALLTEL's common stock. Distributions to minority
investors were $16.1 million and $98.5 million for the three and twelve months
ended March 31, 1999, respectively, compared to $10.4 million and $52.8 million
for the same periods in 1998. The increases in distributions for both periods
reflect the improved operating results of the wireless properties managed by the
Company. Cash flows from financing activities for the twelve months ended
March 31, 1998 include a cash outlay of $179.6 million for the repurchase by the
Company of 5.7 million of its common shares completed prior to January 1, 1998.
The Company has a $1 billion line of credit under a revolving credit
agreement. Borrowings outstanding under this agreement at March 31, 1999 were
$610.2 million, compared to $578.5 million that were outstanding at December 31,
1998. Borrowings outstanding under this agreement at March 31, 1998 were $649.5
million. The weighted average interest rate on borrowings outstanding under the
revolving credit agreement at March 31, 1999, was 4.9 percent. As previously
discussed, proceeds from the sales of MCI WorldCom common stock and HWC were
used primarily to reduce the amount of borrowings outstanding under the
revolving credit agreement. The net increase in revolving credit borrowings from
December 31, 1998, represents all of the long-term debt issued in the first
quarter 1999. The net reduction in revolving credit agreement borrowings from
March 31, 1998, represents a portion of the long-term debt retired during the
twelve months ended March 31, 1999. Scheduled long-term debt retirements, net of
the revolving credit agreement activity, amounted to $15.2 million and $45.7
million for the three and twelve month periods ended March 31, 1999,
respectively.
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 with the primary objective of achieving Year 2000 compliance
of the Company's critical computer systems, infrastructure, and software,
systems and services that the Company provides to its customers and for which
14
<PAGE>
the Company is responsible. For those critical internal computer systems,
infrastructure, and software, systems and services, the Company plans to achieve
substantial compliance by June 30, 1999 and full compliance 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 critical 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, Third-Party Strategies, Risk
Assessment and Planning phases have been completed. For these critical systems,
software and services, the Company has commenced work on and plans to complete
the Remediation and Testing phases by June 30, 1999, and the Implementation
phase by June 30, 1999, except that the Implementation phase for the Company's
Savannah, Albany, Augusta and Columbia wireless markets, which constitute
approximately 8 percent of the Company's wireless customers, is scheduled to be
completed by August 31, 1999. For the Company's critical infrastructure, the
Company has completed the Awareness, Inventory, Third-Party Strategies, Risk
Assessment and Planning phases and has commenced work on and plans to complete
the Remediation, Testing, and Implementation phases by June 30, 1999.
During the first quarter of 1999, the Company acquired Standard and Durango
Cellular Telephone Company ("Durango"). The Company is in the process of
applying the Year 2000 methodology described above to both Standard's and
Durango's critical internal computer systems, infrastructure, and software,
systems and services provided to customers. Prior to the Company's acquisition
of Standard on January 6, 1999, Standard completed its inventory, assessment and
remediation of its critical internal computer systems. Prior to the Company's
acquisition of Durango on March 31, 1999, Durango had not commenced its Year
2000 efforts. Durango constitutes less than 1 percent of the Company's wireless
customers. The Company has commenced the Awareness, Inventory, Third-Party
Strategies, Risk Assessment and Planning phases for Durango's critical internal
computer systems and infrastructure and is working with the vendors of Durango's
critical internal computer systems to verify the Year 2000 status of those
systems. The Company plans to achieve substantial compliance for both recently
acquired companies' critical internal computer systems, infrastructure and
software, systems and services provided to customers prior to August 31, 1999.
As part of its Year 2000 plan, ALLTEL 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. ALLTEL'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 potential delays
in completion of the Remediation, Testing, and Implementation phases. ALLTEL 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, ALLTEL 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 that assess the potential for business disruption in various
scenarios. Those contingency plans address possible, but unlikely, "worst case"
scenarios involving the interruption of telecommunications and information
technology services and/or interruption of customer billing, operating and other
information systems, and provide for key-operation back-up and alternative
solutions for recovery. 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.
