| UNITED STATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| SECURITIES AND EXCHANGE COMMISSION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| WASHINGTON, D. C.    20549                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| FORM 10-Q                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| [x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| For the quarterly period ended  June 30, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| OR                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| [ ]  TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Commission file number  1-4996                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **                                  **ALLTEL  CORPORATION                                                                                                                                                                                                                                                                                       |
| (Exact name of registrant as specified in its  charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|           Delaware                                                                                            34-0868285 |
| (State or other  jurisdiction of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                             (I.R.S.  Employer |
|  incorporation or  organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                             Identification  No.) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   One Allied  Drive, Little Rock,  Arkansas                                                  72202                                                                                                                                                                                                                                                                                 |
| (Address of principal  executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                  (Zip  Code) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
| Registrant’s telephone  number, including area code                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                   (501)  905-8000 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (Former name,  former address and former fiscal year, if changed since last report)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |

 

     Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

       YES  X       NO      

 

 

     Indicateby check mark whether the registrant is an accelerated filer (as defined byRule 12b-2 of the Act).

       YES  X       NO      

 

 

 

Number of commonshares outstanding as of June 30, 2003:  311,816,264

 

 

 

The Exhibit Indexis located on page 40.

 

 

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| **ALLTEL  CORPORATION** |
|-------------------------|
| **FORM  10-Q**          |
| **TABLE  OF CONTENTS**  |
|                    |   |   |

**PART I - FINANCIAL INFORMATION**

** **
|     |                                                              |                      |
|----------|-------------------------------------------------------------------|---------------------------|
| Item 1.  | Financial Statements                                              |                      |
| Item 2.  | Management’s Discussion and  Analysis of Financial Condition |                      |
|     |                                                              | and Results of Operations |   |
| Item  3. | Quantitative and Qualitative  Disclosures About Market Risk       |                      |
| Item 4.  | Controls and Procedures                                           |                      |
|     |                                                              |                      |
|          |                                                                   |                           |  |

**PARTII - OTHER INFORMATION**

** **
| Item 1. | Legal Proceedings                                  |   |
|---------|----------------------------------------------------|--------|
| Item 2. | Changes in Securities*                             |   |
| Item 3. | Defaults Upon Senior Securities*                   |   |
| Item 4. | Submission  of Matters to Vote of Security Holders |   |
| Item 5. | Other Information*                                 |   |
| Item 6. | Exhibits  and Reports on Form 8-K                  |   |

 

        *            Noreportable information under this item.

 

Forward-Looking Statements

This Report on Form 10-Q includes, and future filingsby the Company on Form 10-K, Form 10-Q and Form 8-K and future oral and writtenstatements by ALLTEL and its management may include, certain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  Forward-looking statements aresubject to uncertainties that could cause actual future events and results todiffer materially from those expressed in the forward-looking statements.  These forward-looking statements are basedon estimates, projections, beliefs and assumptions and are not guarantees offuture events and results.  Words suchas “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”,and “should”, and variations of these words and similar expressions, areintended to identify these forward-looking statements.  ALLTEL disclaims any obligation to update orrevise any forward-looking statement based on the occurrence of future events,the receipt of new information, or otherwise.

 

Actual future events and results may differ materiallyfrom those expressed in these forward-looking statements as a result of anumber of important factors. Representative examples of these factors include (without limitation)adverse changes in economic conditions in the markets served by ALLTEL; theextent, timing, and overall effects of competition in the communicationsbusiness; material changes in the communications industry generally that couldadversely affect vendor relationships with equipment and network suppliers andcustomer relationships with wholesale customers; material changes incommunications technology; the risks associated with the integration ofacquired businesses; adverse changes in the terms and conditions of the Company’swireless roaming agreements; the potential for adverse changes in the ratingsgiven to our debt securities by nationally accredited ratings organizations;the availability and cost of financing in the corporate debt markets; theuncertainties related to ALLTEL’s strategic investments; the effects of workstoppages; the effects of litigation; ongoing deregulation (and the resultinglikelihood of significantly increased price and product/service competition) inthe communications business as a result of federal and state legislation,rules, and regulations; the final outcome of federal, state and localregulatory initiatives and proceedings related to the terms and conditions ofinterconnection, access charges, universal service and unbundled network elementsand resale rates; and the effects of the Federal Communications Commission’swireless number portability rules.

 

In addition to these factors, actual futureperformance, outcomes and results may differ materially because of other, moregeneral, factors including (without limitation) general industry and marketconditions and growth rates, economic conditions, governmental and publicpolicy changes.

 

 

1

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**ALLTELCORPORATION**

**FORM10-Q**

**PART I****- FINANCIALINFORMATION**

**                Item 1.  Financial Statements**

**                                                               CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**
| (Millions, except per share amounts)                                                                                                           |   | June 30, |                                | December 31, |       |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-------------------------------------|--------------|------------|
| **ASSETS**                                                                                                                                     |   | 2003     |                                | 2002         |       |
| **CURRENT ASSETS:**                                                                                                                            |   |     |                                |         |       |
| Cash  and short-term investments                                                                                                               |   | $        |     496.4       |         | $          |     134.6 |   |
| Accounts  receivable (less allowance for doubtful accounts of $51.6 and $68.4,  respectively)                                                  |   | 1,111.3  |                                | 1,162.8      |       |
| Inventories                                                                                                                                    |   | 136.0    |                                | 138.5        |       |
| Prepaid expenses  and other                                                                                                                    |   | 52.0     |                                | 38.8         |       |
| Assets held for  sale                                                                                                                          |   | —   |                                | 538.3        |       |
| Total current  assets                                                                                                                          |   | 1,795.7  |                                | 2,013.0      |       |
| Investments                                                                                                                                    |   | 640.0    |                                | 327.4        |       |
| Goodwill                                                                                                                                       |   | 4,851.6  |                                | 4,769.7      |       |
| Other  intangibles                                                                                                                             |   | 1,342.9  |                                | 1,346.5      |       |
| **PROPERTY, PLANT AND EQUIPMENT:**                                                                                                             |   |     | ** **                          |         | ** ** |
| Land                                                                                                                                           |   | 289.8    |                                | 275.3        |       |
| Buildings and  improvements                                                                                                                    |   | 1,114.5  |                                | 1,074.3      |       |
| Wireline                                                                                                                                       |   | 6,331.8  |                                | 6,188.5      |       |
| Wireless                                                                                                                                       |   | 5,069.4  |                                | 4,798.3      |       |
| Information  processing                                                                                                                        |   | 1,064.8  |                                | 1,047.7      |       |
| Other                                                                                                                                          |   | 561.3    |                                | 571.0        |       |
| Under  construction                                                                                                                            |   | 412.4    |                                | 365.0        |       |
| Total property,  plant and equipment                                                                                                           |   | 14,844.0 |                                | 14,320.1     |       |
| Less accumulated  depreciation                                                                                                                 |   | 7,248.7  |                                | 6,756.4      |       |
| Net property,  plant and equipment                                                                                                             |   | 7,595.3  |                                | 7,563.7      |       |
| Other assets                                                                                                                                   |   | 382.3    |                                | 368.8        |       |
| **TOTAL ASSETS**                                                                                                                               |   | $        |  16,607.8                      |         | $          |  16,389.1 |   |
|                                                                                                                                           |   |     |                                |         |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                 |   |     | ** **                          |         | ** ** |
| **CURRENT LIABILITIES:**                                                                                                                       |   |     | ** **                          |         | ** ** |
| Current  maturities of long-term debt                                                                                                          |   | $        |      276.5 |         | $          |      494.7 |   |
| Accounts payable                                                                                                                               |   | 588.8    |                                | 558.3        |       |
| Advance payments  and customer deposits                                                                                                        |   | 208.0    |                                | 214.3        |       |
| Accrued taxes                                                                                                                                  |   | 347.0    |                                | 72.2         |       |
| Accrued  dividends                                                                                                                             |   | 109.5    |                                | 109.6        |       |
| Accrued interest                                                                                                                               |   | 108.2    |                                | 123.8        |       |
| Other current  liabilities                                                                                                                     |   | 144.3    |                                | 136.5        |       |
| Liabilities  related to assets held for sale                                                                                                   |   | —   |                                | 190.5        |       |
| Total current  liabilities                                                                                                                     |   | 1,782.3  |                                | 1,899.9      |       |
| Long-term debt                                                                                                                                 |   | 5,657.7  |                                | 6,145.4      |       |
| Deferred income  taxes                                                                                                                         |   | 1,281.3  |                                | 1,115.4      |       |
| Other  liabilities                                                                                                                             |   | 1,223.4  |                                | 1,230.3      |       |
| **SHAREHOLDERS’ EQUITY:**                                                                                                                 |   |     | ** **                          |         | ** ** |
| Preferred stock,  Series C, $2.06, no par value, 14,728 and 15,635                                                                             |   |     |                                |         |       |
| shares issued  and outstanding, respectively                                                                                                   |   | 0.4      |                                | 0.4          |       |
| Common stock,  par value $1 per share, 1.0 billion shares authorized, 311,816,264 and  311,182,950 shares issued and outstanding, respectively |   | 311.8    |                                | 311.2        |       |
| Additional  paid-in capital                                                                                                                    |   | 718.7    |                                | 695.7        |       |
| Unrealized  holding gain on investments                                                                                                        |   | 23.5     |                                | —       |       |
| Foreign currency  translation adjustment                                                                                                       |   | 0.6      |                                | (6.9         | )          |
| Retained  earnings                                                                                                                             |   | 5,608.1  |                                | 4,997.7      |       |
| Total  shareholders’ equity                                                                                                               |   | 6,663.1  |                                | 5,998.1      |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                           |   | $        |  16,607.8                      |         | $          |  16,389.1 |   |

