UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 March 31, 2000:
315,279,643
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The Exhibit Index is located at sequential page 19.
<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 periods ended March 31, 2000 and 1999, a copy of which is
attached hereto as Exhibit 19, are incorporated herein by reference:
Consolidated Statements of Income - for the three and twelve months
ended March 31, 2000 and 1999.
Consolidated Balance Sheets - March 31, 2000 and 1999 and
December 31, 1999.
Consolidated Statements of Cash Flows - for the three and twelve
months ended March 31, 2000 and 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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GENERAL
The following is a discussion and analysis of the historical results of
operations and financial condition of ALLTEL Corporation ("ALLTEL" or the
"Company"). This discussion should be read in conjunction with the unaudited
consolidated financial statements, including the notes thereto, for the interim
periods ended March 31, 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 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.
2
<PAGE>
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. On July 2, 1999, the Company
completed its merger with Aliant Communications Inc. ("Aliant"). The 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 shares 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 2 to the unaudited consolidated financial statements for additional
information regarding the merger transactions. As further discussed below,
results for the three and twelve months ended March 31, 2000 were affected by
merger and integration expenses and other non-recurring and unusual items.
OVERVIEW-CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
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Three Months Ended Twelve Months Ended
March 31, March 31,
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(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues and sales $1,603,429 $1,483,753 $6,421,947 $5,831,253
Operating income $ 405,445 $ 373,402 $1,557,150 $1,098,155
Net income $ 216,042 $ 186,544 $ 813,132 $ 605,331
Basic earnings per share $.69 $.60 $2.59 $1.97
Diluted earnings per share $.68 $.59 $2.56 $1.95
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</TABLE>
Operating results for the three and twelve months ended March 31, 2000
summarized in the above table reflect strong market demand for the Company's
communications services as highlighted by the strong performance of ALLTEL's
wireless and wireline businesses.
Reported operating income, net income and earnings per share for the three
and twelve month periods ended March 31, 2000 and for the twelve month period
ended March 31, 1999 include the effects of various non-recurring and unusual
items. Adjusted to exclude the effects of these non-recurring and unusual items
in each period, operating income would have increased $42.2 million or 11
percent and $252.7 million or 18 percent, and net income would have increased
$35.4 million or 19 percent and $155.3 million or 22 percent in the three and
twelve month periods ended March 31, 2000, respectively. In addition, when
excluding the effects of the non-recurring and unusual items, basic earnings per
share would have increased 17 percent and 19 percent and diluted earnings per
share would have increased 19 percent in both the three and twelve month periods
ended March 31, 2000, respectively.
3
<PAGE>
Operating income, net income and earnings per share adjusted for the
non-extraordinary, non-recurring and unusual items are summarized in the
following table:
<TABLE>
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Three Months Ended Twelve Months Ended
March 31, March 31,
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(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Operating income, as reported $405,445 $373,402 $1,557,150 $1,098,155
Non-recurring and unusual items:
Merger and integration expenses and other charges 10,136 - 100,656 252,000
Provision to reduce carrying value of certain assets - - - 55,000
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Operating income, as adjusted $415,581 $373,402 $1,657,806 $1,405,155
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Net income, as reported $216,042 $186,544 $ 813,132 $ 605,331
Non-recurring and unusual items, net of tax:
Merger and integration expenses and other charges 5,879 - 71,923 200,995
Provision to reduce carrying value of certain assets - - - 33,605
Gain on disposal of assets and other - - (27,185) (137,325)
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Net income, as adjusted $221,921 $186,544 $ 857,870 $ 702,606
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Basic earnings per share, as reported $.69 $.60 $2.59 $1.97
Non-recurring and unusual items, net of tax:
Merger and integration expenses and other charges .01 - .23 .66
Provision to reduce carrying value of certain assets - - - .11
Gain on disposal of assets and other - - (.09) (.45)
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Basic earnings per share, as adjusted $.70 $.60 $2.73 $2.29
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Diluted earnings per share, as reported $.68 $.59 $2.56 $1.95
Non-recurring and unusual items, net of tax:
Merger and integration expenses and other charges .02 - .23 .65
Provision to reduce carrying value of certain assets - - - .11
Gain on disposal of assets and other - - (.09) (.45)
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Diluted earnings per share, as adjusted $.70 $.59 $2.70 $2.26
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</TABLE>
The operating income, net income and earnings per share impact of the
non-recurring and unusual items has been presented as supplemental information
only. The non-recurring items reflected in the above table are discussed in
reference to the caption in the consolidated statements of income in which they
are reported.
Merger and Integration Expenses and Other Charges
- -------------------------------------------------
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
4
<PAGE>
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 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 March 31, 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.
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 March 31, 2000, the remaining unpaid liability related to the Company's
merger and integration and restructuring activities was $59.0 million,
consisting of contract termination fees of $29.9 million, severance and
employee-related expenses of $17.5 million, lease cancellation and termination
costs of $7.7 million, and other integration costs of $3.9 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 3 to the unaudited consolidated financial statements for
additional information regarding the merger and integration expenses and other
charges).
5
<PAGE>
Provision to Reduce Carrying Value of Certain Assets
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During the third quarter of 1998, the Company recorded a $55.0 million
non-recurring operating expense related to its contract with GTE Corporation
("GTE"). This expense represented a reduction in the cumulative gross margin
earned under the GTE contract. Due to its pending merger with Bell Atlantic
Corporation ("Bell Atlantic"), GTE re-evaluated its billing and customer care
requirements and modified its billing conversion plans.
Gain on Disposal of Assets and Other
- ------------------------------------
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 MCI WorldCom, Inc.
("MCI WorldCom") common stock. During the twelve month period ended March 31,
1999, the Company recorded pretax gains totaling $229.1 million from the sale of
a portion of its investment in MCI WorldCom common stock. These gains were
partially offset by termination fees of $3.5 million associated with the early
retirement of long-term debt by a subsidiary.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Communications-Wireless Operations
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Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
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2000 1999 2000 1999
---- ---- ---- ----
Revenues and sales $695,230 $634,585 $2,803,896 $2,453,040
Operating income $220,689 $196,716 $ 910,451 $ 736,781
- -------------------------------------------------------------------------------
Wireless revenues and sales increased $60.6 million or 10 percent and $350.9
million or 14 percent for the three and twelve month periods ended March 31,
2000, respectively. Operating income increased $24.0 million or 12 percent and
$173.7 million or 24 percent for the three and twelve month periods ended
March 31, 2000, respectively. During the past twelve month period, customer
growth remained strong as the number of wireless customers grew to 5,123,457
from 4,639,171, an increase of 484,286 customers or 10 percent. During the last
nine months of 1999, ALLTEL purchased wireless properties in Alabama and
Colorado and acquired a majority ownership interest in a wireless property in
Illinois. These transactions accounted for approximately 61,000 of the overall
increase in wireless customers that occurred during the past twelve month
period. Including the effect of acquisitions, ALLTEL placed more than 482,000
gross units in service during the first three months of 2000, compared to
504,000 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 13.0 percent as of March 31, 2000. Customer
churn (average monthly rate of customer disconnects) increased slightly and was
2.35 percent and 2.23 percent for the three and twelve months ended March 31,
2000, respectively, compared to 2.23 percent and 2.12 percent for the same
periods in 1999.
