UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 7, 2000
ALLTEL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-4996 34-0868285
- --------------------------------------------------------------------------------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
One Allied Drive, Little Rock, Arkansas 72202
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
-----------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 7. Financial Statements and Exhibits
ALLTEL Corporation (the "Company") is filing restated audited financial
statements to reflect the Company's July 2, 1999 merger with Aliant
Communications, Inc. and subsidiaries and the Company's September 30, 1999
merges with Liberty Cellular, Inc. and subsidiary and with its affiliate,
KINI L.C. The mergers were accounted for as pooling-of-interests. The
restated audited financial statement information included in this filing
consists of the following:
(a) Audited statements of income for the years ended December 31,
1998, 1997 and 1996.
(b) Audited consolidated balance sheets as of December 31, 1998 and
1997.
(c) Audited consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.
(d) Audited audited statements of shareholders' equity for the years
ended December 31, 1998, 1997 and 1996.
(e) Notes to audited consolidated financial statements for the years
ended December 31, 1998, 1997 and 1996.
(f) Management's Discussion and Analysis of Financial Condition and
Results of Operations for the years ended December 31, 1998, 1997
and 1996.
Exhibits.
See Exhibit Index.
2
<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)
By: /s/ Jeffery R. Gardner
---------------------------------------------
Jeffery R. Gardner
Senior Vice President - Finance and Treasurer
(Principal Financial Officer)
January 7, 2000
3
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibits Page Number
- ------ ----------------------- -----------
23.1 Consent of Arthur Andersen LLP 46
23.2 Consent of KPMG LLP
(Financial statements of Aliant Communications, Inc.
are not included separately in this Form 8-K) 47
23.3 Consent of Ernst & Young LLP
(Financial statements of Liberty Cellular, Inc.
are not included separately in this Form 8-K) 48
23.4 Consent of Sartain Fischbein & Co.
(Financial statements of Liberty Cellular, Inc. for
1996 are not included separately in this Form 8-K) 49
27.1 Financial Data Schedule for the year ended
December 31, 1998 50
99.1 Restated audited consolidated financial statements of
ALLTEL Corporation for the years ended December 31, 1998,
1997 and 1996:
(i) Reports of Independent Public Accountants 6-9
(ii) Audited consolidated statements of income
for the years ended December 31, 1998, 1997
and 1996 10
(iii) Audited consolidated balance sheets as of
December 31, 1998 and 1997 11
(iv) Audited consolidated statements of cash flows
for the years ended December 31, 1998, 1997
and 1996 12
(v) Audited consolidated statements of shareholders'
equity for the years ended December 1998,
1997 and 1996 13
(vi) Notes to audited consolidated financial
statements 14-33
(vii) Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the years ended
December 31, 1998, 1997 and 1996 34-45
4
Exhibit 99.1
ALLTEL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
TOGETHER WITH AUDITORS' REPORT
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ALLTEL Corporation:
We have audited the accompanying consolidated balance sheets of ALLTEL
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Aliant Communications Inc. and subsidiaries and Liberty Cellular,
Inc. and subsidiary, which were acquired during 1999 in transactions accounted
for as poolings of interests, as discussed in Note 2, as of December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998.
Such statements are included in the consolidated financial statements of ALLTEL
Corporation and reflect total assets and total revenues of 8 percent and
8 percent in 1998, 7 percent and 8 percent in 1997, respectively, of the
consolidated totals and reflect 8 percent of total consolidated revenues in
1996. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for those entities, is based solely upon the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of ALLTEL Corporation and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
January 7, 2000
6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors
Aliant Communications Inc.:
We have audited the consolidated balance sheets of Aliant Communications Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aliant
Communications Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
Lincoln, Nebraska
February 5, 1999
7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Liberty Cellular, Inc. and Subsidiary
We have audited the consolidated balance sheets of Liberty Cellular, Inc. and
Subsidiary (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for the years then ended (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Liberty Cellular,
Inc. and Subsidiary at December 31, 1998 and 1997, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/Ernst & Young LLP
Kansas City, Missouri
March 5, 1999
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Liberty Cellular, Inc.
Salina, Kansas
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Liberty Cellular, Inc. and Subsidiary for the year ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the consolidated results of
operations and cash flows, of Liberty Cellular, Inc. and Subsidiary for the
year ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/Sartain Fischbein & Co.
Tulsa, Oklahoma
February 25, 1997
9
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues and Sales:
Service revenues $5,051,269 $4,382,319 $3,898,430
Product sales 575,526 524,639 664,914
---------- ---------- ----------
Total revenues and sales 5,626,795 4,906,958 4,563,344
---------- ---------- ----------
Costs and Expenses:
Operations 2,957,960 2,560,078 2,311,040
Cost of products sold 561,359 501,719 593,863
Depreciation and amortization 774,549 699,096 629,149
Merger and integration expenses 252,000 - -
Provision to reduce carrying value of certain assets 55,000 16,874 120,280
---------- ---------- ----------
Total costs and expenses 4,600,868 3,777,767 3,654,332
---------- ---------- ----------
Operating Income 1,025,927 1,129,191 909,012
Equity earnings in unconsolidated partnerships 114,859 92,087 77,500
Minority interest in consolidated partnerships (104,485) (87,966) (80,073)
Other income, net 54,283 18,385 15,689
Interest expense (278,375) (274,917) (250,841)
Gain on disposal of assets and other 292,672 209,651 (2,278)
---------- ---------- ----------
Income before income taxes 1,104,881 1,086,431 669,009
Income taxes 501,754 433,950 262,283
---------- ---------- ----------
Net income 603,127 652,481 406,726
Preferred dividends 1,248 1,233 1,296
---------- ---------- ----------
Net income applicable to common shares $ 601,879 $ 651,248 $ 405,430
========== ========== ==========
Earnings per Share:
Basic $1.97 $2.12 $1.32
Diluted $1.95 $2.10 $1.31
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands)
Assets 1998 1997
- -----------------------------------------------------------------------------
Current Assets:
Cash and short-term investments $ 89,065 $ 55,425
Accounts receivable (less allowance for
doubtful accounts of $30,207 and
$26,221, respectively) 843,129 783,531
Materials and supplies 20,067 18,971
Inventories 98,443 94,088
Prepaid expenses and other 51,857 40,315
----------- ----------
Total current assets 1,102,561 992,330
- -----------------------------------------------------------------------------
Investments 1,675,792 1,286,002
Goodwill and other intangibles 1,824,225 1,773,827
- -----------------------------------------------------------------------------
Property, Plant and Equipment:
Wireline 4,629,308 4,409,325
Wireless 2,935,172 2,487,657
Information services 678,244 608,953
Other 182,066 169,754
Under construction 652,726 412,352
----------- ------------
Total property, plant and equipment 9,077,516 8,088,041
Less accumulated depreciation 3,814,390 3,265,292
----------- -----------
Net property, plant and equipment 5,263,126 4,822,749
- -----------------------------------------------------------------------------
Other assets 289,750 357,099
- -----------------------------------------------------------------------------
Total Assets $10,155,454 $9,232,007
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance
sheets.
11
<PAGE>
CONSOLIDATED BALANCE SHEETS - continued
December 31,
(Dollars in thousands)
Liabilities and Shareholders' Equity 1998 1997
- ------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 81,012 $ 70,260
Accounts and notes payable 564,399 545,635
Advance payments and customer deposits 143,573 127,026
Accrued taxes 136,382 97,684
Accrued dividends 90,804 61,220
Other current liabilities 330,518 203,026
----------- ----------
Total current liabilities 1,346,688 1,104,851
- ------------------------------------------------------------------------------
Long-term debt 3,678,626 3,849,716
Deferred income taxes 956,296 726,262
Other liabilities 536,807 489,059
Preferred stock, redeemable 5,005 10,124
Shareholders' Equity:
Preferred stock 9,121 9,155
Common stock 306,015 304,656
Additional capital 919,021 888,159
Unrealized holding gain on investments 548,723 300,671
Retained earnings 1,849,152 1,549,354
----------- ----------
Total shareholders' equity 3,632,032 3,051,995
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $10,155,454 $9,232,007
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Provided from Operations:
Net income $ 603,127 $ 652,481 $ 406,726
Adjustments to reconcile net income to net cash
provided from operations:
Depreciation and amortization 774,549 699,096 629,149
Merger and integration expenses, provision to
reduce carrying value of certain assets,
gain on disposal of assets and other 54,830 (109,741) 74,197
Other, net 24,906 56,423 61,693
Increase in deferred income taxes 79,698 42,773 83,967
Changes in operating assets and liabilities:
Accounts receivable (150,078) (147,206) (80,937)
Inventories and materials and supplies (2,295) 4,976 (15,451)
Accounts payable 892 26,036 169,455
Other current liabilities 3,018 47,732 (13,413)
Other, net 17,201 (1,811) (39,255)
---------- ----------- -----------
Net cash provided from operations 1,405,848 1,270,759 1,276,131
---------- ----------- -----------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (998,004) (899,723) (821,204)
Additions to capitalized software development costs (90,136) (74,225) (78,319)
Additions to other intangible assets - (146,526) -
Additions to investments (34,625) (134,037) (58,005)
Purchase of property, net of cash acquired (81,102) (113,213) (352,809)
Proceeds from the sale of investments 326,066 195,903 47,880
Proceeds from the return on investments 58,324 50,336 39,182
Proceeds from the sale of assets - 202,300 38,687
Other, net (45,115) (86,687) (61,928)
---------- ----------- -----------
Net cash used in investing activities (864,592) (1,005,872) (1,246,516)
---------- ----------- ----------
Cash Flows from Financing Activities:
Dividends on preferred and common stock (272,091) (236,004) (225,249)
Reductions in long-term debt (414,876) (73,280) (1,662,725)
Purchase of common stock (15,113) (218,617) (83,763)
Preferred stock redemptions and purchases (5,044) (873) (704)
Distributions to minority investors (102,788) (45,063) (35,426)
Contributions from minority investors 10,000 - 5,636
Long-term debt issued 245,071 295,611 1,951,874
Common stock issued 47,225 13,832 4,860
---------- ----------- -----------
Net cash used in provided from financing activities (507,616) (264,394) (45,497)
---------- ----------- -----------
Increase (decrease) in cash and short-term investments 33,640 493 (15,882)
Cash and Short-term Investments:
Beginning of the year 55,425 54,932 70,814
---------- ----------- -----------
End of the year $ 89,065 $ 55,425 $ 54,932
========== ===========
Supplemental Cash Flow Disclosures:
Interest paid $ 262,865 $ 263,180 $ 216,841
Income taxes paid $ 339,703 $ 312,085 $ 231,812
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
12
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Holding
Preferred Common Additional Gain on Retained
Stock Stock Capital Investments Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $9,241 $307,188 $ 735,587 $208,681 $ 958,037 $2,218,734
- ---------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 406,726 406,726
Other comprehensive loss, net of tax:
Unrealized holding gains on
investments, net of
reclassification adjustments
(See Note 13) - - - 143,186 - 143,186
------ -------- ---------- -------- ---------- ----------
Comprehensive income - - - 143,186 406,726 549,912
------ -------- ---------- -------- ---------- ----------
Acquisition of subsidiaries - 4,810 145,503 - - 150,313
Employee plans, net - 494 4,366 - - 4,860
Conversion of preferred stock and debentures (43) 28 100 - - 85
Repurchase of stock - (2,674) (81,089) - - (83,763)
Capital contributions by Sprint Corporation
in connection with spinoff of a subsidiary - - 253,160 - - 253,160
Other, net - - 867 - - 867
Dividends:
Common - - - - (227,655) (227,655)
Preferred - - - - (1,296) (1,296)
------ -------- ---------- -------- ---------- ----------
Balance at December 31, 1996 $9,198 $309,846 $1,058,494 $351,867 $1,135,812 $2,865,217
- ---------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 652,481 652,481
Other comprehensive loss, net of tax:
Unrealized holding gains on investments,
net of reclassification adjustments
(See Note 13) - - - (51,196) - (51,196)
------ -------- ---------- -------- ---------- ----------
Comprehensive income - - - (51,196) 652,481 601,285
------ -------- ---------- -------- ---------- ----------
Acquisition of subsidiaries - 872 26,348 - - 27,220
Employee plans, net - 722 13,110 - - 13,832
Conversion of preferred stock and debentures (43) 67 266 - - 290
Repurchase of stock - (6,851) (211,766) - - (218,617)
Other, net - - 1,707 - - 1,707
Dividends:
Common - - - - (237,706) (237,706)
Preferred - - - - (1,233) (1,233)
------ -------- --------- -------- ---------- ----------
Balance at December 31, 1997 $9,155 $304,656 $ 888,159 $300,671 $1,549,354 $3,051,995
- ---------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 603,127 603,127
Other comprehensive income, net of tax:
Unrealized holding gains on investments,
net of reclassification adjustments
(See Note 13) - - - 248,052 - 248,052
------ -------- ---------- -------- ---------- ----------
Comprehensive income - - - 248,052 603,127 851,179
------ -------- ---------- -------- ---------- ----------
Employee plans, net - 1,741 45,484 - - 47,225
Conversion of preferred stock and debentures (34) 23 86 - - 75
Repurchase of stock (405) (14,708) (15,113)
Dividends:
Common - - - - (302,081) (302,081)
Preferred - - - - (1,248) (1,248)
------ -------- ---------- -------- ---------- ----------
Balance at December 31, 1998 $9,121 $306,015 $ 919,021 $548,723 $1,849,152 $3,632,032
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Description of Business - ALLTEL Corporation ("ALLTEL" or the "Company")
-----------------------
is a customer-focused information technology company that provides
wireline and wireless communications and information services. The Company
owns subsidiaries that provide wireline local, long-distance, network
access and Internet services, wireless communications and information
processing management services and advanced application software. (See
Note 15 for information regarding ALLTEL's business segments.)
Basis of Presentation - ALLTEL prepares its consolidated financial
---------------------
statements in accordance with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. The estimates and
assumptions used in the accompanying consolidated financial statements are
based upon management's evaluation of the relevant facts and circumstances
as of the date of the financial statements. Actual results may differ from
the estimates and assumptions used in preparing the accompanying
consolidated financial statements.
The consolidated financial statements include the accounts of ALLTEL, its
subsidiary companies and majority-owned partnerships. Investments in 20%
to 50% owned entities and all unconsolidated partnerships are accounted
for using the equity method. Investments in less than 20% owned entities
and in which the Company does not exercise significant influence over
operating and financial policies are accounted for under the cost method.
All intercompany transactions, except those with certain affiliates
described below, have been eliminated in the consolidated financial
statements. Certain prior-year amounts have been reclassified to conform
with the 1998 financial statement presentation.
Service revenues consist of wireless access and network usage revenues,
local service, network access, long distance and miscellaneous wireline
operating revenues, information services' data processing and software
maintenance revenues. Product sales primarily consist of the product
distribution and directory publishing operations and information services'
software licensing revenues and equipment sales.
Transactions with Certain Affiliates - ALLTEL Supply, Inc. sells equipment
------------------------------------
and materials to wireline subsidiaries of the Company ($185.7 million in
1998, $115.8 million in 1997 and $109.2 million in 1996) as well as to
other affiliated and non-affiliated communications companies and related
industries. The cost of equipment and materials sold to the wireline
subsidiaries is included, principally, in wireline plant in the
consolidated financial statements. ALLTEL Information Services, Inc.
provides the data processing services for the Company's wireline
operations ($118.9 million in 1998, $103.9 million in 1997 and $103.2
million in 1996) in addition to other affiliated and non-affiliated
companies. Directory publishing services are provided to the wireline
subsidiaries by ALLTEL Publishing Corporation ("Publishing"). Wireline
revenues and sales include directory royalties received from Publishing
($34.5 million in 1998, $33.5 million in 1997 and $32.2 million in 1996).
These intercompany transactions have not been eliminated because the
directory royalties received from Publishing and the prices charged by the
supply and information services subsidiaries are included in the wireline
subsidiaries' rate base and/or are recovered through the regulatory
process.
Regulatory Accounting - The Company's wireline subsidiaries, except for
---------------------
the former Aliant Communications, Inc. operations, follow the accounting
for regulated enterprises prescribed by Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("SFAS 71"). This accounting recognizes the economic effects
of rate regulation by recording costs and a return on investment as such
amounts are recovered through rates authorized by regulatory authorities.
Accordingly, SFAS 71 requires the Company's wireline subsidiaries to
depreciate wireline plant over useful lives as approved by regulators,
which could be longer than the useful lives that would otherwise be
determined by management. SFAS 71 also requires deferral of certain costs
and obligations based upon approvals received from regulators to permit
recovery of such amounts in future years. The Company's wireline
subsidiaries periodically review the applicability of SFAS 71 based on the
developments in their current regulatory and competitive environments.
Cash and Short-term Investments - Cash and short-term investments consist
-------------------------------
of highly liquid investments with original maturities of three months or
less.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Continued:
Inventories - Inventories are stated at the lower of cost or market value.
-----------
Cost is determined primarily using either an average original cost or
first-in, first-out method of valuation.