15
<PAGE>
ALLTEL estimates the total cost of its Year 2000 efforts to be approximately
$80 million. The Company incurred approximately $5 million in the first quarter
of 1999 and as of March 31, 1999, the Company has incurred approximately $59
million of the total amount. The Company has and will capitalize and
subsequently amortize approximately one-half of the total Year 2000 cost,
including costs relating to the remediation of the Company's software products.
Some of the Company's Year 2000 costs are not incremental, but rather represent
the redeployment of existing resources. As for the estimated costs associated
with making the Company's customers' systems Year 2000 compliant in those
situations where the Company is obligated to do so, the Company has treated
those costs as contract costs and has not included them in the Company's Year
2000 costs. The Company continues to evaluate the estimated costs associated
with its Year 2000 efforts based on actual experience. The Company believes,
based on available information, that its Year 2000 costs will not have a
material adverse effect on its results of operations.
The above information is based on the Company's current best estimates using
numerous assumptions of future events. Given the complexity of the Year 2000
issues and possible unidentified risks, actual results may vary from those
anticipated and discussed above.
Other Financial Information
- ---------------------------
During the first three months of 1999, there were no material changes in the
market risks discussed in the Company's Annual Report on Form 10-K, as amended
for the year ended December 31, 1998.
In December 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. On April 27,
1999, Aliant shareholders approved the merger. Under terms of the merger
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 approximately $1.5 billion, as a
pooling-of-interests. The merger is subject to regulatory and other approvals.
The Company expects the merger to be completed by mid-1999.
In March 1999, ALLTEL filed a shelf registration statement with the
Securities and Exchange Commission providing for the issuance of up to $500
million in aggregate initial offering price of unsecured debt securities. The
net proceeds to be received by the Company would be used to repay borrowings
outstanding under ALLTEL's revolving credit agreement. In April 1999, ALLTEL
issued $300 million of 6.8 percent debentures due May 1, 2029, under this shelf
registration statement. The net proceeds from the sale of the debt securities
were used to reduce borrowings outstanding under the revolving credit agreement.
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. As ALLTEL does not have
significant derivative financial instruments, the Company does not expect the
adoption of SFAS 133 to have a material impact on its reported earnings and/or
other comprehensive income.
16
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) See the exhibits specified on the Index of Exhibits located at Page 19.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated April 21, 1999, reporting under
Item 5, Other Events, the Company's Press Release announcing its first
quarter results from operations.
No other reports on Form 8-K have been filed during the quarter for
which this report is filed.
17
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLTEL CORPORATION
------------------
(Registrant)
/s/ Jeffery R. Gardner
----------------------
Jeffery R. Gardner
Senior Vice President - Finance and Treasurer
(Principal Accounting Officer)
May 13, 1999
18
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
INDEX OF EXHIBITS
Form 10-Q Sequential
Exhibit No. Description Page No.
- ---------- ----------- ----------
(19) Interim Report to Stockholders and Notes 20 - 29
to Unaudited Consolidated Financial Statements
for the periods ended March 31, 1999 and 1998
(27) Financial Data Schedule for the 30
three months ended March 31, 1999
19
Exhibit 19
1999 First Quarter Interim Report
March 31, 1999
The Power to Simplify
To ALLTEL Stockholders:
ALLTEL reported record first quarter results from current businesses, including
a 16 increase in revenues from the previous year to $1.4 billion. Net income was
up 31 percent to $167 million, and earnings per share grew 26 percent to 59
cents per share from the previous year.
Among the highlights from current businesses in the first quarter:
o Revenues and operating income for ALLTEL's wireless business increased
21 percent and 49 percent, respectively, from last year. This was driven
by an increase in average revenue per customer (ARPU) of 5 percent year
over year to $47.35.
o ALLTEL added 174,000 net wireless customers during the first quarter,
including 85,000 from the acquisition of the Richmond, Va., market.
o Revenues and operating income for ALLTEL's wireline business increase 12
percent and 10 percent, respectively, from last year, including the
acquisition of Standard Group, Inc. in Georgia.
o Revenues from emerging businesses more than doubled in the quarter over
the same period last year. This was due to growth in long-distance,
competitive local exchange access, Internet access, network management
and PCS (Personal Communications Service) operations.
o Revenues and operating income for ALLTEL's information services business
increased 14 percent and 10 percent, respectively, from last year.
