UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-4996
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ALLTEL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 34-0868285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allied Drive, Little Rock, 72202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (501) 905-8000
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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Number of common shares outstanding as of June 30, 2000:
315,518,471
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The Exhibit Index is located at sequential page 22.
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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The following consolidated financial statements of ALLTEL Corporation
and subsidiaries, included in the interim report of ALLTEL Corporation to its
stockholders for the periods ended June 30, 2000 and 1999, a copy of which is
attached hereto, are incorporated herein by reference:
o Consolidated Statements of Income - for the three, six and twelve
months ended June 30, 2000 and 1999.
o Consolidated Balance Sheets - June 30, 2000 and 1999 and
December 31, 1999.
o Consolidated Statements of Cash Flows - for the six and twelve
months ended June 30, 2000 and 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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GENERAL
The following is a discussion and analysis of the historical results of
operations and financial condition of ALLTEL Corporation (ALLTEL or the
Company). This discussion should be read in conjunction with the unaudited
consolidated financial statements, including the notes thereto, for the interim
periods ended June 30, 2000 and 1999, and the Company's Annual Report on Form
10-K, as amended for the year ended December 31, 1999.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes, and future filings by the Company on Form 10-K, Form
10-Q and Form 8-K and future oral and written statements by the Company and its
management may include, certain forward-looking statements, including (without
limitation) statements with respect to anticipated future operating and
financial performance, growth opportunities and growth rates, acquisition and
divestitive opportunities and other similar forecasts and statements of
expectation. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates, and should, and variations of these words and similar
expressions, are intended to identify these forward-looking statements.
Forward-looking statements by the Company and its management are based on
estimates, projections, beliefs and assumptions of management and are not
guarantees of future performance. The Company disclaims any obligation to
update or revise any forward-looking statement based on the occurrence of future
events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Representative examples
of these factors include (without limitation) rapid technological developments
and changes in the telecommunications and information services industries;
ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996 and other similar federal and state
legislation and the federal and state rules and regulations enacted pursuant to
that legislation; regulatory limitations on the Company's ability to change its
pricing for communications services; the possible future unavailability of
Statement of Financial Accounting Standards No. 71 to the Company's
2
<PAGE>
wireline subsidiaries; continuing consolidation in certain industries, such as
banking, served by the information services business; and the risks associated
with relatively large, multi-year contracts in the Company's information
services business.
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.
EXCHANGE OF WIRELESS ASSETS
On January 31, 2000, ALLTEL, Bell Atlantic Corporation ("Bell Atlantic"),
GTE Corporation ("GTE") and Vodafone Airtouch ("Vodafone") signed agreements to
exchange wireless properties in 13 states. The companies also signed a new
national roaming agreement that allows their customers to roam on one another's
networks at reduced rates across a footprint covering almost 95 percent of the
U.S. population. On April 3, 2000, ALLTEL completed the exchange of wireless
properties with Bell Atlantic in 5 states. Through this transaction, ALLTEL
acquired operations in Arizona (including Phoenix), Albuquerque, New Mexico and
El Paso, Texas and divested operations in Nevada and Iowa. In addition to the
transfer of wireless assets, ALLTEL also paid Bell Atlantic $624.1 million in
cash to complete this transaction.
On June 30, 2000, ALLTEL completed the remaining wireless property exchanges
with Bell Atlantic and GTE. As a result, ALLTEL acquired operations in Florida
(including Tampa and Pensacola), Ohio (including Cleveland), South Carolina and
Mobile, Alabama, while divesting operations in Illinois, Indiana, New York and
Pennsylvania. ALLTEL also transferred to Bell Atlantic or GTE certain of its
minority investments in unconsolidated wireless properties, representing
approximately 2.6 million POPs. In addition to the transfer of the remaining
wireless assets, ALLTEL also received $192.5 million in cash, prepaid vendor
credits of $199.6 million and assumed long-term debt of $425.0 million as part
of these transactions.
Through the completion of the above transactions, ALLTEL acquired interests
in 27 wireless markets representing about 14.6 million POPs and approximately
1,467,000 wireless customers, while divesting interests in 42 wireless markets
representing 6.9 million POPs and approximately 778,000 customers. ALLTEL
accounted for these exchange transactions as purchases, and accordingly, the
accompanying consolidated financial statements include the accounts and results
of operations of the acquired wireless properties from the applicable date of
acquisition. Under the purchase method of accounting, tangible and identifiable
intangible assets acquired are recorded at fair value. The excess of the
aggregate purchase price over the fair market value of the net assets acquired
of $1.4 billion has been initially allocated to goodwill and is being amortized
on a straight-line basis over 25 years. The fair values and useful lives of
assets acquired have been estimated based on a preliminary valuation and are
subject to final valuation adjustments. ALLTEL has engaged a third-party
appraisal firm to perform a study to determine the allocation of the total
purchase price to the various assets acquired. Accordingly, a portion of the
excess cost may be classified as other intangibles and may be amortized over
different periods other than the goodwill amortization period of 25 years. See
Note 2 to the unaudited consolidated financial statements for additional
information regarding the wireless property exchange transactions.
Also during the second quarter, the Company sold its Personal Communications
Services ("PCS") operations in Mobile, Ala. and the PCS license covering the
Pensacola, Fla. market. The sale of these PCS assets was necessary in order for
ALLTEL to meet the U.S. Department of Justice guidelines regarding the overlap
of wireless properties so that the Company could complete the wireless asset
exchanges with Bell Atlantic and GTE. In connection with the exchange of
wireless properties and the sale of PCS assets, ALLTEL recognized a pretax gain
of $1,353.1 million during the second quarter of 2000.
3
<PAGE>
COMPLETION OF MERGERS
On September 30, 1999, the Company completed mergers with Liberty Cellular,
Inc. ("Liberty") and its affiliate KINI L.C. On July 2, 1999, the Company
completed its merger with Aliant Communications Inc. ("Aliant"). These mergers
were accounted for as poolings-of-interests; and accordingly, all prior period
financial information was restated to include the operations of Aliant, Liberty
and KINI L.C.
In January 1999, the Company completed a merger with Standard Group, Inc.
("Standard"). In September 1999, the Company also completed mergers with
Advanced Information Resources, Limited ("AIR") and Southern Data Systems
("Southern Data"). In connection with these mergers, approximately 6.5 million
shares of ALLTEL common stock were issued. All three mergers qualified as
tax-free reorganizations and were accounted for as poolings-of-interests. Prior
period financial information was not restated, since the operations of the three
acquired companies were not significant to ALLTEL's consolidated financial
statements on either a separate or aggregate basis. The accompanying
consolidated financial statements include the accounts and results of operations
of Standard, AIR and Southern Data from the applicable date of acquisition. See
Note 3 to the unaudited consolidated financial statements for additional
information regarding the merger transactions.