Investments - Investments in equity securities are recorded at fair value
-----------
in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115 (See Note 3.) Investments in unconsolidated partnerships are
accounted for using the equity method (See Note 4.) All other investments
are accounted for using the cost method.
Investments were as follows at December 31:
(Thousands)
------------------------
1998 1997
---- ----
Equity securities $ 967,787 $575,501
Investments in unconsolidated partnerships 634,176 629,527
Other cost investments 73,829 80,974
---------- ----------
$1,675,792 $1,286,002
========== ==========
Investments in unconsolidated partnerships include the excess of the
purchase price over the underlying net book value of wireless partnerships
of $299.9 million and $300.7 million as of December 31, 1998 and 1997,
respectively. Amortization expense for the years ended December 31, 1998,
1997 and 1996 was $7.2 million, $6.5 million and $5.8 million,
respectively, and is included in equity earnings from unconsolidated
partnerships in the accompanying consolidated statements of income.
Goodwill and Other Intangibles - Goodwill represents the excess of cost
over the fair value of net assets acquired and is amortized on a
straight-line basis for periods up to 40 years. The Company has acquired
identifiable intangible assets through its acquisitions of interests in
various wireless systems and acquisitions of wireline properties. The cost
of acquired entities is allocated to identifiable assets at the date of
the acquisition and the excess of the total purchase price over the
amounts assigned to identifiable assets is recorded as goodwill.
Intangible assets related to the acquisition of entities in which the
Company does not have a controlling interest are included in investments
in unconsolidated partnerships. At December 31, 1998 and 1997, goodwill,
net of amortization, was $1,577.3 million and $1,601.7 million,
respectively. Amortization expense amounted to $48.9 million in 1998,
$47.8 million in 1997 and $42.0 million in 1996.
Other intangibles consist of the cost of Personal Communications Services
("PCS") licenses including capitalized interest, franchise rights,
cellular licenses, customer lists and trained workforce. The PCS licenses
are amortized upon commencement of operations. The Company began offering
PCS service during 1998, and of the total cost capitalized related to PCS
licenses, $17.5 million was subject to amortization at December 31, 1998.
Amortization of all intangible assets is computed on a straight-line basis
over the periods specified below. Other intangibles were as follows at
December 31:
(Thousands)
--------------------
Amortization Period 1998 1997
------------------- ---- ----
PCS licenses 40 years $163,073 $153,975
Franchise rights 25 years 66,455 -
Cellular licenses 40 years 20,967 19,749
Customer lists 5-13 years 6,732 -
Organizational costs 12 years 18,908 18,765
Trained workforce 14 years 5,800 5,800
-------- --------
281,935 198,289
Accumulated amortization (35,009) (26,167)
-------- --------
Total other intangibles $246,926 $172,122
======== ========
Amortization expense for other intangibles amounted to $8.4 million in
1998, $6.9 million in 1997 and $5.5 million in 1996. The organizational
costs were fully amortized as of December 31, 1998. The carrying value of
goodwill and other intangibles is periodically evaluated by the Company
for the existence of impairment on the basis of whether the intangible
assets are fully recoverable from projected, undiscounted net cash flows
of the related business unit. If not fully recoverable from projected
undiscounted cash flows, an impairment loss would be recognized for the
difference between the carrying value of the intangible asset and its
estimated fair value based on discounted net future cash flows.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Continued: Property, Plant and
Equipment - Property, plant and equipment are stated at original cost.
Depreciation is computed using the straight-line method for financial
reporting purposes. Depreciation expense amounted to $680.7 million in
1998, $619.3 million in 1997 and $552.9 million in 1996. The composite
depreciation rates by class of property as a percent of average
depreciable plant and equipment were:
1998 1997 1996
---- ---- ----
Wireline 6.7% 6.4% 6.3%
Wireless 10.4% 10.4% 10.4%
Information services 17.4% 17.0% 16.8%
Other 5.5% 6.2% 6.8%
The Company capitalizes interest during periods of construction.
Capitalized interest during construction amounted to $23.5 million in
1998, $14.3 million in 1997 and $7.6 million in 1996 and is included in
other income, net in the accompanying consolidated statements of income.
Revenue Recognition - Communications revenues are recognized when billed
-------------------
as determined by contractual arrangements with customers and are primarily
derived from usage of the Company's networks and facilities or under
revenue-sharing arrangements with other telecommunications carriers.
Information services revenues consist of data processing revenue
recognized as services are performed, software licensing revenue
recognized when delivery of the software occurs, and software maintenance
revenue recognized ratably over the maintenance period. Certain long-term
contracts are accounted for using the percentage-of-completion method.
Under this method, revenue and profit are recognized throughout the term
of the contract, based upon estimates of the total costs to be incurred
and revenues to be generated throughout the term of the contract. Changes
in estimates for revenues, costs and profits are recognized in the period
in which they are determinable. Due to the uncertainty of these estimates,
it is reasonably possible that these estimates could change in the near
term and the change could be material to the accompanying consolidated
financial statements. For all other operations, revenue is recognized when
products are delivered or services are rendered to customers.
Included in accounts receivable and other assets are unbilled receivables
primarily related to the information services segment totaling $91.6
million and $185.9 million at December 31, 1998 and 1997, respectively.
Included in these unbilled receivables are amounts totaling $55.0 million
and $94.5 million at December 31, 1998 and 1997, respectively, which
represent costs and estimated earnings in excess of billings related to
long-term contracts accounted for under the percentage-of-completion
method.
Computer Software Development Costs - For the Company's information
-----------------------------------
services operations, research and development expenditures related to
internally developed computer software are charged to expense as incurred.
The development costs of software to be marketed are charged to expense
until technological feasibility is established. After that time, the
remaining software development costs are capitalized and recorded in plant
and other assets in the accompanying consolidated balance sheets. As of
December 31, 1998 and 1997, capitalized software development costs, net of
amortization, were $259.5 million and $206.6 million, respectively.
Amortization of the capitalized amounts is computed on a
product-by-product basis using the straight-line method over the remaining
estimated economic life of the product, not exceeding six years.
Amortization expense amounted to $36.5 million in 1998, $25.1 million in
1997 and $28.1 million in 1996.
The carrying value of capitalized software development costs is
periodically evaluated by the Company. If the net realizable value of the
capitalized software development costs is less than its carrying value, an
impairment loss is recognized for the difference. The determination of net
realizable value requires considerable judgment by management with respect
to certain external factors, including, but not limited to, anticipated
future revenues generated by the software, the estimated economic life of
the software and changes in software and hardware technologies.
Accordingly, it is reasonably possible that estimates of anticipated
future revenues generated by the software, the remaining economic life of
the software, or both, could be reduced in the near term, materially
impacting the carrying value of capitalized software development costs. As
a result of this periodic evaluation, the Company recorded a write-down of
software in 1996. (See Note 9).
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Continued:
Earnings Per Share - Basic earnings per share of common stock was
------------------
determined by dividing net income applicable to common shares by the
weighted average number of common shares outstanding during each year.
Diluted earnings per share reflects the potential dilution that could
occur assuming conversion or exercise of all outstanding preferred stocks
and issued and unexercised stock options. No options were excluded from
the computation of diluted earnings per share at December 31, 1998, while
options to purchase approximately 2,447,000 and 1,326,000 shares of common
stock at December 31, 1997 and 1996, respectively were excluded from the
computation of diluted earnings per share because the effect of including
them was anti-dilutive.
A reconciliation of the net income and numbers of shares used in computing
basic and diluted earnings per share was as follows:
<TABLE>
<CAPTION>
(Thousands, except per share amounts) 1998 1997 1996
------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shares $601,879 $651,248 $405,430
Weighted average common shares
outstanding for the year 305,344 307,884 308,160
-------- -------- --------
Basic earnings per share of common stock $1.97 $2.12 $1.32
===== ===== =====
Diluted earnings per share:
Net income applicable to common shares $601,879 $651,248 $405,430
Adjustments for convertible securities:
Preferred stocks 174 206 220
-------- -------- --------
Net income applicable to common shares,
assuming conversion of above securities $602,053 $651,454 $405,650
======== ======== ========
Weighted average common shares outstanding for
the year 305,344 307,884 308,160
Increase in shares which would result from:
Exercise of stock options 2,551 1,454 1,270
Conversion of convertible preferred stocks 468 523 559
-------- -------- --------
Weighted average common shares, assuming
conversion of the above securities 308,363 309,861 309,989
======== ======== ========
Diluted earnings per share of common stock $1.95 $2.10 $1.31
===== ===== =====
</TABLE>
2. Mergers:
On September 30, 1999, the Company completed mergers with Liberty
Cellular, Inc. ("Liberty") and its affiliate KINI L.C. under definitive
merger agreements entered into on June 22, 1999. Under terms of the merger
agreements, the outstanding stock of Liberty, which operates under the
name Kansas Cellular, 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 a definitive merger agreement
entered into on December 18, 1998. Under the terms of the merger
agreement, Aliant became a wholly-owned subsidiary of ALLTEL, and each
outstanding share of Aliant common stock was converted into the right to
receive .67 shares of ALLTEL common stock, 23.9 million common shares in
the aggregate. The 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. 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 companies.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Mergers, Continued:
Separate and combined results of operations for certain periods prior to
the mergers are as follows:
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended For the Years Ended December 31,
--------------------------------
(In thousands) June 30, 1999 1998 1997 1996
-------------- ------------- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and sales:
ALLTEL, as reported $2,837,950 $5,194,008 $4,545,140 $4,239,467
Aliant 182,892 338,007 286,328 264,225
Liberty amd KINI L.C. 59,526 110,178 92,134 75,348
Eliminations and reclassifications (3,255) (15,398) (16,644) (15,696)
---------- ---------- ---------- ----------
Combined $3,077,113 $5,626,795 $4,906,958 $4,563,344
========== ========== ========== ==========
Net Income:
ALLTEL $356,830 $525,475 $589,381 $351,256
Aliant 32,955 58,059 53,039 44,954
Liberty and KINI L.C. 9,966 19,593 10,061 10,516
-------- -------- -------- --------
Combined $399,751 $603,127 $652,481 $406,726
======== ======== ======== ========
</TABLE>
On July 1, 1998, the Company completed its merger with 360 Communications
Company ("360") under a definitive merger agreement entered into
on March 16, 1998. Under the terms of the merger agreement, 360 became a
wholly-owned subsidiary of the Company. In connection with the merger,
each outstanding share of 360 common stock was converted into the
right to receive .74 shares of the Company's common stock, 92.1 million
common shares in the aggregate. The merger qualified as a tax-free
reorganization and was accounted for as a pooling-of-interests.
Prior to March 7, 1996, 360 was a subsidiary of Sprint Corporation
("Sprint"). On March 7, 1996, Sprint effected a tax-free spinoff of 360
to Sprint shareholders. In conjunction with the spinoff, 360 repaid
$1.4 billion of intercompany debt to Sprint, and Sprint contributed the
remaining intercompany debt, net of receivables from affiliates, to 360
as additional paid-in capital. In addition, a recapitalization of 360's
common stock was effected pursuant to which 360 split its 10 shares of
issued and outstanding common stock into 116.7 million new shares of
common stock to allow for the pro rata distribution of 360 stock to Sprint
shareholders. This distribution was effected as a tax-free dividend.
In connection with the 360 merger, the Company recorded merger and
integration expenses. (See Note 9.)
3. Financial Instruments and Investment Securities:
The carrying amount of cash and short-term investments approximates fair
value due to the short maturity of the instruments. The fair value of
investments was $1,675.8 million in 1998 and $1,286.0 million in 1997
based on quoted market prices and the carrying value of investments for
which there were no quoted market prices. The fair value of the Company's
long-term debt, after deducting current maturities, was estimated to be
$3,912.8 million in 1998 and $3,962.2 million in 1997 compared to a
carrying value of $3,678.6 million in 1998 and $3,849.7 million in 1997.
The fair value estimates were based on the overall weighted rates and
maturities of the Company's long-term debt compared to rates and terms
currently available in the long-term financing markets. The fair value of
the Company's redeemable preferred stock was estimated to be $22.3 million
in 1998 and $22.0 million in 1997 compared to a carrying amount of $5.0
million in 1998 and $10.1 million in 1997. The fair value estimates were
based on the conversion of the Series D convertible redeemable preferred
stock to common stock of the Company and the carrying value of the
redeemable preferred stocks for which there were no quoted market prices.
The fair value of all other financial instruments was estimated by
management to approximate the carrying value.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Financial Instruments and Investment Securities, Continued:
Equity securities owned by the Company have been classified as
available-for-sale and are reported at fair value, with unrealized gains
and losses reported, net of tax, as a separate component of shareholders'
equity. The Company had unrealized gains, net of tax, on investments in
equity securities of $548.7 million, $300.7 million and $351.9 million at
December 31, 1998, 1997 and 1996, respectively, principally derived from
ALLTEL's investment in MCI WorldCom, Inc. common stock. The unrealized
gains, including the related tax impact, are non-cash items and
accordingly have been excluded from the accompanying consolidated
statements of cash flows. During 1998 and 1997, the Company sold a
portion of its investment in MCI WorldCom, Inc. common stock. (See Note
11.)
4. Investments in Unconsolidated Partnerships:
At December 31, 1998, the Company has investments in 52 wireless
partnerships in which it holds a minority ownership interest. The interest
owned in each unconsolidated partnership ranges from approximately 1% to
49%. Unaudited condensed combined financial information for investments
in unconsolidated partnerships was as follows for the years ended
December 31:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
(Thousands)
---------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues and sales $3,120,715 $2,811,724 $2,734,353
---------- ---------- ----------
Operations 1,664,365 1,673,913 1,617,223
Cost of products sold 152,128 83,674 100,663
Depreciation and amortization 358,850 303,225 284,960
---------- ---------- ----------
Total operating expenses 2,175,343 2,060,812 2,002,846
---------- ---------- ----------
Operating income 945,372 750,912 731,507
Non-operating income (expense) (18,414) 1,202 (8,305)
---------- ---------- ----------
Income before cumulative effects of
changes in accounting principles 926,958 752,114 723,202
Cumulative effects of changes in accounting principles, net - (19,278) -
---------- ---------- ----------
Net income $ 926,958 $ 732,836 $ 723,202
-------------------------------------------------------------------------------------------------------------
December 31,
----------------------------
1998 1997
-------------------------------------------------------------------------------------------------------------
Assets:
Current assets $ 634,073 $ 617,291
Non-current assets 2,432,535 2,340,877
---------- ----------
Total assets $3,066,608 $2,958,168
-------------------------------------------------------------------------------------------------------------
Liabilities and equity:
Current liabilities $ 49,602 $ 287,061
Long-term liabilities 19,166 17,920
Equity 2,997,840 2,653,187
---------- ----------
Total liabilities and equity $3,066,608 $2,958,168
-------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Debt:
Long-term debt, after deducting current maturities, was as follows at
December 31:
<TABLE>
<CAPTION>
(Thousands)
--------------------------
1998 1997
---- ----
<S> <C> <C>
Debentures and notes, without collateral,
Weighted rate 7.3% in 1998 and 1997
Weighted maturity 10 years in 1998 and 1997 $2,698,683 $2,535,632
Revolving credit agreements,
Weighted rate 5.7% in 1998 and 6.5% in 1997
Weighted maturity 5 years in 1998 and 1997 578,520 879,920
Rural Telephone Bank and Federal Financing Bank notes,
Weighted rate 7.7% in 1998 and 1997
Weighted maturity 16 years in 1998 and 1997 252,240 255,006
First mortgage bonds and collateralized notes,
Weighted rate 6.3% in 1998 and 8.2% in 1997
Weighted maturity 7 years in 1998 and 4 years in 1997 85,835 110,741
Rural Utilities Service notes,
Weighted rate 4.6% in 1998 and 4.5% in 1997
Weighted maturity 16 years in 1998 and 1997 57,498 61,917
Industrial revenue bonds,
Weighted rate 5.4% in 1998 and 1997
Weighted maturity 9 years in 1998 and 10 years in 1997 5,850 6,500
---------- ----------
Total long-term debt $3,678,626 $3,849,716
========== ==========
Weighted rate 7.0% 7.1%
Weighted maturity 9.5 years 9.1 years
</TABLE>
The Company has a $1 billion revolving credit agreement which has a
termination date of October 1, 2003, with provision for annual extensions.
It is the Company's intention to continue to renew this agreement. The
revolving credit agreement provides for a variety of pricing options. In
connection with its merger with 360, in July 1998, the Company
repaid all borrowings outstanding under a separate $1 billion revolving
credit facility of 360.
The indentures and agreements, as amended, provide, among other things,
for various restrictions on the payment of dividends by the Company.
Retained earnings unrestricted as to the payment of dividends by the
Company amounted to $ million at December 31, 1998. Certain properties
have been pledged as collateral on $401.4 million of obligations.