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

2

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**                                                               CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)**
|                                                                                           |   | Three Months   |                    | Six Months     |   |
|------------------------------------------------------------------------------------------------|--------|----------------|-------------------------|----------------|--------|
|                                                                                           |   | Ended June 30, |                    | Ended June 30, |   |
| (Millions,  except per share amounts)                                                          |   | 2003           |                    | 2002           |   | 2003 |   | 2002 |   |
| **REVENUES AND SALES:**                                                                        |   |           |                    |           |   |   |   |   |   |
| Service revenues                                                                               |   | $              |  1,797.5           |           | $      |  1,524.3 |   | $ |  3,514.0 |   | $ |  3,003.2 |   |
| Product sales                                                                                  |   | 212.7          |                    | 174.7          |   | 402.0 |   | 318.7 |   |
| Total revenues  and sales                                                                      |   | 2,010.2        |                    | 1,699.0        |   | 3,916.0 |   | 3,321.9 |   |
| **COSTS AND EXPENSES:**                                                                        |   |           |                    |           |   |   |   |   |   |
| Cost of services  (excluding depreciation of $225.3, $186.9, $445.5 and $366.6 included below) |   | 541.4          |                    | 490.3          |   | 1,068.8 |   | 940.6 |   |
| Cost of products  sold                                                                         |   | 271.3          |                    | 224.3          |   | 509.0 |   | 433.0 |   |
| Selling,  general, administrative and other                                                    |   | 396.7          |                    | 319.6          |   | 767.8 |   | 615.2 |   |
| Depreciation and  amortization                                                                 |   | 310.7          |                    | 257.8          |   | 614.2 |   | 505.3 |   |
| Integration  expenses and other charges                                                        |   | 19.0           |                    | 9.0            |   | 19.0 |   | 51.9 |   |
| Total costs and  expenses                                                                      |   | 1,539.1        |                    | 1,301.0        |   | 2,978.8 |   | 2,546.0 |   |
| **OPERATING INCOME**                                                                           |   | 471.1          |                    | 398.0          |   | 937.2 |   | 775.9 |   |
|                                                                                           |   |           |                    |           |   |   |   |   |   |
| Equity earnings  in unconsolidated partnerships                                                |   | 16.7           |                    | 13.8           |   | 34.2 |   | 22.4 |   |
| Minority  interest in consolidated partnerships                                                |   | (21.4          | )                       | (18.7          | )      | (39.2 | ) | (33.7 | ) |
| Other income,  net                                                                             |   | 3.7            |                    | 5.5            |   | 4.1 |   | 6.7 |   |
| Interest expense                                                                               |   | (93.2          | )                       | (77.5          | )      | (196.6 | ) | (138.4 | ) |
| Write-down of  investments and other                                                           |   | (13.1          | )                       | (13.7          | )      | (13.1 | ) | (13.7 | ) |
|                                                                                           |   |           |                    |           |   |   |   |   |   |
| Income from  continuing operations before income taxes                                         |   | 363.8          |                    | 307.4          |   | 726.6 |   | 619.2 |   |
| Income taxes                                                                                   |   | 139.6          |                    | 115.4          |   | 274.8 |   | 232.3 |   |
|                                                                                           |   |           |                    |           |   |   |   |   |   |
| Income from  continuing operations                                                             |   | 224.2          |                    | 192.0          |   | 451.8 |   | 386.9 |   |
| Discontinued  operations  (net of income taxes of $231.2, $16.3, $256.2 and $29.0)             |   | 323.9          |                    | 24.2           |   | 361.0 |   | 43.1 |   |
|                                                                                           |   |           |                    |           |   |   |   |   |   |
| Income before  cumulative effect of accounting change                                          |   | 548.1          |                    | 216.2          |   | 812.8 |   | 430.0 |   |
| Cumulative  effect of accounting change  (net of income taxes of $10.3)                        |   | —         |                    | —         |   | 15.6 |   | — |   |
|                                                                                           |   |           |                    |           |   |   |   |   |   |
| Net income                                                                                     |   | 548.1          |                    | 216.2          |   | 828.4 |   | 430.0 |   |
| Preferred  dividends                                                                           |   | 0.1            |                    | 0.1            |   | 0.1 |   | 0.1 |   |
| Net income  applicable to common shares                                                        |   | $              |    548.0 |           | $      |    216.1 |   | $ |    828.3 |   | $ |    429.9 |   |
| **EARNINGS PER SHARE:**                                                                        |   |           |                    |           |   |   |   |   |   |
| Basic:                                                                                         |   |           |                    |           |   |   |   |   |   |
| Income from  continuing operations                                                             |   | $              |   .72         |           | $      | .62 |   | $ | 1.45 |   | $ | 1.24 |   |
| Income from  discontinued operations                                                           |   | 1.04           |                    | .08            |   | 1.16 |   | .14 |   |
| Cumulative  effect of accounting change                                                        |   | —         |                    | —         |   | .05 |   | — |   |
| Net income                                                                                     |   | $              | 1.76                    |           | $      | .70 |   | $ | 2.66 |   | $ | 1.38 |   |
| Diluted:                                                                                       |   |           |                    |           |   |   |   |   |   |
| Income from  continuing operations                                                             |   | $              |   .72         |           | $      |   .61 |   | $ | 1.45 |   | $ | 1.24 |   |
| Income from  discontinued operations                                                           |   | 1.03           |                    | .08            |   | 1.15 |   | .14 |   |
| Cumulative  effect of accounting change                                                        |   | —         |                    | —         |   | .05 |   | — |   |
| Net income                                                                                     |   | $              | 1.75                    |           | $      | .69 |   | $ | 2.65 |   | $ | 1.38 |   |
| Pro forma  amounts assuming change in accounting principle was applied retroactively:          |   |           |                    |           |   |   |   |   |   |
| Net income                                                                                     |   | $              | 548.1                   |           | $      | 216.5 |   | $ | 812.8 |   | $ | 430.5 |   |
| Basic earnings  per share                                                                      |   | $              | 1.76                    |           | $      | .70 |   | $ | 2.61 |   | $ | 1.38 |   |
| Diluted earnings  per share                                                                    |   | $              | 1.75                    |           | $      | .69 |   | $ | 2.60 |   | $ | 1.38 |   |

 

                                            See the accompanyingnotes to the unaudited interim consolidated financial statements.