OVERVIEW-CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
(Dollars in thousands, June 30, June 30, June 30,
------------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
except per share amounts) 2000 1999 2000 1999 2000 1999
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Revenues and sales $1,775,022 $1,630,643 $3,419,985 $3,145,935 $6,735,421 $6,166,384
Operating income $ 445,723 $ 422,769 $ 851,168 $ 796,171 $1,580,104 $1,183,269
Net income $1,003,520 $ 213,269 $1,219,562 $ 399,813 $1,603,383 $ 566,490
Earnings per share:
Basic $3.18 $.68 $3.87 $1.28 $5.10 $1.83
Diluted $3.15 $.67 $3.84 $1.26 $5.04 $1.81
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</TABLE>
Revenues and sales increased 9 percent in each of the three, six and twelve
month periods ended June 30, 2000 or $144.4 million, $274.1 million and $569.0
million, respectively. Revenue growth in each period reflects strong market
demand for the Company's communications services as highlighted by the strong
performance of ALLTEL's wireless and wireline operations as further discussed
below.
Reported operating income, net income and earnings per share for the three,
six and twelve month periods ended June 30, 2000 and for the twelve month period
ended June 30, 1999 include the effects of various non-recurring and unusual
items. As further discussed below, the non-recurring and unusual items include
merger and integration expenses and other charges and gains realized from the
exchange or sale of assets. Adjusted to exclude the effects of the non-recurring
and unusual items in each period, operating income would have increased $29.7
million or 7 percent, $71.9 million or 9 percent and $197.3 million or 13
percent, and net income would have increased $19.2 million or 9 percent, $54.6
million or 14 percent and $125.2 million or 17 percent in the three, six and
twelve month periods ended June 30, 2000, respectively. When excluding the
effects of the non-recurring and unusual items in each period, basic and diluted
earnings per share both would have increased 9 percent, 13 percent and 15
percent in the three, six and twelve month periods ended June 30, 2000,
respectively.
4
<PAGE>
Operating income, net income and earnings per share adjusted for all
non-extraordinary, non-recurring and unusual items are summarized in the
following table:
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
(Dollars in thousands, June 30, June 30, June 30,
------------------------ -------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
except per share amounts) 2000 1999 2000 1999 2000 1999
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Operating income, as reported $ 445,723 $422,769 $ 851,168 $796,171 $1,580,104 $1,183,269
Non-recurring and unusual items:
Merger and integration
expenses and other charges 6,770 - 16,906 - 107,426 252,000
Provision to reduce carrying
value of certain assets - - - - - 55,000
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Operating income, as adjusted $ 452,493 $422,769 $ 868,074 $796,171 $1,687,530 $1,490,269
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Net income, as reported $1,003,520 $213,269 $1,219,562 $399,813 $1,603,383 $ 566,490
Non-recurring and unusual
items, net of tax:
Merger and integration
expenses and other charges 4,062 - 9,941 - 75,985 200,995
Provision to reduce carrying
value of certain assets - - - - - 33,605
Gain on disposal of assets (784,288) - (784,288) - (811,473) (49,233)
Write-down of investment 9,172 - 9,172 - 9,172 -
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Net income, as adjusted $ 232,466 $213,269 $ 454,387 $399,813 $ 877,067 $ 751,857
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Basic earnings per share,
as reported $3.18 $.68 $3.87 $1.28 $5.10 $1.83
Non-recurring and unusual
items, net of tax:
Merger and integration
expenses and other charges .02 - .03 - .24 .65
Provision to reduce carrying
value of certain assets - - - - - .11
Gain on disposal of assets (2.49) - (2.49) - (2.58) (.16)
Write-down of investment .03 - .03 - .03 -
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Basic earnings per share,
as adjusted $ .74 $.68 $1.44 $1.28 $2.79 $2.43
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Diluted earnings per share,
as reported $3.15 $.67 $3.84 $1.26 $5.04 $1.81
Non-recurring and unusual
items, net of tax:
Merger and integration
expenses and other charges .01 - .03 - .24 .64
Provision to reduce carrying
value of certain assets - - - - - .11
Gain on disposal of assets (2.46) - (2.47) - (2.55) (.16)
Write-down of investment .03 - .03 - .03 -
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Diluted earnings per share,
as adjusted $ .73 $.67 $1.43 $1.26 $2.76 $2.40
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</TABLE>
The operating income, net income and earnings per share impact of the
non-recurring and unusual items have been presented as supplemental information
only. The non-recurring and unusual items reflected in the above table are
discussed in reference to the caption in the consolidated statements of income
in which they are reported.
5
<PAGE>
Merger and Integration Expenses and Other Charges
In connection with the exchange of wireless assets with Bell Atlantic and
GTE, the Company recorded integration expenses and other charges of $8.8 million
during the second quarter of 2000. This charge consisted of $5.0 million in
severance and employee benefit costs related to a planned workforce reduction
and $3.8 million in branding and signage costs. Also in the second quarter of
2000, the Company recorded a $2.0 million reduction in the merger and
integration liability related to its July 1999 acquisition of Aliant. The
adjustment primarily reflects a decrease in severance and employee benefit costs
to be paid as a result of reducing the expected number of Aliant employees to be
terminated from 160 to 132.
In an effort to improve the operating efficiency of its information services
business, the Company recorded a restructuring charge of $10.1 million during
the first quarter of 2000. This charge consisted of $5.9 million in severance
and employee benefit costs related to a planned workforce reduction and $4.2
million in lease termination costs related to the consolidation of certain
operating locations. The lease termination costs represent the estimated minimum
contractual commitments over the next one to four years for leased facilities
that the Company has abandoned, net of anticipated sublease income.
During the third quarter of 1999, the Company recorded a pretax charge of
$90.5 million in connection with its mergers with Aliant, Liberty, AIR and
Southern Data and with certain loss contingencies and other restructuring
activities. The merger and integration expenses totaled $73.4 million and
consisted of professional and financial advisors' fees of $24.4 million,
severance and employee-related expenses of $15.4 million and other integration
costs of $33.6 million. The other integration costs included $12.5 million of
lease termination costs, $10.2 million of costs associated with the early
termination of certain service obligations, and a $4.6 million write-down in the
carrying value of certain in-process and other software development assets that
had no future alternative use or functionality. The other integration costs also
included branding and signage costs of $4.1 million and other expenses of $2.2
million incurred in the third quarter of 1999.
The lease termination costs consisted of a cancellation fee of $7.3 million
to terminate the Company's contractual commitment to lease building space
previously occupied by the former 360 Communications Company ("360") operations
acquired in 1998, a $4.1 million write-off of capitalized leasehold improvements
and $1.1 million in other disposal costs. The contract termination fees included
$5.2 million related to long-term contracts with an outside vendor for customer
billing services to be provided to the Aliant and Liberty operations. As part of
its integration plan, ALLTEL will convert the Aliant and Liberty operations to
its own internal billing system. Conversion of the Liberty operations was
completed in November 1999, with conversion of the Aliant operations scheduled
to be begin in early 2001. The Company also recorded an additional $5.0 million
charge to reflect the actual cost of terminating its contract with Convergys
Corporation ("Convergys") for customer billing services to be provided to the
former 360 operations. In September 1999, ALLTEL and Convergys agreed to a final
contract termination fee of $55.0 million, of which $50.0 million was recorded
in the third quarter of 1998, as discussed below. Through June 30, 2000, the
Company has paid Convergys $30.0 million of the termination fee with the
remaining payments due in installments through 2001.