I am extremely pleased with ALLTEL's double-digit earnings growth for the
quarter. Strong performance by the operating units combined to produce
impressive results. Our communications business continued to produce
industry-leading operating and cash flow margins. Additionally, we expanded our
bundled service offerings in key markets with the addition of new services,
including digital wireless service. ALLTEL launched digital wireless service in
three markets in the first quarter with additional markets planned for later
this year.
To date, ALLTEL has introduced digital wireless service to 16 markets
representing nearly 45 percent of the Company's wireless POPs (potential
customers). ALLTEL now has the largest digital wireless network in the
Carolinas. In addition, we launched digital PCS in the Birmingham/Tuscaloosa and
Mobile/Pensacola markets. As we introduced new services, we also expanded
ALLTEL's geographic footprint through the acquisition of wireline and wireless
properties in Georgia, Colorado and Alabama. Our geographically focused
communications operations are now in 23 states.
Our information services business continued to sign new business and expand
its range of information technology solutions. In the first quarter, ALLTEL
Information Services signed a wireline billing contract with Centennial
Communications for its Puerto Rico markets. In addition, ALLTEL successfully
delivered its Virtuoso customer care and billing system to Hughes Ispat
Limited's data center in Bombay, India.
As ALLTEL Information Services signed new business, we continued to expand
the range of services we provide through the acquisition of Corporate Solutions,
Inc. (CSI), a leading provider of consumer loan origination software. The CSI
acquisition further strengthens ALLTEL's efforts to become the worldwide leader
in providing consumer lending automation. We are extremely pleased with ALLTEL's
first quarter results, from both a financial and strategic standpoint.
Throughout the quarter, we maintained our focus on delivering value to our
customers, shareholders and employees.
Board Declares Dividends
ALLTEL's Board of Directors declared regular quarterly dividends on ALLTEL's
common stock. The 30.5 cent dividend is payable July 6, 1999 to stockholders of
record as of June 9, 1999.
Regular quarterly dividends were also declared on all series of the
Company's preferred stock. Preferred dividends are payable June 15, 1999 to
stockholders of record as of May 24, 1999.
/s/ Joe Ford
Joe T. Ford
Chairman and Chief Executive Officer
April 23, 1999
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31, Ended March 31,
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Service revenues $1,240,745 $1,070,701 $4,802,659 $4,176,408
Product sales 127,617 113,617 575,393 477,405
---------- ---------- ---------- ----------
Total revenues and sales 1,368,362 1,184,318 5,378,052 4,653,813
- -----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Operations 716,771 626,755 2,830,289 2,444,019
Cost of products sold 124,046 110,682 563,944 465,904
Depreciation and amortization 190,321 174,976 722,474 658,183
Merger and integration expenses - - 252,000 -
Provision to reduce carrying value
of certain assets - - 55,000 16,874
---------- ---------- ---------- ----------
Total costs and expenses 1,031,138 912,413 4,423,707 3,584,980
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 337,224 271,905 954,345 1,068,833
Equity earnings in unconsolidated partnerships 30,324 24,601 120,582 96,660
Minority interest in consolidated partnerships (30,064) (21,381) (110,860) (91,481)
Other income, net 12,885 3,964 47,071 14,417
Interest expense (64,896) (66,758) (261,807) (265,336)
Gain on disposal of assets and other - 67,090 229,060 257,496
---------- ---------- ---------- ----------
Income before income taxes 285,473 279,421 978,391 1,080,589
Income taxes 118,791 111,750 453,905 434,690
---------- ---------- ---------- ----------
Net income 166,682 167,671 524,486 645,899
Preferred dividends 232 240 930 990
---------- ---------- ---------- ----------