Interest expense on long-term debt amounted to $277.6 million in 1998,
$273.7 million in 1997 and $249.4 million in 1996. Maturities and sinking
fund requirements for the four years after 1999 for long-term debt
outstanding, excluding the revolving credit agreement, as of December 31,
1998, were $67.2 million, $57.5 million, $60.0 million and $500.2 million
for the years 2000 through 2003, respectively.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Common Stock:
There are 1 billion shares of $1 par value common stock authorized of
which 306,014,857 and 304,655,541 shares were outstanding at December 31,
1998 and 1997, respectively. At December 31, 1998, the Company had
25,936,590 common shares reserved for issuance in connection with
convertible preferred stock (828,812 shares) and stock options (25,107,778
shares).
The Company has stock-based compensation plans. Under these plans, the
Company may grant fixed and performance-based incentive and non-qualified
stock options to officers and other key employees. The maximum number of
shares of the Company's common stock that may be issued to officers and
other key employees under all stock options plans in effect at December
31, 1998 is 26,763,918 shares. Fixed options granted under the stock
option plans generally become exercisable in one to five years from the
date of grant. Certain fixed options granted in 1997 become exercisable in
equal increments over a six-year period beginning three years from the
date of grant. Performance-based options were granted in 1997, and such
options become exercisable one year from the date in which certain
performance goals related to operating income growth and return on
invested capital are achieved for the four most recent consecutive
calendar quarters. Four separate levels of performance goal targets have
been established, each specifying different minimum growth and return
rates. Depending upon which of the four performance goal target levels is
attained, 25%, 50%, 75% or 100% of the option award will vest and become
exercisable.
Under the 1994 Stock Option Plan for Non-employee Directors (the
"Directors' Plan"), the Company grants fixed, non-qualified stock options
to directors for up to 1,000,000 shares of common stock. Under the
Directors' Plan, directors receive a one-time grant to purchase 10,000
shares of common stock. Directors are also granted each year, on the date
of the annual meeting of stockholders, an option to purchase a specified
number of shares of common stock (currently 3,500 shares). Options granted
under the Directors' Plan become exercisable the day immediately preceding
the date of the first annual meeting of stockholders following the date of
grant.
For all plans, the exercise price of the option equals the market value of
the Company's common stock on the date of grant. For fixed stock options,
the maximum term for each option granted is 10 years. Any
performance-based option that remains unvested as of January 29, 2003,
will expire.
The fair value of each stock option granted was estimated using the
Black-Scholes option-pricing model and the following weighted average
assumptions:
1998 1997 1996
---- ---- ----
Expected life 5.2 years 5.6 years 5.5 years
Expected volatility 24.0% 21.6% 23.9%
Dividend yield 1.9% 2.9% 2.0%
Risk-free interest rate 5.4% 6.2% 6.1%
The following is a summary of stock options outstanding, granted,
exercised, forfeited and expired under the Company's stock-based compensation
plans:
<TABLE>
<CAPTION>
Weighted Average Price
Shares Per Share
---------------------------------------- ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 9,744,398 6,657,438 5,757,248 $28.65 $24.70 $22.25
Granted 2,889,320 4,442,720 1,498,342 40.50 32.73 31.57
Exercised (1,829,843) (953,313) (442,936) 24.00 20.19 15.01
Forfeited (566,343) (357,413) (155,216) 33.90 28.64 27.93
Expired (10,553) (45,034) - 38.99 25.79 -
---------- --------- --------- ------ ------ ------
Outstanding at end of period 10,226,979 9,744,398 6,657,438 $32.53 $28.65 $24.70
========== ========= ========= ====== ====== ======
Exercisable at end of period 3,643,826 3,822,526 3,690,632 $26.24 $23.56 $21.50
Non-vested at end of period:
Fixed 6,326,653 5,635,372 2,966,806
Performance-based 256,500 286,500 -
Weighted average fair value of stock
options granted during the year $10.49 $7.66 $8.87
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Common Stock, Continued:
The following is a summary of stock options outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number of Remaining Exercise Price Number of Exercise Price
Exercise Price Options Contractual Life Per Share Options Per Share
---------------- ---------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$11.41 - $16.12 294,446 1.8 years $13.95 294,446 $13.95
$20.00 - $26.94 1,715,448 5.1 years 23.69 1,315,581 22.84
$27.12 - $32.52 3,976,804 7.1 years 30.97 1,979,918 30.02
$33.88 - $41.81 2,298,941 8.8 years 34.73 42,041 35.41
$43.13 - $52.94 1,941,340 9.2 years 43.75 11,840 45.27
---------- --------- ------ --------- ------
10,226,979 7.4 years $32.53 3,643,826 $26.24
========== ========= ====== ========= ======
</TABLE>
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 and related Interpretations in accounting for its stock-based
compensation plans. Accordingly, the Company does not record compensation
expense for any of the fixed stock options granted. For performance-based
options, compensation expense is recognized over the expected vesting
period of the options and is adjusted for changes in the market value of
the Company's common stock. Compensation expense for the performance-based
options amounted to $2.8 million in 1998 and $547,000 in 1997. Had
compensation expense for options granted been determined on the basis of
the fair value of the awards at the date of grant, consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma
amounts for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997 1996
---------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net income: As reported $603,127 $652,481 $406,726
Pro forma $594,164 $646,703 $402,384
Basic earnings per share: As reported $1.97 $2.12 $1.32
Pro forma $1.94 $2.10 $1.30
Diluted earnings per share: As reported $1.95 $2.10 $1.31
Pro forma $1.92 $2.08 $1.29
</TABLE>
The pro forma amounts presented above may not be representative of the
future effects on reported net income and earnings per share, since the
pro forma compensation expense is allocated over the periods in which
options become exercisable, and new option awards may be granted each
year.
7. Employee Benefit Plans and Postretirement Benefits Other Than Pensions:
The Company has trusteed, non-contributory defined benefit pension plans
which provide retirement benefits for eligible employees of the Company.
Assets of the plans include common stock of the Company amounting to $43.8
million and $30.0 million at December 31, 1998 and 1997, respectively.
Pension (credit) expense, including provision for executive compensation
agreements, totaled $(9.2) million in 1998, $(6.4) million in 1997 and
$(0.1) million in 1996.
The Company provides postretirement healthcare and life insurance benefits
for eligible employees. Employees share in the cost of these benefits. The
Company funds the accrued costs of these plans as benefits are paid.
Postretirement expense totaled $10.0 million in 1998, $8.8 million in 1997
and $9.0 million in 1996.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Employee Benefit Plans and Postretirement Benefits Other Than Pensions,
Continued:
The components of the pension and postretirement expense (credit) were as
follows for the years ended December 31:
<TABLE>
<CAPTION>
(Thousands)
----------------------------------------------------------------
Pension Benefits Postretirement Benefits
----------------------------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Benefits earned during the year $14,523 $14,173 $16,127 $ 485 $ 940 $ 924
Interest cost on benefit obligation 38,935 36,130 34,935 7,844 6,886 6,906
Amortization of transition (asset) obligation (2,616) (2,616) (2,616) 976 976 976
Amortization of prior service (credit) cost (538) (538) (538) 169 153 153
Recognized net actuarial (gain) loss (3,572) (3,943) (1,418) 482 (170) 32
Expected return on plan assets (55,976) (49,562) (46,522) - - -
------- ------- -------- ------ ------- ------
Net periodic (credit) expense $(9,244) $(6,356) $ (32) $9,956 $8,785 $8,991
======= ======= ======= ====== ====== ======
</TABLE>
The following table presents a summary of plan assets, projected benefit
obligation and funded status of the plans at December 31:
<TABLE>
<CAPTION>
(Thousands)
--------------------------------------------------
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year $688,011 $613,040 $ - $ -
Employer contributions - - 8,464 9,145
Participant contributions - - 2,354 2,500
Actual return on plan assets 88,398 102,359 - -
Benefits paid (31,991) (27,388) (10,818) (11,645)
-------- -------- -------- ---------
Fair value of plan assets at end of year 744,418 688,011 - -
-------- -------- -------- ---------
Projected benefit obligation at beginning of year 526,482 483,637 108,958 90,955
Benefits earned 14,523 14,173 485 940
Interest cost on projected benefit obligation 38,935 36,130 7,844 6,886
Participant contributions - - 2,354 2,500
Plan amendments 2,488 - - -
Actuarial loss 45,035 19,930 8,017 19,322
Benefits paid (31,991) (27,388) (10,818) (11,645)
-------- -------- -------- ---------
Projected benefit obligation at end of year 595,472 526,482 116,840 108,958
-------- -------- -------- ---------
Plan assets in excess of (less than)
projected benefit obligation 148,946 161,529 (116,840) (108,958)
Unrecognized actuarial (gain) loss (116,560) (134,898) 23,736 17,494
Unrecognized prior service (credit) cost 6,314 3,288 2,305 2,036
Unrecognized net transition (asset) obligation (11,275) (13,890) 13,662 14,638
-------- -------- -------- ---------
Prepaid (accrued) benefit cost $ 27,425 $ 16,029 $(77,137) $ (74,790)
======== ======== ======== =========
</TABLE>
Actuarial assumptions used to calculate the projected benefit obligations
were as follows for the years ended December 31:
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Discount rate 6.9% 7.2% 7.5% 7.7%
Expected return on plan assets 8.5% 8.7% - -
Rate of compensation increase 5.2% 5.2% - -
Healthcare cost trend rate - - 9.1% 10.0%
The healthcare cost trend rate is expected to decrease on a graduated
basis to an ultimate rate of 6 percent in the year 2000. A one percent
increase in the assumed healthcare cost trend rate would increase the
postretirement benefit cost by approximately $583,000 for the year ended
December 31, 1998, and the postretirement benefit obligation as of
December 31, 1998, by approximately $7.0 million. A one percent decrease
in the assumed healthcare cost trend rate would decrease the
postretirement benefit cost by approximately $508,000 for the
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Employee Benefit Plans and Postretirement Benefits Other Than Pensions,
Continued:
year ended December 31, 1998, and the postretirement benefit obligation as
of December 31, 1998, by approximately $6.2 million.
The Company has a non-contributory defined contribution plan in the form
of profit-sharing arrangements for eligible employees, except bargaining
unit employees. The amount of profit-sharing contributions to the plan is
determined annually by the Company's Board of Directors. Profit-sharing
expense amounted to $19.4 million in 1998, $22.8 million in 1997 and $20.4
million in 1996.
The Company also sponsors employee savings plans under section 401(k) of
the Internal Revenue Code. The plans cover substantially all full-time
employees, except bargaining unit employees. Employees may elect to
contribute to the plans a portion of their eligible pretax compensation up
to certain limits as specified by the plans. The Company also makes annual
contributions to the plans. Expense recorded by the Company related to
these plans amounted to $11.4 million in 1998, $15.3 million in 1997 and
$15.6 million in 1996.
8. Lease Commitments:
Minimum rental commitments for all non-cancelable operating leases,
consisting principally of leases for office space, office equipment, real
estate and tower space, were as follows as of December 31, 1998:
(Thousands)
Year Amount
---- ------
1999 $ 55,333
2000 44,722
2001 38,277
2002 30,917
2003 21,549
Thereafter 78,941
-------
Total $269,739
========
Rental expense totaled $71.3 million in 1998, $60.6 million in 1997 and
$51.0 million in 1996.
9. Merger and Integration Expenses:
During the third quarter of 1998, the Company recorded transaction costs
and one-time charges totaling $252.0 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
December 31, 1998, the Company had paid $16.8 million in severance and
employee-related expenses and 144 out of the total 521 employee reductions
had been completed. The integration costs included several adjustments
resulting from the redirection of a number of strategic initiatives based
on the merger with 360 and ALLTEL's expanded wireless presence. These
adjustments included a $60.0 million write-down in the carrying value of
certain in-process software development assets, $50.0 million of costs
associated with the early termination of certain service obligations,
branding and signage costs of $20.7 million, an $18.0 million write-down
in the carrying value of certain assets resulting from a revised PCS
deployment plan, and other integration costs of $23.1 million.
The estimated cost of contract termination primarily related to a
long-term contract continuing through 2006 with Convergys Corporation
("Convergys") for customer billing services to be provided to the 360
operations, under which the Company is currently paying $45 million per
year. As part of its integration plan, the Company will convert the 360
operations to its own internal billing system by 2001. The $50.0 million
of costs recorded represented the present value of the estimated profit to
the vendor over the remaining term of the contract and was the Company's
best estimate of the cost of terminating the billing services contract
prior to the expiration of its term. In December 1998, Convergys filed a
declaratory judgment suit against the Company requesting a ruling that the
Company did not have the right to terminate the contract. In September
1999, the Company and Convergys agreed upon a final contract termination
fee of $55.0 million. 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. Payments for the
continuing processing services will be expensed as incurred.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Merger and Integration Expenses, Continued:
The $18.0 million write-down in the carrying value of certain PCS-related
assets include approximately $15.0 million related to cell site
acquisition and improvement costs and capitalized labor and engineering
charges that were incurred during the initial construction phase of the
PCS buildout in three markets. As a result of the merger with 360,
the Company elected not to continue to complete construction of its PCS
network in these three markets. The remaining $3.0 million of the
PCS-related write-down represents cell site lease termination fees.
The major action steps of the 360 merger and integration plan
included: (1) the immediate stoppage of further development of a customer
billing system which had no alternative use or functionality, (2) the
immediate negotiation with a vendor of an early termination of a customer
billing contract, and (3) the immediate abandonment of the PCS buildout in
three markets.
The following is a summary of activity related to the liabilities
associated with the Company's merger and integration accrual at
December 31, 1998:
(Thousands)
-----------
Balance, beginning of year $ -
Merger and integration expenses 252,000
Non-cash write-down of assets (74,800)
Cash outlays (85,863)
---------
Balance, end of year $ 91,337
=========
At December 31, 1998, the remaining unpaid liability related to the
Company's merger and integration and restructuring activities consists of
the Convergys contract termination fees of $50.0 million, severance and
employee-related expenses of $31.9 million and other integration costs of
$9.4 million.
The merger and integration expenses decreased net income $201.0 million
for the year ended December 31, 1998.
10. Provision to Reduce Carrying Value of Certain Assets:
In the third quarter of 1998, the Company recorded a non-recurring
operating expense associated with a contingency reserve on an unbilled
receivable of $55.0 million related to its contract with GTE Corporation
("GTE"). Due to its pending merger with Bell Atlantic Corporation, GTE
re-evaluated its billing and customer care requirements and modified its
billing conversion plans and is purchasing certain processing services
from ALLTEL for an interim period. This charge decreased net income by
$33.6 million for the year ended December 31, 1998.
In the second quarter of 1997, the Company recorded a pretax write-down of
$16.9 million to reflect the fair value less cost to sell its product
distribution segment's wire and cable subsidiary, HWC Distribution Corp.
("HWC"). The sale of HWC was completed in May 1997. This write-down
resulted in a decrease in net income of $11.7 million for the year ended
December 31, 1997.
In 1996, the Company incurred non-cash, pretax charges of $120.3 million
to write down the carrying value of certain assets. In accordance with the
Company's plan to dispose of its wire and cable subsidiary, the Company
recorded a pretax write-down of $45.3 million in the carrying value of
goodwill related to HWC. In addition, the information services segment
recorded a pretax write-down of $53.0 million, primarily consisting of an
adjustment to the carrying value of certain capitalized software
development costs. The write-down of software resulted from performing a
net realizability evaluation of software-related products that have been
impacted by changes in software and hardware technologies. Finally, due to
current and projected future operating losses sustained by its community
banking operations, information services also recorded a pretax write-down
of $22.0 million to adjust the carrying value of these operations to their
estimated fair value based upon projections of future cash flows. These
write-downs resulted in a decrease in net income of $72.7 million for the
year ended December 31, 1996.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Gain on Disposal of Assets and Other:
During the third quarter of 1998, the Company recorded a pretax gain of
$80.9 million from the sale of a portion of its investment in MCI
WorldCom, Inc. common stock. Proceeds from this sale amounted to $87.6
million. This transaction increased net income $49.2 million. During the
second quarter of 1998, the Company recorded a pretax gain of $148.2
million from the sale of a portion of its investment in MCI WorldCom, Inc.
common stock. Proceeds from this sale amounted to $162.6 million. The
Company also incurred termination fees of $3.5 million related to the
early retirement of long-term debt. These transactions increased net
income $88.1 million. During the first quarter of 1998, the Company
recorded a pretax gain of $36.6 million primarily from the sale of a
portion of its investment in MCI WorldCom, Inc. common stock. Proceeds
from the sale of stock amounted to $40.7 million. In addition, the Company
recorded a pretax gain of $30.5 million from the sale of its ownership
interest in a cellular partnership serving the Omaha, Neb. market. The
gains from these first quarter transactions resulted in an increase of
$40.4 million in net income.
During the third quarter of 1997, the Company recorded a pretax gain of
$34.4 million primarily related to the sale of its investment in a
software company. During the second quarter of 1997, the Company recorded
a pretax gain of $156.0 million from the sale of a portion of its
investment in MCI WorldCom, Inc. common stock. Proceeds from the sale of
this stock amounted to $185.9 million. During the first quarter of 1997,
the Company recorded a pretax gain of $16.2 million from the sale of
information services' healthcare operations; and the Company recorded a
pretax gain of $3.0 million from the divestiture of its ownership
interests in two unconsolidated partnerships. The net income impact from
these transactions resulted in an increase of $121.5 million in net income
for the year ended December 31, 1997.