During the third quarter of 1999, the Company also recorded a restructuring
charge of $17.1 million consisting of $10.8 million in severance and employee
benefit costs related to a planned workforce reduction and $6.3 million in lease
termination costs related to the consolidation of certain operating locations.
The lease termination costs represent the minimum estimated contractual
commitments over the next one to four years for leased facilities that the
Company has abandoned.
6
<PAGE>
During the third quarter of 1998, the Company recorded transaction costs and
one-time charges totaling $252.0 million on a pretax basis related to the
closing of its merger with 360. The merger and integration expenses
included professional and financial advisors' fees of $31.5 million, severance
and employee-related expenses of $48.7 million and integration costs of $171.8
million. The integration costs included a $60.0 million write-down in the
carrying value of certain in-process software development assets which had no
alternative use or functionality, $50.0 million of costs associated with the
early termination of 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 $50.0 million of costs
recorded for contract termination fees related to the long-term billing contract
with Convergys. As previously noted, the Company and Convergys agreed upon a
final termination fee of $55.0 million. The $18.0 million write-down in the
carrying value of certain PCS-related assets included approximately $15.0
million related to cell site acquisition and improvement costs and capitalized
labor and engineering charges that were incurred during the initial construction
phase of the PCS buildout in three markets. As a result of the merger with
360, ALLTEL elected not to continue to complete construction of its PCS
network in these three markets. The remaining $3.0 million of the PCS-related
write-down represented cell site lease termination fees.
At June 30, 2000, the remaining unpaid liability related to the Company's
merger and integration and restructuring activities was $54.8 million,
consisting of contract termination fees of $29.9 million, severance and
employee-related expenses of $15.2 million, lease cancellation and termination
costs of $6.5 million, and other integration costs of $3.2 million. Of the
remaining contract termination fees, $20.0 million will be paid by December 31,
2000 and $9.9 million in 2001. Cash outlays for the remaining employee-related
expenses, lease termination fees and other integration costs are expected to be
substantially completed by September 2000. Funding for the unpaid merger and
integration and restructuring liability will be internally financed from
operating cash flows. As a result of its integration and restructuring efforts,
ALLTEL expects to realize synergies through a reduction in operating expenses of
approximately $128 million in 2000. The Company estimates 40 percent of the cost
savings will result from a reduction in duplicative salaries and employee
benefits, 20 percent from a reduction in variable network expenses, 20 percent
from volume purchase discounts, 10 percent from a reduction in branding and
advertising costs and 10 percent from a reduction in information technology
expenses. (See Note 4 to the unaudited consolidated financial statements for
additional information regarding the merger and integration expenses and other
charges).
Provision to Reduce Carrying Value of Certain Assets
During the third quarter of 1998, the Company recorded a $55.0 million
non-recurring operating expense related to its contract with GTE. This expense
represented a reduction in the cumulative gross margin earned under the GTE
contract. Due to its merger with Bell Atlantic, GTE re-evaluated its billing and
customer care requirements and modified its billing conversion plans.
Gain on Disposal of Assets and Other
As previously discussed, in the second quarter of 2000, the Company recorded
pretax gains totaling $1,353.1 million from the exchange of wireless properties
with Bell Atlantic and GTE and the sale of certain PCS assets. In addition, the
Company recorded a pretax write-down of $15.0 million on its investment in APEX
Global Information Services, Inc. ("APEX"), a provider of Internet access
services. The write-off was recorded due to adverse market conditions facing
APEX and the company's bankruptcy filing.
During the fourth quarter of 1999, the Company recorded a pretax gain of
$43.1 million from the sale of a portion of its investment in WorldCom, Inc.
("WorldCom" formerly MCI WorldCom, Inc.) common stock. During the third quarter
of 1998, the Company also recorded a pretax gain of $80.9 million from the sale
of a portion of its investment in WorldCom common stock.
7
<PAGE>
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Communications-Wireless Operations
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
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<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
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Revenues and sales $837,065 $736,170 $1,573,504 $1,402,237 $3,073,434 $2,715,043
Operating income $258,562 $243,815 $ 479,251 $ 440,531 $ 925,198 $ 805,142
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</TABLE>
Wireless revenues and sales increased $100.9 million or 14 percent, $171.3
million or 12 percent and $358.4 million or 13 percent for the three, six and
twelve month periods ended June 30, 2000, respectively. Operating income
increased $14.7 million or 6 percent, $38.7 million or 9 percent and $120.1
million or 15 percent for the three, six and twelve month periods of 2000,
respectively. During the past twelve month period, customer growth continued as
the number of wireless customers grew to 5,893,445 from 4,767,453, an increase
of 1,125,992 customers or 24 percent. As previously discussed, in the second
quarter, ALLTEL completed the exchange of wireless properties with Bell Atlantic
and GTE. The exchange transactions accounted for approximately 689,000 of the
overall increase in wireless customers that occurred during the past twelve
months. Excluding the effect of the exchange transactions and other
acquisitions, ALLTEL placed nearly 945,000 gross units in service during the
first six months of 2000, compared to approximately 785,000 gross units for the
same period of 1999. Overall, the Company's market penetration rate (number of
customers as a percent of the total population in ALLTEL's service areas)
increased to 12.3 percent as of June 30, 2000. Customer churn (average monthly
rate of customer disconnects) increased slightly over prior periods and was 2.19
percent, 2.27 percent and 2.28 percent for the three, six and twelve months
ended June 30, 2000, respectively, compared to 1.97 percent, 2.06 percent and
2.14 percent for the same periods in 1999.
During the second quarter of 2000, ALLTEL changed the reporting presentation
for wireless customer roaming revenues to a gross basis. This change conforms
the Company's financial reporting policies to prevailing wireless industry
practice and is consistent with the reporting policies of the recently acquired
Bell Atlantic and GTE properties. Previously, ALLTEL netted these revenues
against roaming charges from other wireless service providers and included the
net amount in operations expense. Prior period revenue, operating expense and
revenue per customer statistical information have been reclassified to conform
to the new reporting presentation. This change does not affect previously
reported operating income or net income of the Company.
Wireless revenues and sales increased in all periods primarily due to the
growth in wireless customers. Increases in local airtime, roaming and
long-distance revenues, reflecting higher volumes of network usage, also
contributed to the growth in revenues and sales in all periods. The exchange of
wireless properties with Bell Atlantic accounted for approximately $26.0 million
of the overall increases in revenues and sales in the three and six month
periods of 2000. During 1999, ALLTEL also purchased wireless properties in
Alabama and Colorado and acquired a majority ownership interest in a wireless
property in Illinois. These acquisitions along with the exchange of wireless
properties with Bell Atlantic accounted for approximately $108.0 million of the
overall increase in revenues and sales in the twelve month period ended June 30,
2000.
