Exhibit 19
2000 Second Quarter Interim Report
June 30, 2000
This Way to the Future
To ALLTEL Stockholders:
ALLTEL recently announced strong second quarter results from current businesses,
which exclude one-time adjustments. The results reflect the impact of the first
phase of a wireless property exchange with Bell Atlantic and GTE.
The integration of the new markets is going extremely well. We are pleased
to report strong financial results for the quarter that are in line with our
targets.
Among the highlights from current businesses in the second quarter:
o Communications revenue grew 13 percent to $1.4 billion, driven by
wireless growth of 14 percent.
o Revenues and earnings per share grew 9 percent to $1.8 billion and 74
cents.
o Wireless operations added 81,000 customers. Combined with the nearly
690,000 customers acquired in the quarter, ALLTEL's wireless subscriber
base totals 5.9 million.
o Wireless operating cash flow and operating income margins were 42 percent
and 31 percent, respectively.
o Operating income from ALLTEL's wireline business grew 13 percent to $168
million on revenue growth of 5 percent.
o Wireline operating cash flow and operating income margins were 58 percent
and 38 percent, respectively.
o Revenues from emerging businesses grew 46 percent as ALLTEL surpassed 1
million long-distance customers.
o Revenues at ALLTEL Information Services grew by 2 percent to $319 million
and operating cash flow grew by 5 percent to $83 million.
On June 30, ALLTEL completed the remaining wireless property exchanges with
Bell Atlantic and GTE involving properties in 13 states, giving the Company a
strong position in key markets of Phoenix, Cleveland and Tampa.
ALLTEL now has cost-effective access to a wireless footprint covering
nearly 95 percent of the U.S. population.
ALLTEL netted about 690,000 customers in the exchange, increasing the
Company's customer base to 5.9 million and making ALLTEL the fifth largest
wireless carrier in the nation.
ALLTEL is offering profitable national wireless rate plans that eliminate
long-distance and roaming charges for our customers. Our Total Freedom plans,
combined with our bundling strategy, will help us capture an increasing share of
the $46 billion in addressable communications spending that is up for grabs in
our markets.
ALLTEL also took steps to enhance wireless Internet services for our
customers. The Company signed major agreements with InfoSpace, Phone.com and
Software.com.
ALLTEL is committed to providing our customers with access to the Internet
through wireless handsets. We now offer wireless Internet in eight markets and
will roll out the service in the majority of our digital markets by the end of
the third quarter.
In addition, we began deploying equipment for a fixed wireless local loop
trial for residential customers. We are very excited about the opportunity this
technology presents, as it could substantially improve the way we deploy
competitive local telephone service in our wireless markets. We remain on course
to reach 43 cities with our competitive local phone service by the end of 2000.
ALLTEL Information Services finalized plans to open a mortgage processing
and support office in Bingley, West Yorkshire, England. The office is a joint
venture with the Bradford & Bingley Group, a top 10 United Kingdom mortgage
lender.
The joint venture will use ALLTEL's leading-edge technology to further
advance our competitive position in the European market. ALLTEL's results for
the quarter included several one-time items, related primarily to the Bell
Atlantic/GTE property exchanges. ALLTEL reported a $1.4 billion gain from the
transaction and $6.8 million in name-change expenses and restructuring charges.
ALLTEL also had a write-off of $15 million relating to our investment in an
Internet circuit provider.
23
<PAGE>
ALLTEL Announces Stock Repurchase Plan, Declares Quarterly Dividends
--------------------------------------------------------------------
Citing the Company's strong financial performance, ALLTEL's board of directors
recently voted to adopt a stock repurchase plan. The plan would allow the
Company to repurchase up to 7.5 million shares of outstanding common stock.
Shares will be repurchased in open market transactions. The repurchase plan
represents about 2.4 percent of ALLTEL's 315.5 million outstanding common shares
as of June 30, 2000. The stock repurchase program allows us to take advantage of
our strong financial position and deliver increased value to shareholders.
ALLTEL's strong financial position and cash flow will allow us to execute
the repurchase program without materially leveraging the balance sheet.
In addition, ALLTEL's board of directors declared a regular quarterly
dividend of 32 cents per share on the Company's common stock. The dividend is
payable on Oct. 3, 2000, to stockholders of record as of Sept. 11, 2000.
A regular quarterly dividend was also declared on all series of the
Company's preferred stock. Preferred dividends are payable Sept. 15, 2000 to
stockholders of record as of Aug. 28, 2000.
Penske Named to Board of Directors
----------------------------------
Gregory W. Penske has been elected to the ALLTEL board of directors. Penske is
president of Penske Automeotive Group Inc. of El Monte, Calif.
It is an honor for ALLTEL to add Greg Penske to our board of directors.
Greg is an outstanding leader in his industry, and he will lend a valuable voice
to the ALLTEL board.