Net income applicable to common shares $ 166,450 $ 167,431 $ 523,556 $ 644,909
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $.59 $.61 $1.90 $2.34
Diluted $.59 $.61 $1.88 $2.32
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------------ ------------------------
(Dollars in thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED FROM OPERATIONS $ 250,622 $ 295,259 $1,202,457 $1,275,173
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (181,705) (132,890) (917,392) (791,152)
Purchase of property, net of cash acquired (32,533) (14,283) (73,323) (94,189)
Additions to capitalized software development costs (9,661) (22,669) (77,128) (81,381)
Additions to other intangible assets - - - (146,526)
Additions to investments (5,024) (9,524) (12,754) (106,075)
Proceeds from the sale of investments - 55,926 252,517 240,212
Proceeds from the return on investments 7,052 4,312 61,064 18,080
Proceeds from the sale of assets - - - 96,887
Other, net 10,578 12,337 (56,550) (73,132)
--------- --------- ---------- ----------
Net cash used in investing activities (211,293) (106,791) (823,566) (937,276)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on preferred and common stock (83,953) (53,590) (270,747) (207,905)
Reductions in long-term debt (15,211) (210,715) (84,932) (7,759)
Purchase of common stock - - - (179,550)
Distributions to minority investors (16,109) (10,446) (98,451) (52,832)
Preferred stock redemptions and purchases - (46) (499) (875)
Long term debt issued 31,720 99,144 8,160 99,144
Common stock issued 18,029 10,868 53,489 18,310
--------- --------- ---------- ----------
Net cash used in financing activities (65,524) (164,785) (392,980) (331,467)
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and short-term investments (26,195) 23,683 (14,089) 6,430
CASH AND SHORT-TERM INVESTMENTS:
Beginning of the period 55,472 19,683 43,366 36,936
--------- --------- ---------- ----------
End of the period $ 29,277 $ 43,366 $ 29,277 $ 43,366
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
ASSETS 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 29,277 $ 55,472 $ 43,366
Accounts receivable (less allowance for doubtful
accounts of $33,124, $29,121 and $25,488, respectively) 771,859 776,720 685,494
Materials and supplies 17,876 10,539 17,491
Inventories 92,091 88,467 71,608
Prepaid expenses and other 64,349 49,633 43,634
---------- ---------- ----------
Total current assets 975,452 980,831 861,593
- --------------------------------------------------------------------------------------------------------------------------
Investments 1,882,639 1,668,171 1,463,510
Goodwill and other intangibles 1,691,256 1,625,617 1,630,279
- --------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Wireline 4,357,186 4,090,791 3,962,816
Wireless 2,871,786 2,658,822 2,364,449
Information services 695,724 678,244 628,538
Other 181,983 182,066 170,676
Under construction 562,441 623,415 393,643
---------- ---------- ----------
Total property, plant and equipment 8,669,120 8,233,338 7,520,122
Less accumulated depreciation 3,664,872 3,405,270 3,044,635
---------- ---------- ----------
Net property, plant and equipment 5,004,248 4,828,068 4,475,487
- --------------------------------------------------------------------------------------------------------------------------
Other assets 307,484 271,539 343,388
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,861,079 $9,374,226 $8,774,257
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 56,224 $ 55,484 $ 64,588
Accounts and notes payable 407,599 486,047 376,985
Advance payments and customer deposits 112,390 129,092 135,129
Accrued taxes 182,013 130,675 167,629
Accrued dividends 86,374 84,388 55,155
Other current liabilities 275,643 320,822 164,233
---------- ---------- ----------
Total current liabilities 1,120,243 1,206,508 963,719
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt 3,604,100 3,491,755 3,592,697
Deferred income taxes 1,050,357 933,485 816,652
Other liabilities 494,816 466,601 426,182
Preferred stock, redeemable 4,991 5,005 5,592