 

 

3

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**                                              CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**
|                                                                                            |   | Six Months     |   |
|-------------------------------------------------------------------------------------------------|--------|----------------|--------|
|                                                                                            |   | Ended June 30, |   |
| (Millions)                                                                                      |   | 2003           |   | 2002 |   |
|                                                                                            |   |           |   |   |   |
| **CASH PROVIDED FROM OPERATIONS:**                                                              |   |           |   |   |   |
| Net income                                                                                      |   | $              | 828.4  |   | $ | 430.0 |   |
| Adjustments to  reconcile net income to net cash provided from operations:                      |   |           |   |   |   |
| Income from  discontinued operations                                                            |   | (361.0         | )      | (43.1 | ) |
| Cumulative  effect of accounting change                                                         |   | (15.6          | )      | — |   |
| Depreciation and  amortization                                                                  |   | 614.2          |   | 505.3 |   |
| Provision for  doubtful accounts                                                                |   | 97.1           |   | 135.1 |   |
| Non-cash portion  of integration expenses and other charges                                     |   | 13.3           |   | 12.4 |   |
| Write-down of  investments                                                                      |   | 6.0            |   | 13.7 |   |
| Increase in  deferred income taxes                                                              |   | 114.5          |   | 63.4 |   |
| Other, net                                                                                      |   | 11.8           |   | 6.2 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  dispositions: |   |           |   |   |   |
| Accounts  receivable                                                                            |   | (71.2          | )      | (146.8 | ) |
| Inventories                                                                                     |   | 3.3            |   | 41.4 |   |
| Accounts payable                                                                                |   | (13.7          | )      | 12.3 |   |
| Other current  liabilities                                                                      |   | (9.1           | )      | 99.1 |   |
| Other, net                                                                                      |   | (7.9           | )      | (23.8 | ) |
| Net cash  provided from operations                                                              |   | 1,210.1        |   | 1,105.2 |   |
|                                                                                            |   |           |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                      |   |           |   |   |   |
| Additions to  property, plant and equipment                                                     |   | (531.4         | )      | (524.6 | ) |
| Additions to  capitalized software development costs                                            |   | (28.4          | )      | (37.3 | ) |
| Additions to  investments                                                                       |   | (10.6          | )      | (4.5 | ) |
| Purchases of  property, net of cash acquired                                                    |   | (132.1         | )      | (19.7 | ) |
| Proceeds from  the lease of cell site towers                                                    |   | —         |   | 7.5 |   |
| Proceeds from  the return on investments                                                        |   | 17.6           |   | 19.7 |   |
| Other, net                                                                                      |   | 7.0            |   | (6.0 | ) |
| Net cash used in  investing activities                                                          |   | (677.9         | )      | (564.9 | ) |
|                                                                                            |   |           |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                      |   |           |   |   |   |
| Dividends on  preferred and common stock                                                        |   | (218.1         | )      | (211.4 | ) |
| Reductions in  long-term debt                                                                   |   | (740.5         | )      | (253.0 | ) |
| Distributions to  minority investors                                                            |   | (28.3          | )      | (25.8 | ) |
| Long-term debt  issued                                                                          |   | —         |   | 2,810.9 |   |
| Common stock  issued                                                                            |   | 23.0           |   | 11.9 |   |
| Net cash  provided from (used in) financing activities                                          |   | (963.9         | )      | 2,332.6 |   |
|                                                                                            |   |           |   |   |   |
| Net cash  provided from discontinued operations                                                 |   | 792.7          |   | 3.5 |   |
|                                                                                            |   |           |   |   |   |
| Effect of  exchange rate changes on cash and short-term investments                             |   | 0.8            |   | 2.6 |   |
|                                                                                            |   |           |   |   |   |
| Increase in cash  and short-term investments                                                    |   | 361.8          |   | 2,879.0 |   |
|                                                                                            |   |           |   |   |   |
| **CASH AND SHORT-TERM INVESTMENTS:**                                                            |   |           |   |   |   |
| Beginning of the  period                                                                        |   | 134.6          |   | 63.2 |   |
| End of period                                                                                   |   | $              | 496.4  |   | $ | 2,942.2 |   |
|                                                                                            |   |           |   |   |   |
| **NON-CASH INVESTING AND FINANCING  ACTIVITY:**                                                 |   |           |   |   |   |
| Change in fair  value of interest rate swap agreements                                          |   | $              | 30.9   |   | $ | 12.6 |   |

 

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

4

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS**

          

 

**1.       General:**

Basis of Presentation— The consolidated financial statements at June 30, 2003 and 2002 and for thethree and six month periods then ended of ALLTEL Corporation (“ALLTEL” or the“Company”) are unaudited.  Theconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial reporting andSecurities and Exchange Commission rules and regulations.  Certain information and footnote disclosureshave been condensed or omitted in accordance with those rules and regulations.  Certain prior year amounts, as furtherdiscussed below, have been reclassified to conform to the 2003 financialstatement presentation.  Theconsolidated financial statements reflect all adjustments (consisting only ofnormal recurring adjustments) which are, in the opinion of management,necessary for a fair presentation of the financial position and operatingresults for the interim periods presented.

 

Change in BusinessSegment Reporting — Effective January 1,2003, ALLTEL changed its business segment presentation to reclassify the operationsof the telecom division of its information services subsidiary, ALLTELInformation Services, Inc., to be included within the Company’s communicationssupport services segment.  This segmentalso includes ALLTEL’s long-distance and network management services,communications products, and directory publishing operations.  Previously, the telecom division had beencombined with the financial services division and reported within the Company’sinformation services segment.  Asfurther discussed in Note 11 to the unaudited consolidated financialstatements, on January 28, 2003, ALLTEL signed a definitive agreement to sellthe financial services division of ALLTEL Information Services, Inc. toFidelity National Financial Inc. (“Fidelity National”).  ALLTEL completed the sale transaction onApril 1, 2003.  Accordingly, thefinancial services division has been reported in the accompanying unauditedconsolidated financial statements as discontinued operations.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 131 “Disclosures about Segments of anEnterprise and Related Information”, all prior period segment information hasbeen reclassified to conform to this new financial reporting presentation.

 

**2.       AccountingChanges:**

Except for certain wireline subsidiariesas further discussed below, the Company adopted SFAS No. 143, “Accounting forAsset Retirement Obligations”, effective January 1, 2003.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  This standard applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the assets.  SFAS No. 143 requires that a liability foran asset retirement obligation be recognized when incurred and reasonablyestimable, recorded at fair value, and classified as a liability in the balancesheet.  When the liability is initiallyrecorded, the entity capitalizes the cost and increases the carrying value ofthe related long-lived asset.  Theliability is then accreted to its present value each period, and thecapitalized cost is depreciated over the estimated useful life of the relatedasset.  At the settlement date, theentity will settle the obligation for its recorded amount and recognize a gainor loss upon settlement.