In 1996, the Company recorded a pretax gain of $15.3 million from the sale
of wireline properties in Nevada to Citizens Utilities Company. The
Company also incurred $15.8 million of termination fees related to the
early retirement of $200 million of long-term debt, and the Company
realized a pretax loss of $1.8 million related to the withdrawal of its
investment in GO Communications Corporation. These transactions resulted
in a decrease in net income of $1.5 million for the year ended December
31, 1996.
12. Income Taxes:
Income tax expense was as follows:
(Thousands)
---------------------------------------
1998 1997 1996
---- ---- ----
Federal $438,336 $376,407 $210,157
State and other 63,418 57,543 52,126
-------- -------- --------
$501,754 $433,950 $262,283
======== ======== ========
The federal income tax expense consists of the following:
(Thousands)
---------------------------------------
1998 1997 1996
---- ---- ----
Currently payable $409,794 $275,398 $184,964
Deferred 32,827 106,652 34,893
Investment tax credit amortized (4,285) (5,643) (9,700)
-------- ---------- --------
$438,336 $376,407 $210,157
======== ======== ========
Deferred income tax expense results principally from temporary differences
between depreciation expense for income tax purposes and depreciation
expense recorded in the financial statements. Deferred tax balances are
adjusted to reflect tax rates, based on currently enacted tax laws, that
will be in effect in the years in which the temporary differences are
expected to reverse. For the Company's regulated operations, the
adjustment in deferred tax balances for the change in tax rates is
reflected as regulatory assets or liabilities. These regulatory assets and
liabilities are amortized over the lives of the related depreciable asset
or liability concurrent with recovery in rates.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Income Taxes, Continued:
Differences between the federal income tax statutory rates and effective
income tax rates, which include both federal and state income taxes, were
as follows:
1998 1997 1996
---- ---- ----
Statutory income tax rates 35.0% 35.0% 35.0%
Increase (decrease):
Investment tax credit (0.4) (0.5) (1.5)
State income taxes, net of federal benefit 3.7 3.5 5.1
Amortization of intangibles 1.3 1.3 1.8
Merger and integration expenses 4.0 - -
Other items 1.8 0.7 (1.1)
---- ---- ----
Effective income tax rates 45.4% 40.0% 39.3%
==== ==== ====
The significant components of the Company's net deferred income tax
liability were as follows at December 31:
(Thousands)
---------------------
1998 1997
---- ----
Property, plant and equipment $601,000 $580,368
Capitalized computer software 110,547 80,466
Unrealized holding gain on investments 333,963 196,634
Operating loss carryforwards (20,922) (40,629)
Other, net (83,639) (110,139)
-------- --------
940,949 706,700
Valuation allowance 15,347 19,562
-------- ---------
Total $956,296 $726,262
======== ========
At December 31, 1998 and 1997, total deferred tax assets were $246.3
million and $307.9 million, respectively, and total deferred tax
liabilities were $1,202.6 million and $1,034.2 million, respectively.
As of December 31, 1998 and 1997, the Company had available tax benefits
associated with federal and state operating loss carryforwards of $20.9
million and $40.6 million, respectively, which expire annually in varying
amounts to 2012. The valuation allowance primarily represents tax benefits
of certain state operating loss carryforwards and other deferred tax
assets which may expire unutilized.
13. Other Comprehensive Income:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). As required, the Company adopted the
provisions of SFAS 130 in its year-end 1998 financial statements and has
reclassified its prior-year financial statements to conform to SFAS 130's
presentation requirements. For the Company, other comprehensive income
consists of unrealized holding gains on its investments in equity
securities, principally consisting of its investment in MCI WorldCom, Inc.
common stock. The components of other comprehensive income were as follows
for the years ended December 31:
(Thousands)
------------------------------
1998 1997 1996
---- ---- ----
Unrealized holding gains arising in
the period $674,461 $ 69,449 $225,008
Income tax expense 264,964 32,540 81,822
-------- -------- --------
409,497 36,909 143,186
-------- -------- --------
Less: reclassification adjustments
for gains included in net
income for the period (265,644) (155,993) -
Income tax expense 104,199 67,888 -
-------- -------- --------
(161,445) (88,105) -
-------- -------- --------
Other comprehensive income (loss)
before tax 408,817 (86,544) 225,008
Income tax expense (benefit) 160,765 (35,348) 81,822
-------- -------- --------
Other comprehensive income (loss) $248,052 $(51,196) $143,186
======== ======== ========
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Litigation-Claims and Assessments:
On July 12, 1996, the Georgia Public Service Commission ("Georgia PSC")
issued an order requiring that ALLTEL's wireline subsidiaries which
operate within its jurisdiction reduce their annual network access charges
by $24 million, prospectively, effective July 1, 1996. The Georgia PSC's
action was in response to the Company's election to move from a
rate-of-return method of pricing to an incentive rate structure, as
provided by a 1995 Georgia telecommunications law. The Company appealed
the Georgia PSC order. On November 6, 1996, the Superior Court of Fulton
County, Georgia, (the "Superior Court") rendered its decision and reversed
the Georgia PSC order, finding, among other matters, that the Georgia PSC
had exceeded its authority by conducting a rate proceeding after the
Company's election of alternative regulation.
The Superior Court did not rule on a number of other assertions made by
the Company as grounds for reversal of the Georgia PSC order. The Georgia
PSC appealed the Superior Court's decision, and on July 3, 1997, the
Georgia Court of Appeals reversed the Superior Court's decision. On August
5, 1997, the Company filed with the Georgia Supreme Court a petition for
writ of certiorari requesting that the Georgia Court of Appeals' decision
be reversed. On October 5, 1998, the Georgia Supreme Court, in a 4-3
decision, upheld the Georgia Court of Appeals' ruling that the Georgia PSC
had the authority to conduct the rate proceeding. The case was returned to
the Superior Court for it to rule on the issues it had not previously
decided. On April 6, 1999, the Superior Court found that with respect to
the July 1996 order, the Georgia PSC did not provide ALLTEL with
sufficient notice of the charges against the Company, did not provide
ALLTEL a fair opportunity to present its case and respond to the charges,
and failed to satisfy its burden of proving that ALLTEL's rates were
unjust and unreasonable. Further, the Superior Court found that the July
1996 order was an unlawful attempt to retroactively reduce ALLTEL's rates
and certain statutory revenue recoveries. For each of these independent
reasons, the Superior Court vacated and reversed the July 1996 order and
remanded the case with instructions to dismiss the case. The Georgia PSC
appealed the Superior Court's April 1999 decision.
At December 31, 1998, the maximum possible liability to the Company
related to this case is $60.0 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.
15. Business Segments:
In 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which requires reporting segment information consistent with
the way management internally disaggregates an entity's operations to
assess performance and to allocate resources. As required, the Company
adopted the provisions of SFAS 131 in its year-end 1998 financial
statements and has restated its prior-year segment information to conform
to SFAS 131's requirements.
ALLTEL disaggregates its business operations based upon differences in
products and services. The Company's communications operations consist of
its wireless, wireline and emerging businesses segments. Wireless
communications and paging services are provided in 25 states in four major
markets: Southeast, Mid-Atlantic, Midwest and West. The Company's wireline
subsidiaries provide primary local service and network access in 15
states. Emerging businesses include the Company's long-distance, local
competitive access, Internet access, network management and PCS
operations. Long-distance and internet access services are marketed in 25
states. The Company is currently providing local competitive access, PCS
and network management services in select areas within its geographically
focused communications markets. Information services provides information
processing, outsourcing services and application software primarily to
financial and telecommunications customers. The principal markets for
information services' products and services are commercial banks,
financial institutions and telecommunications companies in the United
States and major international markets. Other operations consist of the
Company's product distribution and directory publishing operations.
Corporate items represent general corporate expenses, headquarters
facilities and equipment, investments, goodwill and other non-recurring
and unusual items not allocated to the segments.
The accounting policies used in measuring segment assets and operating
results are the same as those described in Note 1. The non-recurring and
unusual items discussed in Notes 9, 10 and 11 are not allocated to the
segments and are included in corporate operations. The Company evaluates
performance of the segments based on segment operating income, excluding
non-recurring and unusual items. The Company accounts for intersegment
sales at current market prices or in accordance with regulatory
requirements.
28
<PAGE>
15. Business Segments, Continued:
(Dollars in thousands)
Information about the Company's business segments was as follows for the year
ended December 31, 1998:
<TABLE>
<CAPTION>
Communications
--------------------------------------------------
Emerging Information Other Total
Wireless Wireline Businesses Total Services Operations Segments
-------- -------- ---------- ----- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues and sales
from unaffiliated
customers:
Domestic $2,339,756 $1,448,817 $ 155,919 $3,944,492 $ 850,841 $338,115 $5,133,448
International - - - - 154,300 - 154,300
---------- ---------- --------- ---------- ---------- -------- ----------
2,339,756 1,448,817 155,919 3,944,492 1,005,141 338,115 5,287,748
Intersegment revenues
and sales - 50,390 11,399 61,789 156,627 263,235 481,651
---------- ---------- --------- ---------- ---------- -------- ----------
Total revenues
and sales 2,339,756 1,499,207 167,318 4,006,281 1,161,768 601,350 5,769,399
---------- ---------- --------- ---------- ---------- -------- ----------
Operating expenses 1,345,568 679,109 191,108 2,215,785 860,385 573,685 3,649,855
Depreciation and
amortization 319,582 289,525 14,187 623,294 138,732 1,739 763,765
Merger and integration
expenses - - - - - - -
Provision to reduce
carrying value of
certain assets - - - - - - -
---------- ---------- --------- ---------- ---------- -------- ----------
Total costs and
expenses 1,665,150 968,634 205,295 2,839,079 999,117 575,424 4,413,620
---------- ---------- --------- ---------- ---------- -------- ----------
Operating income
(loss) 674,606 530,573 (37,977) 1,167,202 162,651 25,926 1,355,779
Equity earnings in
unconsolidated
partnerships 114,859 - - 114,859 - - 114,859
Minority interest in
consolidated
partnerships (104,485) - - (104,485) - - (104,485)
Other income (expense) 29,570 10,506 2,861 42,937 10,646 235 53,818
---------- ---------- --------- ---------- ---------- -------- ----------
Total other income
(expense) 39,944 10,506 2,861 53,311 10,646 235 64,192
---------- ---------- --------- ---------- ---------- -------- ----------
Interest expense (162,725) (62,804) (12,978) (238,507) (12,268) (1,259) (252,034)
Gain on disposal of
assets and other - - - - - - -
---------- ---------- --------- ---------- ---------- -------- ----------
Income before
income taxes 551,825 478,275 (48,094) 982,006 161,029 24,902 1,167,937
Income tax expense
(benefit) 241,314 179,074 (18,562) 401,826 67,602 9,631 479,059
---------- ---------- --------- ---------- ---------- -------- ----------
Net income (loss) $ 310,511 $ 299,201 $ (29,532) $ 580,180 $ 93,427 $ 15,271 $ 688,878
========== ========== ========= ========== =========== ======== ==========
Assets $4,611,493 $3,079,993 $ 217,047 $7,908,533 $ 872,845 $179,850 $8,961,228
Investments in
unconsolidated
partnerships $ 634,176 $ - $ - $ 634,176 $ - $ - $ 634,176
Capital expenditures $ 363,384 $ 319,145 $ 174,578 $ 857,107 $ 111,257 $ 1,489 $ 969,853
</TABLE>
29
<PAGE>
15. Business Segments, Continued:
(Dollars in thousands)
Information about the Company's business segments was as follows for the year
ended December 31, 1998:
Corporate Intercompany Consolidated
Operations Eliminations Total
---------- ------------- ------------
Revenues and sales
from unaffiliated
customers:
Domestic - $ - $ 5,133,448
International - - 154,300
---------- ---------- -----------
- - 5,287,748
Intersegment revenues
and sales - (142,604)a 339,047
---------- ---------- -----------
Total revenues
and sales - (142,604) 5,626,795
---------- ---------- -----------
Operating expenses 12,068 (142,604)a 3,519,319
Depreciation and
amortization 10,784 - 774,549
Merger and integration
expenses 252,000 - 252,000
Provision to reduce
carrying value of
certain assets 55,000 - 55,000
---------- ---------- -----------
Total costs and
expenses 329,852 (142,604) 4,600,868
---------- ---------- -----------
Operating income
(loss) (329,852) - 1,025,927
Equity earnings in
unconsolidated
partnerships - - 114,859
Minority interest in
consolidated
partnerships - - (104,485)
Other income (expense) 465 - 54,283
---------- ---------- -----------
Total other income
(expense) 465 - 64,657
---------- ---------- -----------
Interest expense (26,341) - (278,375)
Gain on disposal of
assets and other 292,672 - 292,672
---------- ---------- -----------
Income before
income taxes (63,056) - 1,104,881
Income tax expense
(benefit) 22,695 - 501,754
---------- ---------- -----------
Net income (loss) $ (85,751) $ - $ 603,127
========== ========== ===========
Assets $1,258,385b $ (64,159)c $10,155,454
Investments in
unconsolidated
partnerships $ - $ - $ 634,176
Capital expenditures $ 28,151 $ - $ 998,004
Notes:
a) Elimination of intersegment revenues and sales. See "Transactions with
Certain Affiliates" in Note 1 for a discussion of intersegment revenues and
sales not eliminated in preparing the consolidated financial statements.
b) Corporate assets consist of headquarters fixed assets ($141,432), investments
($954,601), goodwill ($104,259) and other assets ($58,093) not allocated to
the segments.
c) Elimination of intersegment receivables.
<PAGE>
15. Business Segments, Continued:
(Dollars in thousands)
Information about the Company's business segments was as follows for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
Communications
--------------------------------------------------
Emerging Information Other Total
Wireless Wireline Businesses Total Services Operations Segments
-------- -------- ---------- ----- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues and sales
from unaffiliated
customers:
Domestic $1,986,807 $1,371,203 $ 94,826 $3,452,836 $730,386 $355,605 $4,538,827
International - - - - 114,918 - 114,918
---------- ---------- -------- ---------- -------- -------- ----------
1,986,807 1,371,203 94,826 3,452,836 845,304 355,605 4,653,745
Intersegment revenues
and sales - 45,069 5,944 51,013 128,847 123,317 303,177
---------- ---------- -------- ---------- -------- -------- ----------
Total revenues
and sales 1,986,807 1,416,272 100,770 3,503,849 974,151 478,922 4,956,922
---------- ---------- -------- ---------- -------- -------- ----------
Operating expenses 1,188,922 631,608 112,890 1,933,420 716,907 454,922 3,105,249
Depreciation and
amortization 291,010 278,505 4,300 573,815 112,316 2,068 688,199
Provision to reduce
carrying value of
certain assets - - - - - - -
---------- ---------- -------- ---------- -------- -------- ----------
Total costs and
expenses 1,479,932 910,113 117,190 2,507,235 829,223 456,990 3,793,448
---------- ---------- -------- ---------- -------- -------- ----------
Operating income
(loss) 506,875 506,159 (16,420) 996,614 144,928 21,932 1,163,474
Equity earnings in
unconsolidated
partnerships 92,087 - - 92,087 - - 92,087
Minority interest in
consolidated
partnerships (87,966) - - (87,966) - - (87,966)
Other income (expense) 7,628 8,576 1,197 17,401 (1,152) (21) 16,228
---------- ---------- -------- ---------- -------- -------- ----------
Total other income
(expense) 11,749 8,576 1,197 21,522 (1,152) (21) 20,349
---------- ---------- -------- ---------- -------- -------- ----------
Interest expense (158,710) (62,614) (3,587) (224,911) (12,330) (782) (238,023)
Gain on disposal
of assets and other - - - - - - -
---------- ---------- -------- ---------- -------- -------- ----------
Income before
income taxes 359,914 452,121 (18,810) 793,225 131,446 21,129 945,800
Income tax expense
(benefit) 142,988 166,498 (1,673) 307,813 55,400 7,530 370,743
---------- ---------- -------- ---------- -------- ------- ----------
Net income (loss) $ 216,926 $ 285,623 $(17,137) $ 485,412 $ 76,046 $ 13,599 $575,057
Assets $4,317,819 $3,031,494 $ 92,979 $7,442,292 $809,242 $129,973 $8,381,507
Investments in
unconsolidated
partnerships $ 629,527 $ - $ - $ 629,527 $ - $ - $ 629,527
Capital expenditures $ 396,670 $ 308,076 $ 79,286 $ 784,032 $ 87,937 $ 1,620 $ 873,589
</TABLE>
30
<PAGE>
15. Business Segments, Continued:
(Dollars in thousands)
Information about the Company's business segments was as follows for the year
ended December 31, 1997:
Corporate Intercompany Consolidated
Operations Eliminations Total
---------- ------------- ------------
Revenues and sales
from unaffiliated
customers:
Domestic $ - $ - $4,538,827
International - - 114,918
-------- -------- ----------
- - 4,653,745
Intersegment revenues
and sales - (49,964)a 253,213
-------- -------- ----------
Total revenues
and sales - (49,964) 4,906,958
-------- -------- ----------
Operating expenses 6,512 (49,964)a 3,061,797
Depreciation and
amortization 10,897 - 699,096
Provision to reduce
carrying value of
certain assets 16,874 - 16,874
-------- -------- ----------
Total costs and
expenses 34,283 (49,964) 3,777,767
-------- -------- ----------
Operating income
(loss) (34,283) - 1,129,191
Equity earnings in
unconsolidated
partnerships - - 92,087
Minority interest in
consolidated
partnerships - - (87,966)
Other income (expense) 2,157 - 18,385
-------- -------- ----------
Total other income
(expense) 2,157 - 22,506
-------- -------- ----------
Interest expense (36,894) - (274,917)
Gain on disposal of
assets and other 209,651 - 209,651
-------- -------- ----------
Income before
income taxes 140,631 - 1,086,431
Income tax expense
(benefit) 63,207 - 433,950
-------- -------- ----------
Net income (loss) $ 77,424 $ - $ 652,481
Assets $874,718b $(24,218)c $9,232,007
Investments in
unconsolidated
partnerships $ - $ - $ 629,527
Capital expenditures $ 26,134 $ - $ 899,723
Notes:
a) Elimination of intersegment revenues and sales. See "Transactions with
Certain Affiliates" in Note 1 for a discussion of intersegment revenues and
sales not eliminated in preparing the consolidated financial statements.
b) Corporate assets consist of headquarters fixed assets ($116,532),
investments ($628,912), goodwill ($107,930) and other assets ($21,344) not
allocated to the segments.
c) Elimination of intersegment receivables.