/s/ Joe Ford
Joe T. Ford,
Chairman and Chief Executive Officer
July 20, 2000
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------------- -------------------------- ---------------------------
(Dollars in thousands,
except per share amounts) 2000 1999 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND SALES:
Service revenues $1,607,086 $1,479,006 $3,108,962 $2,862,667 $6,085,544 $5,581,625
Product sales 167,936 151,637 311,023 283,268 649,877 584,759
---------- ---------- ---------- ---------- ---------- ----------
Total revenues and sales 1,775,022 1,630,643 3,419,985 3,145,935 6,735,421 6,166,384
---------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Operations 927,740 853,139 1,790,296 1,659,418 3,515,654 3,276,015
Cost of products sold 168,570 142,259 307,939 268,391 638,344 582,492
Depreciation and amortization 226,219 212,476 453,676 421,955 893,893 817,608
Merger and integration expenses
and other charges 6,770 - 16,906 - 107,426 252,000
Provision to reduce carrying
value of certain assets - - - - - 55,000
---------- ---------- ---------- ---------- ---------- ---------
Total costs and expenses 1,329,299 1,207,874 2,568,817 2,349,764 5,155,317 4,983,115
---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 445,723 422,769 851,168 796,171 1,580,104 1,183,269
Equity earnings in unconsolidated
partnerships 39,121 29,647 71,718 59,971 116,772 124,703
Minority interest in consolidated
partnerships (32,008) (34,777) (51,756) (64,841) (103,562) (119,917)
Other income, net 11,634 14,421 24,427 27,695 51,203 70,455
Interest expense (76,708) (69,878) (144,937) (138,616) (286,496) (276,824)
Gain on disposal of assets
and other 1,338,085 - 1,338,085 - 1,381,156 80,901
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 1,725,847 362,182 2,088,705 680,380 2,739,177 1,062,587
Income taxes 722,327 148,913 869,143 280,567 1,135,794 496,097
---------- ---------- ---------- ---------- ----------- ----------
Net income 1,003,520 213,269 1,219,562 399,813 1,603,383 566,490
Preferred dividends 40 227 81 459 511 926
---------- ---------- ---------- ---------- ---------- ----------
Net income applicable to
common shares $1,003,480 $ 213,042 $1,219,481 $ 339,354 $1,602,872 $ 565,564
---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $3.18 $.68 $3.87 $1.28 $5.10 $1.83
Diluted $3.15 $.67 $3.84 $1.26 $5.04 $1.81
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
ASSETS 2000 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 5,408 $ 17,595 $ 50,253
Accounts receivable (less allowance for doubtful
accounts of $42,538, $35,017 and $30,207, respectively) 1,045,822 922,159 906,588
Materials and supplies 12,869 15,130 22,022
Inventories 171,023 148,292 115,104
Prepaid expenses and other 295,475 64,003 63,737
----------- ----------- -----------
Total current assets 1,530,597 1,167,179 1,157,704
------------------------------------------------------------------------------------------------------------------------
Investments 1,208,508 1,594,029 1,847,223
Goodwill and other intangibles 3,077,196 1,997,315 1,919,164
------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Wireline 5,406,241 5,194,546 5,002,921
Wireless 4,274,664 3,545,778 3,251,402
Information services 875,364 775,532 739,850
Other 236,373 241,297 178,700
Under construction 471,534 533,854 613,063
----------- ----------- -----------
Total property, plant and equipment 11,264,176 10,291,007 9,785,936
Less accumulated depreciation 5,135,040 4,556,462 4,253,626
----------- ----------- -----------
Net property, plant and equipment 6,129,136 5,734,545 5,532,310
------------------------------------------------------------------------------------------------------------------------
Other assets 321,010 281,135 318,992
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $12,266,447 $10,774,203 $10,775,393
------------------------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 1999
------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 64,012 $ 71,222 $ 80,125
Accounts and notes payable 419,196 508,045 465,848
Advance payments and customer deposits 130,215 117,915 127,027
Accrued taxes 242,428 88,723 115,301
Accrued dividends 101,789 101,607 93,129
Other current liabilities 265,973 306,455 286,588
----------- ----------- -----------
Total current liabilities 1,223,613 1,193,967 1,168,018
------------------------------------------------------------------------------------------------------------------------
Long-term debt 4,441,106 3,750,413 3,856,207
Deferred income taxes 818,336 1,056,921 1,094,759
Other liabilities 528,137 567,165 588,773
------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 512 562 9,105
Common stock 315,519 314,258 312,630
Additional capital 1,080,353 973,356 960,792
Unrealized holding gain on investments 521,027 594,130 647,895
Retained earnings 3,337,844 2,323,431 2,137,214
----------- ----------- -----------
Total shareholders' equity 5,255,255 4,205,737 4,067,636
------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,266,447 $10,774,203 $10,775,393
------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------
Six Months Twelve Months
Ended June 30, Ended June 30,
------------------------- ------------------------
(Dollars in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED FROM OPERATIONS $ 719,694 $ 612,755 $ 1,606,968 $ 1,425,928
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (407,555) (434,657) (979,373) (1,028,861)
Purchase of property, net of cash acquired (625,816) (95,446) (630,316) (131,533)
Additions to capitalized software development costs (32,387) (20,814) (56,665) (65,072)
Additions to investments (20,940) (10,572) (36,456) (26,109)
Proceeds from the sale of investments - - 45,021 101,458
Proceeds from the return on investments 89,339 60,326 116,867 70,735
Proceeds from the sale of assets 224,501 - 224,501 -
Other, net 10,821 (16,822) 11,000 (62,502)
--------- ---------- ---------- ----------