- --------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 9,114 9,121 9,142
Common stock 281,346 275,137 274,097
Additional capital 879,015 846,647 814,103
Unrealized holding gain on investments 667,506 551,615 425,498
Retained earnings 1,749,591 1,588,352 1,446,575
---------- ---------- ----------
Total shareholders' equity 3,586,572 3,270,872 2,969,415
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,861,079 $9,374,226 $8,774,257
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
HIGHLIGHTS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, Twelve Months Ended March 31,
-------------------------------------- -------------------------------------
(Dollars in thousands, % Increase % Increase
except per share amounts) 1999 1998 (Decrease) 1999 1998 (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM CURRENT BUSINESSES:
Revenues and sales:
Wireless $ 582,822 $ 481,638 21 $2,238,345 $1,900,428 18
Wireline 357,531 319,876 12 1,346,719 1,257,107 7
Emerging businesses 39,049 19,094 105 119,902 62,868 91
---------- ---------- ---------- ----------
Total communications 979,402 820,608 19 3,704,966 3,220,403 15
Information services 305,398 266,861 14 1,200,305 1,023,317 17
Other operations 117,064 105,115 11 613,299 430,812 42
---------- ---------- ---------- ----------
Total business segments 1,401,864 1,192,584 18 5,518,570 4,674,532 18
Less: intercompany eliminations 33,502 8,266 305 140,518 32,036 339
---------- ---------- ---------- ----------
Total revenues and sales $1,368,362 $1,184,318 16 $5,378,052 $4,642,496 16
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Wireless $ 180,402 $ 121,215 49 $ 662,800 $ 497,152 33
Wireline 129,986 117,904 10 483,646 461,860 5
Emerging businesses (12,129) (5,729) (112) (51,276) (23,074) (122)
---------- ---------- ---------- ----------
Total communications 298,259 233,390 28 1,095,170 935,938 17
Information services 40,452 36,825 10 166,278 148,161 12
Other operations 4,250 5,137 (17) 25,039 19,598 28
---------- ---------- ---------- ----------
Total business segments 342,961 275,352 25 1,286,487 1,103,697 17
Corporate expenses 5,737 3,447 66 25,142 18,310 37
---------- ---------- ---------- ----------
Total operating income $ 337,224 $ 271,905 24 $1,261,345 $1,085,387 16
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 166,682 $ 127,323 31 $ 619,664 $ 506,440 22
Basic earnings per share $.59 $.47 26 $2.24 $1.84 22
Diluted earning per share $.59 $.46 28 $2.22 $1.82 22
- ----------------------------------------------------------------------------------------------------------------------------------
AS REPORTED:
Revenues and sales $1,368,362 $1,184,318 16 $5,378,052 $4,653,813 16
Operating income $ 337,224 $ 271,905 24 $ 954,345 $1,068,833 (11)
Net income $ 166,682 $ 167,671 (1) $ 524,486 $ 645,899 (19)
Basic earnings per share $.59 $.61 (3) $1.90 $2.34 (19)
Diluted earning per share $.59 $.61 (3) $1.88 $2.32 (19)
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares 280,720,000 273,296,000 3 276,008,000 275,095,000 -
Current annual dividend rate per
common share $1.22 $1.16 5
Capital expenditures $ 172,044 $ 132,890 29 $ 907,732 $ 791,152 15
Total assets $9,861,079 $8,774,257 12
Wireless customers 4,182,601 3,620,842 16
Wireline customers 2,034,750 1,821,170 12
Long-distance customers 581,703 389,465 49
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
Current businesses excludes the sold wire and cable operations, merger and integration expenses, provision to reduce carrying value
of certain assets, and gain on disposal of assets.
Emerging businesses includes the long-distance, local competitive access, Internet access, network management and PCS operations.
</FN>
ALLTEL Corporation One Allied Drive Little Rock, Arkansas 72202 (501) 905-8900 www.alltel.com
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation:
The consolidated financial statements at March 31, 1999 and 1998 and for
the three and twelve month periods then ended are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim periods.