 

The Company has evaluated the effects ofSFAS No. 143 on its operations and has determined that, for telecommunicationsand other operating facilities in which the Company owns the underlying land,ALLTEL has no contractual or legal obligation to remediate the property if theCompany were to abandon, sell or otherwise dispose of the property.  ALLTEL is subject to asset retirementobligations associated with its cell site and switch site operating leases,which are subject to the provisions of SFAS No. 143.  Cell site and switch site lease agreements frequently containclauses requiring restoration of the leased site at the end of the lease term,creating an asset retirement obligation. The Company has concluded that the fair value of these obligationscannot be reasonably estimated at this time because neither the range of settlementdates of the asset retirement obligations nor the probability of enforcement ofthe remediation clauses are currently determinable.  The Company has insufficient historical data to determinereasonably the extent to which the remediation terms of the lease would beenforced.  In addition, ALLTEL is unableto estimate a potential range of settlement dates because of its intent andright to renew site leases after the initial lease expiration.  ALLTEL will record a liability for the assetretirement obligation associated with the Company’s cell site and switch siteleases if and when ALLTEL can determine a reasonable estimate of fairvalue.  In addition to cell site andswitch site operating leases, ALLTEL also has leases for office and retaillocations that are subject to the provisions of SFAS No. 143.  The adoption of SFAS No. 143 related to theleased office and retail locations did not have a material impact on ALLTEL’sconsolidated results of operations, financial position, or cash flows as of andfor the three and six months ended June 30, 2003.

 

In accordance with federal and stateregulations, depreciation expense for ALLTEL’s wireline operations hashistorically included an additional provision for cost of removal.  Effective with the adoption of SFAS No. 143,the additional cost of removal provision will no longer be included indepreciation expense because it does not meet the recognition and measurementprinciples of an asset retirement obligation under SFAS No. 143.  In December 2002, the Federal CommunicationsCommission (“FCC”) notified wireline carriers that they should not adopt theprovisions of SFAS No. 143

 

5

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**2.       AccountingChanges, Continued:**

unless specifically required by the FCCin the future.  As a result of the FCCruling, ALLTEL will continue to record a regulatory liability for cost ofremoval for its wireline subsidiaries that follow the accounting prescribed bySFAS No. 71 “Accounting for the Effects of Certain Types of Regulation”.  The regulatory liability for cost of removalincluded in accumulated depreciation amounted to $151.6 million and $156.5million at June 30, 2003 and 2002, respectively.

 

For the acquired Kentucky and Nebraskawireline operations not subject to SFAS No. 71, effective January 1, 2003, theCompany ceased recognition of the cost of removal provision in depreciationexpense and eliminated the cumulative cost of removal included in accumulateddepreciation.  The cumulative effect ofretroactively applying these changes to periods prior to January 1, 2003,resulted in a non-cash credit of $15.6 million, net of income tax benefit of$10.3 million, and was included in net income for the six months ended June 30,2003.

 

Effective January 1, 2003, the Companyadopted Emerging Issues Task Force Issue 00-21 “Accounting for RevenueArrangements with Multiple Deliverables” for all new arrangements entered intoon or after that date.  Issue 00-21addresses the accounting by a vendor for arrangements under which it willperform multiple revenue-generating activities.  Specifically, Issue 00-21 addresses how to determine whether anarrangement involving multiple deliverables contains one or more units ofaccounting and how arrangement consideration should be measured and allocatedto the separate units of accounting. Upon adoption, the Company ceased deferral of fees assessed to wirelesscommunications customers to activate service and direct incremental customeracquisition costs incurred in the activation of service.  The adoption of Issue 00-21 did not have amaterial impact on the Company’s consolidated results of operations for thethree and six months ended June 30, 2003.

 

**3.       Goodwill andOther Intangible Assets:**

Goodwillrepresents the excess of cost over the fair value of net identifiable tangibleand intangible assets acquired through various business combinations.  The Company has acquired identifiableintangible assets through its acquisitions of interests in various wireless andwireline properties.  The cost ofacquired entities at the date of the acquisition is allocated to identifiableassets and the excess of the total purchase price over the amounts assigned toidentifiable assets is recorded as goodwill. The changes in the carrying amount of goodwill by business segment forthe six months ended June 30, 2003 were as follows:

 
|                          |   |     |    |     |   | Communications |   |   |   |
|-------------------------------|--------|----------|---------|----------|--------|----------------|--------|--------|--------|
|                          |   |     |    |     |   | Support        |   |   |   |
| (Millions)                    |   | Wireless |    | Wireline |   | Services       |   | Total  |   |
| Balance at  December 31, 2002 |   | $        | 3,519.7 |     | $      | 1,247.7        |   | $      | 2.3    |   | $ | 4,769.7 |   |
| Acquired during  the period   |   | 90.4     |    | —   |   | —         | 90.4   |   |
| Other  adjustments            |   | (8.4     | )       | (0.1     | )      | —         |   | (8.5   | )      |
| Balance at June  30, 2003     |   | $        | 3,601.7 |     | $      | 1,247.6        |   | $      | 2.3    |   | $ | 4,851.6 |   |
|                               |        |          |         |          |        |                |        |        |        |  |  |  |  |  |  |  |  |  |  |  |

 

The carrying value of indefinite-livedintangible assets other than goodwill were as follows:

 
|                                       |   | June 30,                                                                 |    | December 31,                                                                                           |   |
|--------------------------------------------|--------|--------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------------------------------|--------|
| (Millions)                                 |   |              2003 |    |                   2002 |   |
| Cellular  licenses                         |   | $                                                                        | 738.8   |                                                                                                   | $      | 720.2 |   |
| Personal  Communications Services licenses |   | 76.9                                                                     |    | 76.9                                                                                                   |   |
| Franchise rights  — wireline          |   | 265.0                                                                    |    | 265.0                                                                                                  |   |
|                                       |   | $                                                                        | 1,080.7 |                                                                                                   | $      | 1,062.1 |   |
|                                            |        |                                                                          |         |                                                                                                        |        |  |  |  |  |  |

 

Intangible assets subject to amortizationwere as follows:
|                    |   | June  30, 2003 |   |
|-------------------------|--------|----------------|--------|
|                    |   | Gross 

Cost   |   | Accumulated  Amortization |   | Net 

Carrying Value |   |
| (Millions)              |   |           |   |
| Customer lists          |   | $              | 382.4  |   | $ | (130.1 | ) | $ | 252.3 |   |
| Franchise rights        |   | 22.5           |   | (12.6 | ) | 9.9 |   |
| Non-compete  agreements |   | 2.9            |   | (2.9 | ) | — |   |
|                    |   | $              | 407.8  |   | $ | (145.6 | ) | $ | 262.2 |   |
|                         |        |                |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

6

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**3.       Goodwill andOther Intangible Assets, Continued:**
|                    |   | December 31, 2002 |   |
|-------------------------|--------|-------------------|--------|
|                    |   | Gross 

Cost      |   | Accumulated  Amortization |   | Net 

Carrying Value |   |
| (Millions)              |   |              |   |
| Customer lists          |   | $                 | 374.6  |   | $ | (101.0 | ) | $ | 273.6 |   |
| Franchise rights        |   | 22.5              |   | (11.9 | ) | 10.6 |   |
| Non-compete  agreements |   | 2.9               |   | (2.7 | ) | 0.2 |   |
|                    |   | $                 | 400.0  |   | $ | (115.6 | ) | $ | 284.4 |   |
|                         |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense for intangibleassets subject to amortization was $15.1 million and $30.0 million for thethree and six month periods ended June 30, 2003, compared to $9.7 million and$18.9 million for the same periods of 2002. Amortization expense for intangible assets subject to amortization isestimated to be $60.3 million in 2003, $60.3 million in 2004, $59.6 million in2005, $41.0 million in 2006 and $24.3 million in 2007.  (See Note 4 for a discussion of the acquisitionscompleted during 2003 that resulted in the recognition of goodwill and otherintangible assets.)