Average revenue per customer per month was $52.25, $50.41 and $50.96 for the
three, six and twelve months ended June 30, 2000, respectively, compared to
$52.14, $49.67 and $50.25 for the same periods of 1999. Growth in average
revenue per customer per month in each period reflects increased usage of the
Company's network facilities, partially offset by the effects of bundled rate
plans, decreased roaming rates and continued penetration into lower-usage market
segments. The Company expects these industry-wide trends to continue. During the
second quarter of 2000, as a result of its new roaming agreements with Bell
Atlantic, GTE and Vodafone, the Company began offering new rate plans that
provide customers with national wireless coverage with no toll or roaming
charges. ALLTEL expects these rate plans to increase customer usage of its
network and to provide the Company the ability to compete effectively for the
high volume, roaming customer.
8
<PAGE>
ALLTEL's future revenue growth will be dependent upon the Company's success
in adding new customers in its existing markets, increasing customer usage of
its network and providing customers with enhanced products and services.
The growth in operating income in all periods of 2000 primarily reflects the
increases in revenues and sales noted above. Reductions in customer
service-related expenses also contributed to the growth in operating income in
the twelve month period ended June 30, 2000. Partially offsetting these
increases in operating income in all periods were increases in advertising and
other selling and marketing costs, consistent with the overall growth in
revenues and sales, the roll-out of new rate plans and expanded competition in
ALLTEL's service areas from other wireless service providers. Increased
depreciation and amortization expense resulting from with the growth in wireless
plant in service, and increased network-related expenses resulting from the
growth in customers and network traffic also affected operating income growth in
all periods. The reduction in customer service-related expenses reflect cost
savings realized as a result of the mergers with 360, Aliant and
Liberty, which resulted in the elimination of certain duplicative salaries and
other employee benefit costs.
The cost to acquire a new wireless customer represents sales, marketing and
advertising costs and the net equipment cost for each new customer added. Cost
to acquire a new wireless customer was $318, $301 and $300 for the three, six
and twelve month periods ended June 30, 2000, respectively, compared to $344,
$322 and $293 for the same periods of 1999. The decreases in the cost to acquire
a new customer in the three and six month periods primarily reflect a reduction
in sales commissions paid to national dealers due to proportionately lower sales
generated from these external distribution channels. While ALLTEL continues to
utilize its large dealer network, the Company has expanded its sales
distribution channels through Company 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. The increase in cost to acquire a new customer in the twelve month
period primarily reflects the increase in advertising and other selling and
marketing costs noted above, as well as increased equipment costs consistent
with the migration of customers to higher-priced digital phones.
Communications-Wireline Operations
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
--------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
Local service $205,430 $194,291 $405,700 $376,857 $ 799,067 $ 725,158
Network access and
long-distance 204,626 192,623 410,204 382,934 806,226 733,900
Miscellaneous 28,675 29,228 59,458 64,345 123,390 126,669
-------- -------- -------- -------- ---------- ----------
Total revenues and sales $438,731 $416,142 $875,362 $824,136 $1,728,683 $1,585,727
Operating income $167,632 $148,348 $338,256 $295,715 $ 661,605 $ 565,000
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</TABLE>
Wireline revenues and sales increased $22.6 million or 5 percent, $51.2
million or 6 percent and $143.0 million or 9 percent for the three, six and
twelve months ended June 30, 2000, respectively. Wireline operating income
increased $19.3 million or 13 percent, $42.5 million or 14 percent and $96.6
million or 17 percent for the three, six and twelve month periods ended June 30,
2000, respectively. During the past twelve months, access line growth, including
the sales of residential and second access lines, remained strong as the number
of access lines grew to 2,519,952 from 2,362,502, an increase of more than 6
percent.
Local service revenues increased $11.1 million or 6 percent, $28.8 million
or 8 percent and $73.9 million or 10 percent in the three, six and twelve month
periods ended June 30, 2000, respectively. The increases in all periods reflect
growth in customer access lines. Revenues from custom calling and other enhanced
services increased $3.9 million, $7.5 million and $16.6 million in the three,
six and twelve month periods
9
<PAGE>
ended June 30, 2000, respectively, also contributing to the overall growth in
local service revenues in all periods. Additionally, the acquisition of Standard
accounted for $11.6 million of the increase in local service revenues in the
twelve month period of 2000. Local service revenues also reflect the
reclassification of certain service-related revenues from miscellaneous
revenues, which accounted for $3.1 million of the overall increases in local
service revenues for the three, six and twelve months ended June 30, 2000.
Network access and long-distance revenues increased $12.0 million or 6
percent, $27.3 million or 7 percent and $72.3 million or 10 percent in the
three, six and twelve month periods ended June 30, 2000, respectively. The
increases in each period primarily reflect growth in customer access lines and
higher volumes of access usage. The acquisition of Standard accounted for $42.7
million of the increase in network access and long-distance revenues in the
twelve month period of 2000. The increases in network access and long-distance
revenues in all periods attributable to growth in customer access lines and
increased access usage were partially offset by a reduction in intrastate toll
revenues.
Miscellaneous revenues decreased $0.5 million or 2 percent, $4.9 million or
8 percent and $3.3 million or 3 percent for the three, six and twelve month
periods ended June 30, 2000, respectively. The decreases in each period
primarily reflect the reclassification of certain service-related revenues to
local service revenues previously discussed.
Growth in operating income for both periods of 2000 reflects the increases
in wireline operating revenues and reductions in customer service and other
general and administrative expenses, primarily resulting from the Company's
third quarter 1999 restructuring efforts. The increases in operating income
attributable to revenue growth and cost savings were partially offset by
increases in network-related expenses, depreciation and amortization, data
processing charges and selling and marketing expenses. The acquisition of
Standard accounted for $12.9 million of the increase in operating income in the
twelve month period of 2000. Network-related expenses, data processing charges
and selling and marketing expenses increased in both periods primarily due to
the growth in wireline customers and network usage, while depreciation and
amortization expense increased in both periods primarily due to growth in
wireline plant in service.
As reported in Note 8 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 and received a
favorable decision from the Superior Court of Fulton County, Georgia (the
"Superior Court"). The Georgia PSC appealed the Superior Court's decision, and
in July 1997, the Georgia Court of Appeals reversed the Superior Court's
decision. The Company appealed to the Georgia Supreme Court, and in October
1998, the Georgia Supreme Court, upheld the Georgia Court of Appeals' ruling.
The case was returned to the Superior Court, and in April 1999, the Superior
Court vacated and reversed the July 1996 order and remanded the case with
instructions to dismiss. The Georgia PSC appealed the Superior Court's decision.
On April 11, 2000, ALLTEL signed a settlement agreement with the Georgia PSC. As
part of the agreement, ALLTEL agreed to accelerate deployment of digital
subscriber lines and Internet service to its customers in Georgia and to reduce
certain optional local calling plan rates. In addition, the Company agreed to
future reductions in funds received from the Georgia Universal Service Fund.