Wireless revenues and sales increased in all periods primarily due to the
growth in wireless customers. Increases in local airtime and roaming revenues,
reflecting higher volumes of network usage, also contributed to the growth in
revenues and sales in all periods. The acquisition of wireless properties
accounted for approximately $74.2 million of the increase in revenues and sales
in the twelve month period ended March 31, 2000. Average revenue per customer
per month was $46.01 and $48.11 for the three and twelve months ended March 31,
2000, respectively, compared to $46.46 and $47.40 for the same two periods of
1999. Average revenue per customer per month continues to be affected by
industry-wide trends of bundled rate plans, decreased roaming rates and
continued penetration into lower-usage market segments. The Company expects
these trends to continue. In addition, the growth rate of new customers is
expected to decline as the Company's wireless customer base grows. Accordingly,
future revenue growth will be dependent upon ALLTEL's success in maintaining
customer growth in existing markets, increasing customer usage of the Company's
network and providing customers with enhanced products and services.
6
<PAGE>
The growth in operating income for the periods ended March 31, 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 March 31, 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 and due to expanded competition in ALLTEL's service areas
from other wireless service providers. Increased depreciation and amortization
expense consistent with the growth in wireless plant in service, and increased
network-related expenses consistent with 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 $284 and $304 for the three and twelve
month periods ended March 31, 2000, respectively, compared to $302 and $286 for
the same periods of 1999. The decrease in the cost to acquire a new customer in
the three month period primarily reflects a reduction in sales commissions paid
to national dealers due to proportionately lower sales generated from these
external distribution channels. Although ALLTEL intends to continue to utilize
its large dealer network, the Company has expanded its internal sales
distribution channels to include its own retail stores and kiosks located in
shopping malls and other retail outlets. Incremental sales costs at a Company
retail store or kiosk are significantly lower than commissions paid to national
dealers. Accordingly, ALLTEL intends to manage the costs of acquiring new
customers by continuing to expand and enhance its internal distribution
channels. 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
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Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
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2000 1999 2000 1999
---- ---- ---- ----
Local service $200,270 $182,563 $ 787,931 $ 699,408
Network access and long-distance 205,578 190,312 794,222 715,617
Miscellaneous 30,783 35,119 123,941 126,163
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Total revenues and sales $436,631 $407,994 $1,706,094 $1,541,188
Operating income $170,624 $147,367 $ 642,321 $ 545,479
- --------------------------------------------------------------------------------
Wireline revenues and sales increased $28.6 million or 7 percent and $164.9
million or 11 percent for the three and twelve months ended March 31, 2000,
respectively. Wireline operating income increased $23.3 million or 16 percent
and $96.8 million or 18 percent for the three and twelve month periods ended
March 31, 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 2,483,616 from 2,333,629, an increase of 6
percent.
Local service revenues increased $17.7 million or 10 percent and $88.5
million or 13 percent in the three and twelve month periods ended March 31,
2000, respectively. The increases in both periods primarily reflect growth in
customer access lines, as noted above. Revenues from custom calling and other
enhanced services increased $3.4 million and $15.5 million in the three and
twelve month periods ended March 31, 2000, respectively, also contributing to
the overall growth in local service revenues in both periods. 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 and twelve months ended
March 31, 2000. Additionally, the acquisition of Standard accounted for $28.6
million of the increase in local service revenues in the twelve month period of
2000.
7
<PAGE>
Network access and long-distance revenues increased $15.3 million or 8
percent and $78.6 million or 11 percent for the three and twelve month periods
ended March 31, 2000, respectively. The increases in both periods primarily
reflect growth in customer access lines and higher volumes of access usage. The
acquisition of Standard accounted for $44.0 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 both 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 $4.3 million or 12 percent and $2.2 million
or 2 percent for the three and twelve month periods ended March 31, 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 reflect 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 $32.2 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 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 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 announced that it had reached an agreement
with the Georgia PSC to settle this case. As part of the agreement, the Company
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.
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.
8
<PAGE>
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.
In October 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, 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.
9
<PAGE>
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.
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 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
- ---------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- ---------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues and sales $ 88,642 $59,443 $309,449 $192,992
Operating loss $(13,423) $(9,646) $(51,018) $(43,280)
- ---------------------------------------------------------------------------
Emerging businesses consist of the Company's long-distance, Internet access,
CLEC, 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. ALLTEL
currently offers PCS in Jacksonville, Fla. and in the Birmingham and Mobile,
Ala. markets.
10
<PAGE>
Emerging businesses' revenues and sales increased $29.2 million or 49
percent and $116.5 million or 60 percent for the three and twelve month periods
ended March 31, 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 $16.3 million and $56.2 million in the three
and twelve month periods ended March 31, 2000, respectively, while CLEC revenues
increased $3.2 million and $16.0 million for the same periods of 2000,
respectively. Additionally, during the three and twelve month periods of 2000,
Internet revenues increased $2.9 million and $15.6 million, respectively.
Operating losses sustained by emerging businesses increased $3.8 million or 39
percent and $7.7 million or 18 percent for the three and twelve month periods
ended March 31, 2000, respectively, primarily due to expansion of the CLEC
operations.
Information Services Operations
- -------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- -------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues and sales $310,830 $305,398 $1,250,935 $1,200,305
Operating income $ 42,073 $ 40,452 $ 176,937 $ 166,278
- -------------------------------------------------------------------------------
Information services revenues and sales increased $5.4 million or 2 percent
and $50.6 million or 4 percent for the three and twelve month periods ended
March 31, 2000, respectively. Revenues and sales increased in both periods of
2000, primarily due to growth in the telecommunications outsourcing operations,
which increased $8.6 million and $67.8 million in the three and twelve month
periods, respectively. The increases in telecommunications revenues in both
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, including the residential
lending and international operations, decreased in both periods of 2000 as
revenues earned from new and existing contracts were more than offset by reduced
revenues from selected large customers and contract terminations. These reduced
revenue streams primarily reflect the merger and consolidation activity in the
domestic financial services industry. Financial services revenues for the three
and twelve months ended March 31, 2000 were also affected by a $5.3 million
unfavorable cumulative adjustment related to an outsourcing agreement accounted
for under the percentage-of-completion method.
Operating income increased $1.6 million or 4 percent and $10.7 million or 6
percent for the three and twelve month periods ended March 31, 2000,
respectively. The increase in operating income in the three month period
primarily reflects the growth in revenues and sales noted above, partially
offset by lower margins earned by the financial services operations. The
increase in operating income for the twelve month period reflects the growth in
revenues and sales noted above and improved profit margins realized from the
telecommunications operations. These increases in operating income were
partially offset by lower margins realized by the financial services business.
Financial services operating margins for the three and twelve month periods were
affected by the unfavorable revenue adjustment recorded in the first quarter of
2000 noted above. Financial services operating income for the twelve month
period ended March 31, 2000 also includes a $4.6 million unfavorable cumulative
margin adjustment related to another outsourcing agreement recorded in the
second quarter of 1999. In addition to reflecting the affects of these
unfavorable contract adjustments, financial services operating margins also
decreased in both periods of 2000 due to the loss of higher margin operations
due to contract terminations. Operating income growth for both periods of 2000
also reflects increases in depreciation and amortization expense. Depreciation
and amortization expense increased in both periods of 2000 primarily due to the
acquisition of additional data processing equipment and an increase in
amortization of internally developed software.