 

**4.       Acquisitions:**

On April 1, 2003, the Company increasedits ownership interest to approximately 86 percent in a wireless property,representing approximately 145,000 potential customers (“POPs”) in a WisconsinRural Service Area (“RSA”), for $7.5 million in cash.  Prior to this acquisition, ALLTEL owned approximately 43 percentof this property.  During the secondquarter of 2003, the Company completed the purchase price allocation of thisacquisition based upon a fair value analysis of the tangible and identifiableintangible assets acquired.  The excessof the aggregate purchase price over the fair market value of the tangible netassets acquired of $3.0 million was assigned to customer list ($0.4 million),cellular licenses ($1.0 million) and goodwill ($1.6 million).

 

On February 28, 2003, the Company alsoacquired from the other five minority owners the remaining ownership interestin wireless properties, representing approximately 355,000 POPs in two MichiganRSAs, for $60.0 million in cash.  Priorto this acquisition, ALLTEL owned approximately 49 percent of the Michiganproperties.  During the second quarterof 2003, the Company completed the purchase price allocation of thisacquisition based upon a fair value analysis of the tangible and identifiableintangible assets acquired.  The excessof the aggregate purchase price over the fair market value of the tangible netassets acquired of $46.8 million was assigned to customer list ($3.4 million),cellular licenses ($8.0 million) and goodwill ($35.4 million).

 

On February 28, 2003, the Companycompleted its purchase of wireless properties, representing approximately370,000 POPs in southern Mississippi, from Cellular XL Associates (“CellularXL”), a privately held company, for $72.0 million in cash.  Of the total purchase price, ALLTEL paid$64.6 million to Cellular XL at the date of purchase with the remaining cashpayment, subject to adjustments as specified in the purchase agreement, payablewith interest, 12 months after the closing date.  During the first quarter of 2003, the Company completed thepurchase price allocation of this acquisition based upon a fair value analysisof the tangible and identifiable intangible assets acquired.  The excess of the aggregate purchase priceover the fair market value of the tangible net assets acquired of $67.0 millionwas assigned to customer list ($4.0 million), cellular licenses ($9.6 million)and goodwill ($53.4 million).

 

The accompanyingconsolidated financial statements include the accounts and results ofoperations of the acquired wireless properties from the dates ofacquisition.  The customer listsrecorded in connection with these transactions are being amortized on astraight-line basis over their estimated useful lives of six years.  The cellular licenses are classified asindefinite-lived intangible assets and are not subject to amortization.

 

The purchase price paid for the wirelessproperties discussed above was based on estimates of future cash flows of theproperties acquired.  ALLTEL paid apremium (i.e., goodwill) over the fair value of the net tangible and identifiedintangible assets acquired because the purchase of wireless properties expandedthe Company’s wireless footprint into new markets across Michigan, Mississippiand Wisconsin and added a combined 141,000 new wireless customers to ALLTEL’scommunications customer base. Additionally, in the wireless properties acquired, ALLTEL should realize,over time, accelerated customer growth and higher average revenue per customeras a result of the Company’s higher revenue national rate plans.

 

 

7

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**5.       IntegrationExpenses and Other Charges:**

          Set forth below is a summary of theintegration expenses and other charges recorded for the three and six monthperiods ended June 30:

 
|                                                    |   | Three Months Ended |      | Six Months Ended |   |
|---------------------------------------------------------|--------|--------------------|-----------|------------------|--------|
| (Millions)                                              |   | 2003               |      | 2002             |   | 2003 |   | 2002 |   |
| Severance and  employee benefit costs                   |   | $                  |  6.3 |             | $      |  — |   | $ |  6.3 |   | $ | 13.4 |   |
| Lease and  contract termination costs                   |   | (0.5               | )         | —           |   | (0.5 | ) | 12.4 |   |
| Write-down of  cell site equipment                      |   | —             |      | —           |   | — |   | 7.1 |   |
| Write-down of  software development costs               |   | 13.2               |      | —           |   | 13.2 |   | 4.4 |   |
| Computer system  conversion and other integration costs |   | —             |      | 9.0              |   | — |   | 12.4 |   |
| Equipment  removal and other disposal costs             |   | —             |      | —           |   | — |   | 2.2 |   |
| Total  integration expenses and other charges           |   | $                  | 19.0      |             | $      | 9.0 |   | $ | 19.0 |   | $ | 51.9 |   |
|                                                    |   |               |      |             |   |   |   |   |   |

During the second quarter of 2003, theCompany recorded a restructuring charge of $8.5 million consisting of severanceand employee benefit costs related to a planned workforce reduction, primarilyresulting from the closing of certain call center locations.  As of June 30, 2003, the Company had paid$5.4 million in severance and employee-related expenses, and all of theemployee reductions had been completed. The Company also recorded a $2.7 million reduction in the liabilities associatedwith various restructuring activities initiated prior to 2003, consisting of$2.2 million in severance and employee benefit costs and $0.5 million in leasetermination costs.  The reductionprimarily reflected differences between estimated and actual costs paid incompleting the previous planned workforce reductions and leaseterminations.  During the second quarterof 2003, ALLTEL also wrote off certain capitalized software development coststhat had no alternative future use or functionality.

 

During the first two quarters of 2002,the Company incurred expenses related to its pending acquisitions of wirelineproperties in Kentucky from Verizon Communications, Inc. (“Verizon”) andwireless properties from CenturyTel, Inc. (“CenturyTel”).  These expenses included internal payroll andemployee benefit costs, contracted services, branding and other computerprogramming costs incurred in connection with expanding ALLTEL’s customerservice and operations support functions to handle increased customer volumesresulting from the acquisitions and to convert Verizon’s customer billing andoperations support systems to ALLTEL’s internal systems.

 

In January 2002, the Company announcedits plans to exit its Competitive Local Exchange Carrier (“CLEC”) operations inseven states.  The Company alsoconsolidated its call center and retail store operations during the firstquarter of 2002.  In connection withthese activities, the Company recorded a restructuring charge consisting ofseverance and employee benefit costs related to a planned workforce reduction,costs associated with terminating certain CLEC transport agreements and leasetermination fees related to the closing of certain retail and call centerlocations.  In exiting the CLECoperations, the Company also incurred costs to disconnect and remove switchingand other transmission equipment from central office facilities and expenses tonotify and migrate customers to other service providers.  ALLTEL also wrote off certain capitalizedsoftware development costs that had no alternative future use orfunctionality.  The restructuring plans,completed in March 2002, provided for the elimination of 910 employeesprimarily in the Company’s sales, customer service and network operationssupport functions.  In the fourthquarter of 2002, ALLTEL reduced the liabilities associated with theserestructuring plans by $2.5 million. The reduction primarily reflected differences between estimated andactual costs to exit certain CLEC markets and consisted of $2.0 million inlease termination costs and $0.5 million in severance and employee benefitcosts.  As of June 30, 2003, the Companyhad paid $11.9 million in severance and employee-related expenses, and all ofthe employee reductions had been completed.