These revenue reductions will total approximately $12 million during the
remainder of 2000 and approximately $18 million annually thereafter. In exchange
for the Company's commitments, the Georgia PSC agreed to withdraw its appeal of
the Superior Court's April 1999 decision. On June 27, 2000, the Georgia Court of
Appeals acknowledged that the case had been settled and thus its ruling was
moot, but denied the motion to dismiss and reversed the Superior Court's
decision. On June 30, 2000, an attorney for the Georgia PSC notified the Company
that the Georgia PSC may consider the settlement unenforceable in light of the
Georgia Court of Appeals' ruling. ALLTEL has appealed the decision of the
Georgia Court of Appeals to the Georgia Supreme Court, and if necessary, also
may file a separate action to enforce the terms of the settlement agreement.
Since the Company believes that the terms of the settlement agreement will be
enforced, ALLTEL has not established any additional reserves for refund related
to this matter.
10
<PAGE>
Regulatory Matters - Wireline Operations
ALLTEL's wireline subsidiaries, except for the former Aliant operations,
currently follow the accounting for regulated enterprises prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation". 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.
While the Company believes that the application of SFAS 71 is still
appropriate, it is possible that changes in regulation, legislation or
competition could result in the Company's wireline operations no longer being
subject to SFAS 71 in the near future. 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 would be material. The non-cash charge would include the write-off of
previously established regulatory assets and liabilities and an adjustment of
accumulated depreciation to reflect the difference between recorded depreciation
and the amount of depreciation that would have been recorded had ALLTEL's
wireline subsidiaries not been subject to rate regulation.
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 considered first by the U.S. Eighth Circuit
Court of Appeals (the "Eighth Circuit Court") and then by the U.S. Supreme Court
("Supreme 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. 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 November 1999, the FCC issued a decision outlining how it would interpret
the "necessary" and "impair" standards set forth in the 96 Act, and which
specific network elements it would require ILECs to unbundle as a result of its
interpretation of those standards. The FCC reaffirmed that ILECs must provide
unbundled access to the following network elements: loops, including loops used
to provide high-capacity and advanced telecommunications services, network
interface devices, local circuit switching, dedicated and shared transport,
signaling and call-related databases, and operations support systems. 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. The FCC has adopted national rules for the unbundling of
the high frequency portion of the local loop. The FCC also began a rulemaking
regarding the ability of carriers to use certain unbundled network elements as a
substitute for the ILEC's special access services.
11
<PAGE>
In July 2000, the Eighth Circuit Court issued a decision on the earlier
remand from the Supreme Court, and rejected, as contrary to the 96 Act, the use
of hypothetical network costs which the FCC had used in developing certain of
its pricing rules. The FCC's pricing rules related to unbundled network
elements, termination and transport were also vacated. The Eight Circuit Court
upheld its prior decision that ILECs universal subsidies should not be included
in the costs of providing network elements. Finally, the Eighth Circuit Court
also vacated the FCC's rules requiring that (1) ILECs recombine unbundled
network elements for competitors in any technically feasible combination; (2)
all preexisting interconnection agreements be submitted to the states for
review; and (3) the burden of proof for retention of a rural exemption be
shifted to the ILEC.
In October 1999, the FCC adopted two orders, currently on appeal, 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, high-cost support will be targeted to the highest cost wire
center within the state and support will be portable. That is, when a non-rural
ILEC loses a customer to a competitor, the competitor may receive the universal
service high-cost support for service provided to that customer. 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 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 96 Act
to refer to the legal entity that provides local exchange services. By May 1,
2000, states are required to establish different rates for pricing
interconnection and unbundled network elements in at least three defined
geographic areas within the state to reflect geographic cost differences. 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.
The Supreme Court has agreed to hear GTE's appeal of certain FCC universal
service rules. GTE contends that the universal service program should compensate
carriers for the historic costs of building their telephone networks rather than
basing the universal service payments on forward-looking costs. The U.S. Fifth
Circuit Court of Appeals had earlier rejected this argument, ruling that the use
of a forward-looking cost model was not unconstitutional.
Certain states in which the Company's wireline subsidiaries operate have
adopted alternatives to rate-of-return regulation, either through legislative or
regulatory commission actions. The Company has elected alternative regulation
for certain of its wireline subsidiaries in Alabama, Arkansas, Florida, Georgia,
Kentucky, North Carolina and Texas. The Company also has an alternative
regulation application pending in Pennsylvania. The Company continues to
evaluate alternative regulation for its other wireline subsidiaries.
The FCC instituted a rulemaking in June 1998 in which it proposed to amend
the access charge rules for rate-of-return Local Exchange Carriers ("LECs") in a
manner similar to that adopted earlier 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.
12
<PAGE>
The Company continues to evaluate rate-of-return regulation and price cap
regulation with respect to interstate access services. Currently, the Company's
wireline subsidiaries, except for the former Aliant operations, remain under
rate base rate-of-return regulation. For companies subject to rate-of-return
regulation, the FCC authorizes a rate-of-return that telephone companies may
earn on interstate services they provide. In October 1998, the FCC began a
proceeding to consider a represcription of the authorized rate of return for the
interstate access services of approximately 1,300 ILECs, including ALLTEL's
wireline subsidiaries. The currently prescribed rate of return is 11.25 percent.
The purpose of the FCC's proceeding is to determine whether the prescribed rate
of return corresponds to current market conditions and whether the rate should
be changed. A decision by the FCC related to this matter may be issued later
this year. However, ALLTEL and other ILECs have asked the FCC to address other
important issues relating to universal service, interconnection and access
reform before considering any represcription of the authorized return. The
Company's wireline subsidiaries currently receive compensation from
long-distance companies for intrastate, intraLATA services through access
charges or toll settlements that are subject to state regulatory commission
approval.
Because resolution of the regulatory matters discussed above that are
currently under FCC or judicial review is uncertain and regulations to implement
other provisions of the 96 Act have yet to be issued, ALLTEL cannot predict at
this time the specific effects, if any, that the 96 Act and future competition
will have on its wireline operations.
Communications-Emerging Businesses Operations
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
Revenues and sales $ 96,517 $66,033 $185,484 $125,533 $340,385 $221,791
Operating loss $(12,400) $(8,893) $(25,823) $(18,539) $(54,525) $(41,569)
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Emerging businesses consist of the Company's long-distance, CLEC, Internet
access, network management and PCS operations. Long-distance and Internet access
services are currently marketed to residential and business customers in the
majority of states in which ALLTEL provides communications services. During
1999, ALLTEL expanded its CLEC product offering to include residential customers
in additional markets in Arkansas, Florida, Nebraska, North Carolina,
Pennsylvania and Virginia. During 2000, ALLTEL plans to offer CLEC services in
additional markets in Alabama, Georgia, Missouri and South Carolina. Network
management services are marketed to business customers in select areas.
Following the sale of its Mobile, Ala. operations, ALLTEL currently offers PCS
in Birmingham, Ala. and Jacksonville, Fla.