Net cash used in investing activities (762,037) (517,985) (1,305,421) (1,141,884)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on preferred and common stock (201,832) (189,899) (390,109) (339,232)
Reductions in long-term debt (376,656) (235,024) (486,159) (271,900)
Purchase of common stock - - - (2,397)
Distributions to minority investors (38,995) (34,532) (117,757) (98,234)
Preferred stock redemptions and purchases (10) (498) (11,427) (300)
Long term debt issued 632,000 298,174 632,000 333,081
Common stock issued 15,649 28,197 27,060 62,752
---------- ---------- ---------- ---------
Net cash provided from (used in) financing activities 30,156 (133,582) (346,392) (316,230)
-----------------------------------------------------------------------------------------------------------------------
Decrease in cash and short-term investments (12,187) (38,812) (44,845) (32,186)
CASH AND SHORT-TERM INVESTMENTS:
Beginning of the period 17,595 89,065 50,253 82,439
---------- ---------- ---------- ----------
End of the period $ 5,408 $ 50,253 $ 5,408 $ 50,253
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
HIGHLIGHTS (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, Twelve Months Ended June 30,
--------------------------------- ----------------------------------- --------------------------------
Dollars in thousands, % Increase % Increase % Increase
except per share amounts) 2000 1999 (Decrease) 2000 1999 (Decrease) 2000 1999 (Decrease)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM CURRENT BUSINESSES:
Revenues and sales:
Wireless $ 837,065 $ 736,170 14 $1,573,504 $1,402,237 12 $3,073,434 $2,715,043 13
Wireline 438,731 416,142 5 875,362 824,136 6 1,728,683 1,585,727 9
Emerging
businesses 96,517 66,033 46 185,484 125,533 48 340,385 221,791 53
---------- ----------- ----------- ----------- ----------- -----------
Total
communications 1,372,313 1,218,345 13 2,634,350 2,351,906 12 5,142,502 4,522,561 14
Information services 318,690 313,850 2 629,520 619,248 2 1,255,775 1,216,964 3
Other operations 168,311 143,997 17 306,342 261,061 17 625,099 615,849 2
---------- ----------- ----------- ----------- ----------- -----------
Total business
segments 1,859,314 1,676,192 11 3,570,212 3,232,215 10 7,023,376 6,355,374 11
Less: intercompany 84,292 45,549 85 150,227 86,280 74 287,955 188,990 52
eliminations
---------- ----------- ----------- ----------- ----------- -----------
Total revenues
and sales $1,775,022 $1,630,643 9 $3,419,985 $3,145,935 9 $6,735,421 $6,166,384 9
--------------------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Wireless $ 258,562 $ 243,815 6 $ 479,251 $ 440,531 9 $ 925,198 $ 805,142 15
Wireline 167,632 148,348 13 338,256 295,715 14 661,605 565,000 17
Emerging businesses (12,400) (8,893) (39) (25,823) (18,539) (39) (54,525) (41,569) (31)
---------- ---------- ---------- ---------- ---------- ----------
Total
communications 413,794 383,270 8 791,684 717,707 10 1,532,278 1,328,573 15
Information service 44,058 43,286 2 86,131 83,738 3 177,709 170,197 4
Other operations 4,578 6,064 (25) 8,953 10,314 (13) 20,200 23,973 (16)
---------- ---------- ---------- ---------- ---------- ----------
Total business
segments 462,430 432,620 7 886,768 811,759 9 1,730,187 1,522,743 14
Corporate expenses 9,937 9,851 1 18,694 15,588 20 42,657 32,474 31
---------- ---------- ---------- ---------- ---------- ----------
Total operating
income $ 452,493 $ 422,769 7 $ 868,074 $ 796,171 9 $1,687,530 $1,490,269 13
--------------------------------------------------------------------------------------------------------------------------------
Net income $ 232,466 $ 213,269 9 $ 454,387 $ 399,813 14 $ 877,067 $ 751,857 17
Basic earnings
per share $.74 $.68 9 $1.44 $1.28 13 $2.79 $2.43 15
Diluted earnings
per share $.73 $.67 9 $1.43 $1.26 13 $2.76 $2.40 15
--------------------------------------------------------------------------------------------------------------------------------
AS REPORTED:
Revenues and sales $1,775,022 $1,630,643 9 $3,419,985 $3,145,935 9 $6,735,421 $6,166,384 9
Operating income $ 445,723 $ 422,769 5 $ 851,168 $ 796,171 7 $1,580,104 $1,183,269 34
Net income $1,003,520 $ 213,269 371 $1,219,562 $ 399,813 205 $1,603,383 $ 566,490 183
Basic earnings
per share $3.18 $.68 368 $3.87 $1.28 202 $5.10 $1.83 179
Diluted earnings
per share $3.15 $.67 370 $3.84 $1.26 205 $5.04 $1.81 178
---------------------------------------------------------------------------------------------------------------------------------
Weighted average
common shares 315,413,000 312,481,000 1 315,194,000 312,040,000 1 314,419,000 309,345,000 2
Annual dividend per
common share $1.28 $1.22 5
Capital expenditures $ 249,325 $ 231,966 7 $ 407,555 $ 434,657 (6) $ 979,373 $1,028,861 (5)
Total assets $12,266,447 $10,775,393 14
Wireless customers 5,893,445 4,767,453 24
Wireline customers 2,519,952 2,362,502 7
Long-distance
customers 1,040,740 726,348 43
------------------------------------------------------------------------------------------------------------------------------------
<FN>
Current businesses excludes the merger and integration expenses and other charges, provision to reduce carrying value of
certain assets, and gain on disposal of assets. Emerging businesses includes the long-distance, local competitive access,
Internet access, network management and PCS operations.
</FN>
</TABLE>
28
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General:
-------
Basis of Presentation - The consolidated financial statements at June 30,
2000 and 1999 and for the three, six and twelve month periods then ended
for ALLTEL Corporation ("ALLTEL" or the "Company") are unaudited. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting
and Securities and Exchange Commission rules and regulations. Certain
information and footnote disclosures have been condensed or omitted
pursuant to such rules and regulations. The consolidated financial
statements 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 presented.