2. Merger:
On July 1, 1998, ALLTEL completed its merger with 360 Communications
Company ("360") under a definitive merger agreement entered into on
March 16, 1998. Under the terms of the merger agreement, 360 became a
wholly-owned subsidiary of ALLTEL, and each outstanding share of 360
common stock was converted into the right to receive .74 shares of ALLTEL
common stock, 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. The accompanying interim financial statements have
been restated to include the accounts and results of 360 for all periods
presented. The combined results include certain eliminations and
reclassification adjustments to conform the accounting and financial
reporting policies of ALLTEL and 360. Separate and combined results of
operations for certain interim periods are as follows:
<TABLE>
<CAPTION>
Six Months Three Months Twelve Months
Ended Ended Ended
(In thousands, except per share amounts) June 30, March 31, March 31,
1998 1998 1998
---- ---- ----
<S> <C> <C> <C>
Revenues and sales:
ALLTEL $1,781,454 $ 846,962 $3,326,220
360 753,448 354,835 1,395,161
Eliminations and reclassifications (46,454) (17,479) (67,568)
---------- ---------- ----------
Combined $2,488,448 $1,184,318 $4,653,813
========== ========== ==========
Net income:
ALLTEL $ 320,449 $ 123,551 $ 529,729
360 81,239 44,120 116,170
Eliminations and reclassifications - - -
---------- ---------- ----------
Combined $ 401,688 $ 167,671 $ 645,899
========== ========== ==========
Combined earnings per share:
Basic $1.46 $.61 $2.34
Diluted $1.45 $.61 $2.32
</TABLE>
3. 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
completed by the end of 1999. As of March 31, 1999, the Company had paid
$28.5 million in severance and employee-related expenses and 291 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, an $18 million write-down in the carrying value of certain
assets resulting from a revised Personal Communication Services ("PCS")
deployment plan, and other integration costs of $23.1 million.
25
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Merger and Integration Expenses (continued):
The estimated cost of contract termination primarily relates to a
long-term contract continuing through 2006 with an outside vendor for
customer billing services to be provided to the 360 operations,
under which the Company currently is paying $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.
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. The following is a
summary of activity related to the Company's merger and integration
accrual:
(In Millions)
-------------
Total merger and integration costs $ 252.0
Cash outlays (102.1)
Noncash write-down of assets (74.8)
-------
Accrued reserve balance at March 31, 1999 $ 75.1
=======
The merger and integration expenses decreased net income $201.0 million.
4. Comprehensive Income:
Comprehensive income was as follows for the three and twelve month periods
ended March 31:
<TABLE>
<CAPTION>
Three Months Twelve Months
(Dollars in thousands) Ended Ended
--------------------- ----------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $166,682 $167,671 $ 524,486 $ 645,899
-------- -------- --------- ---------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
investments arising during the period 190,780 241,667 628,375 419,535
Income tax expense 74,889 94,606 247,155 169,974
-------- -------- --------- ---------
115,891 147,061 381,220 249,561
-------- -------- --------- ---------
Less: reclassification adjustments for
gains included in net income - (36,584) (229,060) (192,577)
Income tax expense - 14,350 89,848 82,538
-------- -------- --------- ---------
- (22,234) (139,212) (110,039)
-------- -------- --------- ---------
Other comprehensive income before tax 190,780 205,083 399,315 226,958
Income tax expense 74,889 80,256 157,307 87,436
-------- -------- --------- ---------
Other comprehensive income 115,891 124,827 242,008 139,522
-------- -------- --------- ---------
Comprehensive income $282,573 $292,498 $ 766,494 $ 785,421
======== ======== ========= =========
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Earnings per Share:
A reconciliation of the net income and number of shares used in computing
basic and diluted earnings per share for the three and twelve month
periods ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
(In thousands, except per share amounts) Ended Ended