Emerging businesses' revenues and sales increased $30.5 million or 46
percent, $60.0 million or 48 percent and $118.6 million or 53 percent for the
three, six and twelve month periods ended June 30, 2000. The increases in
revenues and sales in both periods primarily reflect growth in the
long-distance, CLEC and Internet operations, primarily driven by growth in
ALLTEL's customer base for these services. Long-distance revenues increased
$18.5 million, $38.9 million and $75.3 million, while CLEC revenues increased
$6.5 million, $9.7 million and $17.9 million in the three, six and twelve month
periods ended June 30, 2000, respectively. Additionally, during the three, six
and twelve month periods of 2000, Internet revenues increased $3.0 million, $5.9
million and $14.6 million, respectively. Operating losses sustained by emerging
businesses increased $3.5 million or 39 percent, $7.3 million or 39 percent and
$13.0 million or 31 percent for the three, six and twelve month periods of 2000,
respectively, primarily due to expansion of the CLEC operations into additional
markets.
13
<PAGE>
Information Services Operations
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
Revenues and sales $318,690 $313,850 $629,520 $619,248 $1,255,775 $1,216,964
Operating income $ 44,058 $ 43,286 $ 86,131 $ 83,738 $ 177,709 $ 170,197
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Information services' revenues and sales increased $4.8 million or 2
percent, $10.3 million or 2 percent and $38.8 million or 3 percent for the
three, six and twelve month periods ended June 30, 2000, respectively. Revenues
and sales increased in all periods of 2000, primarily due to growth in the
telecommunications outsourcing operations, which increased $15.9 million, $24.5
million and $69.9 million in the three, six and twelve month periods,
respectively. The increases in telecommunications revenues in all periods
primarily reflect additional billings to affiliates as a result of the Company's
recent acquisitions. Revenue growth from the telecommunications operations was
partially offset by decreased revenues from the financial services business.
Financial services revenues, which includes the residential lending and
international operations, decreased in all periods of 2000 primarily reflecting
the merger and consolidation activity in the domestic financial services
industry. Financial services revenues for the six and twelve months ended June
30, 2000 were also reduced by a $5.3 million cumulative adjustment related to an
outsourcing agreement accounted for under the percentage-of-completion method.
Operating income increased $0.8 million or 2 percent, $2.4 million or 3
percent and $7.5 million or 4 percent for the three, six and twelve month
periods ended June 30, 2000, respectively. The increases in operating income in
all periods primarily reflect the growth in revenues and sales noted above,
partially offset by lower margins earned by the financial services operations.
Financial services operating margins decreased in all periods of 2000 due to the
loss of higher margin operations from contract terminations. Financial services
operating margins for the six and twelve month periods were also reduced by the
revenue adjustment recorded in the first quarter of 2000 noted above. Operating
income growth for all periods of 2000 also reflects increases in depreciation
and amortization expense. Depreciation and amortization expense increased in
each period of 2000 primarily due to the acquisition of additional data
processing equipment and an increase in amortization of internally developed
software.
Other Operations
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------------- ------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
Revenues and sales $168,311 $143,997 $306,342 $261,061 $625,099 $615,849
Operating income $ 4,578 $ 6,064 $ 8,953 $ 10,314 $ 20,200 $ 23,973
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other operations consist of the Company's product distribution and directory
publishing operations. Revenues and sales increased $24.3 million or 17 percent,
$45.3 million or 17 percent and $9.2 million or 2 percent for the three, six and
twelve month periods ended June 30, 2000, respectively. Operating income
decreased $1.5 million or 25 percent, $1.4 million or 13 percent and $3.8
million or 16 percent for the three, six and twelve month periods ended June 30,
2000, respectively.
Revenues and sales increased in the three and six month periods of 2000
primarily due to additional sales of telecommunications and data products,
including sales to affiliates. Sales of telecommunications and data products
increased $25.2 million and $40.0 million in the three and six month periods,
respectively, with sales to affiliates accounting for $11.9 million and $27.9
million of the overall increases in the three and six month periods,
respectively. Sales to affiliates increased primarily due to additional
purchases made by the Company's wireline subsidiaries reflecting the Aliant and
Standard acquisitions.
14
<PAGE>
Sales of telecommunications and data products decreased $5.3 million in the
twelve month period of 2000 due to a $31.7 million reduction in affiliate sales.
The decrease in affiliate sales resulted from a change in reporting intercompany
transactions with the wireless subsidiaries. Beginning in 1999, these
intercompany transactions were recorded at cost as inventory transfers. The
decrease in affiliate sales in the twelve month period was partially offset by
increased sales to non-affiliates by the product distribution operations and an
increase in directory publishing revenues. Directory publishing revenues
increased $13.8 million in the twelve month period primarily due to an increase
in the number of directory contracts published.
The decreases in other operations operating income for all periods of 2000
primarily reflect lower profit margins realized by the product distribution
operations and an increase in data processing costs. The decrease in profit
margins realized by the product distribution operations reflect lower margins
earned on affiliated sales and increased competition from other distributors and
from direct sales by manufacturers.
Corporate Expenses
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
Corporate operating expenses $ 9,937 $9,851 $18,694 $15,588 $ 42,657 $ 32,474
Merger and integration expenses
and other charges 6,770 - 16,906 - 107,426 252,000
Provision to reduce carrying
value of certain assets - - - - - 55,000
-------- ------- ------- ------- -------- --------
Total corporate expenses $16,707 $9,851 $35,600 $15,588 $150,083 $339,474
------------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated in the above table, corporate expenses include the merger and
integration expenses and other charges and provision to reduce carrying value of
certain assets, as previously discussed. Excluding the impact of the merger and
integration expenses, other charges and asset write-downs in each period,
corporate expenses would have increased $0.1 million or 1 percent, $3.1 million
or 20 percent and $10.2 million or 31 percent for the three, six and twelve
month periods ended June 30, 2000. Net of the merger and integration expenses
and other charges and asset write-downs, the increases in corporate expenses in
the six and twelve month periods of 2000 reflect increases in employee benefit
costs and depreciation and amortization expense.
Non-Operating Income, Net
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------------- ------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 1999 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------
Equity earnings in
unconsolidated partnerships $39,121 $29,647 $71,718 $59,971 $116,772 $124,703
Minority interest in
consolidated partnerships (32,008) (34,777) (51,756) (64,841) (103,562) (119,917)
Other income, net 11,634 14,421 24,427 27,695 51,203 70,455
------- -------- ------- ------- -------- --------
Non-operating income, net $18,747 $ 9,291 $44,389 $22,825 $ 64,413 $ 75,241
----------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated in the above table, non-operating income, net increased $9.5
million or 102 percent, increased $21.6 million or 94 percent and decreased
$10.8 million or 14 percent in the three, six and twelve months ended June 30,
2000, respectively. The decreases in minority interest expense in all periods
primarily reflect ALLTEL's acquisition of the remaining ownership interests in
wireless limited partnerships serving Richmond, Va., completed during the first
quarter of 1999, and in a Georgia Rural Service Area completed in January 2000.