11
<PAGE>
Other Operations
- -------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- -------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues and sales $138,031 $117,064 $600,785 $613,299
Operating income $ 4,375 $ 4,250 $ 21,686 $ 25,039
- -------------------------------------------------------------------------------
Other operations consist of the Company's product distribution and directory
publishing operations. Revenues and sales increased $21.0 million or 18 percent
and decreased $12.5 million or 2 percent for the three and twelve month periods
ended March 31, 2000, respectively. Operating income increased $0.1 million or 3
percent and decreased $3.4 million or 13 percent for the three and twelve month
periods ended March 31, 2000, respectively.
Revenues and sales increased in the three month period of 2000 primarily due
to additional sales of telecommunications and data products to affiliates. Sales
to affiliates increased $16.1 million in the three month period ended March 31,
2000, primarily due to additional purchases made by the Company's wireline
subsidiaries reflecting the Aliant and Standard acquisitions. Sales of
telecommunications and data products decreased $27.0 million in the twelve month
period of 2000 due to a $45.7 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
retail sales and sales to non-affiliates by the product distribution operations
and increased directory publishing revenues. During the twelve month period
ended March 31, 2000, directory publishing revenues increased $14.5 million
primarily due to an increase in the number of directory contracts published.
The increase in other operations operating income for the three month period
of 2000 primarily reflects the increase in revenues and sales noted above,
partially offset by lower gross profit margins realized by the product
distribution operations and an increase in data processing costs. The decrease
in gross 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. The decrease in other
operations operating income for the twelve month period of 2000 primarily
reflects the decrease in revenues and sales noted above, as well as lower gross
profit margins realized by the product distribution operations.
Corporate Expenses
- --------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- --------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Corporate operating expenses $ 8,757 $5,737 $ 42,571 $ 25,142
Merger and integration expenses
and other charges 10,136 - 100,656 252,000
Provision to reduce carrying
value of certain assets - - - 55,000
------- ------ -------- --------
Total corporate expenses $18,893 $5,737 $143,227 $332,142
- --------------------------------------------------------------------------------
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 and other charges and asset write-downs in each period,
corporate expenses would have increased $3.0 million or 53 percent and $17.4
million or 69 percent for the three and twelve month periods ended March 31,
2000. Net of the merger and integration expenses and other charges and asset
write-downs, the increases in corporate expenses in both periods of 2000 reflect
increases in employee benefit costs and depreciation and amortization expense.
12
<PAGE>
Non-Operating Income, Net
- -------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- -------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Equity earnings in unconsolidated
partnerships $32,597 $30,324 $107,298 $ 120,582
Minority interest in consolidated
partnerships (19,748) (30,064) (106,331) (112,810)
Other income, net 12,793 13,274 53,990 61,876
------- ------- -------- ---------
Total non-operating income, net $25,642 $13,534 $ 54,957 $ 69,648
- -------------------------------------------------------------------------------
As indicated in the above table, non-operating income, net increased $12.1
million or 89 percent and decreased $14.7 million or 21 percent in the three and
twelve months ended March 31, 2000, respectively. The decreases in minority
interest expense in both 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
March 31, 2000. Other income, net for the twelve months ended March 31, 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 decreased $0.5 million or 1 percent and increased $2.7
million or 1 percent in the three and twelve month periods ended March 31, 2000,
respectively. The increase in interest expense in the twelve month period
reflects the issuance in April 1999 of $300 million of 6.8 percent debentures
due 2029. The increase in interest expense attributable to this debt issuance
was partially offset by a decrease in the average amount of borrowings
outstanding applicable to ALLTEL's revolving credit agreement.
Income Taxes
- ------------
Income tax expense increased $15.2 million or 12 percent and $51.3 million
or 10 percent for the three and twelve month periods ended March 31, 2000,
respectively. Income tax expense for all periods includes the tax-related impact
of the merger and integration expenses and the other non-recurring and unusual
items previously discussed. Excluding the impact on tax expense of these items
in each period, income tax expense would have increased $19.4 million or 15
percent and $80.0 million or 16 percent in the three and twelve month periods
ended March 31, 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 and 2
percent in the three and twelve month periods ended March 31, 2000,
respectively. The increases in both 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 $8.0 billion at March 31, 2000,
reflecting 54 percent common and preferred equity and 46 percent debt. The
Company's capital structure at December 31, 1999 was also $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.
13
<PAGE>
- -------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
(Dollars in thousands) March 31, March 31,
- -------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Cash flows from (used in):
Operating activities $347,407 $311,866 $1,535,570 $1,379,443
Investing activities (131,245) (252,922) (939,692) (996,839)
Financing activities (230,494) (79,492) (661,132) (412,990)
-------- -------- ---------- ----------
Decrease in cash and short-term
investments $(14,332) $(20,548) $ (65,254) $ (30,386)
- --------------------------------------------------------------------------------
Cash Flows from Operations
- --------------------------
Cash provided from operations continues to be ALLTEL's primary source of
liquidity. The increases in the three and twelve month periods ended March 31,
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 the timing of payment of accounts
payable.
Cash Flows used in Investing Activities
- ---------------------------------------
Capital expenditures for the three and twelve month periods of 2000 were
$158.2 million and $962.0 million, respectively, compared to $202.7 million and
$1,034.8 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 to 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
$995 million for 2000, which are expected to be funded primarily from internally
generated funds.
Cash flows used in investing activities for the twelve month period ended
March 31, 2000 also includes cash outlays for the acquisition of property of
$55.1 million, principally consisting of $30.6 million for the acquisition of a
wireless property in Illinois and $20.0 million for a wireless property in
Alabama. Cash flows from investing activities for the three and twelve month
periods of 1999 include cash outlays for the acquisition of property of $44.9
million and $112.9 million, respectively. These amounts are net of cash acquired
of approximately $24.1 million received in the Standard acquisition. The cash
outlays principally consist of $46.5 million for the acquisition of a wireless
property in Colorado and $12.1 million for the remaining ownership interest in a
wireless property in Nebraska in which the Company already owned a controlling
interest. In addition to these acquisitions, cash outlays for the twelve months
ended March 31, 1999, include $34.6 million related to the purchase of two
wireless properties in Georgia.
Cash flows used in investing activities for the three and twelve month
periods ended March 31, 2000 include proceeds from the return on investments of
$35.1 million and $114.8 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 March 31, 2000
and 1999 also include proceeds from the sale of investments of $45.0 million and
$267.1 million, respectively. These amounts principally consist of proceeds of
$45.0 million and $250.1 million, respectively, from the sale of a portion of
the Company's investment in MCI WorldCom common stock. The proceeds received
from these investment sales were used primarily to reduce borrowings under the
Company's revolving credit agreement.
14
<PAGE>
Cash Flows used in Financing Activities
- ---------------------------------------
Dividend payments are a significant use of capital resources for ALLTEL.
Common and preferred dividend payments were $101.0 million and $386.6 million
for the three and twelve month periods ended March 31, 2000, respectively,
compared to $92.6 million and $302.2 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.
Distributions to minority investors were $25.0 million and $122.2 million for
the three and twelve months ended March 31, 2000, respectively, compared to
$16.1 million and $108.5 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.