 

The $12.4 million of lease and contracttermination costs recorded in the first quarter of 2002 consisted of $5.0million representing the estimated minimum contractual commitments over thenext one to five years for 31 operating locations that the Company has abandoned,net of anticipated sublease income.  Thelease and contract termination costs also included $3.6 million of costs toterminate transport agreements with six interexchange carriers.  The Company also recorded an additional $2.8million to reflect the revised estimated costs, net of anticipated subleaseincome, to terminate leases associated with four operating locations.  ALLTEL had previously recorded $6.3 millionin lease termination costs related to these four locations in 1999.  The additional charge reflected a reductionin expected sublease income attributable primarily to softening demand in thecommercial real estate market and bankruptcy filings by two sublessees.  Finally, the lease termination costs also included$1.0 million of unamortized leasehold improvement costs related to theabandoned locations.

 

8

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**5.       IntegrationExpenses and Other Charges, Continued:**

During the first quarter of 2002, theCompany also recorded the final write-down in the carrying value of certaincell site equipment to fair value.  Inconjunction with a product replacement program initiated by a vendor in 2001,the Company exchanged certain used cell site equipment for new equipment.  The exchange of cell site equipment beganduring the third quarter of 2001 and continued through the first quarter of2002.  As the equipment exchanges werecompleted, the Company recorded write-downs in the carrying value of the usedcell site equipment to fair value.

 

During the third quarter of 2002, theCompany recorded a restructuring charge of $4.1 million consisting of severanceand employee benefit costs of $1.9 million related to a planned workforce reductionand $2.2 million of lease termination costs primarily related to the closing ofseven product distribution centers.  Thelease termination costs consisted of $1.2 million, primarily representing theestimated minimum contractual commitments over the ensuing one to four yearsfor operating locations that the Company abandoned, net of anticipated subleaseincome.  The lease termination costsalso included an additional $1.0 million to reflect the revised estimatedcosts, net of anticipated sublease income, to terminate leases associated withfour operating locations.  ALLTEL hadpreviously recorded $9.1 million in lease termination costs related to thesefour locations ($2.8 million during the first quarter of 2002 and $6.3 millionin 1999).  The additional chargereflected a further reduction in expected sublease income attributableprimarily to softening demand in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 130 employees primarily in theCompany’s product distribution operations. As of June 30, 2003, the Company had paid $1.9 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.

 

The following is a summary of activityrelated to the liabilities associated with the Company’s integration expensesand other charges for the six months ended June 30, 2003:
|                                    |   |   |            |
|-----------------------------------------|--------|--------|-----------------|
| (Millions)                              |   |   |            |
| Balance,  beginning of period           |   | $      |  13.1      |   |
| Integration  expenses and other charges |   | 21.7   |            |
| Reversal of  accrued liabilities        |   | (2.7   | )               |
| Non-cash  write-down of assets          |   | (13.5  | )               |
| Cash outlays                            |   | (8.7   | )               |
| Balance, end of  period                 |   | $      |   9.9 |   |

 

At June 30, 2003, the remaining unpaidliability related to the Company’s integration and restructuring activitiesconsisted of severance and employee-related expenses of $4.6 million and leasetermination costs of $5.3 million and is included in other current liabilitiesin the accompanying consolidated balance sheets.

 

**6.       Write-down ofInvestments and Other:**

In the second quarter of 2003, ALLTELrecorded pretax write-downs totaling $6.0 million to reflectother-than-temporary declines in the fair value of certain investments inunconsolidated limited partnerships.  Inaddition, during the second quarter of 2003, the Company retired, prior tostated maturity dates, $249.1 million of long-term debt, representing all ofthe long-term debt outstanding under the Rural Utilities Services, RuralTelephone Bank and Federal Financing Bank programs. In connection with theearly retirement of the debt, the Company incurred pretax termination fees of$7.1 million.

 

In the second quarter of 2002, ALLTELrecorded a pretax write-down of $12.5 million on its investment in HughesTele.com Limited (“HTCL”), a public company and provider of communications servicesin India.  The Company recorded thewrite-down in connection with HTCL’s agreement to merge with a major Indiantelecommunications company and an other-than-temporary decline in the fairvalue of HTCL’s common stock. In addition, the Company also recorded a pretaxwrite-down of $1.2 million related to an other-than-temporary decline inALLTEL’s investment in Airspan Networks, Inc., a provider of wirelesstelecommunications equipment.

 

9

----

 

**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**7.       ComprehensiveIncome:**

Comprehensive income wasas follows for the three and six month periods ended June 30:

 
|                                                                                |   | Three Months Ended |        | Six Months Ended |   |
|-------------------------------------------------------------------------------------|--------|--------------------|-------------|------------------|--------|
| (Millions)                                                                          |   | 2003               |        | 2002             |   | 2003 |   | 2002 |   |
| Net income                                                                          |   | $                  |  548.1 |             | $      |  216.2 |   | $ |  828.4 |   | $ |  430.0 |   |
| Other  comprehensive income:                                                        |   |               |        |             |   |   |   |   |   |
| Unrealized  holding gains (losses) on investments arising in the period             |   | 38.6               |        | (3.1             | )      | 38.5 |   | (6.1 | ) |
| Income tax  expense (benefit)                                                       |   | 15.0               |        | (1.1             | )      | 15.0 |   | (2.3 | ) |
|                                                                                |   | 23.6               |        | (2.0             | )      | 23.5 |   | (3.8 | ) |
| Less:  reclassification adjustments for (gains)  losses included in net income |   | —             |        | 13.7             |   | — |   | 13.7 |   |
| Income tax  expense (benefit)                                                       |   | —             |        | (5.3             | )      | — |   | (5.3 | ) |
|                                                                                |   | —             |        | 8.4              |   | — |   | 8.4 |   |
|                                                                                |   |               |        |             |   |   |   |   |   |
| Net unrealized  gains                                                               |   | 38.6               |        | 10.6             |   | 38.5 |   | 7.6 |   |
| Income tax  expense                                                                 |   | 15.0               |        | 4.2              |   | 15.0 |   | 3.0 |   |
|                                                                                |   | 23.6               |        | 6.4              |   | 23.5 |   | 4.6 |   |
|                                                                                |   |               |        |             |   |   |   |   |   |
| Foreign currency  translation adjustment                                            |   | 7.6                |        | 3.0              |   | 7.5 |   | 2.6 |   |
|                                                                                |   |               |        |             |   |   |   |   |   |
| Other  comprehensive income before tax                                              |   | 46.2               |        | 13.6             |   | 46.0 |   | 10.2 |   |
| Income tax  expense                                                                 |   | 15.0               |        | 4.2              |   | 15.0 |   | 3.0 |   |
| Other  comprehensive income                                                         |   | 31.2               |        | 9.4              |   | 31.0 |   | 7.2 |   |
| Comprehensive  income                                                               |   | $                  |  579.3 |             | $      |  225.6 |   | $ |  859.4 |   | $ |  437.2 |   |
|                                                                                     |        |                    |             |                  |        |  |  |  |  |  |  |  |  |  |

 