<PAGE>
15. Business Segments, Continued:
(Dollars in thousands)
Information about the Company's business segments was as follows for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
Communications
--------------------------------------------------
Emerging Information Other Total
Wireless Wireline Businesses Total Services Operations Segments
-------- -------- ---------- ----- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues and sales
from unaffiliated
customers:
Domestic $1,666,919 $1,298,450 $ 48,498 $3,013,867 $741,476 $470,066 $4,225,409
International - - - - 93,338 - 93,338
---------- ---------- -------- ---------- -------- -------- ----------
1,666,919 1,298,450 48,498 3,013,867 834,814 470,066 4,318,747
Intersegment revenues
and sales - 43,134 2,810 32,117 125,261 119,874 291,079
---------- ---------- -------- ---------- -------- -------- ----------
Total revenues
and sales 1,666,919 1,341,584 51,308 3,059,811 960,075 589,940 4,609,826
---------- ---------- -------- ---------- -------- -------- ----------
Operating expenses 1,021,116 616,730 52,374 1,690,220 706,817 552,626 2,949,663
Depreciation and
amortization 235,807 263,270 2,624 501,701 112,911 3,347 617,959
Provision to reduce
carrying value of
certain assets - - - - - - -
---------- ---------- -------- ---------- -------- -------- ----------
Total costs and
expenses 1,256,923 880,000 54,998 2,191,921 819,728 555,973 3,567,622
---------- ---------- -------- ---------- -------- -------- ----------
Operating income
(loss) 409,996 461,584 (3,690) 867,890 140,347 33,967 1,042,204
Equity earnings in
unconsolidated
partnerships 77,500 - - 77,500 - - 77,500
Minority interest in
consolidated
partnerships (80,073) - - (80,073) - - (80,073)
Other income (expense) 930 10,232 251 11,413 (1,132) (153) 10,128
--------- ---------- -------- ---------- -------- -------- ----------
Total other income
(expense) (1,643) 10,232 251 8,840 (1,132) (153) 7,555
---------- ---------- -------- ---------- -------- -------- ----------
Interest expense (126,887) (62,987) (1,964) (191,838) (17,728) (1,027) (210,593)
Gain on disposal of
assets and other - - - - - - -
---------- ---------- -------- ---------- -------- -------- ----------
Income before
income taxes 281,466 408,829 (5,403) 684,892 121,487 32,787 839,166
Income tax expense
(benefit) 118,253 148,375 (27) 266,601 50,666 11,864 329,131
---------- ---------- -------- ----------- -------- -------- ----------
Net income (loss) $ 163,213 $ 260,454 $ (5,376) $ 418,291 $ 70,821 $ 20,923 $ 510,035
========== ========== ======== ========== ======== ======== ==========
Assets $3,897,066 $2,963,960 $ 43,889 $6,904,915 $786,662 $192,513 $7,884,090
Investments in
unconsolidated
partnerships $ 493,458 $ - $ - $ 493,458 $ - $ - $ 493,458
Capital expenditures $ 412,848 $ 315,073 $ 4,136 $ 732,057 $ 83,530 $ 1,066 $ 816,653
</TABLE>
31
<PAGE>
15. Business Segments, Continued:
(Dollars in thousands)
Information about the Company's business segments was as follows for the year
ended December 31, 1996:
Corporate Intercompany Consolidated
Operations Eliminations Total
---------- ------------- ------------
Revenues and sales
from unaffiliated
customers:
Domestic $ - $ - $4,225,409
International - - 93,338
--------- -------- ----------
- - 4,318,747
Intersegment revenues
and sales - (46,482)a 244,597
--------- -------- ---------
Total revenues
and sales - (46,482) 4,563,344
--------- -------- ----------
Operating expenses 1,723 (46,482)a 2,904,904
Depreciation and
amortization 11,189 - 629,148
Provision to reduce
carrying value of
certain assets 120,280 - 120,280
--------- -------- ----------
Total costs and
expenses 133,192 (46,482) 3,654,332
--------- -------- ----------
Operating income
(loss) (133,192) - 909,012
Equity earnings in
unconsolidated
partnerships - - 77,500
Minority interest in
consolidated
partnerships - - (80,073)
Other income (expense) 5,561 - 15,689
--------- -------- ----------
Total other income
(expense) 5,561 - 13,116
--------- -------- ----------
Interest expense (40,248) - (250,841)
Gain on disposal of
assets and other (2,278) - (2,278)
--------- -------- ----------
Income before
income taxes (170,157) - 669,009
Income tax expense
(benefit) (66,848) - 262,283
--------- -------- ----------
Net income (loss) $(103,309) $ - $ 406,726
========= ======== ==========
Assets $ 939,503b $(23,952)c $8,799,641
Investments in
unconsolidated
partnerships $ - $ - $ 493,458
Capital expenditures $ 4,551 $ - $ 821,204
Notes:
a) Elimination of intersegment revenues and sales. See "Transactions with
Certain Affiliates" in Note 1 for a discussion of intersegment revenues and
sales not eliminated in preparing the consolidated financial statements.
b) Corporate assets consist of headquarters fixed assets ($95,615), investments
($715,440), goodwill ($96,161) and other assets ($32,287) not allocated to
the segments.
c) Elimination of intersegment receivables.
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION - (Unaudited):
(Dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Total 4th 3rd 2nd 1st
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues and sales $5,626,795 $1,487,028 $1,446,379 $1,414,093 $1,279,295
Operating income $1,025,927 $ 335,603 $ 51,495 $ 337,655 $ 301,174
Net income (loss) $ 603,127 $ 174,082 $ (7,405) $ 252,110 $ 184,340
Preferred dividends 1,248 228 239 485 296
---------- ---------- ---------- ---------- ----------
Net income (loss)
applicable to
common shares $ 601,879 $ 173,854 $ (7,644) $ 251,625 $ 184,044
- --------------------------------------------------------------------------------------
Earnings per share:
Basic $1.97 $.57 $(.03) $.82 $.60
Diluted $1.95 $.56 $(.02) $.82 $.60
- --------------------------------------------------------------------------------------
<FN>
Notes: A. Third quarter 1998 operating income includes transaction costs and one-time charges totaling $252.0 million related to
the closing of the merger with 360. These transaction and one-time charges decreased net income $201.0 million
or $.66 per share. The Company also recorded a pretax charge of $55.0 million resulting from changes in a customer care
and billing contract with a major customer. This charge decreased net income $33.6 million or $.11 per share. In
addition, the Company recorded a pretax gain of $80.9 million from the sale of a portion of its investment in MCI
WorldCom, Inc. common stock. This gain increased net income by $49.2 million or $.16 per share. (See Notes 9, 10
and 11.)
B. Second quarter 1998 net income includes a pretax gain of $148.2 million from the sale of a portion of the Company's
investment in MCI WorldCom, Inc. common stock. The Company also incurred termination fees of $3.5 million related to the
early retirement of long-term debt. These transactions increased net income $88.1 million or $.29 per share.
(See Note 10.)
C. First quarter 1998 net income includes a pretax gain of $36.6 million primarily from the sale of a portion of the
Company's investment in MCI WorldCom, Inc. common stock. In addition, the Company recorded a pretax gain of $30.5
million from the sale of its ownership interest in one unconsolidated partnership. These gains increased net income by
$40.4 million or $.13 per share. (See Note 10.)
</FN>
</TABLE>
32
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION - (Unaudited), Continued:
(Dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Total 4th 3rd 2nd 1st
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues and sales $4,906,958 $1,277,034 $1,238,417 $1,230,992 $1,160,515
Operating income $1,129,191 $ 300,869 $ 305,385 $ 274,925 $ 248,012
Net income (loss) $ 652,481 $ 148,301 $ 168,049 $ 211,203 $ 124,928
Preferred dividends 1,233 299 308 312 314
---------- ---------- ---------- ---------- ----------
Net income (loss)
applicable to
common shares $ 651,248 $ 148,002 $ 167,741 $ 210,891 $ 124,614
- ----------------------------------------------------------------------------------------
Earnings per share:
Basic $2.12 $.48 $.55 $.68 $.40
Diluted $2.10 $.48 $.54 $.68 $.40
- ----------------------------------------------------------------------------------------
<FN>
Notes: D. Third quarter 1997 net income includes a pretax gain of $34.4 million primarily related to the sale of the Company's
investment in a software company. This gain increased net income by $22.6 million or approximately $.07 per share.
(See Note 11.)
E. Second quarter 1997 operating income includes a pretax write-down of $16.9 million to reflect the fair value less cost to
sell the Company's wire and cable operations. This write-down decreased net income $11.7 million or $.04 per share.
In addition, the Company recorded a pretax gain of $156.0 million from the sale of a portion of its investment in MCI
WorldCom, Inc. common stock. This gain increased net income by $88.1 million or $.29 per share. (See Notes 10 and 11.)
F. First quarter 1997 net income includes a pretax gain of $16.2 million from the sale of information services' healthcare
operations. In addition, the Company recorded a pretax gain of $3.0 million from the divestiture of its ownership
interests in two unconsolidated partnerships. These transactions increased net income by $10.8 million or $.03 per
share. (See Note 11.)
G. In the opinion of management, all adjustments necessary for a fair presentation of results for each period have been
included.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 audited
consolidated financial statements, including the notes thereto, for the years
ended December 31, 1998, 1997 and 1996.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial Condition and Results
of Operations of ALLTEL Corporation ("ALLTEL" or the "Company") includes, and
future filings by the Company on Form 10-K, Form 10-Q and Form 8-K and future
oral and written statements by the Company and its management may include,
certain forward-looking statements, including (without limitation) statements
with respect to anticipated future operating and financial performance, growth
opportunities and growth rates, acquisition and divestitive opportunities, Year
2000 compliance and other similar forecasts and statements of expectation. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and "should", and variations of these words and similar expressions,
are intended to identify these forward-looking statements. Forward-looking
statements by the Company and its management are based on estimates,
projections, beliefs and assumptions of management and are not guarantees of
future performance. The Company disclaims any obligation to update or revise any
forward-looking statement based on the occurrence of future events, the receipt
of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Representative examples
of these factors include (without limitation) rapid technological developments
and changes in the telecommunications and information services industries;
ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996 and other similar federal and state
legislation and the federal and state rules and regulations enacted pursuant to
that legislation; regulatory limitations on the Company's ability to change its
pricing for communications services; the possible future unavailability of
accounting under Statement of Financial Accounting Standards No. 71 for the
Company's wireline subsidiaries; continuing consolidation in certain industries,
such as banking, served by the Company's information services business; the
risks associated with relatively large, multi-year contracts in the Company's
information services business; and higher than anticipated expenditures
associated with the Company's Year 2000 efforts. In addition to these factors,
actual future performance, outcomes and results may differ materially because of
other, more general, factors including (without limitation) general industry and
market conditions and growth rates, domestic and international economic
conditions, governmental and public policy changes and the continued
availability of financing in the amounts, at the terms and on the conditions
necessary to support the Company's future business.
COMPLETION OF MERGERS
On September 30, 1999, the Company completed mergers with Liberty Cellular,
Inc. ("Liberty") and its affiliate KINI L.C. under definitive merger agreements
entered into on June 22, 1999. Under terms of the merger agreements, the
outstanding stock of Liberty, which operates under the name Kansas Cellular, 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 a
definitive merger agreement entered into on December 18, 1998. Under terms of
the merger agreement, Aliant became a wholly-owned subsidiary of ALLTEL, and
each outstanding share of Aliant common stock was converted into the right to
receive .67 shares of ALLTEL common stock, 23.9 million common shares in the
aggregate. Each of these mergers qualified as a tax-free reorganization and has
been accounted for as a pooling-of-interests. Accordingly, all prior period
financial information included in this Form 8-K has been restated to include the
accounts and results of operations of Aliant, Liberty and KINI L.C. The
financial statements presented include certain eliminations and
reclassifications to conform the accounting and financial reporting policies of
ALLTEL, Aliant, Liberty and KINI L.C.
On July 1, 1998, ALLTEL completed its merger with 360 Communications
Company ("360"). The merger with 360 was also accounted for as a
pooling of interests. (See Note 2 to the consolidated financial statements for
additional information regarding the merger transaction.)
33
<PAGE>
RESULTS OF OPERATIONS
Revenues and sales increased $719.8 million or 15 percent in 1998, $343.6
million or 8 percent in 1997, and $387.2 million or 9 percent in 1996. Operating
income decreased $103.3 million or 9 percent in 1998, increased $220.2 million
or 24 percent in 1997 and increased $17.1 million or 2 percent in 1996. Growth
in revenues and sales in all three years were affected by various asset
dispositions. In May 1997, the Company completed the sale of its wire and cable
subsidiary, HWC Distribution Corp. ("HWC"), and in January 1997, the Company
sold its information services' healthcare operations. During 1996 and 1995,
ALLTEL sold certain non-strategic wireline properties. In addition to these
asset dispositions, operating income growth in each of the three years in the
period ended December 31, 1998 was also affected by charges to write down the
carrying value of certain assets. Operating income growth for 1998 also reflects
merger and integration expenses related to the merger with 360. Adjusted
to exclude the results from operations for the asset dispositions and to exclude
the impact of the merger and integration expenses and asset write-downs,
revenues and sales would have increased $762.7 million or 16 percent in 1998,
$572.4 million or 13 percent in 1997 and $496.9 million or 13 percent in 1996,
and operating income would have increased $188.3 million or 16 percent in 1998,
$125.7 million or 12 percent in 1997 and $155.4 million or 18 percent in 1996.
Net income decreased $49.4 million or 8 percent in 1998, increased $245.8
million or 60 percent in 1997 and increased $35.8 million or 10 percent in 1996.
Basic and diluted earnings per share both decreased 7 percent in 1998, increased
61 percent in 1997 and increased 9 percent in 1996. Reported net income and
earnings per share include the effects of the asset dispositions, assets
write-downs and merger and integration expenses, as well as, several
non-recurring and unusual items further discussed below. Excluding the impact in
each year of the asset dispositions and all non-recurring and unusual items, net
income would have increased $118.2 million or 22 percent in 1998, $67.4 million
or 14 percent in 1997 and $125.7 million or 36 percent in 1996, and basic and
diluted earnings per share would have increased 23 percent and 22 percent,
respectively in 1998, and both would have increased 14 percent in 1997 and 35
percent in 1996.
Net income and earnings per share adjusted for the asset dispositions,
and all non-extraordinary, non-recurring and unusual items are summarized in the
following tables:
(Dollars in thousands)
- -------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Net income, as reported $603,127 $652,481 $406,726
Disposition of healthcare, wire and cable
and wireline operations - (838) (6,429)
Non-recurring and unusual items, net of tax:
- --------------------------------------------
Merger and integration expenses 200,995 - -
Provision to reduce carrying value of
certain assets 33,605 11,744 72,716
Gain on disposal of assets (179,770) (121,485) (8,465)
Termination fees on early retirement of
long-term debt 2,097 - 9,946
-------- -------- --------
Net income, as adjusted $660,054 $541,902 $474,494
======== ======== ========
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Basic Diluted
--------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings per share, as reported $1.97 $2.12 $1.32 $1.95 $2.10 $1.31
Disposition of healthcare, wire and cable
and wireline operations - - (.02) - - (.02)
Non-recurring and unusual items:
- --------------------------------
Merger and integration expenses .66 - - .65 - -
Provision to reduce carrying value of certain assets .11 .04 .23 .11 .04 .23
Gain on disposal of assets (.59) (.40) (.02) (.58) (.39) (.02)
Termination fees on early retirement
of long-term debt .01 - .03 .01 - .03
----- ----- ----- ------ ----- -----
Earnings per share, as adjusted $2.16 $1.76 $1.54 $2.14 $1.75 $1.53
===== ===== ===== ===== ===== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The net income and earnings per share impact of the asset dispositions, and the
non-recurring and unusual items have been presented as supplemental information
only. The non-recurring and unusual items reflected in the above tables are
discussed below in reference to the caption in the consolidated statements of
income in which they are reported.