The Company has a $1 billion line of credit under a revolving credit
agreement, which expires in October 2004. Effective April 3, 2000, the borrowing
capacity under the revolving credit 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 billion ($1.4 billion
after April 3, 2000). ALLTEL classifies commercial paper borrowings as long-term
debt because the revolving credit agreement supports these borrowings.
Commercial paper borrowings outstanding at March 31, 2000 were $224.7 million
with a weighted average interest rate of 6.0 percent. No borrowings were
outstanding under the revolving credit agreement at March 31, 2000, compared to
$341.1 million and $610.2 million that were outstanding at December 31, 1999 and
March 31, 1999, respectively. As discussed previously, proceeds from the sale of
MCI 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, represents all of the long-term debt issued
in the twelve months ended March 31, 2000.
Retirements of long-term debt were $139.5 million and $495.3 million for the
three and twelve months ended March 31, 2000. The net reductions from
December 31, 1999 and March 31, 1999 in the total commercial paper and revolving
credit borrowings of $116.4 million and $385.5 million, respectively, represent
the majority of the long-term debt retired in the three and twelve month periods
ended March 31, 2000, respectively. In addition, scheduled long-term debt
retirements, net of commercial paper and revolving credit agreement activity,
amounted to $23.1 million and $109.8 million for the three and twelve month
periods ended March 31, 2000, respectively.
Agreements to Exchange Certain Wireless Assets
- ----------------------------------------------
As further discussed in Note 8 to the unaudited consolidated financial
statements, on January 31, 2000, ALLTEL, Bell Atlantic, GTE and Vodafone
Airtouch signed agreements to exchange wireless properties in 13 states. Upon
the closing of the transactions, Bell Atlantic or GTE will transfer to ALLTEL
interests in 27 wireless markets in Alabama, Arizona, Florida, Ohio, New Mexico,
Texas and South Carolina, representing about 14 million POPs and more than 1.5
million wireless customers. ALLTEL will transfer to Bell Atlantic or GTE
interests in 42 wireless markets in Illinois, Indiana, Iowa, Nevada, New York,
and Pennsylvania, representing 6.3 million POPs and more than 700,000 customers.
ALLTEL will also transfer certain of its minority investments in unconsolidated
wireless properties, representing approximately 2.6 million POPs. In addition to
the transfer of wireless assets, ALLTEL will also pay approximately $600 million
in cash. The Company will finance the cash payment through use of its existing
revolving credit facilities or through the issuance of long-term debt.
15
<PAGE>
On March 30, 2000, the FCC approved the exchange of wireless interests
between ALLTEL and Bell Atlantic in Nevada, Iowa, Arizona, New Mexico and Texas.
Subsequently, ALLTEL and Bell Atlantic completed the exchange of wireless assets
in those states. As a result, on April 3, 2000, ALLTEL began operations in
Phoenix, Tucson, Coconino, Flagstaff and Gila, Arizona; Albuquerque, New Mexico
and El Paso, Texas, while Bell Atlantic began operations in Las Vegas, Lander
and Mineral, Nevada; and Cedar Rapids, Iowa City, Waterloo, Cedar Falls, Dubuque
and Jackson, Iowa.
Consummation of the remaining transactions between ALLTEL, Bell Atlantic and
GTE are subject to certain conditions, including the receipt of regulatory
approval of the proposed Bell Atlantic and GTE merger and FCC approval of the
exchange of wireless assets in the remaining states of Alabama, Florida,
Illinois, Indiana, Ohio, Pennsylvania, New York and South Carolina. If all
necessary regulatory approvals are received and the other contractual conditions
satisfied, ALLTEL, Bell Atlantic and GTE expect to complete the remaining
transactions by mid-2000.
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. The
Company is currently evaluating the impact, if any, that SAB 101 may have on its
other communications revenue recognition policies. In March 2000, the SEC
amended SAB 101 to permit reporting accounting changes as a result of applying
the provisions of SAB 101 in the second 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 interim unaudited consolidated financial
statements for the periods ended June 30, 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 three 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.
16
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) See the exhibits specified on the Index of Exhibits located at
Page 19.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated January 7, 2000, reporting
under Item 7, Financial Statements and Exhibits, ALLTEL filed
restated audited financial statements for the three years in the
period ended December 31, 1998, to reflect the Company's
September 30, 1999 mergers with Liberty Cellular, Inc. and its
affiliate, KINI L.C., and the Company's July 2, 1999 merger with
Aliant Communications Inc. The mergers had been accounted for as
poolings-of-interests.
Current Report on Form 8-K dated January 31, 2000, reporting
under Item 5, Other Events, the Company's Press Release
announcing the agreements between ALLTEL, Bell Atlantic, GTE and
Vodafone Airtouch to exchange wireless properties in 13 states.
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 includes 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. The exchange transaction
has been accounted for as a purchase.
No other reports on Form 8-K have been filed during the quarter
for which this report is filed.
17
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLTEL CORPORATION
-----------------------------------------------
(Registrant)
/s/ Jeffery R. Gardner
-----------------------------------------------
Jeffery R. Gardner
Senior Vice President - Chief Financial Officer
(Principal Financial Officer)
May 12, 2000
18
<PAGE>
ALLTEL CORPORATION
FORM 10-Q
INDEX OF EXHIBITS
Form 10-Q Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
(19) Interim Report to Stockholders and 20 - 31
Notes to Unaudited Consolidated Financial
Statements for the periods ended March 31, 2000
and 1999
(27) Financial Data Schedule 32
for the three months ended March 31, 2000
19
Exhibit 19
2000 First Quarter Interim Report
March 31, 2000
To ALLTEL Stockholders:
ALLTEL is pleased to report record first quarter revenues, net income and
earnings per share from current businesses, which exclude one-time adjustments.
Revenues and earnings per share grew 8 percent and 17 percent,
respectively, to $1.6 billion and 70 cents per share.
Among the highlights from current businesses in the first quarter:
Net income and operating income grew 19 percent and 11 percent,
respectively, from a year ago, to $222 million and $416 million.
Communications revenue and operating income grew 11 percent and 13
percent, respectively, to $1.2 billion and $378 million.
Wireless operations added 105,000 customers in the quarter as revenue and
operating income from this business grew 10 percent and 12 percent,
respectively, to $695 million and $221 million.
Revenues and operating income from ALLTEL's wireline business grew 7
percent and 16 percent, respectively, to $437 million and $171 million.
Revenues and operating income from ALLTEL Information Services grew 2
percent and 4 percent, respectively, to $311 million and $42 million.
ALLTEL's communications business continued its successful strategy of
expanding into geographically focused markets.
In April, ALLTEL completed the initial transaction with Bell Atlantic/GTE
that will make ALLTEL the fifth largest wireless provider in America and will
provide us with low-cost access to a nationwide digital footprint covering 95
percent of the U.S. population. ALLTEL has begun operations in Phoenix, Tucson,
Coconino, Flagstaff and Gila in Ariz.; Albuquerque, N.M.; and El Paso, Texas.
When the exchange of properties is complete, ALLTEL will have acquired
wireless markets in Phoenix, Cleveland and Tampa, and other areas in Arizona,
New Mexico, Texas, Florida, Alabama and Ohio. Bell Atlantic/GTE will have
acquired former ALLTEL wireless markets in Las Vegas and other areas in Nevada,
Iowa, Illinois, Indiana, New York and Pennsylvania.