Change in Reporting Wireless Roaming Revenues - During the second quarter
of 2000, the Company changed the reporting presentation for wireless
customer roaming revenues to a gross basis. This change conforms the
Company's financial reporting policies to prevailing wireless industry
practice and is consistent with the reporting policies of the recently
acquired Bell Atlantic Corporation ("Bell Atlantic") and GTE Corporation
("GTE") properties. Previously, the Company netted these revenues against
roaming charges from other wireless service providers and included the net
amount in operations expense. Prior period revenue and operating expense
information has been reclassified to conform to the new reporting
presentation. This change does not affect previously reported operating
income or net income of the Company.
2. Exchange of Wireless Assets:
---------------------------
On January 31, 2000, ALLTEL, Bell Atlantic, GTE and Vodafone Airtouch
("Vodafone") signed agreements to exchange wireless properties in 13
states. On April 3, 2000, ALLTEL completed the exchange of wireless
properties with Bell Atlantic in 5 states. Through this transaction,
ALLTEL acquired operations in Arizona (including Phoenix), Albuquerque,
New Mexico and El Paso, Texas and divested operations in Nevada and Iowa.
In addition to the transfer of wireless assets, ALLTEL also paid Bell
Atlantic $624.1 million in cash to complete this transaction.
On June 30, 2000, ALLTEL completed the remaining wireless property
exchanges with Bell Atlantic and GTE. As a result, ALLTEL acquired
operations in Florida (including Tampa and Pensacola) Ohio (including
Cleveland), South Carolina and Mobile, Alabama, while divesting operations
in Illinois, Indiana, New York and Pennsylvania. ALLTEL also transferred
to Bell Atlantic or GTE certain of its minority investments in
unconsolidated wireless properties, representing approximately 2.6 million
POPs. In addition to the transfer of the remaining wireless assets, ALLTEL
also received $192.5 million in cash, prepaid vendor credits of $199.6
million and assumed long-term debt of $425.0 million as part of these
transactions.
Through the completion of the above transactions, ALLTEL acquired
interests in 27 wireless markets representing about 14.6 million POPs and
approximately 1,467,000 wireless customers, while divesting interests in
42 wireless markets representing 6.9 million POPs and approximately
778,000 customers. ALLTEL accounted for these exchange transactions as
purchases, and accordingly, the accompanying consolidated financial
statements include the accounts and results of operations of the acquired
wireless properties from the applicable date of acquisition. Under the
purchase method of accounting, tangible and identifiable intangible assets
acquired are recorded at fair value. The excess of the aggregate purchase
price over the fair market value of the net assets acquired of $1.4
billion has been initially allocated to goodwill and is being amortized on
a straight-line basis over 25 years. The fair values and useful lives of
assets acquired have been estimated based on a preliminary valuation and
are subject to final valuation adjustments. ALLTEL has engaged a
third-party appraisal firm to perform a study to determine the allocation
of the total purchase price to the various assets acquired. Accordingly, a
portion of the excess cost may be classified as other intangibles and may
be amortized over different periods other than the goodwill amortization
period of 25 years.
29
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Exchange of Wireless Assets, Continued:
--------------------------------------
The following unaudited pro forma combined results of operations of the
Company assumes that the wireless property exchanges with Bell Atlantic
and GTE were completed as of January 1, 1999 (in thousands, except per
share amounts):
For the Six Months
Ended June 30,
-----------------------------
2000 1999
---- ----
Revenues and sales $3,525,369 $3,294,215
Net income $ 386,213 $ 350,220
Basic earnings per share $1.22 $1.12
Diluted earnings per share $1.21 $1.11
The pro forma amounts represent the historical operating results of the
properties acquired from Bell Atlantic and GTE with appropriate
preliminary adjustments that give effect to depreciation and amortization
and interest expense. The pretax gain of $1,353.1 million (net of related
tax expense of $568.8 million) recognized by ALLTEL related to the
wireless property exchanges has been excluded from the pro forma net
income and earnings per share amounts presented. The pro forma amounts are
not necessarily indicative of the operating results that would have
occurred if the Bell Atlantic and GTE properties had been operated by
ALLTEL during the periods presented. In addition, the pro forma amounts do
not reflect potential cost savings related to full network optimization
and the redundant effect on selling and general and administrative
expenses.
Operating results of the wireless properties divested in the transactions
with Bell Atlantic and GTE included in the Company's consolidated results
of operations for the three, six and twelve months ended June 30, 2000,
were as follows (in thousands):
Three Months Six Months Twelve Months
Ended Ended Ended
---------- -------- ----------
Revenues and sales $85,809 $211,262 $475,592
Operating income $31,391 $ 73,118 $163,914
In conjunction with the exchange of wireless assets completed during the
second quarter, assets acquired, liabilities assumed and assets exchanged
were as follows (in thousands):
Acquired from Acquired from Combined
Bell Atlantic GTE Total
------------- ------------- ------------
Fair value of
assets acquired $ 479,721 $ 767,151 $ 1,246,872
Goodwill and
other intangibles 601,188 800,036 1,401,224
Liabilities assumed - (425,000) (425,000)
Fair value of
assets exchanged (456,776) (1,334,688) (1,791,464)
--------- ----------- -----------
Net cash paid
(received) $ 624,133 $ (192,501) $ 431,632
========= ============ ===========
3. Mergers:
-------
On September 30, 1999, the Company completed mergers with Liberty
Cellular, Inc. ("Liberty") and its affiliate KINI L.C. Under terms of the
merger agreements, the outstanding stock of Liberty and the outstanding
ownership units of KINI L.C. were exchanged for approximately 7.0 million
shares of ALLTEL's common stock. On July 2, 1999, the Company completed
its merger with Aliant Communications Inc. ("Aliant"). Under the terms of
the merger agreement, Aliant became a wholly-owned subsidiary of ALLTEL,
and each outstanding share of Aliant common stock was converted into the
right to receive .67 shares of ALLTEL common stock, 23.9 million common
shares in the aggregate. These mergers qualified as tax-free
reorganizations and have been accounted for as poolings-of-interests. The
accompanying consolidated financial statements have been restated to
include the accounts and results of operations of Aliant, Liberty and KINI
L.C. for all periods prior to the mergers.