The Company increased its ownership in the Richmond, Va. property to 100 percent
through the exchange of its minority interest investment in a wireless limited
partnership serving Orlando, Fla. The transfer of the interest in the Orlando,
Fla. limited partnership primarily accounts for the reduction in equity earnings
in the twelve month period ended June 30, 2000.
15
<PAGE>
The decreases in other income, net in all periods primarily reflect a reduction
in capitalized interest costs. In addition, other income, net for the twelve
months ended June 30, 1999 includes a one-time pretax gain of $7.5 million
related to the sale of a minority interest in a subsidiary.
Interest Expense
Interest expense increased $6.8 million or 10 percent, $6.3 million or 5
percent and $9.7 million or 4 percent in the three, six and twelve month periods
ended June 30, 2000, respectively. The increases in interest expense in all
periods reflect increases in the both the weighted average borrowing amounts and
rates applicable to ALLTEL's commercial paper program and revolving credit
agreement. Additional borrowings under these credit facilities were used
principally to finance the Company's cash payment to complete the exchange of
wireless properties with Bell Atlantic and GTE.
Income Taxes
Income tax expense increased $573.4 million or 385 percent, $588.6 million
or 210 percent and $639.7 million or 129 percent for the three, six and twelve
month periods ended June 30, 2000, respectively. The increases in income tax
expense in each period primarily reflects the tax-related impact of the gain
recognized on the exchange of wireless assets and the other non-recurring and
unusual items previously discussed. Excluding the impact on tax expense of the
non-recurring and unusual items in each period, income tax expense would have
increased $13.2 million or 9 percent, $32.6 million or 12 percent and $51.6
million or 10 percent in the three, six and twelve month periods ended June 30,
2000, respectively, consistent with the overall growth in the Company's earnings
from continuing operations before non-recurring and unusual items.
Average Common Shares Outstanding
The average number of common shares outstanding increased 1 percent in the
three and six month periods and increased 2 percent in the twelve month period
ended June 30, 2000, respectively. The increases in all periods primarily
reflect the additional shares issued in September 1999 in connection with the
AIR and Southern Data acquisitions
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
ALLTEL's total capital structure was $9.8 billion at June 30, 2000,
reflecting 54 percent common and preferred equity and 46 percent debt. The
Company's capital structure at December 31, 1999 was $8.0 billion and reflected
52 percent common and preferred equity and 48 percent debt. The Company believes
it has adequate internal and external resources available to finance its ongoing
operating requirements, including capital expenditures, business development and
the payment of dividends.
<TABLE>
Six Months Ended Twelve Months Ended
(Dollars in thousands) June 30, June 30,
------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from (used in):
Operating activities $719,694 $612,755 $1,606,968 $1,425,928
Investing activities (762,037) (517,985) (1,305,421) (1,141,884)
Financing activities 30,156 (133,582) (346,392) (316,230)
-------- -------- ---------- -----------
Decrease in cash and short-term investments $(12,187) $(38,812) $ (44,845) $ (32,186)
------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Cash Flows from Operations
Cash provided from operations continues to be ALLTEL's primary source of
liquidity. The increases in the six and twelve month periods ended June 30, 2000
reflect growth in operating income of the Company before non-recurring and
unusual charges. The increases in cash provided from operations resulting from
earnings growth in both periods of 2000 were partially offset by changes in
working capital requirements, including timing differences in the receipt and
payment of trade receivables and payables.
Cash Flows used in Investing Activities
Capital expenditures for the six and twelve month periods of 2000 were
$407.6 million and $979.4 million, respectively, compared to $434.7 million and
$1,028.9 million for the same periods in 1999. During the past two-year period,
the Company funded the majority of its capital expenditures through internally
generated funds. Capital expenditures were incurred primarily to upgrade
ALLTEL's telecommunications network. 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 $1,071.0 million for 2000, which are
expected to be funded primarily from internally generated funds.
Cash flows used in investing activities for six and twelve month period
ended June 30, 2000 include cash outlays for the acquisition of property of
$625.8 million and $630.3 million, respectively. The amounts principally consist
of $624.1 million paid by ALLTEL in connection with the exchange of wireless
assets with Bell Atlantic completed in April 2000, as previously discussed. Cash
flows from investing activities for the six and twelve month periods of 1999
include cash outlays for the acquisition of property of $95.4 million and $131.5
million, respectively. These amounts are net of cash acquired of approximately
$24.1 million received in the Standard acquisition and principally consist of
cash outlays of $46.5 million for a wireless property in Colorado, $30.6 million
for a wireless property in Illinois, and $20.0 million for a wireless property
in Alabama. In addition to these acquisitions, cash outlays for the twelve
months ended June 30, 1999, include $34.6 million related to the purchase of two
wireless properties in Georgia.
Cash flows used in investing activities for the six and twelve month periods
ended June 30, 2000 include proceeds from the sale of assets of $224.5 million.
These amounts consist of $192.5 million received by ALLTEL to complete the
exchange of wireless assets with GTE in June 2000 and $32.0 million received
from the sale of PCS assets related to the Mobile, Ala. and Pensacola, Fla.
markets as previously discussed. Cash flows used in investing activities for the
six and twelve month periods ended June 30, 2000 also include proceeds from the
return on investments of $89.3 million and $116.9 million, respectively,
primarily consisting of cash distributions received from ALLTEL's wireless
minority investments. Cash flows used in investing activities for the twelve
month periods ended June 30, 2000 and 1999 also include proceeds from the sale
of investments of $45.0 million and $101.5 million, respectively. These amounts
principally consist of proceeds of $45.0 million and $87.6 million,
respectively, from the sale of a portion of the Company's investment in WorldCom
common stock. The proceeds received from the asset and investment sales were
used primarily to reduce borrowings under the Company's commercial paper program
or revolving credit agreement.
Cash Flows from Financing Activities
Dividend payments remain a significant use of capital resources. Common and
preferred dividend payments were $201.8 million and $390.1 million for the six
and twelve month periods ended June 30, 2000, respectively, compared to $189.9
million and $339.2 million for the same periods in 1999. The increases in
dividend payments in both periods primarily reflect the additional shares
outstanding due to the mergers with Aliant, AIR and Southern Data, as well as
growth in the annual dividend rate on ALLTEL's common stock.