ALLTEL is launching competitive local exchange carrier service in 17 cities
in 2000. When the rollouts are complete, ALLTEL will offer local telephone
service in 43 cities in the Southeast and Midwest.
Our strategy of providing a bundle of telecommunications products,
including local telephone service in our wireless footprint has shown
outstanding results.
The Company's information services business continued to position itself
during the first quarter for future growth. By forming a joint venture with the
Bradford & Bingley Group of West Yorkshire, England, ALLTEL will provide
mortgage administration and information technology solutions to the mortgage
lending industry in the United Kingdom.
2000 Stockholders Meeting Results
At ALLTEL's Annual Meeting of Stockholders held April 20 in Little Rock, Joe T.
Ford, Dennis E. Foster, John P. McConnell, Fred W. Smith and Josie C. Natori
were elected directors to the class whose term will expire in 2003. William H.
Zimmer retired from the Company's board of directors. Zimmer joined the board in
1985, and his years of dedicated service on the board and its Audit Committee
have greatly benefited ALLTEL and its stockholders.
Board Declares Dividends
ALLTEL's board of directors declared regular quarterly dividends on the
Company's common stock. The 32-cent dividend is payable July 3, 2000 to
stockholders of record as of June 9, 2000.
Regular quarterly dividends were also declared on all series of the
Company's preferred stock. Preferred dividends are payable June 15, 2000 to
stockholders of record as of May 26, 2000.
/s/ Joe Ford
Joe T. Ford
Chairman and Chief Executive Officer
April 20, 2000
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31, Ended March 31,
--------------------------- ---------------------------
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Service revenues $1,460,342 $1,352,122 $5,788,369 $5,240,882
Product sales 143,087 131,631 633,578 590,371
---------- ---------- ---------- ----------
Total revenues and sales 1,603,429 1,483,753 6,421,947 5,831,253
- -----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Operations 821,022 774,740 3,271,958 3,057,423
Cost of products sold 139,369 126,132 612,033 574,919
Depreciation and amortization 227,457 209,479 880,150 793,756
Merger and integration expenses and other charges 10,136 - 100,656 252,000
Provision to reduce carrying value
of certain assets - - - 55,000
---------- ---------- ---------- ----------
Total costs and expenses 1,197,984 1,110,351 4,864,797 4,733,098
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 405,445 373,402 1,557,150 1,098,155
Equity earnings in unconsolidated partnerships 32,597 30,324 107,298 120,582
Minority interest in consolidated partnerships (19,748) (30,064) (106,331) (112,810)
Other income, net 12,793 13,274 53,990 61,876
Interest expense (68,229) (68,738) (279,666) (276,995)
Gain on disposal of assets and other - - 43,071 225,582
---------- ---------- ---------- ----------
Income before income taxes 362,858 318,198 1,375,512 1,116,390
Income taxes 146,816 131,654 562,380 511,059
---------- ---------- ---------- ----------
Net income 216,042 186,544 813,132 605,331
Preferred dividends 41 232 698 1,184
---------- ---------- ---------- ----------
Net income applicable to common shares $ 216,001 $ 186,312 $ 812,434 $ 604,147
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $.69 $.60 $2.59 $1.97
Diluted $.68 $.59 $2.56 $1.95
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
ASSETS 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 3,263 $ 17,595 $ 68,517
Accounts receivable (less allowance for doubtful
accounts of $33,996, $35,017 and $34,425, respectively) 950,363 922,159 834,095
Materials and supplies 12,758 15,130 25,610
Inventories 162,308 148,292 103,800
Prepaid expenses and other 79,768 64,003 66,918
----------- ----------- -----------
Total current assets 1,208,460 1,167,179 1,098,940
- ------------------------------------------------------------------------------------------------------------------
Investments 1,440,242 1,594,029 1,890,682
Goodwill and other intangibles 2,031,566 1,997,315 1,893,518
- ------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Wireline 5,275,523 5,194,546 4,922,780
Wireless 3,627,032 3,545,778 3,161,206
Information services 843,764 775,532 695,724
Other 241,905 241,297 181,983
Under construction 427,628 533,854 578,566
----------- ----------- -----------
Total property, plant and equipment 10,415,852 10,291,007 9,540,259
Less accumulated depreciation 4,728,218 4,556,462 4,088,019
----------- ----------- -----------
Net property, plant and equipment 5,687,634 5,734,545 5,452,240
- ------------------------------------------------------------------------------------------------------------------
Other assets 301,916 281,135 325,090
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,669,818 $10,774,203 $10,660,470
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 69,258 $ 71,222 $ 83,680
Accounts and notes payable 410,981 508,045 491,843
Advance payments and customer deposits 130,374 117,915 127,618
Accrued taxes 163,376 88,723 196,190
Accrued dividends 101,607 101,607 92,790
Other current liabilities 294,192 306,455 285,370
----------- ----------- -----------
Total current liabilities 1,169,788 1,193,967 1,277,491
- ------------------------------------------------------------------------------------------------------------------
Long-term debt 3,616,000 3,750,413 3,783,891
Deferred income taxes 1,019,577 1,056,921 1,074,913
Other liabilities 551,917 567,165 565,109
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 527 562 9,114
Common stock 315,280 314,258 312,227
Additional capital 1,071,878 973,356 951,320
Unrealized holding gain on investments 492,848 594,130 664,835
Retained earnings 2,432,003 2,323,431 2,021,570
----------- ----------- -----------
Total shareholders' equity 4,312,536 4,205,737 3,959,066
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,669,818 $10,774,203 $10,660,470
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31, Ended March 31,
----------------------- -------------------------
(Dollars in thousands) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED FROM OPERATIONS $ 347,407 $ 311,866 $1,535,570 $ 1,379,443
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (158,230) (202,691) (962,014) (1,034,759)
Additions to capitalized software development costs (10,265) (9,661) (45,696) (77,128)
Additions to investments (5,700) (5,047) (26,741) (28,645)
Purchase of property, net of cash acquired - (44,856) (55,090) (112,899)
Proceeds from the sale of investments - - 45,021 267,065
Proceeds from the return on investments 35,078 8,115 114,817 54,799
Other, net 7,872 1,218 (9,989) (65,272)
--------- --------- ---------- -----------
Net cash used in investing activities (131,245) (252,922) (939,692) (996,839)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on preferred and common stock (101,010) (92,636) (386,550) (302,226)
Reductions in long-term debt (139,516) (20,496) (495,267) (181,404)
Purchase of common stock - - - (14,950)
Preferred stock redemptions and purchases (3) - (11,918) (4,998)
Contributions from minority investors - - - 10,000
Distributions to minority investors (24,991) (16,109) (122,176) (108,451)
Long term debt issued - 31,720 298,174 145,020
Common stock issued 35,026 18,029 56,605 44,019
--------- --------- ---------- -----------
Net cash used in financing activities (230,494) (79,492) (661,132) (412,990)
- ------------------------------------------------------------------------------------------------------------------------
Decrease in cash and short-term investments (14,332) (20,548) (65,254) (30,386)
CASH AND SHORT-TERM INVESTMENTS:
Beginning of the period 17,595 89,065 68,517 98,903
--------- --------- ---------- ------------
End of the period $ 3,263 $ 68,517 $ 3,263 $ 68,517
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
HIGHLIGHTS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, Twelve Months Ended March 31,