30
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Mergers, Continued:
------------------
The combined operating results of ALLTEL, Aliant, Liberty and KINI L.C.
include certain eliminations and reclassification adjustments to conform
the accounting and financial reporting policies of the three companies.
Separate and combined unaudited results of operations for certain interim
periods were as follows:
<TABLE>
Three Months Six Months Twelve Months
Ended Ended Ended
(In thousands, except per share amounts) June 30, June 30, June 30,
---------------------------------------- ------------ ---------- -------------
<S> <C> <C> <C>
1999 1999 1999
---- ---- ----
Revenues and sales:
ALLTEL, as reported $1,469,588 $2,837,950 $5,543,510
Aliant 93,127 182,892 359,745
Liberty and KINI L.C. 31,877 59,526 116,522
Change in reporting wireless roaming revenues (see Note 1) 37,283 68,822 155,864
Eliminations and reclassifications (1,232) (3,255) (9,257)
---------- ---------- ----------
Combined $1,630,643 $3,145,935 $6,166,384
========== ========== ==========
Net income:
ALLTEL, as reported $ 190,148 $ 356,830 $ 480,617
Aliant 17,650 32,955 65,617
Liberty and KINI L.C. 5,471 10,028 20,256
---------- ---------- ----------
Combined $ 213,269 $ 399,813 $ 566,490
========== ========== ==========
Combined earnings per share:
Basic $.68 $1.28 $1.83
Diluted $.67 $1.26 $1.81
</TABLE>
In January 1999, the Company completed a merger with Standard Group, Inc.
("Standard"). In September 1999, the Company also completed mergers with
Advanced Information Resources, Limited ("AIR") and Southern Data Systems
("Southern Data"). In connection with the mergers, approximately 6.5
million shares of ALLTEL common stock were issued. All three mergers
qualified as tax-free reorganizations and were accounted for as
poolings-of-interests. Prior period financial information has not been
restated, since the operations of the three acquired companies are not
significant to ALLTEL's consolidated financial statements on either a
separate or aggregate basis. The accompanying consolidated financial
statements include the accounts and results of operations of Standard, AIR
and Southern Data from the applicable date of acquisition.
4. Merger and Integration Expenses and Other Charges:
-------------------------------------------------
In connection with the exchange of wireless assets with Bell Atlantic and
GTE, the Company recorded integration expenses and other charges of $8.8
million during the second quarter of 2000. This charge consisted of $5.0
million in severance and employee benefit costs related to a planned
workforce reduction and $3.8 million in branding and signage costs. The
integration plan, to be completed by September 2000, provides for the
elimination of 22 employees in the Company's wireless operations
management, engineering and sales support functions. As of June 30, 2000,
the Company had paid $0.5 million in severance and employee-related
expenses and 18 of the 22 employee reductions had been completed. Also in
the second quarter of 2000, the Company recorded a $2.0 million reduction
in the merger and integration liability related to its July 1999
acquisition of Aliant. This adjustment primarily reflects a decrease in
severance and employee benefit costs to be paid as a result of reducing
the expected number of Aliant employees to be terminated from 160 to 132.
In an effort to improve the operating efficiency of its information
services business, the Company recorded a restructuring charge of $10.1
million during the first quarter of 2000. This charge consisted of $5.9
million in severance and employee benefit costs related to a planned
workforce reduction and $4.2 million in lease termination costs related to
the consolidation of certain operating locations. The restructuring plan,
which resulted in the elimination of 199 employees, was completed in July
2000.
31
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Merger and Integration Expenses and Other Charges, Continued:
------------------------------------------------------------
As of June 30, 2000, the Company had paid $5.1 million in severance and
employee-related expenses and all of the employee reductions had been
completed. The lease termination costs represent the estimated minimum
contractual commitments over the next one to four years for leased
facilities that the Company has abandoned, net of anticipated sublease
income.
During the third quarter of 1999, the Company recorded a pretax charge of
$90.5 million in connection with its mergers with Aliant, Liberty, AIR and
Southern Data and with certain loss contingencies and other restructuring
activities. The merger and integration expenses, which totaled $73.4
million, included professional and financial advisors' fees of $24.4
million, severance and employee-related expenses of $15.4 million and
other integration costs of $33.6 million. The Company's merger and
integration plan, as approved by ALLTEL's Board of Directors, provided for
a reduction of 160 employees of Aliant and 40 employees of Liberty,
primarily in the corporate support functions, to be substantially
completed by the third quarter of 2000. As previously discussed, in the
second quarter of 2000, the Company reduced the expected number of Aliant
employees to be terminated to 132 and decreased the related accrued
liability by $2.0 million. As of June 30, 2000, the Company had paid $10.0
million in severance and employee-related expenses and 149 out of the
total 172 employee reductions had been completed. The other integration
costs included $12.5 million of lease termination costs, $10.2 million of
costs associated with the early termination of certain service
obligations, and a $4.6 million write-down in the carrying value of
certain in-process and other software development assets that have no
future alternative use or functionality. Also included are other
integration costs incurred in the third quarter consisting of branding and
signage costs of $4.1 million and other expenses of $2.2 million.