34
<PAGE>
Merger and Integration Expenses
- -------------------------------
In 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 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 $60.0 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, $50.0 million of costs associated
with the early termination of certain service obligations, branding and signage
costs of $20.7 million, an $18.0 million write-down in the carrying value of
certain assets resulting from a revised Personal Communications Services ("PCS")
deployment plan, and other integration costs of $23.1 million.
The estimated cost of contract termination primarily relates to a
long-term contract continuing through 2006 with Convergys Corporation
("Convergys") 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. The $50.0 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 $50.0
million amount is the present value of the estimated profit to the vendor over
the remaining term of the contract. In December 1998, Convergys filed a
declaratory judgment suit against the Company requesting a ruling that the
Company did not have the right to terminate the contract. In September 1999, the
Company and Convergys agreed upon a final contract termination fee of $55.0
million. 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. Payments for the continuing processing services will be
expensed as incurred.
The $18.0 million write-down in the carrying value of certain PCS-related
assets include approximately $15.0 million related to cell site acquisition and
improvement costs and capitalized labor and engineering charges that were
incurred during the initial construction phase of the PCS buildout in three
markets. As a result of the merger with 360, the Company elected not to
continue to complete construction of its PCS network in these three markets. The
remaining $3.0 million of the PCS-related write-down represents cell site lease
termination fees.
As a result of its integration efforts, ALLTEL expects to realize
synergies through a reduction in operating expenses of $80 million in 1999 and
$100 million in 2000. Of the total syngeries expected to be realized each year,
ALLTEL estimates 40 percent of the cost savings will result from a reduction in
duplicative salaries and employee benefits, 20 percent from a reduction in
variable network expenses, 20 percent from volume purchase discounts, 10 percent
from a reduction in branding and advertising costs and 10 percent from a
reduction in information technology expenses. At December 31, 1998, the
Company's remaining unpaid liability related to its merger and integration
efforts was $91.3 million, consisting of $50 million of contract termination
fees, $31.9 million of employee-related expenses and $9.4 million of other
integration costs. Cash outlays for the employee-related expenses and other
integration costs are expected to be substantially completed by the end of 1999.
Funding for this liability will be internally financed from operating cash
flows. (See Note 9 to the consolidated financial statements for additional
information regarding the merger and integration expenses.)
Provision to Reduce Carrying Value of Certain Assets
- ----------------------------------------------------
In the third quarter of 1998, the Company recorded a non-recurring operating
expense associated with a contingency reserve on an unbilled receivable of $55.0
million related to its contract with GTE Corporation ("GTE"). Due to its pending
merger with Bell Atlantic Corporation, GTE re-evaluated its billing and customer
care requirements and modified its billing conversion plans and is purchasing
certain processing services from ALLTEL for an interim period.
During 1997, ALLTEL recorded a pretax write-down of $16.9 million to
reflect the fair value less cost to sell its wire and cable subsidiary, HWC.
During 1996, the Company incurred non-cash, pretax charges of $120.3 million to
write down the carrying value of certain assets. In accordance with ALLTEL's
plan to dispose of HWC, the Company recorded a pretax write-down of goodwill in
the amount of $45.3 million. In addition, information services recorded a pretax
write-down of $53.0 million in the carrying value of certain assets primarily
consisting of capitalized software development costs. The write-down of software
resulted from performing a net realizability evaluation of software-related
products that have been impacted by changes in software and hardware
technologies. Information services also recorded a pretax write-down of $22.0
million to adjust the carrying value of its community banking operations to
their estimated fair value based upon projections of future cash flows. (See
Note 10 to the consolidated financial statements for additional information
regarding the asset write-downs discussed in this section.)
35
<PAGE>
Gain on Disposal of Assets and Other
- ------------------------------------
During 1998, the Company recorded pretax gains of $265.7 million from the sale
of a portion of its investment in MCI WorldCom, Inc. ("MCI WorldCom") common
stock. In addition, the Company recorded a pretax gain of $30.5 million
resulting from the sale of its ownership interest in an unconsolidated
partnership. The Company also incurred termination fees of $3.5 million related
to the early retirement of long-term debt.
During 1997, ALLTEL recorded a pretax gain of $156.0 million from the sale
of a portion of its investment in MCI WorldCom, Inc common stock. In addition,
the Company recorded a pretax gain of $37.5 million primarily related to the
sale of its investment in a software company, a pretax gain of $16.2 million
from the sale of information services' healthcare operations, and a pretax gain
of $3.0 million from the sale of its ownership interests in two unconsolidated
partnerships.
In 1996, the Company recorded a pretax gain of $15.3 million from the
sale of wireline properties in Nevada to Citizens Utilities Company
("Citizens"). ALLTEL also incurred $15.8 million of termination fees related to
the early retirement of $200 million of long-term debt. Additionally, ALLTEL
realized a pretax loss of $1.8 million related to the withdrawal of its
investment in GO Communications Corporation ("GOCC"). (See Note 11 to the
consolidated financial statements for additional information regarding these
non-recurring and unusual items recorded in 1998, 1997 and 1996.)
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Communications-Wireless Operations
- ----------------------------------
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------------
Revenues and sales $2,339.8 $1,986.8 $1,666.9
Operating income $ 674.6 $ 506.9 $ 410.0
Total customers 4,452,049 3,824,094 3,223,414
Market penetration rate 11.4% 10.2% 9.1%
Churn 2.1% 2.0% 2.0%
- ---------------------------------------------------------------------
Wireless revenues and sales increased $353.0 million or 18 percent in 1998,
$319.9 million or 19 percent in 1997 and $381.5 million or 30 percent in 1996.
Operating income increased $167.7 million or 33 percent, $96.9 million or 24
percent in 1997 and $124.4 million or 44 percent in 1996. Customer growth
continued, as the number of customers increased 16 percent over 1997, compared
to annual growth rates in customers of 19 percent in 1997 and 39 percent in
1996. ALLTEL placed more than 1,695,000 gross units in service in 1998, compared
to 1,450,000 units in 1997 and 1,302,000 units in 1996. While the rate of
customer growth has declined, the overall market penetration rate (number of
customers as a percentage of the total population in ALLTEL's service areas) has
increased.
Wireless revenues and sales increased in all periods primarily due to the
growth in ALLTEL's customer base. 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. Growth in
revenues and sales in all periods also reflects the acquisition of new wireless
properties and increased ownership interest in existing wireless properties. As
a result of the increased usage in the Company's network facilities, average
monthly revenue per customer increased slightly in 1998 to $47. Average monthly
revenue per customer was $46 for 1997 and $50 for 1996. Average monthly revenue
per customer declined in 1997 primarily due to the migration of existing
customers to lower rate plans, increased penetration into lower-usage market
segments and a reduction in roaming revenue rates. During 1997, as a result of
competition in its service areas, ALLTEL increased its offering of monthly
service plans, which had lower base access rates and included more packaged
airtime minutes. The Company expects that average monthly revenue per customer
will continue to be affected by the industry-wide trends of decreased roaming
revenue rates and continued penetration into lower-usage market segments. In
addition, the growth rate of new customers is expected to decline as the
Company's wireless customer base grows. Accordingly, future revenue growth will
be dependent upon ALLTEL's success in maintaining customer growth in existing
markets, increasing customer usage of the Company's network and providing
customers with enhanced products and services.
Operating income increased in all periods primarily due to the growth in
revenues and sales. Improved margins realized on the sale of wireless equipment,
reductions in branding and other advertising costs and declines in losses
sustained from fraud contributed to the increases in operating income for 1998
and 1997. The reduction in branding and other advertising costs in 1998,
reflects savings realized as a result of the merger, as ALLTEL ceased promotion
of the 360 brand name. Branding and other advertising costs declined in
1997 due to a decrease in promotional activities. Losses sustained from fraud
decreased in 1998 and 1997 primarily due to the Company's continuing efforts to
control unauthorized usage of its customers' wireless telephone numbers that
results in unbillable fraudulent roaming activity. Growth in operating income in
all periods was affected by increases in sales commissions,
customer-service-related expenses and general and administrative expenses
consistent with the overall growth in revenues and sales. Depreciation and
amortization expense also increased in all periods primarily due to growth in
wireless plant in service.
36
<PAGE>
The cost to acquire a new wireless customer represents sales, marketing
and advertising costs and losses on equipment sales for each new customer added.
The cost to acquire a new wireless customer was $290, $281 and $292 for 1998,
1997 and 1996, respectively. The increase in cost to acquire a new customer for
1998 reflects increased commissions paid to national dealers, resulting from
increased sales from external distribution channels, partially offset by
reductions in branding and other advertising costs, as noted above. The decrease
in cost to acquire a new customer for 1997 primarily reflects reduced branding
and advertising costs, as well as the affect of distributing costs over a larger
number of customers acquired, when compared to the corresponding prior-year
period. Although the Company intends to continue to utilize its large dealer
network, ALLTEL has expanded its internal sales distribution channels to include
its own retail stores and kiosks located in shopping malls and other retail
outlets. Incremental sales costs at a Company retail store or kiosk are
significantly lower than commissions paid to national dealers. Accordingly,
ALLTEL intends to manage the costs of acquiring new customers by continuing to
expand and enhance its internal distribution channels.
Communications-Wireline Operations
- ----------------------------------
(Dollars in millions) 1998 1997 1996
- -----------------------------------------------------------------------------
Local service $ 681.0 $ 624.5 $ 562.0
Network access and long-distance 698.6 678.3 673.4
Miscellaneous 119.6 113.5 106.2
-------- -------- --------
Total revenues and sales $1,499.2 $1,416.3 $1,341.6
Operating income $ 530.6 $ 506.2 $ 461.6
Access lines in service 2,181,859 2,062,877 1,944,603
- -----------------------------------------------------------------------------
Wireline's revenues and sales increased $82.9 million or 6 percent in 1998,
increased $74.7 million or 6 percent in 1997 and decreased $69.7 million or 5
percent in 1996. Operating income increased $24.4 million or 5 percent in 1998,
$44.6 million or 10 percent in 1997 and $4.0 million or 1 percent in 1996. As
previously noted, ALLTEL sold certain wireline properties in eight states to
Citizens during 1996 and 1995. The sale of properties to Citizens resulted in
decreases in revenues and sales and operating income in 1996 of $88.4 million
and $31.7 million, respectively. Operating expenses for 1995 also include an
additional charge of $21.6 million related to an early retirement program
offered by a subsidiary. Excluding the impact of the sale of properties to
Citizens and the additional charge for early retirement benefits, wireline's
revenues and sales would have increased $18.7 million or 1 percent in 1996, and
operating income would have increased $14.1 million or 3 percent in 1996.
Local service revenues increased $56.5 million or 9 percent in 1998,
$62.5 million or 11 percent in 1997 and $16.4 million or 3 percent in 1996. The
increases in local service revenues in all periods reflect both growth in
customer access lines and growth in custom calling and other enhanced services
revenues. Customer access lines increased 6 percent in both 1998 and 1997,
reflecting sales of residential and second access lines. Local service revenues
for 1997 also reflect the expansion of local calling areas in North Carolina and
Georgia, which reclassified certain revenues from network access and
long-distance revenues to local service revenues. Local service revenues for
1996 reflect 4 percent growth in customer access lines and increased revenues
from enhanced services, partially offset by lost revenues due to the property
sales to Citizens. Future access line growth is expected to result from
population growth in the Company's service areas, from sales of second access
lines and through strategic acquisitions.
Network access and long-distance revenues increased $20.3 million or 3
percent in 1998, increased $4.9 million or 1 percent in 1997 and decreased $84.7
million or 11 percent in 1996. The increase in network access and long-distance
revenues in 1998 reflect higher volumes of access usage and growth in customer
access lines, partially offset by a reduction in intrastate toll revenues. The
increase in 1997 primarily reflects higher volumes of access usage, partially
offset by the reclassification of certain revenues to local service revenues, as
previously discussed, and a reduction in intrastate toll rates in Nebraska. The
decrease in network access and long-distance revenues in 1996 primarily reflects
the sale of properties to Citizens and the reclassification of certain
long-distance revenues earned in Nebraska from the wireline segment to emerging
businesses, partially offset by higher volumes of access usage.
Total wireline operating expenses increased $58.5 million or 6 percent in
1998, increased $30.1 million or 3 percent in 1997 and decreased $73.7 million
or 8 percent in 1996. Operating expenses for 1998 and 1997 reflect increases in
data processing charges, network-related expenses, depreciation and
amortization, and general administrative expenses. Operating expenses for 1997
also include additional costs incurred by ALLTEL in consolidating its customer
service operations. Operating expenses decreased in 1996 by approximately $56.7
million as a result of the sale of properties to Citizens. Operating expenses
for 1996 when compared to 1995 also reflect a $21.6 million reduction in
employee benefit costs related to the early retirement program, as previously
discussed. The decreases in operating expenses in 1996 attributable to the sale
of properties to Citizens and reduction in employee benefit costs were partially
offset by increased expense for maintenance and repair of cable, digital
electronic switching and circuit equipment and an increase in depreciation
expense.
37
<PAGE>
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
order. In November 1996, the Superior Court of Fulton County, Georgia, (the
"Superior Court") rendered its decision and reversed the Georgia PSC order,
finding, among other matters, that the Georgia PSC had exceeded its authority by
ordering the rate reductions. The Superior Court did not rule on a number of
other assertions made by the Company as grounds for reversal of the Georgia PSC
order. The Georgia PSC appealed the Superior Court's decision, and, in July
1997, the Georgia Court of Appeals (the "Appellate Court") reversed the Superior
Court's decision. The Company appealed to the Georgia Supreme Court, and on
October 5, 1998, the Georgia Supreme Court, in a 4-3 decision, upheld the
Appellate Court's ruling that the Georgia PSC had the authority to conduct the
rate proceeding. The case was returned to the Superior Court for it to rule on
the issues it had not previously decided. On April 6, 1999, the Superior Court
found that, with respect to the July 1996 order, the Georgia PSC did not provide
ALLTEL with sufficient notice of the charges against the Company, did not
provide ALLTEL a fair opportunity to present its case and respond to the
charges, and failed to satisfy its burden of proving that ALLTEL's rates were
unjust and unreasonable. Further, the Superior Court found that the July 1996
order was an unlawful attempt to retroactively reduce ALLTEL's rates and certain
statutory revenue recoveries. For each of these independent reasons, the
Superior Court vacated and reversed the July 1996 order and remanded the case
with instructions to dismiss the case. The Georgia PSC appealed the Superior
Court's April 1999 decision. The Company remains confident that it will
ultimately prevail in this case, and as such, has not implemented any revenue
reductions or established any reserves for refund related to this matter at this
time.
Regulatory Matters-Wireline Operations
- --------------------------------------
ALLTEL's wireline subsidiaries, except for the former Aliant operations,
follow the accounting for regulated enterprises prescribed by Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"). If ALLTEL's wireline subsidiaries no longer
qualified for the provisions of SFAS 71, the accounting impact to the Company
would be an extraordinary non-cash charge to operations of an amount that could
be material. Criteria that would give rise to the discontinuance of SFAS 71
include (1) increasing competition that restricts the wireline subsidiaries'
ability to establish prices to recover specific costs and (2) significant change
in the manner in which rates are set by regulators from cost-based regulation to
another form of regulation. The Company periodically reviews these criteria to
ensure the continuing application of SFAS 71 is appropriate. As a result of the
passage of the Telecommunications Act of 1996 (the "96 Act") and state
telecommunications reform legislation, ALLTEL's wireline subsidiaries could
begin to experience increased competition in their local service areas. To date,
competition has not had a significant adverse effect on the operations of
ALLTEL's wireline subsidiaries.