--------------------------------------- ----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shares $166,450 $167,431 $523,556 $644,909
Weighted average common shares outstanding
for the period 280,720 273,296 276,008 275,095
-------- -------- -------- --------
Basic earnings per share $.59 $.61 $1.90 $2.34
==== ==== ===== =====
Diluted earnings per share:
Net income applicable to common shares $166,450 $167,431 $523,556 $644,909
Adjustments for convertible securities:
Preferred stocks 44 46 172 198
-------- -------- -------- --------
Net income applicable to common shares
assuming conversion of above securities $166,494 $167,477 $523,728 $645,107
-------- -------- -------- --------
Weighted average common shares outstanding
for the period 280,720 273,296 276,008 275,095
Increase in shares which would result from:
Exercise of stock options 3,395 2,569 2,747 1,865
Conversion of convertible preferred stocks 456 476 463 506
-------- -------- -------- --------
Weighted average common shares outstanding
assuming conversion of above securities 284,571 276,341 279,218 277,466
-------- -------- -------- --------
Diluted earnings per share $.59 $.61 $1.88 $2.32
==== ==== ===== =====
</TABLE>
27
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Business Segment Information:
ALLTEL disaggregates its business operations based on differences in
products and services. The Company evaluates performance based on segment
operating income, excluding non-recurring and unusual items. Segment
operating results were as follows:
<TABLE>
Three Months Ended Twelve Months Ended
(In thousands) March 31, March 31,
-------------- --------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and Sales from External Customers:
Wireless $ 582,822 $ 481,638 $2,238,345 $1,900,428
Wireline 348,790 311,426 1,311,961 1,223,364
Emerging businesses 39,049 19,094 119,902 62,868
---------- ---------- ---------- ----------
Total communications 970,661 812,158 3,670,208 3,186,660
Information services 243,259 233,082 1,015,318 891,750
Other operations 78,169 75,803 340,481 322,688
---------- ---------- ---------- ----------
Total business segments $1,292,089 $1,121,043 $5,026,007 $4,401,098
========== ========== ========== ==========
Intersegment Revenues and Sales:
Wireless $ - $ - $ - $ -
Wireline 8,741 8,450 34,758 33,743
Emerging businesses - - - -
---------- ---------- ---------- ----------
Total communications 8,741 8,450 34,758 33,743
Information services 62,139 33,779 184,987 131,567
Other operations 38,895 29,312 272,818 119,441
---------- ---------- ---------- ----------
Total business segments $ 109,775 $ 71,541 $ 492,563 $ 284,751
========== ========== ========== ==========
Total Revenues and Sales:
Wireless $ 582,822 $ 481,638 $2,238,345 $1,900,428
Wireline 357,531 319,876 1,346,719 1,257,107
Emerging businesses 39,049 19,094 119,902 62,868
---------- ---------- ---------- ----------
Total communications 979,402 820,608 3,704,966 3,220,403
Information services 305,398 266,861 1,200,305 1,023,317
Other operations 117,064 105,115 613,299 442,129
---------- ---------- ---------- ----------
Total business segments 1,401,864 1,192,584 5,518,570 4,685,849
Less: intercompany eliminations 33,502 8,266 140,518 32,036
---------- ---------- ---------- ----------
Consolidated revenues and sales $1,368,362 $1,184,318 $5,378,052 $4,653,813
========== ========== ========== ==========
Operating Income (Loss):
Wireless $ 180,402 $ 121,215 $ 662,800 $ 497,152
Wireline 129,986 117,904 483,646 461,860
Emerging businesses (12,129) (5,729) (51,276) (23,074)
---------- ---------- ---------- ----------
Total communications 298,259 233,390 1,095,170 935,938
Information services 40,452 36,825 166,278 148,161
Other operations 4,250 5,137 25,039 19,918
---------- ---------- ---------- ----------
Total business segments 342,961 275,352 1,286,487 1,104,017
Corporate operating expenses (5,737) (3,447) (25,142) (18,310)
Merger and integration expenses - - (252,000) -
Provision to reduce carrying value
of certain assets - - (55,000) (16,874)
---------- ---------- ---------- ----------
Total corporate expenses (5,737) (3,447) (332,142) (35,184)
---------- ---------- ---------- ----------
Consolidated operating income $ 337,224 $ 271,905 $ 954,345 $1,068,833
========== ========== ========== ==========
</TABLE>
28
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Business Segment Information, (continued):