The lease termination costs included a cancellation fee of $7.3 million
representing the negotiated settlement to terminate the Company's
contractual commitment to lease building space previously occupied by the
former 360 Communications Company ("360") operations. The lease
termination costs also included a $4.1 million write-off of capitalized
leasehold improvements and $1.1 million in other disposal costs.
The contract termination fees included $5.2 million related to long-term
contracts with an outside vendor for customer billing services to be
provided to the Aliant and Liberty operations. As part of its integration
plan, the Company will convert both the Aliant and Liberty operations to
its own internal billing system. Conversion of the Liberty operations was
completed in November 1999 and conversion of the Aliant operations will
begin in early 2001. The $5.2 million amount represented the termination
fee specified in the contracts. Of the total termination fee, $0.3 million
has been paid with the remainder due upon completion of the conversion of
the Aliant operations to ALLTEL's billing system. The Company also
recorded an additional $5.0 million charge to reflect the actual cost of
terminating its contract with Convergys Corporation ("Convergys") for
customer billing services to be provided to the former 360 operations. In
September 1999, the Company and Convergys agreed to a final contract
termination fee of $55.0 million, of which $50.0 million of termination
costs were recorded in the third quarter of 1998, as discussed below.
Through June 30, 2000, the Company had paid $30.0 million of the
termination fee. In addition to the termination fee, the Company will
continue to pay Convergys for processing customer accounts until all
customers are switched to ALLTEL's billing system, which is expected to be
completed in 2001.
In connection with management's plan to reduce costs and improve operating
efficiencies, the Company recorded a restructuring charge of $17.1 million
during the third quarter of 1999. This charge consisted of $10.8 million
in severance and employee benefit costs related to a planned workforce
reduction and $6.3 million in lease termination costs related to the
consolidation of certain operating locations. The restructuring plan
provided for the elimination of approximately 308 employees in the
Company's wireline operations support functions to be completed by
September 2000. As of June 30, 2000, the Company had paid $6.9 million in
severance and employee-related expenses and 202 of the total 308 employee
reductions had been completed. The lease termination costs represent the
estimated minimum contractual commitments over the next one to four years
for leased facilities that the Company has abandoned.
32
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Merger and Integration Expenses and Other Charges, Continued:
------------------------------------------------------------
During the third quarter of 1998, the Company recorded transaction costs
and one-time charges totaling $252.0 million on a pretax basis related to
the closing of its merger with 360. The merger and integration
expenses included professional and financial advisors' fees of $31.5
million, severance and employee-related expenses of $48.7 million and
integration costs of $171.8 million. The Company's merger and integration
plan, as approved by ALLTEL's Board of Directors, provided for a reduction
of 521 employees, primarily in the corporate support functions. As of June
30, 2000, the Company had paid $47.1 million in severance and
employee-related expenses and substantially all of the employee reductions
had been completed. The integration costs included several adjustments
resulting from the redirection of a number of strategic initiatives based
on the merger with 360 and ALLTEL's expanded wireless presence. These
adjustments included a $60.0 million write-down in the carrying value
of certain in-process software development assets which had no
alternative use or functionality, $50.0 million of costs associated with
the early termination of certain service obligations, branding and signage
costs of $20.7 million, an $18.0 million write-down in the carrying value
of certain assets resulting from a revised PCS deployment plan, and other
integration costs of $23.1 million.
The $50.0 million of costs recorded for contract termination fees related
to the long-term billing contract with Convergys. This amount represented
the present value of the estimated profit to the vendor over the remaining
term of the contract and was the Company's best estimate of the cost of
terminating the billing services contract prior to the expiration of its
term. As previously noted, in September 1999, the Company and Convergys
agreed upon a final termination fee of $55.0 million. The $18.0 million
write-down in the carrying value of certain PCS-related assets included
approximately $15.0 million related to cell site acquisition and
improvement costs and capitalized labor and engineering charges that were
incurred during the initial construction phase of the PCS buildout in
three markets. As a result of the merger with 360, the Company elected not
to continue to complete construction of its PCS network in these three
markets. The remaining $3.0 million of the PCS-related write-down
represented cell site lease termination fees.
The following is a summary of activity related to the liabilities
associated with the Company's merger and integration expenses and other
charges for the twelve months ended June 30:
(In Thousands)
---------------------------
2000 1999
---- ----
Balance, beginning of period $ 68,790 $ -
Merger and integration expenses 109,426 252,000
and other charges
Reversal of accrued severance (2,000) -
liability for Aliant
Non-cash write-down of assets (11,408) (74,800)
Cash outlays (109,986) (108,410)
--------- ---------
Balance, end of period $ 54,822 $ 68,790
========= =========
At June 30, 2000, the remaining unpaid liability related to the Company's
merger and integration and restructuring activities consists of contract
termination fees of $29.9 million, severance and employee-related expenses
of $15.2 million, lease cancellation and termination costs of $6.5
million, and other integration costs of $3.2 million.