-------------------------------------- -------------------------------------
(Dollars in thousands, % Increase % Increase
except per share amounts) 2000 1999 (Decrease) 2000 1999 (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
FROM CURRENT BUSINESSES:
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales:
Wireless $ 695,230 $ 634,585 10 $2,803,896 $2,453,040 14
Wireline 436,631 407,994 7 1,706,094 1,541,188 11
Emerging businesses 88,642 59,443 49 309,449 192,992 60
---------- ---------- ---------- ----------
Total communications 1,220,503 1,102,022 11 4,819,439 4,187,220 15
Information services 310,830 305,398 2 1,250,935 1,200,305 4
Other operations 138,031 117,064 18 600,785 613,299 (2)
---------- ---------- ---------- ----------
Total business segments 1,669,364 1,524,484 10 6,671,159 6,000,824 11
Less: intercompany eliminations 65,935 40,731 62 249,212 169,571 47
---------- ---------- ---------- ----------
Total revenues and sales $1,603,429 $1,483,753 8 $6,421,947 $5,831,253 10
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Wireless $ 220,689 $ 196,716 12 $ 910,451 $ 736,781 24
Wireline 170,624 147,367 16 642,321 545,479 18
Emerging businesses (13,423) (9,646) (39) (51,018) (43,280) (18)
---------- ---------- ---------- ----------
Total communications 377,890 334,437 13 1,501,754 1,238,980 21
Information services 42,073 40,452 4 176,937 166,278 6
Other operations 4,375 4,250 3 21,686 25,039 (13)
---------- ---------- ---------- ---------
Total business segments 424,338 379,139 12 1,700,377 1,430,297 19
Corporate expenses 8,757 5,737 53 42,571 25,142 69
---------- ---------- ---------- ---------
Total operating income $ 415,581 $ 373,402 11 $1,657,806 $1,405,155 18
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 221,921 $ 186,544 19 $ 857,870 $ 702,606 22
Basic earnings per share $.70 $.60 17 $2.73 $2.29 19
Diluted earning per share $.70 $.59 19 $2.70 $2.26 19
- ------------------------------------------------------------------------------------------------------------------------------------
AS REPORTED:
Revenues and sales $1,603,429 $1,483,753 8 $6,421,947 $5,831,253 10
Operating income $ 405,445 $ 373,402 9 $1,557,150 $1,098,155 42
Net income $ 216,042 $ 186,544 16 $ 813,132 $ 605,331 34
Basic earnings per share $.69 $.60 15 $2.59 $1.97 31
Diluted earning per share $.68 $.59 15 $2.56 $1.95 31
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares 314,975,000 311,596,000 1 313,685,000 306,954,000 2
Current annual dividend rate per
common share $1.28 $1.22 5
Capital expenditures $ 158,230 $ 202,691 (22) $ 962,014 $ 1,034,759 (7)
Total assets $10,669,818 $10,660,470 -
Wireless customers 5,123,457 4,639,171 10
Wireline customers 2,483,616 2,333,629 6
Long-distance customers 982,852 658,326 49
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
Current businesses excludes merger and integration expenses and other charges, provision to reduce carrying value of certain assets
and gain on disposal of assets.
Emerging businesses includes the long-distance, local competitive access, Internet access, network management and PCS operations.
</FN>
</TABLE>
For additional information throughout the year, visit the investor section
of ALLTEL's website at www.alltel.com
ALLTEL Corporation One Allied Drive Little Rock, Arkansas 72202 (501) 905-8900
www.alltel.com
24
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation:
The consolidated financial statements at March 31, 2000 and 1999 and for
the three and twelve month periods then ended are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim periods.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
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 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 three companies. Separate and combined unaudited results of operations
for certain interim periods were as follows:
<TABLE>
Six Months Three Months Twelve Months
Ended Ended Ended
(In thousands, except per share amounts) June 30, March 31, March 31,
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
Revenues and sales:
ALLTEL, as reported $2,837,950 $1,368,362 $5,378,052
Aliant 182,892 89,765 352,662
Liberty and KINI L.C. 59,526 27,649 111,479
Eliminations and reclassifications (3,255) (2,023) (10,940)
---------- ---------- ----------
Combined $3,077,113 $1,483,753 $5,831,253
========== ========== ==========
Net income:
ALLTEL, as reported $ 356,830 $ 166,682 $ 524,486
Aliant 32,955 15,350 60,246
Liberty and KINI L.C. 9,966 4,557 20,599
---------- ---------- ----------
Combined $ 399,751 $ 186,544 $ 605,331
========== ========== ==========
Combined earnings per share:
Basic $1.28 $.60 $1.97
Diluted $1.26 $.59 $1.95
</TABLE>
In January 1999, the Company completed a merger with Standard Group, Inc.
("Standard"). In September 1999, the Company also completed mergers with
Advanced Information Resources, Limited ("AIR") and Southern Data Systems
("Southern Data"). In connection with the mergers, approximately 6.5
million shares of ALLTEL common shares were issued. All three mergers
qualified as tax-free reorganizations and were accounted for as
poolings-of-interests. Prior period financial information has not been
restated, since the operations of the three acquired companies are not
significant to ALLTEL's consolidated financial statements on either a
separate or aggregate basis. The accompanying consolidated financial
statements include the accounts and results of operations of Standard, AIR
and Southern Data from the applicable date of acquisition.
25
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Merger and Integration Expenses and Other Charges:
In an effort to improve the operating efficiency of its information
services business, the Company recorded a restructuring charge of $10.1
million during the first quarter of 2000. This charge consisted of $5.9
million in severance and employee benefit costs related to a planned
workforce reduction and $4.2 million in lease termination costs related to
the consolidation of certain operating locations. The restructuring plan,
which will result in the elimination of 199 employees will be completed by
July 2000. As of March 31, 2000, the Company had paid $3.8 million in
severance and employee-related expenses and 159 of the total 199 employee
reductions had been completed. The lease termination costs represent the
estimated minimum contractual commitments over the next one to four years
for leased facilities that the Company has abandoned, net of anticipated
sublease income.
During the third quarter of 1999, the Company recorded a pretax charge in
connection with its mergers with Aliant, Liberty, AIR and Southern Data
and with certain loss contingencies and other restructuring activities.
The following is a summary of the significant components included in this
charge:
(In Thousands)
--------------
Merger and integration costs $73,410
Restructuring charge 17,110
-------
Total pretax charge $90,520
=======
The merger and integration expenses included professional and financial
advisors' fees of $24.4 million, severance and employee-related expenses
of $15.4 million and other integration costs of $33.6 million. The
Company's merger and integration plan, as approved by ALLTEL's Board of
Directors, provided for a reduction of approximately 200 employees of
Aliant and Liberty, primarily in the corporate support functions, to be
substantially completed by the third quarter of 2000. As of March 31,
2000, the Company had paid $8.2 million in severance and employee-related
expenses and 59 out of the total 200 employee reductions had been
completed. The other integration costs included $12.5 million of lease
termination costs, $10.2 million of costs associated with the early
termination of certain service obligations, and a $4.6 million write-down
in the carrying value of certain in-process and other software development
assets that have no future alternative use or functionality. Also included
are other integration costs incurred in the third quarter consisting of
branding and signage costs of $4.1 million and other expenses of $2.2
million.