Segment assets as of March 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(In thousands)
-------------------------
1999 1998
---- ----
<S> <C> <C>
Wireless $4,199,072 $3,967,983
Wireline 2,941,353 2,754,972
Emerging businesses 249,663 46,998
---------- ----------
Total communications 7,390,088 6,769,953
Information services 882,562 801,786
Other operations 182,977 134,521
---------- ----------
Total business segments 8,455,627 7,706,260
Add: Corporate assets not allocated to segments:
Headquarters fixed assets, net of accumulated depreciation 161,250 112,249
Investments 1,171,806 832,653
Goodwill, net of amortization 104,178 107,180
Other assets 15,439 34,481
Less: elimination of intersegment receivables (47,221) (18,566)
---------- ----------
Consolidated assets $9,861,079 $8,774,257
========== ==========
</TABLE>
7. Litigation-Claims and Assessments:
On July 12, 1996, the Georgia Public Service Commission ("Georgia PSC")
issued an order requiring that ALLTEL's wireline subsidiaries which
operate within its jurisdiction reduce their annual network access charges
by $24 million, prospectively, effective July 1, 1996. The Georgia PSC's
action was in response to the Company's election to move from a
rate-of-return method of pricing to an incentive rate structure, as
provided by a 1995 Georgia telecommunications law. The Company appealed
the Georgia PSC order. On November 6, 1996, the Superior Court of Fulton
County, Georgia, (the "Superior Court") rendered its decision and reversed
the Georgia PSC order, finding, among other matters, that the Georgia PSC
had exceeded its authority by conducting a rate proceeding after the
Company's election of alternative regulation.
The Superior Court did not rule on a number of other assertions made by
the Company as grounds for reversal of the Georgia PSC order. The Georgia
PSC appealed the Superior Court's decision, and on July 3, 1997, the
Georgia Court of Appeals reversed the Superior Court's decision. On
August 5, 1997, the Company filed with the Georgia Supreme Court a
petition for writ of certiorari requesting that the Georgia Court of
Appeals' decision be reversed. On October 5, 1998, the Georgia Supreme
Court, in a 4-3 decision, upheld the Georgia Court of Appeals' ruling that
the Georgia PSC had the authority to conduct the rate proceeding. The case
was returned to the Superior Court for it to rule on the issues it had not
previously decided. On April 6, 1999, the Superior Court found that with
respect to the July 1996 order, the Georgia PSC did not provide ALLTEL
with sufficient notice of the charges against the Company, did not provide
ALLTEL a fair opportunity to present its case and respond to the charges,
and failed to satisfy its burden of proving that ALLTEL's rates were
unjust and unreasonable. Further, the Superior Court found that the July
1996 order was an unlawful attempt to retroactively reduce ALLTEL's rates
and certain statutory revenue recoveries. For each of these independent
reasons, the Superior Court vacated and reversed the July 1996 order and
remanded the case with instructions to dismiss the case. The Georgia PSC
has thirty days from April 23, 1999 to appeal.
At March 31, 1999, the maximum possible liability to the Company related
to this case is $66 million, plus interest at 7 percent accruing from
July 1, 1996. Since the Company believes that it will prevail in this
case, the Company has not implemented any revenue reductions or
established any reserves for refund related to this matter at this time.
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER REPORT TO STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH REPORT.
</LEGEND>
<CIK> 0000065873
<NAME> ALLTEL CORPORATION
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,277
<SECURITIES> 0
<RECEIVABLES> 771,859
<ALLOWANCES> 33,124
<INVENTORY> 92,091
<CURRENT-ASSETS> 975,452
<PP&E> 8,669,120
<DEPRECIATION> 3,664,872
<TOTAL-ASSETS> 9,861,079
<CURRENT-LIABILITIES> 1,120,243
<BONDS> 3,604,100
4,991
9,114
<COMMON> 281,346
<OTHER-SE> 3,296,112
<TOTAL-LIABILITY-AND-EQUITY> 9,861,079
<SALES> 127,617
<TOTAL-REVENUES> 1,368,362
<CGS> 124,046
<TOTAL-COSTS> 1,031,138
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,896
<INCOME-PRETAX> 285,473
<INCOME-TAX> 118,791
<INCOME-CONTINUING> 166,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,450
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