33
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Comprehensive Income:
--------------------
Comprehensive income was as follows for the three, six and twelve month
periods ended June 30:
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
------------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
---------------------- ---- ---- ---- ---- ---- ----
Net income $1,003,520 $213,269 $1,219,562 $399,813 $1,603,383 $ 566,490
---------- -------- ---------- -------- ---------- ----------
Other comprehensive income (loss):
Unrealized holding gains (losses)
on investments arising during
the period 42,588 (28,260) (115,795) 162,886 (195,137) 516,740
Income tax expense (benefit) 14,409 (11,320) (42,692) 63,714 (95,454) 202,577
---------- -------- ---------- -------- ---------- ----------
28,179 (16,940) (73,103) 99,172 (99,683) 314,163
---------- -------- ---------- -------- ---------- ----------
Less: reclassification adjustments
for gains included in net income - - - - (43,071) (80,901)
Income tax expense - - - - 15,886 31,733
---------- -------- ---------- -------- ---------- ----------
- - - - (27,185) (49,168)
---------- -------- ---------- -------- ---------- ----------
Other comprehensive income
(loss) before tax 42,588 (28,260) (115,795) 162,886 (238,208) 435,839
Income tax expense (benefit) 14,409 (11,320) (42,692) 63,714 (111,340) 170,844
---------- -------- ---------- -------- ---------- ----------
Other comprehensive income 28,179 (16,940) (73,103) 99,172 (126,868) 264,995
---------- -------- ---------- -------- ---------- ----------
Comprehensive income $1,031,699 $196,329 $1,146,459 $498,985 $1,476,515 $ 831,485
========== ======== ========== ======== ========== ==========
</TABLE>
6. Earnings per Share:
------------------
A reconciliation of the net income and number of shares used in computing
basic and diluted earnings per share was as follows for the three, six and
twelve month periods ended June 30:
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
------------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts) 2000 1999 2000 1999 2000 1999
---------------------------------------- ---- ---- ---- ---- ---- ----
Basic earnings per share:
Net income applicable to
common shares $1,003,480 $213,042 $1,219,481 $399,354 $1,602,872 $565,564
Weighted average common shares
outstanding for the period 315,413 312,481 315,194 312,040 314,419 309,345
---------- -------- ---------- -------- ---------- --------
Basic earnings per share $3.18 $.68 $3.87 $1.28 $5.10 $1.83
===== ==== ===== ===== ===== =====
Diluted earnings per share:
Net income applicable to
common shares $1,003,480 $213,042 $1,219,481 $399,354 $1,602,872 $565,564
Adjustments for convertible securities:
Preferred stock dividends 40 44 81 88 166 178
---------- -------- ---------- -------- ---------- --------
Net income applicable to common
shares assuming conversion $1,003,520 $213,086 $1,219,562 $399,442 $1,603,038 $565,742
---------- -------- ---------- -------- ---------- --------
Weighted average common shares
outstanding for the period 315,413 312,481 315,194 312,040 314,419 309,345
Increase in shares resulting from:
Exercise of stock options 2,421 3,568 2,231 3,550 3,109 3,061
Conversion of preferred stocks 414 448 418 452 427 457
---------- -------- ---------- -------- ---------- --------
Weighted average common shares
outstanding assuming conversion 318,248 316,497 317,843 316,042 317,955 312,863
---------- -------- ---------- -------- ---------- --------
Diluted earnings per share $3.15 $.67 $3.84 $1.26 $5.04 $1.81
===== ==== ===== ===== ===== =====
</TABLE>
34
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. 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 for the three, six and twelve month
periods ended June 30:
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
------------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
---------------------- ---- ---- ---- ---- ---- ----
Revenues and Sales from
External Customers:
Wireless $ 837,065 $ 736,170 $1,573,504 $1,402,237 $3,073,434 $2,715,043
Wireline 422,500 400,472 842,833 794,632 1,669,628 1,530,572
Emerging businesses 83,138 63,585 166,424 120,949 315,484 209,852
---------- ---------- ---------- ---------- ---------- ----------
Total communications 1,342,703 1,200,227 2,582,761 2,317,818 5,058,546 4,455,467
Information services 241,868 245,563 477,692 488,822 966,219 1,007,999
Other operations 106,206 93,747 189,252 171,916 386,118 345,166
---------- ---------- ---------- ---------- ---------- ----------
Total business segments $1,690,777 $1,539,537 $3,249,705 $2,978,556 $6,410,883 $5,808,632
========== =========== ========== ========== ========== ==========
Intersegment Revenues
and Sales:
Wireless $ - $ - $ - $ - $ - $ -
Wireline 16,231 15,670 32,529 29,504 59,055 55,155
Emerging businesses 13,379 2,448 19,060 4,584 24,901 11,939
---------- ---------- ---------- ---------- ---------- ----------
Total communications 29,610 18,118 51,589 34,088 83,956 67,094
Information services 76,822 68,287 151,828 130,426 289,556 208,965
Other operations 62,105 50,250 117,090 89,145 238,981 270,683
---------- ---------- ---------- ---------- ---------- ----------
Total business segments $ 168,537 $ 136,655 $ 320,507 $ 253,659 $ 612,493 $ 546,742
========== ========== ========== ========== ========== ==========
Total Revenues and Sales:
Wireless $ 837,065 $ 736,170 $1,573,504 $1,402,237 $3,073,434 $2,715,043
Wireline 438,731 416,142 875,362 824,136 1,728,683 1,585,727
Emerging businesses 96,517 66,033 185,484 125,533 340,385 221,791
---------- ---------- ---------- ---------- ---------- ----------
Total communications 1,372,313 1,218,345 2,634,350 2,351,906 5,142,502 4,522,561
Information services 318,690 313,850 629,520 619,248 1,255,775 1,216,964
Other operations 168,311 143,997 306,342 261,061 625,099 615,849
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 1,859,314 1,676,192 3,570,212 3,232,215 7,023,376 6,355,374
Less: intercompany