In 1996, the FCC issued regulations implementing the local competition
provisions of the 96 Act. These regulations established pricing rules for state
regulatory commissions to follow with respect to entry by competing carriers
into the local, intrastate markets of incumbent local exchange carriers
("ILECs") and addressed interconnection, unbundled network elements and resale
rates. The FCC's authority to adopt such pricing rules, including permitting new
entrants to "pick and choose" among the terms and conditions of approved
interconnection agreements, was challenged in federal court by various ILECs and
state regulatory commissions. In 1997, the U.S. Eighth Circuit Court of Appeals
(the "Eighth Circuit Court") vacated the FCC's pricing rules, finding, among
other matters, that the FCC had exceeded its jurisdiction in establishing
pricing rules for intrastate communications services. The Eighth Circuit Court
also ruled that ILECs are not required by the 96 Act to recombine network
elements purchased by requesting carriers on an unbundled basis. The FCC asked
the U.S. Supreme Court ("Supreme Court") to review two interconnection decisions
of the Eighth Circuit Court. In January 1999, the Supreme Court ruled that the
FCC had the jurisdiction to carry out certain local competition provisions of
the 96 Act. These provisions include designing a pricing methodology for states
to follow in determining rates to be charged by ILECs to competitors for
interconnection services and network elements, adopting rules regarding states'
review of pre-existing interconnection agreements between ILECs and other
carriers and adopting rules relating to dialing parity and standards for
granting exemptions to rural ILECs. As part of its ruling, the Supreme Court
reinstated the FCC's "pick and choose" rule. The Supreme Court remanded a
portion of the decision to the Eighth Circuit Court for it to rule on certain
issues that it had not previously decided, such as whether the FCC's pricing
rules are consistent with the 96 Act. Other issues were remanded to the FCC.
In response to the Supreme Court's decision, the FCC recently completed a
rulemaking outlining how it will interpret the "necessary" and "impair"
standards set forth in the 96 Act and which specific network elements it will
require ILECs to unbundle as a result of its interpretation of those standards.
The FCC reaffirmed that ILECs must provide unbundled access to six of the
original seven network elements that it required to be unbundled. The six
network elements consist of loops, including loops used to provide high-capacity
and advanced telecommunications services, network interface devices, local
38
<PAGE>
circuit switching, dedicated and shared transport, signaling and call-related
databases, and operations support systems. Access to ILEC operator and directory
assistance services was the one network element that the FCC omitted. The FCC
also imposed on ILECs the obligation to unbundle other network elements
including access to sub-loops or portions of sub-loops, fiber optic loops and
transport. At this time, the FCC declined to impose any obligations on ILECs to
provide unbundled access to packet switching or to digital subscriber line
access multiplexers. Finally the FCC began a rulemaking regarding the ability of
carriers to use certain unbundled network elements as a substitute for the
ILEC's special access services.
In May 1997, the FCC issued regulations applicable to local exchange
carriers ("LECs") relating to access charge reform and universal service. The
access charge reform regulations are applicable mainly to price cap regulated
local exchange companies. Aliant, which ALLTEL recently acquired, formerly was
subject to price cap regulation; however, the FCC has granted ALLTEL a waiver to
operate Aliant on a rate-of-return basis. ALLTEL expects to transition Aliant to
rate-of-return regulation by July 2000. ALLTEL's other wireline subsidiaries are
not price cap regulated companies, and, accordingly, the access charge
regulations, with few exceptions, are not currently applicable to them. However,
the FCC instituted a rulemaking in June 1998 in which it proposed to amend the
access charge rules for rate-of-return LECs in a manner similar to that earlier
adopted for price cap LECs. The FCC's proposal involves the modification of the
transport rate structure, the reallocation of costs in the transport
interconnection charge and amendments to reflect changes necessary to implement
universal service. The issue of additional pricing flexibility for
rate-of-return LECs is expected to be addressed in a subsequent phase of the
proceeding. Once the access charge rules for rate-of-return LECs are finalized,
ALLTEL will assess the impact, if any, the new rules will have on its wireline
operations.
On October 21, 1999, the FCC adopted two orders involving universal
service. In the first order, the FCC completed development of the cost model
that will be used to estimate non-rural ILECs' forwarding-looking costs of
providing telephone service. In the second order, the FCC adopted a methodology
that uses the costs generated by the cost model to calculate the appropriate
level of support for non-rural carriers serving rural areas. Under the new
funding mechanism, seven states (Alabama, Kentucky, Maine, Mississippi, Vermont,
West Virginia, and Wyoming) will receive high-cost support of approximately $255
million. The new high-cost support mechanism should ensure that rates are
reasonably comparable on average among states, while the states will continue to
ensure that rates are reasonably comparable within their borders. The FCC also
adopted a "hold-harmless" measure, which is intended to prevent potential rate
shocks and disruptions in state rate designs when the new high cost mechanism
takes effect on January 1, 2000. The FCC reiterated that the high cost support
mechanism for rural carriers is not scheduled to be revised until January 1,
2001, at the earliest. The FCC also clarified its interpretation of the
definition of a "rural telephone company" under the Act to refer to the legal
entity that provides local exchange services.
Based upon ALLTEL's review of the FCC's current regulations concerning
the universal service subsidy, it is unlikely that material changes in the
universal service funding for ALLTEL's rural rate-of-return wireline
subsidiaries will occur prior to 2001. In 2001, the universal service subsidy
may change from being based on actual costs to being based on a proxy model for
ALLTEL's rural rate-of-return subsidiaries.
Certain aspects of the original universal service decision were appealed
to the U.S. Fifth Circuit Court of Appeals ("Fifth Circuit Court"). In July
1999, the Fifth Circuit Court ruled on these appeals and affirmed most of the
FCC's decision regarding implementation of the high cost support system. The
Fifth Circuit Court, however, reversed both the FCC's requirement that ILECs
recover their universal service contributions from access charges and the
blanket prohibition on additional state eligibility requirements for carriers
receiving high cost support. The Fifth Circuit Court also concluded that the FCC
exceeded its jurisdiction by assessing carrier contributions to the schools and
libraries program based on their combined interstate and intrastate revenues and
by asserting its authority to do the same with respect to carrier contributions
to the high cost fund. The Fifth Circuit Court subsequently denied petitions for
rehearing but granted the FCC a stay until November 1, 1999. The FCC has now
adopted rules to comply with the court's decision. The amended rules provide for
a single contribution base for purposes of funding all of the universal support
mechanisms. Affected carriers' intrastate revenues are eliminated from the
contribution base. The FCC also ruled that ILECs may recover their contributions
through either access charges or through end user charges.
In October 1998, the FCC began a proceeding to consider a represcription
of the authorized rate-of-return for the interstate access services of
approximately 1,300 ILECs, including ALLTEL's wireline subsidiaries. The
currently prescribed rate-of-return is 11.25 percent. The purpose of the FCC's
proceeding is to determine whether the prescribed rate-of-return corresponds to
current market conditions and whether the rate should be changed. A decision by
the FCC related to this matter may be issued later this year.
In March 1999, the FCC released an order designed to facilitate the
development of competition in the advanced services market. The FCC determined
that ILECs must make available to requesting competitive local exchange carriers
("CLECs") the use of shared collocation arrangements. Competitors must also be
able to collocate all equipment used for interconnection and/or access to
unbundled network elements even when that equipment includes a switching or
enhanced services function. This decision has been appealed by certain ILECs to
the U.S. Court of Appeals, Washington, D.C. Circuit. The FCC also issued a
39
<PAGE>
further rulemaking to determine whether the FCC should mandate line sharing
nationally by ILECs in order that CLECs may provide data or advanced services
over those lines.
Because resolution of the regulatory matters discussed above that are
currently under FCC or judicial review is uncertain and regulations to implement
other provisions of the 96 Act have yet to be issued, ALLTEL cannot predict at
this time the specific effects, if any, that the 96 Act and its implementing
regulations will have on its wireline operations; however, the Company still
believes that it will be able to recover its costs and earn a fair
rate-of-return as provided for through the regulatory process.
Communications-Emerging Businesses
- ----------------------------------
(Millions) 1998 1997 1996
- -------------------------------------------------------------------
Revenues and sales $167.3 $100.8 $51.3
Operating loss $(38.0) $(16.4) $(3.7)
- -------------------------------------------------------------------
Emerging businesses consist of the Company's long-distance, competitive local
exchange carrier ("CLEC"), Internet access, network management and PCS
operations. Long-distance and Internet access services are currently marketed to
residential and business customers in the majority of states in which ALLTEL
provides communications services. During 1998, ALLTEL began offering its CLEC
and PCS services. Through its CLEC operations, the Company offers local access
services to business customers in select markets outside its traditional service
areas. ALLTEL expects to expand this product offering to residential customers
in the near term. In March 1998, the Company began providing PCS service in
Jacksonville, Florida, and ALLTEL expects to begin offering PCS service in other
markets in the near future. Network management services, which were first
offered in 1996, are currently marketed to business customers in select areas.
Revenues and sales increased in all periods primarily due to growth in the
long-distance operations. Long-distance revenues increased in each period
primarily due to growth in its customer base. The start-up of the CLEC and PCS
operations also contributed to the overall growth in revenues and sales from
emerging businesses in 1998. The operating losses sustained by emerging
businesses reflect the start-up nature of these operations.
Information Services Operations
- -------------------------------
(Millions) 1998 1997 1996
- -------------------------------------------------------------------
Revenues and sales $1,161.8 $974.2 $960.1
Operating income $ 162.7 $144.9 $140.3
- -------------------------------------------------------------------
Information services' revenues and sales increased $187.6 million or 19 percent
in 1998, 14.1 million or 1 percent in 1997 and $30.4 million or 3 percent in
1996. Operating income increased $17.7 million or 12 percent, $4.6 million or 3
percent in 1997 and $9.7 million or 7 percent in 1996.
Revenues and sales increased in 1998 primarily due to the growth in the
financial services, international and telecommunications outsourcing operations.
Growth in revenues and sales for 1997 was impacted by the sale of healthcare
operations completed in January 1997. Excluding the sold healthcare operations,
information services' revenues and sales would have increased $123.7 million or
15 percent in 1997. Excluding the healthcare operations, revenues and sales
increased in 1997 primarily due to growth in the financial services and
telecommunications businesses, while revenues and sales increased in 1996
primarily due to growth in the telecommunications operations. The increases in
revenues and sales for all periods reflect volume growth in existing data
processing contracts, the addition of new outsourcing agreements and additional
software maintenance and service revenues. Additionally, the increases in
revenues and sales in all periods were partially offset by lost operations from
contract terminations due to the merger and consolidation activity in the
domestic financial services market and by a reduction in revenues collected for
early termination of facilities management contracts. The domestic financial
services industry continues to experience consolidation due to mergers.
Operating income increased $17.7 million or 12 percent in 1998, $4.6
million or 3 percent in 1997 and $9.7 million or 7 percent in 1996. Excluding
the impact of the sold healthcare operations, operating income would have
increased $6.2 million or 5 percent in 1997 and $16.1 million or 13 percent in
1996. Operating income increased in 1998 primarily due to the growth in revenues
and sales noted above, additional fees collected from the early termination of
contracts and improved profit margins realized from the international financial
services businesses, partially offset by lower margins realized by the
telecommunications operations. Telecommunications' operating margins decreased
due to higher operating costs, including depreciation and amortization expense.
Depreciation and amortization expense increased due to the acquisition of
additional data processing equipment and an increase in amortization of
internally developed software. Operating income for 1997 reflects the growth in
revenues and sales noted above, as well as, improved profit margins realized
from the international financial services business, partially offset by the loss
of
40
<PAGE>
operations due to the sale of the healthcare business. Growth in operating
income for 1997 was adversely affected by start-up and product development costs
associated with several new business initiatives designed to expand the
Company's service offerings in existing markets. Operating income growth in 1996
primarily reflects the increase in revenues and sales. Growth in operating
income for 1997 and 1996 was affected by the loss of higher-margin operations
due to contract terminations, reductions in fees collected on the early
termination of facilities management contracts and an increase in operating
costs, corresponding with the growth in revenues and sales.
Other Operations
- ----------------
(Millions) 1998 1997 1996
- --------------------------------------------------------------
Revenues and sales $601.3 $478.9 $589.9
Operating income $ 25.9 $ 21.9 $ 34.0
- --------------------------------------------------------------
Other operations consist of the Company's product distribution and directory
publishing operations. Revenues and sales increased $122.4 million or 26 percent
in 1998, decreased $111.0 million or 19 percent in 1997 and increased $1.8
million or less than 1 percent in 1996. Operating income increased $4.0 million
or 18 percent in 1998, decreased $12.1 million or 35 percent in 1997 and
increased $0.6 million or 2 percent in 1996. Growth in revenues and sales and
operating income for 1998 and 1997 was affected by the sale of the HWC
operations completed in May 1997. Excluding the sold HWC operations, revenues
and sales would have increased $165.3 million or 38 percent in 1998 and $3.2
million or 1 percent in 1997, and operating income would have increased $5.5
million or 27 percent in 1998 and would have decreased $5.8 million or 22
percent in 1997.
Revenues and sales increased in 1998 primarily due to growth in sales of
telecommunications and data products to both affiliated and non-affiliated
customers, including increased retail sales of these products at the Company's
counter showrooms. Sales to affiliates increased $140.0 million in 1998,
including additional purchases by the Company's wireless subsidiaries reflecting
the merger with 360 and expansion of ALLTEL Supply's product lines to
include wireless equipment. The increase in revenues and sales in 1998
attributable to ALLTEL Supply's operations were partially offset by decreases in
directory publishing revenues, primarily reflecting the loss of one large
directory publishing contract. The decrease in revenues and sales for 1997
primarily reflects the sale of HWC and a decrease in directory publishing
revenues as a result of publishing 43 fewer directories in 1997 as compared to
1996. Sales of telecommunications and data products increased $21.1 million in
1997 primarily reflecting increased sales to affiliated and non-affiliated
customers and additional retail sales of these products at the Company's counter
showrooms. Revenues and sales increased slightly in 1996, as growth in sales of
telecommunications and data products were partially offset by a reduction in
directory publishing revenues, reflecting the loss of several large independent
directory contracts.
Operating income increased in 1998 primarily due to the increase in
revenues and sales noted above. Growth in operating income for 1998 continued to
be affected by lower gross profit margins realized by ALLTEL Supply, reflecting
a reduction in margins earned on affiliated sales and increased competition from
other distributors and from direct sales by manufacturers. Operating income
decreased in 1997 primarily due to the decrease in revenues and sales noted
above. Lower gross profit margins realized on the sale of telecommunications and
data products, reflecting increased competition and a reduction in product cost
rebates received from vendors also impacted operating income growth in 1997. In
addition, increased selling expenses incurred by the Company to open several new
counter showroom facilities also impacted operating income growth in 1997. The
decrease in operating income in 1996 primarily reflects lower profit margins
realized by the HWC operations. During 1996, HWC's gross profit margins were
adversely affected by sharp declines in copper prices and by increased
competition from manufacturers.
Interest Expense
- ----------------
Interest expense increased $3.5 million or 1 percent in 1998, increased $24.1
million or 10 percent in 1997 and decreased $36.6 million or 13 percent in 1996.
The increase in interest expense in 1997 reflects the issuance of $200 million
of debentures completed in March 1997 and the issuance of $122 million of
subordinated promissory notes issued in November 1996 in connection with an
acquisition. The decrease in interest expense in 1996 primarily reflects the two
debt refinancings completed in March 1996 and October 1995, which resulted in
the retirement of three high-cost debt issues. Interest expense in 1996 also
reflects reduced borrowing rates resulting from the recapitalization of
360 at the time of its spinoff from Sprint Corporation. (See Note 2 to
the consolidated financial statements for additional information regarding
360's spinoff).
41
<PAGE>
Income Taxes
- ------------
Income tax expense increased $67.8 million or 16 percent in 1998, $171.7 million
or 65 percent in 1997 and $8.0 million or 3 percent in 1996. The changes in
income tax expense for all periods primarily reflect the tax-related impact of
the various non-recurring and unusual items, previously discussed. Excluding the
impact on tax expense of these items in each year, income tax expense would have
increased $108.2 million or 31 percent in 1998, $40.3 million or 13 percent in
1997 and $57.9 million or 23 percent in 1996, consistent with the overall growth
in ALLTEL's earnings from continuing operations before non-recurring and unusual
items.
Average Common Shares Outstanding
- ---------------------------------
The average number of common shares outstanding decreased 1 percent in 1998,
primarily due to the Company's repurchase of its common stock in 1997. During
1998, common shares issued through stock option plans amounted to 1,741,000
shares, and preferred stock and debentures were converted into 23,000 shares.
The average number of common shares outstanding decreased slightly in 1997.
During 1997, 872,000 shares were issued in connection with acquisitions, common
shares issued through stock option plans amounted to 722,000 shares, and
preferred stock and debentures were converted into 67,000 shares. These
increases were offset by the Company's repurchase on the open market of
6,851,000 of its common shares. The average number of common shares outstanding
increased 1 percent in 1996. During 1996, 4,810,000 shares were issued in
connection with acquisitions, common shares issued through stock option plans
amounted to 494,000 shares, and preferred stock and debentures were converted
into 28,000 shares. These increases were offset by the Company's repurchase on
the open market of 2,674,000 of its common shares.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
(Dollars in millions,
except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------
Cash provided from operations $1,405.8 $1,270.8 $1,276.1
Capital expenditures $ 998.0 $ 899.7 $ 821.2
Total capital structure $7,396.7 $6,982.1 $6,561.0
Percent equity to total capital 49.2% 43.9% 43.8%
Interest coverage ratio 4.74x 4.41x 4.63x
Book value per share $ 11.84 $9.99 $9.22
- -------------------------------------------------------------------------------
Cash Flows From Operations
- --------------------------
Cash provided from operations continues to be ALLTEL's primary source of
liquidity. The increase in cash provided from operations for 1998 primarily
reflects growth in earnings of the Company and changes in working capital
requirements, including the timing of additional income tax payments associated
with gains realized from the sale of MCI WorldCom common stock. Cash provided
from operations increased in 1996 primarily due to growth in earnings of the
Company and changes in working capital requirements mainly attributable to
timing differences in the payment of accounts payable.