**8.       Earnings perShare:**

Basic earnings per shareof common stock was computed by dividing net income applicable to common sharesby the weighted average number of common shares outstanding during theperiod.  Diluted earnings per sharereflects the potential dilution that could occur assuming conversion orexercise of all unexercised stock options and outstanding preferred stock.  A reconciliation of the net income andnumber of shares used in computing basic and diluted earnings per share was asfollows for the three and six month periods ended June 30:

 
|                                                       |   | Three Months Ended |            | Six Months Ended |   |
|------------------------------------------------------------|--------|--------------------|-----------------|------------------|--------|
| (Millions,  except per share amounts)                      |   | 2003               |            | 2002             |   | 2003 |   | 2002 |   |
|                                                       |   |               |            |             |   |   |   |   |   |
| **Basic earnings per share:**                              |   |               |            |             |   |   |   |   |   |
| Income from  continuing operations                         |   | $                  |  224.2     |             | $      |  192.0 |   | $ |  451.8 |   | $ |  386.9 |   |
| Income from  discontinued operations                       |   | 323.9              |            | 24.2             |   | 361.0 |   | 43.1 |   |
| Cumulative  effect of accounting change                    |   | —             |            | —           |   | 15.6 |   | — |   |
| Less: preferred  dividends                                 |   | (0.1               | )               | (0.1             | )      | (0.1 | ) | (0.1 | ) |
| Net income  applicable to common shares                    |   | $                  |  548.0     |             | $      |  216.1 |   | $ |  828.3 |   | $ |  429.9 |   |
|                                                       |   |               |            |             |   |   |   |   |   |
| Weighted average  common shares outstanding for the period |   | 311.4              |            | 311.0            |   | 311.3 |   | 310.9 |   |
|                                                       |   |               |            |             |   |   |   |   |   |
| Basic earnings  per share:                                 |   |               |            |             |   |   |   |   |   |
| From continuing  operations                                |   | $                  |   .72 |             | $      | .62 |   | $ | 1.45 |   | $ | 1.24 |   |
| From  discontinued operations                              |   | 1.04               |            | .08              |   | 1.16 |   | .14 |   |
| Cumulative  effect of accounting change                    |   | —             |            | —           |   | .05 |   | — |   |
| Net income                                                 |   | $                  |  1.76      |             | $      | .70 |   | $ | 2.66 |   | $ | 1.38 |   |

 

 

10

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**8.       Earnings perShare, Continued:**
|                                                                           |   | Three Months Ended |            | Six Months Ended |   |
|--------------------------------------------------------------------------------|--------|--------------------|-----------------|------------------|--------|
| (Millions,  except per share amounts)                                          |   | 2003               |            | 2002             |   | 2003 |   | 2002 |   |
|                                                                           |   |               |            |             |   |   |   |   |   |
| **Diluted earnings per share:**                                                |   |               |            |             |   |   |   |   |   |
| Net income  applicable to common shares                                        |   | $                  |  548.0     |             | $      |  216.1 |   | $ |  828.3 |   | $ |  429.9 |   |
| Adjustment for  convertible preferred stock dividends                          |   | 0.1                |            | 0.1              |   | 0.1 |   | 0.1 |   |
| Net income  applicable to common shares assuming conversion of preferred stock |   | $                  |  548.1     |             | $      |  216.2 |   | $ |  828.4 |   | $ |  430.0 |   |
|                                                                           |   |               |            |             |   |   |   |   |   |
| Weighted average  common shares outstanding for the period                     |   | 311.4              |            | 311.0            |   | 311.3 |   | 310.9 |   |
| Increase in  shares resulting from the assumed:                                |   |               |            |             |   |   |   |   |   |
| Exercise of  stock options                                                     |   | 0.7                |            | 1.1              |   | 0.8 |   | 1.3 |   |
| Conversion of  preferred stock                                                 |   | 0.3                |            | 0.3              |   | 0.3 |   | 0.3 |   |
| Weighted average  common shares assuming conversion                            |   | 312.4              |            | 312.4            |   | 312.4 |   | 312.5 |   |
|                                                                           |   |               |            |             |   |   |   |   |   |
| Diluted earnings  per share:                                                   |   |               |            |             |   |   |   |   |   |
| From continuing  operations                                                    |   | $                  |   .72 |             | $      | .61 |   | $ | 1.45 |   | $ | 1.24 |   |
| From  discontinued operations                                                  |   | 1.03               |            | .08              |   | 1.15 |   | .14 |   |
| Cumulative  effect of accounting change                                        |   | —             |            | —           |   | .05 |   | — |   |
| Net income                                                                     |   | $                  | 1.75            |             | $      | .69 |   | $ | 2.65 |   | $ | 1.38 |   |

 

**9.       BusinessSegment Information:**

ALLTEL manages itsbusiness operations based on differences in products and services.  The Company evaluates performance of thesegments based on segment income, which is computed as revenues and sales lessoperating expenses, excluding the effects of the items discussed in Notes 2 and5.  These items are not allocated to thesegments and are included in corporate operations.  Segment operating results were as follows for the three and sixmonth periods ended June 30:

 
|                                             |   | Three Months Ended |                                                   | Six Months Ended |   |
|--------------------------------------------------|--------|--------------------|--------------------------------------------------------|------------------|--------|
| (Millions)                                       |   | 2003               |                                                   | 2002             |   | 2003 |   | 2002 |   |
| **Revenues and Sales from External  Customers:** |   |               |                                                   |             |   |   |   |   |   |
| Wireless                                         |   | $                  |  1,195.4                                          |             | $      |  1,002.7 |   | $ |  2,303.2 |   | $ |  1,946.8 |   |
| Wireline                                         |   | 569.1              |                                                   | 460.1            |   | 1,141.4 |   | 920.7 |   |
| Communications  support services                 |   | 156.4              |                                                   | 141.7            |   | 301.5 |   | 274.1 |   |
| Total business  segments                         |   | $                  |  1,920.9                                          |             | $      |  1,604.5 |   | $ |  3,746.1 |   | $ |  3,141.6 |   |
|                                             |   |               |                                                   |             |   |   |   |   |   |
| **Intersegment Revenues and Sales:**             |   |               |                                                   |             |   |   |   |   |   |
| Wireless                                         |   | $                  |         — |             | $      |         — |   | $ |         — |   | $ |         — |   |
| Wireline                                         |   | 37.1               |                                                   | 37.1             |   | 73.7 |   | 75.6 |   |
| Communications  support services                 |   | 86.4               |                                                   | 98.2             |   | 166.4 |   | 177.6 |   |
| Total business  segments                         |   | $                  |    123.5                                |             | $      |    135.3 |   | $ |    240.1 |   | $ |    253.2 |   |
|                                             |   |               |                                                   |             |   |   |   |   |   |
| **Total Revenues and Sales:**                    |   |               |                                                   |             |   |   |   |   |   |
| Wireless                                         |   | $                  |  1,195.4                                          |             | $      |  1,002.7 |   | $ |  2,303.2 |   | $ |  1,946.8 |   |
| Wireline                                         |   | 606.2              |                                                   | 497.2            |   | 1,215.1 |   | 996.3 |   |
| Communications  support services                 |   | 242.8              |                                                   | 239.9            |   | 467.9 |   | 451.7 |   |
| Total business  segments                         |   | 2,044.4            |                                                   | 1,739.8          |   | 3,986.2 |   | 3,394.8 |   |
| Less:  intercompany eliminations                 |   | (34.2              | )                                                      | (40.8            | )      | (70.2 | ) | (72.9 | ) |
| Total revenues  and sales                        |   | $                  |  2,010.2                                          |             | $      |  1,699.0 |   | $ |  3,916.0 |   | $ |  3,321.9 |   |

 

 