eliminations 84,292 45,549 150,227 86,280 287,955 188,990
---------- ---------- ---------- ---------- ---------- ---------
Total revenues and sales $1,775,022 $1,630,643 $3,419,985 $3,145,935 $6,735,421 $6,166,384
========== ========== ========== ========== ========== ==========
Operating Income (Loss):
Wireless $ 258,562 $ 243,815 $ 479,251 $ 440,531 $ 925,198 $ 805,142
Wireline 167,632 148,348 338,256 295,715 661,605 565,000
Emerging businesses (12,400) (8,893) (25,823) (18,539) (54,525) (41,569)
---------- ---------- ---------- ---------- ---------- ----------
Total communications 413,794 383,270 791,684 717,707 1,532,278 1,328,573
Information services 44,058 43,286 86,131 83,738 177,709 170,197
Other operations 4,578 6,064 8,953 10,314 20,200 23,973
---------- ---------- ---------- ---------- ---------- ----------
Total business segments 462,430 432,620 886,768 811,759 1,730,187 1,522,743
Corporate operations (9,937) (9,851) (18,694) (15,588) (42,657) (32,474)
Merger and integration costs
and other charges (6,770) - (16,906) - (107,426) (252,000)
Provision to reduce carrying
value of certain assets - - - - - (55,000)
---------- ---------- ---------- ---------- ---------- ----------
Total corporate expenses (16,707) (9,851) (35,600) (15,588) (150,083) (339,474)
---------- ---------- ---------- ---------- ---------- ----------
Total operating income $ 445,723 $ 422,769 $ 851,168 $ 796,171 $1,580,104 $1,183,269
========== ========== ========== ========== ========== =========
</TABLE>
35
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Business Segment Information, Continued:
---------------------------------------
Segment assets were as follows as of June 30:
<TABLE>
(Thousands)
----------------------------------
<S> <C> <C>
2000 1999
---- ----
Wireless $ 6,442,298 $ 4,792,030
Wireline 3,054,087 3,158,343
Emerging businesses 424,628 385,789
----------- -----------
Total communications 9,921,013 8,336,162
Information services 881,010 869,444
Other operations 380,387 213,250
----------- -----------
Total business segments 11,182,410 9,418,856
----------- -----------
Add: Corporate assets not allocated to segments:
Headquarters fixed assets, net of accumulated depreciation 222,309 182,112
Investments 930,525 1,140,710
Goodwill, net of amortization 100,567 103,427
Other assets 9,748 33,495
----------- -----------
Total corporate assets 1,263,149 1,459,744
----------- -----------
Less: elimination of intersegment receivables (179,112) (103,207)
----------- -----------
Consolidated assets $12,266,447 $10,775,393
=========== ===========
</TABLE>
8. 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. 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 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 in July 1997,
the Georgia Court of Appeals reversed the Superior Court's decision. In
August 1997, the Company filed with the Georgia Supreme Court a petition
for writ of certiorari requesting that the Georgia Court of Appeals'
decision be reversed. In October 1998, the Georgia Supreme Court 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.
In April 1999, the Superior Court found that with respect to the July 1996
order, the Georgia PSC did not provide ALLTEL with sufficient notice of
the charges against the Company, did not provide ALLTEL a fair opportunity
to present its case and respond to the charges, and failed to satisfy its
burden of proving that ALLTEL's rates were unjust and unreasonable.
Further, the Superior Court found that the July 1996 order was an unlawful
attempt to retroactively reduce ALLTEL's rates and certain statutory
revenue recoveries. For each of these independent reasons, the Superior
Court vacated and reversed the July 1996 order and remanded the case with
instructions to dismiss the case. The Georgia PSC appealed the Superior
Court's April 1999 decision.
36
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Litigation-Claims and Assessments, Continued:
--------------------------------------------
On April 11, 2000, ALLTEL signed a settlement agreement with the Georgia
PSC to settle this case. As part of the agreement, ALLTEL agreed to
accelerate deployment of digital subscriber lines and Internet service to
its customers in Georgia and to reduce certain optional local calling plan
rates. In addition, ALLTEL agreed to future reductions in funds received
from the Georgia Universal Service Fund. These revenue reductions will
total approximately $12 million during the remainder of 2000 and
approximately $18 million annually thereafter. In exchange for the
Company's commitments, the Georgia PSC agreed to withdraw its appeal of
the Superior Court's April 1999 decision.
On June 27, 2000, the Georgia Court of Appeals acknowledged that the case
had been settled and thus its ruling was moot, but denied the motion to
dismiss and reversed the Superior Court's decision. On June 30, 2000, an
attorney for the Georgia PSC notified the Company that the Georgia PSC may
consider the settlement unenforceable in light of the Georgia Court of
Appeals' ruling. ALLTEL has appealed the decision of the Georgia Court of
Appeals to the Georgia Supreme Court, and if necessary, also may file a
separate action to enforce the terms of the settlement agreement. Since
the Company believes that the terms of the settlement agreement will be
enforced, ALLTEL has not established any additional reserves for refund
related to this matter.
9. Subsequent Event-Acquisition of Wireless Assets:
-----------------------------------------------
On July 31, 2000, ALLTEL agreed to purchase wireless properties in New
Orleans and Baton Rouge, Louisiana from SBC Communications, Inc. The
purchase will also include three rural service areas in Iberville, St.
James and Plaquemines parishes. Upon completion of the transaction, ALLTEL
will pay about $400 million in cash and will acquire approximately 160,000
wireless customers and 300,000 paging customers. The transaction is
expected to close later this year.
37