The lease termination costs included a cancellation fee of $7.3 million
representing the negotiated settlement to terminate the Company's
contractual commitment to lease building space previously occupied by the
former 360 Communications Company ("360") operations. The lease
termination costs also included a $4.1 million write-off of capitalized
leasehold improvements and $1.1 million in other disposal costs.
The contract termination fees included $5.2 million related to long-term
contracts with an outside vendor for customer billing services to be
provided to the Aliant and Liberty operations. As part of its integration
plan, the Company will convert both the Aliant and Liberty operations to
its own internal billing system. Conversion of the Liberty operations was
completed in November 1999 and conversion of the Aliant operations will
begin in early 2001. The $5.2 million amount represented the termination
fee specified in the contracts. Of the total termination fee, $0.3 million
has been paid with the remainder due upon completion of the conversion of
the Aliant operations to ALLTEL's billing system. The Company also
recorded an additional $5.0 million charge to reflect the actual cost of
terminating its contract with Convergys Corporation ("Convergys") for
customer billing services to be provided to the former 360 operations. In
September 1999, the Company and Convergys agreed to a final contract
termination fee of $55.0 million, of which $50.0 million of termination
costs were recorded in the third quarter of 1998, as discussed below.
Through March 31, 2000, the Company had paid $30.0 million of the
termination fee. In addition to the termination fee, the Company will
continue to pay Convergys for processing customer accounts until all
customers are switched to ALLTEL's billing system, which is expected to be
completed in 2001.
26
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Merger and Integration Expenses and Other Charges, Continued:
In connection with management's plan to reduce costs and improve operating
efficiencies, the Company recorded a restructuring charge 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 restructuring plan
provided for the elimination of approximately 308 employees in the
Company's wireline operations support functions to be completed by
September 2000. As of March 31, 2000, the Company had paid $5.0 million in
severance and employee-related expenses and 151 of the total 308 employee
reductions had been completed. The lease termination costs represent the
estimated minimum contractual commitments over the next one to four years
for leased facilities that the Company has abandoned.
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
March 31, 2000, the Company had paid $46.3 million in severance and
employee-related expenses and substantially all of the employee reductions
had been completed. The integration costs included several adjustments
resulting from the redirection of a number of strategic initiatives based
on the merger with 360 and ALLTEL's expanded wireless presence.
These adjustments included a $60.0 million write-down in the carrying
value of certain in-process software development assets which had no
alternative use or functionality, $50.0 million of costs associated with
the early termination of certain service obligations, branding and signage
costs of $20.7 million, an $18.0 million write-down in the carrying value
of certain assets resulting from a revised PCS deployment plan, and other
integration costs of $23.1 million.
The $50.0 million of costs recorded for contract termination fees related
to the long-term billing contract with Convergys. This amount represented
the present value of the estimated profit to the vendor over the remaining
term of the contract and was the Company's best estimate of the cost of
terminating the billing services contract prior to the expiration of its
term. As previously noted, in September 1999, the Company and Convergys
agreed upon a final termination fee of $55.0 million. The $18.0 million
write-down in the carrying value of certain PCS-related assets included
approximately $15.0 million related to cell site acquisition and
improvement costs and capitalized labor and engineering charges that were
incurred during the initial construction phase of the PCS buildout in
three markets. As a result of the merger with 360, the Company
elected not to continue to complete construction of its PCS network in
these three markets. The remaining $3.0 million of the PCS-related
write-down represented cell site lease termination fees.
The following is a summary of activity related to the liabilities
associated with the Company's merger and integration expenses and other
charges for the twelve months ended March 31:
(In Thousands)
-------------------------
2000 1999
---- ----
Balance, beginning of period $ 75,108 $ -
Merger and integration expenses
and other charges 100,656 252,000
Non-cash write-down of assets (10,187) (74,800)
Cash outlays (106,555) (102,092)
--------- ---------
Balance, end of period $ 59,022 $ 75,108
========= =========
At March 31, 2000, the remaining unpaid liability related to the Company's
merger and integration and restructuring activities consists of contract
termination fees of $29.9 million, severance and employee-related expenses
of $17.5 million, lease cancellation and termination costs of $7.7
million, and other integration costs of $3.9 million.
27
<PAGE>
<TABLE>
<CAPTION>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Comprehensive Income:
Comprehensive income was as follows for the three and twelve month periods
ended March 31:
Three Months Twelve Months
(Dollars in thousands) Ended Ended
--------------------- ---------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 216,042 $186,544 $ 813,132 $ 605,331
--------- -------- --------- ---------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
investments arising during the period (158,383) 191,147 (265,986) 616,169
Income tax expense (benefit) (57,101) 75,035 (121,184) 242,618
--------- -------- --------- ---------
(101,282) 116,112 (144,802) 373,551
--------- -------- --------- ---------
Less: reclassification adjustments for
gains included in net income - - (43,071) (229,060)
Income tax expense - - 15,886 87,074
--------- -------- --------- ---------
- - (27,185) (141,986)
--------- -------- --------- ---------
Other comprehensive income (loss)
before tax (158,383) 191,147 (309,057) 387,109
Income tax expense (benefit) (57,101) 75,035 (137,070) 155,544
--------- ------- --------- ---------
Other comprehensive income (loss) (101,282) 116,112 (171,987) 231,565
--------- -------- --------- ---------
Comprehensive income $ 114,760 $302,656 $ 641,145 $ 836,896
========= ======== ========= =========
</TABLE>
5. Earnings per Share:
A reconciliation of the net income and number of shares used in computing
basic and diluted earnings per share was as follows for the three and
twelve month periods ended March 31:
<TABLE>
Three Months Twelve Months
(In thousands, except per share amounts) Ended Ended
--------------------------------------- ---------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shares $ 216,001 $186,312 $ 812,434 $ 604,147
Weighted average common shares outstanding
for the period 314,975 311,596 313,685 306,954
--------- -------- --------- ---------
Basic earnings per share $.69 $.60 $2.59 $1.97
==== ==== ===== =====
Diluted earnings per share:
Net income applicable to common shares $ 216,001 $186,312 $ 812,434 $ 604,147
Adjustments for convertible securities:
Preferred stocks 41 44 170 172
--------- -------- --------- ---------
Net income applicable to common shares
assuming conversion of above securities $ 216,042 $186,356 $ 812,604 $ 604,319
--------- -------- --------- ---------
Weighted average common shares outstanding
for the period 314,975 311,596 313,685 306,954
Increase in shares which would result from:
Exercise of stock options 2,813 3,466 3,365 2,834
Conversion of convertible preferred stocks 421 456 436 463
--------- -------- --------- ---------
Weighted average common shares outstanding
assuming conversion of above securities 318,209 315,518 317,486 310,251
--------- -------- --------- ---------
Diluted earnings per share $.68 $.59 $2.56 $1.95
==== ==== ===== =====
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Business Segment Information:
ALLTEL disaggregates its business operations based on differences in