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The Company has a line of credit under a revolving credit agreement, which
expires in October 2004. On April 3, 2000, the borrowing capacity under this
agreement was increased to $1.4 billion. In the first quarter of 2000, the
Company established a commercial paper program. Under this program, commercial
paper borrowings are supported by the Company's revolving credit agreement and
are deducted from the revolving credit agreement in determining the amount
available for borrowing. Accordingly, the total amount outstanding under the
commercial paper program and the indebtedness incurred under the revolving
credit agreement may not exceed $1.4 billion. ALLTEL classifies commercial paper
borrowings as long-term debt because the revolving credit agreement supports
these borrowings. Commercial paper borrowings outstanding at June 30, 2000 were
$632.0 million with a weighted average interest rate of 6.7 percent. The
commercial paper borrowings represent all of the long-term debt issued in the
six and twelve month periods ended June 30, 2000. No borrowings were outstanding
under the revolving credit agreement at June 30, 2000, compared to $341.1
million and $405.7 million that were outstanding at December 31, 1999 and June
30, 1999, respectively. As discussed previously, proceeds from the sale of
WorldCom common stock were used primarily to reduce the amount of borrowings
outstanding under the revolving credit agreement. In March 1999, ALLTEL filed a
shelf registration statement with the Securities and Exchange Commission
providing for the issuance of up to $500 million in aggregate initial offering
price of unsecured debt securities. In April 1999, ALLTEL issued $300 million of
debentures, under this shelf registration statement to reduce borrowings
outstanding under the Company's revolving credit agreement. The $300 million
debentures, net of issuance costs, represent substantially all of the long-term
debt issued in the six and twelve month periods ended June 30, 1999.
Retirements of long-term debt were $376.7 million and $486.2 million for the
six and twelve months ended June 30, 2000, respectively, compared to $235.0
million and $271.9 million for the same periods of 1999. The net reductions from
December 31, 1999 and June 30, 1999 in revolving credit borrowings of $341.1
million and $405.7 million, respectively, represent the majority of the
long-term debt retired in the six and twelve month periods ended June 30, 2000,
respectively. Scheduled long-term debt retirements, net of revolving credit
agreement activity, amounted to $35.6 million and $80.5 million for the six and
twelve month periods ended June 30, 2000, respectively, compared to $62.2
million and $88.7 million for the same periods of 1999. Retirements of long-term
debt for the six and twelve months ended June 30, 1999 also reflect net
reductions of $172.8 million and $183.2 million, respectively, in revolving
credit borrowings.
Distributions to minority investors were $39.0 million and $117.8 million
for the six and twelve months ended June 30, 2000, respectively, compared to
$34.5 million and $98.2 million for the same periods in 1999. The increases in
distributions for both periods reflect the improved operating results of the
wireless properties managed by the Company.
On July 20, 2000, ALLTEL's Board of Directors adopted a stock repurchase
plan that allows the Company to repurchase up to 7.5 million shares of its
outstanding common stock. Shares will be repurchased in open market
transactions. ALLTEL expects to finance the cost of the repurchase program
through internally generated funds and from the sale of non-strategic assets.
Recently Issued Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements", ("SAB 101"), which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition in consolidated financial statements. To conform its revenue
recognition policies to be consistent with the provisions of SAB 101, the
Company will change its method of recognizing wireless access revenues in 2000.
Previously, monthly non-refundable wireless access revenues were recognized when
billed in accordance with contractual arrangements with customers. With this
change, the Company will recognize wireless access revenues over the period in
which the corresponding services are provided. Because ALLTEL bills its
customers on a cycle basis throughout the month, this change in accounting
results in the deferral of approximately 15 days of wireless access revenue.
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The Company is currently evaluating the impact, if any, that SAB 101 may have on
its other communications revenue recognition policies. In June 2000, the SEC
amended SAB 101 to delay reporting accounting changes as a result of applying
the provisions of SAB 101 until the fourth quarter. Accordingly, the Company
will first report the impact of the change in recognizing wireless access
revenues along with any other changes in revenue recognition as a cumulative
effect of a change in accounting in ALLTEL's annual audited consolidated
financial statements for the year ended December 31, 2000. The impact of this
one-time cumulative change in accounting will be material to net income in 2000.
There is no impact to the Company's cash flow from operations as a result of
this change. This change in accounting would not have been material to the
Company's previously reported consolidated results of operations, financial
position or cash flows, if adopted in prior periods.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and for Hedging Activities".
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.
Other Financial Information
During the first six months of 2000, there were no material changes in the
market risks discussed in the Company's Annual Report on Form 10-K, as amended
for the year ended December 31, 1999.
On July 31, 2000, ALLTEL agreed to purchase wireless properties in New
Orleans and Baton Rouge, Louisiana from SBC Communications, Inc. The purchase
will also include three rural service areas in Iberville, St. James and
Plaquemines parishes. Upon completion of the transaction, ALLTEL will pay about
$400 million in cash and will acquire approximately 160,000 wireless customers
and 300,000 paging customers. The transaction is expected to close later this
year.
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ALLTEL CORPORATION
FORM 10-Q
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The Company's 2000 Annual Meeting of Stockholders was held on
April 20, 2000. At the meeting, the following items were
submitted to a vote of stockholders:
(1) The election of five directors, constituting the class of
the Board of Directors, who will serve a three-year term
expiring at the 2003 Annual Meeting of Stockholders:
Nominee Votes For Votes Withheld
------- --------- --------------
Joe T. Ford 275,539,648 2,090,205
Dennis E. Foster 275,582,417 2,047,436
John P. McConnell 275,588,834 2,041,019
Fred W. Smith 275,553,760 2,076,093
Josie C. Natori 275,523,631 2,106,222
(2) A stockholder proposal requesting that future stock splits
of ALLTEL's common stock would require two-thirds approval
of all outstanding shares and a pre-split price of at least
$1,000 per share was not adopted with 5,978,509 votes for,
241,406,149 votes against and 3,529,326 abstentions. Broker
non-votes related to this proposal totaled 26,715,869.
Item 6. Exhibits and Reports on Form 8-K
(a) See the exhibits specified on the Index of Exhibits located at
Page 22.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated April 3, 2000, reporting under
Item 2, Acquisition or Disposition of Assets, that the Company
had completed its exchange of wireless assets with Bell Atlantic
in Nevada, Iowa, Arizona, New Mexico and Texas. The Form 8-K
also included under Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits, unaudited pro forma summary
information for the Company after giving effect to the exchange
of wireless assets with Bell Atlantic.
Current Report on Form 8-K dated June 30, 2000, reporting under
Item 2, Acquisition or Disposition of Assets, that the Company
had completed the remaining wireless property exchanges with
Bell Atlantic and GTE. The pro forma financial information
required pursuant to Article 11 of Regulation S-X will be filed
by amendment not later than 75 days after the date of the Form
8-K.
Current Report on Form 8-K dated July 19, 2000, reporting under
Item 5, Other Events, the Company's Press Release announcing its
second quarter results from operations.
No other reports on Form 8-K have been filed during the quarter
for which this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLTEL CORPORATION
-----------------------------------------------
(Registrant)
/s/ Jeffery R. Gardner
-----------------------------------------------
Jeffery R. Gardner
Senior Vice President - Chief Financial Officer
(Principal Financial Officer)
August 9, 2000
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ALLTEL CORPORATION
FORM 10-Q
INDEX OF EXHIBITS
Form 10-Q Sequential
Exhibit No. Description Page No.
----------- ----------- ----------
(19) Interim Report to Stockholders and 23 - 37
Notes to Unaudited Consolidated Financial
Statements for the periods ended June 30,
2000 and 1999
(27) Financial Data Schedule 38
for the six months ended June 30, 2000
22