Cash Flows from Investing Activities
- ------------------------------------
Capital expenditures continued to be ALLTEL's primary use of capital
resources. Capital expenditures increased in 1998, reflecting construction of
additional network facilities and deployment of digital wireless technology in
select markets. Capital expenditures increased in 1997 primarily due to the
start-up construction of ALLTEL's PCS network. Capital expenditures decreased in
1996 primarily as a result of the sale of wireline properties and a reduction in
capital expenditures by the remaining wireline subsidiaries. The Company
financed the majority of its capital expenditures through the internal
generation of funds in each of the past three years. Capital expenditures were
incurred to continue to modernize and upgrade ALLTEL's telecommunications
network and to expand into existing information services markets. In addition,
capital expenditures were incurred to construct additional network facilities to
provide PCS and digital wireless service and to offer other communications
services, including long-distance, Internet and local competitive access
services. Capital expenditures are forecast at approximately $900 million for
1999, which are expected to be funded primarily from internally generated funds.
Cash flows from investing activities for 1998 include cash outlays of
$81.1 million for the purchase of property, principally consisting of $34.6
million for the acquisition of two wireless properties in Georgia and $43.6
million for the purchase of additional ownership interests in wireless
properties in Nebraska, North Carolina and Texas. Cash flows from investing
activities for 1997 include a cash outlay of $146.5 million related to the
acquisition of PCS licensing rights for 73 markets in 12 states. The PCS
licenses increase the size of ALLTEL's potential wireless customer base to more
than 50 million.
42
<PAGE>
Cash flows from investing activities for 1997 also include a total cash
outlay of $134.0 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, Florida and Richmond, Virginia
markets. Cash flows from investing activities for 1997 also include total cash
outlays of $113.2 million for various acquisitions, including a wireline
property in Georgia, two wireless properties in Alabama and the purchase of
additional ownership interests in 16 wireless properties in which the Company
owns a controlling interest. Cash flows from investing activities for 1996
include a cash outlay of $352.8 million primarily related to the acquisition of
Independent Cellular Network, Inc. ("ICN"). ICN owned and operated cellular
systems serving more than 140,000 customers in Ohio, Kentucky, Pennsylvania and
West Virginia.
Cash flows from investing activities for 1998 and 1997 include proceeds
from the sale of investments of $326.1 million and $195.9 million, respectively,
principally consisting of proceeds of $288.2 million and $185.9 million,
respectively, received from the sale of a portion of ALLTEL's investment in MCI
WorldCom common stock. In addition, cash proceeds from the sale of investments
in 1998 include $20.2 million primarily from the sale of the Company's ownership
interest in a wireless partnership. Cash flows from investing activities for
1997 include proceeds of $202.3 million received from the sale of assets,
principally consisting of three non-strategic operations. In September 1997, the
Company received cash proceeds of $48.7 million in connection with the sale of
an investment in a software company. In May 1997, ALLTEL completed the sale of
its wire and cable subsidiary, HWC, for approximately $45.0 million in cash; and
in January 1997, the Company received cash proceeds of $104.9 million in
connection with the sale of its healthcare operations. The proceeds from the
sales of investments and other assets were used primarily to reduce borrowings
under the Company's revolving credit agreement. Cash flows from investing
activities for 1996 include proceeds totaling $38.7 million received principally
from the sale of certain wireline properties to Citizens, as previously
discussed. Cash flows from investing activities for 1996 also include proceeds
of $30.4 million related to the withdrawal of ALLTEL's investment in GOCC.
Cash Flows from Financing Activities
- ------------------------------------
Cash flows from financing activities include dividend payments and the
repurchase by the Company of its common stock. Common and preferred dividend
payments amounted to $272.1 million in 1998, $236.0 million in 1997 and $225.2
million in 1996. The increases in each year primarily reflect growth in the
annual dividend rates on ALLTEL's common stock. Dividend payments on common
shares also increased in 1998 as a result of additional shares outstanding due
to the merger with 360. Under a share repurchase program initiated by
the Company in 1996 and expanded in 1997, the Company repurchased 6.9 million
and 2.7 million of its shares at a total cost of $218.6 million and $83.8
million in 1997 and 1996, respectively. Distributions to minority investors were
$92.8 million in 1998, $45.1 million in 1997 and $35.4 million in 1996. The
increase in distributions for 1998 reflects the improved operating results of
the wireless properties managed by ALLTEL.
Currently, the Company has a $1 billion line of credit under a revolving
credit agreement. Borrowings outstanding under this agreement at December 31,
1998 were $578.5 million, with a weighted average interest rate of 5.7 percent.
At December 31, 1997, ALLTEL and 360 had separate lines of credit under
revolving credit agreements. Borrowings outstanding under these agreements at
December 31, 1997 and 1996 were $847.9 million and $763.7 million, respectively.
Upon completion of its merger with 360, ALLTEL refinanced the borrowings
outstanding under 360's revolving credit agreement (approximately $495
million) through ALLTEL's existing credit facilities; and 360's
revolving credit agreement was terminated. Additional borrowings under the
revolving credit agreements in 1997 were incurred primarily to fund the stock
repurchase program and to acquire the PCS licensing rights. As previously noted,
proceeds from the sales of MCI WorldCom, Inc. common stock, the HWC and
healthcare operations and from the sale of investments in a software company
were used primarily to reduce borrowings outstanding under the revolving credit
agreements in 1998 and 1997.
Long-term debt issued was $245.1 million in 1998, $295.6 million in 1997
and $1,951.8 million in 1996, while retirements of long-term debt amounted to
$414.9 million in 1998, $73.3 million in 1997 and $1,662.7 million in 1996. In
January 1998, the Company issued $100 million of 6.65 percent notes and in April
1998, a subsidiary issued $100 million of 6.75 percent notes. These two debt
issues represent substantially all of the long-term debt issued in 1998.
Long-term debt issued in 1997 includes the net increase in revolving credit
agreement borrowings from December 31, 1996, and the issuance of $200 million of
7.6 percent notes. In 1996, ALLTEL issued $300 million of 7.0 percent debentures
to refinance $200 million of 9.5 percent debentures and to reduce borrowings
under its revolving credit agreement. Also in 1996, in connection with its
spinoff from Sprint, 360 repaid $1.4 billion of intercompany debt. The
repayment was funded by proceeds from the issuance of $900 million of senior
notes and from $500 million of initial borrowings under 360's revolving
credit agreement. In addition, the Company issued $122 million of subordinated
promissory notes in connection with the ICN acquisition. The net reduction in
revolving credit agreement borrowings
43
<PAGE>
from December 31, 1997, represent substantially all of the long-term debt
retired in 1998. The repayment of intercompany debt to Sprint and the refinanced
debt issue represent substantially all of the long-term debt retired in 1996. In
connection with the debt refinancing completed in 1996, the Company was required
to pay termination fees in the amount of $15.8 million. Following its merger
with 360, ALLTEL's bond ratings with Moody's Investors Service and
Standard & Poor's Corporation were A2 and A-, respectively, compared to A2 and
A+, respectively, prior to the merger. (See Note 5 to the consolidated financial
statements for additional information regarding the Company's long-term debt.)
The Company believes it has adequate internal and external capital
resources available to finance its ongoing operating requirements including
capital expenditures, business development and the payment of dividends. ALLTEL
has access to the capital markets, including the private placement market,
public issuance and the Rural Utilities Service financing programs for wireline
companies. T he Company and its subsidiaries expect these sources to continue to
be available for future borrowings.
Year 2000 Compliance
- --------------------
The Year 2000 issue affects the Company's internal computer systems and
certain software, systems and services that the Company provides to its
customers, as well as the Company's infrastructure. The Company's Year 2000 plan
consists of eight phases: (i) Awareness; (ii) Inventory; (iii) Third-Party
Strategies; (iv) Risk Assessment; (v) Planning; (vi) Remediation; (vii) Testing;
and (viii) Implementation. Except with regard to the recent acquisition of
Liberty discussed below, the Company has completed all of the phases of the Year
2000 plan for the Company's critical internal computer systems and software,
systems and services that the Company provides to its customers and for which
the Company is responsible. Additionally, the Company has completed all phases
of the Year 2000 plan for the Company's critical infrastructure, except for
critical infrastructure acquired in the recent acquisition of Liberty.
In July 1999, the Company completed its acquisition of Aliant. The
Company applied its Year 2000 methodology described above to this company and
completed all of the Year 2000 plan phases listed above for the critical
internal computer systems and software, systems and services that Aliant
provides to its customers and for which the company is responsible, as well as
for the infrastructure acquired in the Aliant acquisition.
On September 30, 1999, ALLTEL acquired Liberty. The Company applied its
Year 2000 methodology described above to this company and completed all of the
Year 2000 plan phases listed above for the critical internal computer systems
and software, systems and services that Liberty provides to its customers and
for which the company is responsible, as well as for the infrastructure acquired
in the Liberty acquisition.
As part of its Year 2000 plan, the Company implemented a third party
management process and contacted its critical vendors and suppliers and other
third parties upon which the Company depends regarding their plans for making
their products, services and systems Year 2000 compliant. The Company's ability
to achieve Year 2000 compliance and meet its target completion dates is
dependent upon Year 2000 efforts of its vendors and suppliers. The Company is
also dependent upon other third parties who provide essential services (such as
utilities, interexchange carriers, etc.) to make their critical systems Year
2000 compliant in a timely manner. Generally, the Company does not have the
ability to test those systems for Year 2000 compliance and, instead, must rely
on the third parties' representations.
Contingency planning to maintain and restore service in the event of a
natural disaster, power failure, or software related interruption has long been
part of the Company's standard business practices. The Company has leveraged
this experience in the development and implementation of its Year 2000
contingency plans that assess the potential for business disruption in various
scenarios. Those contingency plans address possible, but unlikely, "worst case"
scenarios involving the interruption of telecommunications and information
technology services and/or interruption of customer billing, operating and other
information systems, and provide for key-operation back-up and alternative
solutions for recovery. With the exception of Liberty, the Company has developed
contingency plans for its critical systems and plans to augment, modify and test
those contingency plans throughout the end of the year, as appropriate.
Contingency plans consistent with the Company's Year 2000 methodology were
developed for Liberty prior to the end of 1999.
The Company estimates the total cost of its Year 2000 efforts to be
approximately $80 million. As of December 31, 1998, ALLTEL has incurred
approximately $58 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.
44
<PAGE>
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. To date, the Company has not experienced any
significant Year 2000 related problems.
Other Financial Information and Recently Issued Accounting Pronouncements
- -------------------------------------------------------------------------
Management is currently not aware of any environmental matters which in the
aggregate would have a material adverse effect on the financial condition or
results of operations of the Company.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities", ("SFAS 133"). This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. SFAS 133 requires that changes in a derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. The FASB recently issued SFAS No. 137, which deferred the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000. As
ALLTEL does not have significant derivative financial instruments, the Company
does not expect the adoption of SFAS 133 to have a material impact on its
reported earnings and/or other comprehensive income.
Market Risk
- -----------
The Company is exposed to market risk from changes in marketable equity security
prices and from changes in interest rates on its credit facility and long-term
debt obligations that impact the fair value of these obligations. The Company's
financial instruments are described further in Notes 3 and 5 to the consolidated
financial statements. The Company has estimated its market risk using
sensitivity analysis. Market risk has been defined as the potential loss in fair
value of a financial instrument due to a hypothetical adverse change in market
prices or interest rates. Fair value for investments was determined using quoted
market prices, if available, or the carrying amount of the investment if no
quoted market price was available. Fair value of long-term debt obligations was
determined based on a discounted cash flows analysis, using the overall weighted
rates and maturities of these obligations compared to terms and rates currently
available in the long-term markets. The results of the sensitivity analysis are
presented below. Actual results may differ.
At December 31, 1998 and 1997, investments of the Company are recorded at
fair value of $1,675.8 million and $1,286.0 million, respectively. Marketable
equity securities, consisting principally of the Company's investment in MCI
WorldCom common stock, amounted to $967.8 million and $575.5 million and
included unrealized holding gains of $548.7 million and $300.7 million at
December 31, 1998 and 1997, respectively. A hypothetical 10 percent decrease in
quoted market prices would result in a $90.8 million and $57.6 million decrease
in the fair value of these securities at December 31, 1998 and 1997,
respectively.
The Company has no material future earnings or cash flow exposures from
changes in interest rates on its long-term debt obligations, as substantially
all of the Company's long-term debt obligations are fixed rate obligations. At
December 31, 1998 and 1997, the fair value of the Company's long-term debt was
estimated to be $3,912.8 million and $3,962.2 million, respectively. A
hypothetical increase of 70 basis points (10 percent of the Company's overall
weighted average borrowing rate) would result in approximately a $135.5 million
and $124.2 million decrease in the fair value of the Company's long-term debt at
December 31, 1998 and 1997, respectively.
Although the Company conducts business in foreign countries, the
international operations are not material to the Company's operations, financial
condition and liquidity. Additionally, the foreign currency translation gains
and losses were not material to the Company's results of operations for the
years ended December 31, 1998 and 1997. Accordingly, the Company is not
currently subject to material foreign currency exchange rate risk from the
effects that exchange rate movements of foreign currency would have on the
Company's future costs or on future cash flows it would receive from its foreign
subsidiaries. To date, the Company has not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
The Company is evaluating the future use of such financial instruments.
45
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 8-K, into the Company's previously filed
Registration Statements, File Nos. 333-68243, 333-76485, 333-85395, 2-99523,
33-35343, 33-48476, 33-54175, 33-56291, 33-65199, 333-88907, 333-88923 and
333-90167.
/s/ARTHUR ANDERSEN LLP
Little Rock, Arkansas
January 7,2000
46
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ALLTEL Corporation:
We consent to the incorporation by reference in the registration statements on
Form S-3 (Numbers 333-68243, 333-76485, and 333-85395) and Form S-8 (Numbers
2-99523, 33-35343, 33-48476, 33-54175, 33-56291, 333-88907, 333-88923, and
333-90167) of ALLTEL Corporation of our reort dated February 5, 1999, with
respect to the consolidated balance sheets of Aliant Communications and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the Form 8-K of ALLTEL Corporation dated January 7, 2000.
/s/KPMG LLP
Lincoln, Nebraska
January 7, 2000
47
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-3, No. 333-68243; From S-3, No. 333-76485; Form S-3, No. 333-85395;
Form S-8, No. 2-99523; Form S-8, No. 33-35343; Form S-8, No. 33-48476; Form S-8,
No. 33-54175; Form S-8, No. 33-56291; Fors S-8, No. 33-65199, Form S-8,
No. 333-88907; Form S-8, No. 333-88923; and Form S-8, No. 333-90167) of ALLTEL
Corporation and in the related Prospectuses of our report dated March 5, 1999,
with respect to the consolidated financial statements of Liberty Cellular, Inc.
and Subsidiary, included (such financial statements are not separately
presented therein) in the Current Report (Form 8-K) of ALLTEL Corporation
dated January 7, 2000.
/s/ERNST & YOUNG LLP
Kansas City, Missouri
January 7, 2000
48
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K, into the Company's previously filed
Registration Statements, File Nos. 333-68243, 333-76485, 333-85395, 2-99523,
33-35343, 33-48476, 33-54175, 33-56291, 33-65199, 333-88907, 333-88923 and
333-90167.
/s/SARTAIN FISCHBEINN & CO.
Tulsa, Oklahoma
January 7,2000
49
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.1
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA
FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONTAINED IN THE COMPANY'S FORM 8-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000065873
<NAME> ALLTEL CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 89,065
<SECURITIES> 0
<RECEIVABLES> 843,129
<ALLOWANCES> 30,207
<INVENTORY> 98,443
<CURRENT-ASSETS> 1,102,561
<PP&E> 9,077,516
<DEPRECIATION> 3,814,390
<TOTAL-ASSETS> 10,155,454
<CURRENT-LIABILITIES> 1,346,688
<BONDS> 3,678,626
5,005
9,121
<COMMON> 306,015
<OTHER-SE> 3,316,896
<TOTAL-LIABILITY-AND-EQUITY> 10,155,454
<SALES> 575,526
<TOTAL-REVENUES> 5,626,795
<CGS> 561,359
<TOTAL-COSTS> 4,600,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 55,000
<INTEREST-EXPENSE> 278,375
<INCOME-PRETAX> 1,104,881
<INCOME-TAX> 501,754
<INCOME-CONTINUING> 603,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 603,127
<EPS-BASIC> 1.97
<EPS-DILUTED> 1.95
</TABLE>