products and services. The Company evaluates performance based on segment
operating income, excluding non-recurring and unusual items. Segment
operating results were as follows:
Three Months Ended Twelve Months Ended
(In thousands) March 31, March 31,
-------------- --------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and Sales from External Customers:
Wireless $ 695,230 $ 634,585 $2,803,896 $2,453,040
Wireline 420,333 394,160 1,647,600 1,489,112
Emerging businesses 82,961 57,307 295,479 181,257
---------- ---------- ---------- ----------
Total communications 1,198,524 1,086,052 4,746,975 4,123,409
Information services 235,824 243,259 969,914 1,015,318
Other operations 83,046 78,169 373,659 340,481
---------- ---------- ---------- ----------
Total business segments $1,517,394 $1,407,480 $6,090,548 $5,479,208
========== ========== ========== ==========
Intersegment Revenues and Sales:
Wireless $ - $ - $ - $ -
Wireline 16,298 13,834 58,494 52,076
Emerging businesses 5,681 2,136 13,970 11,735
---------- ---------- ---------- ----------
Total communications 21,979 15,970 72,464 63,811
Information services 75,006 62,139 281,021 184,987
Other operations 54,985 38,895 227,126 272,818
---------- ---------- ---------- ----------
Total business segments $ 151,970 $ 117,004 $ 580,611 $ 521,616
========== ========== ========== ==========
Total Revenues and Sales:
Wireless $ 695,230 $ 634,585 $2,803,896 $2,453,040
Wireline 436,631 407,994 1,706,094 1,541,188
Emerging businesses 88,642 59,443 309,449 192,992
---------- ---------- ---------- ----------
Total communications 1,220,503 1,102,022 4,819,439 4,187,220
Information services 310,830 305,398 1,250,935 1,200,305
Other operations 138,031 117,064 600,785 613,299
---------- ---------- ---------- ----------
Total business segments 1,669,364 1,524,484 6,671,159 6,000,824
Less: intercompany eliminations 65,935 40,731 249,212 169,571
---------- ---------- ---------- ----------
Consolidated revenues and sales $1,603,429 $1,483,753 $6,421,947 $5,831,253
========== ========== ========== ==========
Operating Income (Loss):
Wireless $ 220,689 $ 196,716 $ 910,451 $ 736,781
Wireline 170,624 147,367 642,321 545,479
Emerging businesses (13,423) (9,646) (51,018) (43,280)
---------- ---------- ---------- ----------
Total communications 377,890 334,437 1,501,754 1,238,980
Information services 42,073 40,452 176,937 166,278
Other operations 4,375 4,250 21,686 25,039
---------- ---------- ---------- ----------
Total business segments 424,338 379,139 1,700,377 1,430,297
---------- ---------- ---------- ----------
Corporate operating expenses (8,757) (5,737) (42,571) (25,142)
Merger and integration expenses and other charges (10,136) - (100,656) (252,000)
Provision to reduce carrying value
of certain assets - - - (55,000)
---------- ---------- ---------- ----------
Total corporate expenses (18,893) (5,737) (143,227) (332,142)
---------- ---------- ---------- ----------
Consolidated operating income $ 405,445 $ 373,402 $1,557,150 $1,098,155
========== ========== ========== ==========
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Subsequent Event - Settlement of Litigation:
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 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 that the
Georgia PSC had the authority to conduct the rate proceeding. The case was
returned to the Superior Court for it to rule on the issues it had not
previously decided. In April 1999, the Superior Court found that with
respect to the July 1996 order, the Georgia PSC did not provide ALLTEL
with sufficient notice of the charges against the Company, did not provide
ALLTEL a fair opportunity to present its case and respond to the charges,
and failed to satisfy its burden of proving that ALLTEL's rates were
unjust and unreasonable. Further, the Superior Court found that the July
1996 order was an unlawful attempt to retroactively reduce ALLTEL's rates
and certain statutory revenue recoveries. For each of these independent
reasons, the Superior Court vacated and reversed the July 1996 order and
remanded the case with instructions to dismiss the case. The Georgia PSC
appealed the Superior Court's April 1999 decision. Since the Company
believed that it would prevail in this case, the Company did not implement
any revenue reductions or establish any reserves for refund related to
this matter.
On April 11, 2000, ALLTEL announced that it had reached an agreement with
the Georgia PSC to settle this case. As part of the agreement, ALLTEL
agreed to accelerate deployment of digital subscriber lines and Internet
service to its customers in Georgia and to reduce certain optional local
calling plan rates. In addition, ALLTEL agreed to future reductions in
funds received from the Georgia Universal Service Fund. These revenue
reductions will total approximately $12 million during the remainder of
2000 and approximately $18 million annually thereafter. In exchange for
the Company's commitments, the Georgia PSC agreed to withdraw its appeal
of the Superior Court's April 1999 decision.
8. Subsequent Event - Exchange of Wireless Assets:
On January 31, 2000, ALLTEL, Bell Atlantic, GTE and Vodafone Airtouch
signed agreements to exchange wireless properties in 13 states. Upon the
closing of the transactions, Bell Atlantic or GTE will transfer to ALLTEL
interests in 27 wireless markets in Alabama, Arizona, Florida, Ohio, New
Mexico, Texas and South Carolina, representing about 14 million POPs and
more than 1.5 million wireless customers. ALLTEL will transfer to Bell
Atlantic or GTE interests in 42 wireless markets in Illinois, Indiana,
Iowa, Nevada, New York, and Pennsylvania, representing 6.3 million POPs
and more than 700,000 customers. ALLTEL will also transfer certain of its
minority investments in unconsolidated wireless properties, representing
approximately 2.6 million POPs. In addition to the transfer of wireless
assets, ALLTEL will also pay approximately $600 million in cash.
Following the receipt of all regulatory approvals, ALLTEL and Bell
Atlantic completed the initial exchange of wireless assets in Nevada,
Iowa, Arizona, New Mexico and Texas. On April 3, 2000, ALLTEL began
operations in Phoenix, Tucson, Coconino, Flagstaff and Gila, Arizona;
Albuquerque, New Mexico and El Paso, Texas, while Bell Atlantic began
operations in Las Vegas, Lander and Mineral, Nevada; and Cedar Rapids,
Iowa City, Waterloo, Cedar Falls, Dubuque and Jackson, Iowa.
30
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Subsequent Event - Exchange of Wireless Assets, Continued:
The Company will account for the April 2000 exchange of wireless assets as
a purchase. As a result of this transaction, ALLTEL will record goodwill
of approximately $734 million and a pre-tax gain of $726 million. The
goodwill, pretax gain and operating results of the acquired properties
will first be reported in the Company's interim unaudited consolidated
financial statements for the periods ended June 30, 2000.
Consummation of the remaining transactions between ALLTEL, Bell Atlantic
and GTE are subject to certain conditions, including the receipt of
regulatory approval of the proposed Bell Atlantic and GTE merger and FCC
approval of the exchange of wireless assets in the remaining states of
Alabama, Florida, Illinois, Indiana, Ohio, Pennsylvania, New York and
South Carolina. If all necessary regulatory approvals are received and the
other contractual conditions satisfied, ALLTEL, Bell Atlantic and GTE
expect to complete the remaining transactions by mid-2000.
Upon completion of all of the exchange transactions, ALLTEL expects to
recognize goodwill of approximately $1.0 billion and a pre-tax gain of
$1.2 billion in its consolidated financial statements.
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER REPORT TO STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH REPORT.
</LEGEND>
<CIK> 0000065873
<NAME> ALLTEL CORPORATION
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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<RECEIVABLES> 950,363
<ALLOWANCES> 33,996
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<TOTAL-ASSETS> 10,669,818
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<OTHER-SE> 3,996,729
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<TOTAL-REVENUES> 1,603,429
<CGS> 139,369
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<EPS-BASIC> .69
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