11

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**9.       BusinessSegment Information, Continued:**
|                                    |   | Three Months Ended |              | Six Months Ended |   |
|-----------------------------------------|--------|--------------------|-------------------|------------------|--------|
| (Millions)                              |   | 2003               |              | 2002             |   | 2003 |   | 2002 |   |
|                                    |   |               |              |             |   |   |   |   |   |
| **Segment Income:**                     |   |               |              |             |   |   |   |   |   |
| Wireless                                |   | $                  |   262.0 |             | $      |   224.3 |   | $ |   498.0 |   | $ |   444.5 |   |
| Wireline                                |   | 216.8              |              | 170.5            |   | 439.6 |   | 360.6 |   |
| Communications  support services        |   | 20.8               |              | 21.0             |   | 38.5 |   | 39.8 |   |
| Total segment  income                   |   | 499.6              |              | 415.8            |   | 976.1 |   | 844.9 |   |
| Corporate  expenses                     |   | (9.5               | )                 | (8.8             | )      | (19.9 | ) | (17.1 | ) |
| Integration  expenses and other charges |   | (19.0              | )                 | (9.0             | )      | (19.0 | ) | (51.9 | ) |
| Total corporate  operations             |   | (28.5              | )                 | (17.8            | )      | (38.9 | ) | (69.0 | ) |
| Total operating  income                 |   | $                  |   471.1 |             | $      |   398.0 |   | $ |   937.2 |   | $ |   775.9 |   |
|                                    |   |               |              |             |   |   |   |   |   |

Segment assets were asfollows:
|                                                     |   | June 30, |                | December 31, |   |
|----------------------------------------------------------|--------|----------|---------------------|--------------|--------|
| (Millions)                                               |   | 2003     |                | 2002         |   |
| Wireless                                                 |   | $        |   9,574.5 |         | $      |   9,418.7 |   |
| Wireline                                                 |   | 5,326.4  |                | 5,394.1      |   |
| Communications  support services                         |   | 533.9    |                | 535.6        |   |
| Total business  segments                                 |   | 15,434.8 |                | 15,348.4     |   |
| Corporate  headquarters assets not allocated to segments |   | 1,227.4  |                | 545.3        |   |
| Assets held for  sale                                    |   | —   |                | 538.3        |   |
| Less:  elimination of intersegment receivables      |   | (54.4    | )                   | (42.9        | )      |
| Consolidated  total assets                               |   | $        |  16,607.8      |         | $      |  16,389.1 |   |

 

Supplemental informationpertaining to the communications support services segment was as follows forthe three and six month periods ended June 30:
|                                             |   | Three Months Ended |                   | Six Months Ended |   |
|--------------------------------------------------|--------|--------------------|------------------------|------------------|--------|
| (Millions)                                       |   | 2003               |                   | 2002             |   | 2003 |   | 2002 |   |
| **Revenues and Sales from External  Customers:** |   |               |                   |             |   |   |   |   |   |
| Product  distribution                            |   | $                  |    67.1 |             | $      |    54.3 |   | $ |   127.5 |   | $ |    98.8 |   |
| Long-distance  and network management services   |   | 50.2               |                   | 42.6             |   | 99.1 |   | 89.7 |   |
| Telecommunications  information services         |   | 25.6               |                   | 30.6             |   | 52.2 |   | 59.8 |   |
| Directory publishing                             |   | 13.5               |                   | 14.2             |   | 22.7 |   | 25.8 |   |
| Total                                            |   | $                  |   156.4      |             | $      |   141.7 |   | $ |   301.5 |   | $ |   274.1 |   |
|                                             |   |               |                   |             |   |   |   |   |   |
| **Intersegment Revenues and Sales:**             |   |               |                   |             |   |   |   |   |   |
| Product  distribution                            |   | $                  |    33.7 |             | $      |    39.7 |   | $ |    66.4 |   | $ |    76.1 |   |
| Long-distance  and network management services   |   | 30.9               |                   | 37.0             |   | 63.0 |   | 64.6 |   |
| Telecommunications  information services         |   | —             |                   | —           |   | — |   | — |   |
| Directory  publishing                            |   | 21.8               |                   | 21.5             |   | 37.0 |   | 36.9 |   |
| Total                                            |   | $                  |    86.4 |             | $      |    98.2 |   | $ |   166.4 |   | $ |   177.6 |   |
|                                             |   |               |                   |             |   |   |   |   |   |
| **Total Revenues and Sales:**                    |   |               |                   |             |   |   |   |   |   |
| Product  distribution                            |   | $                  |   100.8      |             | $      |    94.0 |   | $ |   193.9 |   | $ |   174.9 |   |
| Long-distance  and network management services   |   | 81.1               |                   | 79.6             |   | 162.1 |   | 154.3 |   |
| Telecommunications  information services         |   | 25.6               |                   | 30.6             |   | 52.2 |   | 59.8 |   |
| Directory  publishing                            |   | 35.3               |                   | 35.7             |   | 59.7 |   | 62.7 |   |
| Total revenues  and sales                        |   | $                  |   242.8      |             | $      |   239.9 |   | $ |   467.9 |   | $ |   451.7 |   |

 

 

12

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**10.     Stock-BasedCompensation:**

ALLTEL may grant fixedand performance-based incentive and non-qualified stock options to officers andother key employees under various stock-based compensation plans.  The Company accounts for these plans underthe recognition and measurement principles of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations.  No compensationexpense was recognized related to stock-based compensation plans in the threeand six month periods ended June 30, 2003 or 2002.  The following table illustrates the effects on net income andearnings per share had the Company applied the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to itsstock-based employee compensation plans for the three and six months ended June30:

 
|                                                                                                                             |   |        |        | Three Months Ended |        | Six Months Ended |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|--------------------|-------------|------------------|--------|
| (Millions, except per share amounts)                                                                                             |   | 2003        |        | 2002               |        | 2003             |   | 2002 |   |
| Net income as reported                                                                                                           |   | $           |  548.1 |               | $           |  216.2      |   | $ |  828.4 |   | $ |  430.0 |   |
| Deduct stock-based  employee compensation expense determined under fair value method for all  awards, net of related tax effects |   | (6.9        | )           | (7.9               | )           | (11.3            | )      | (15.1 | ) |
| Pro forma net  income                                                                                                            |   |        |        | $                  |  541.2 |             | $      |  208.3 |   | $ |  817.1 |   | $ |  414.9 |   |
| Basic earnings  per share:                                                                                                       |   | As reported |        | $                  | 1.76        |             | $      | .70 |   | $ | 2.66 |   | $ | 1.38 |   |
|                                                                                                                             |   | Pro forma   |        | $                  | 1.74        |             | $      | .67 |   | $ | 2.62 |   | $ | 1.33 |   |
| Diluted earnings  per share:                                                                                                     |   | As reported |        | $                  | 1.75        |             | $      | .69 |   | $ | 2.65 |   | $ | 1.38 |   |
|                                                                                                                             |   | Pro forma   |        | $                  | 1.73        |             | $      | .67 |   | $ | 2.62 |   | $ | 1.33 |   |

 

The pro forma amounts presented above maynot be representative of the future effects on reported net income and earningsper share, since the pro forma compensation expense is allocated over theperiods in which options become exercisable, and new option awards may begranted each year.

 

**11.     DiscontinuedOperations:**

Pursuant to a definitive agreement datedJanuary 28, 2003, on April 1, 2003, ALLTEL sold the financial services divisionof its information services subsidiary, ALLTEL Information Services, Inc., toFidelity National for $1.05 billion received as $775.0 million in cash and$275.0 million in Fidelity National common stock.  Approximately 5,500 employees of the Company transitioned toFidelity National as part of the transaction. As a result of this transaction, ALLTEL recorded an after tax gain of$323.9 million.  The after-tax proceedsfrom the sale were used primarily to reduce borrowings outstanding under theCompany’s commercial paper program and to retire all long-term debt outstandingunder the Rural Utilities Services, Rural Telephone Bank and Federal FinancingBank programs.  The Fidelity Nationalcommon stock acquired in this transaction represented an approximate eightpercent interest in Fidelity National and may not be disposed of by ALLTEL,subject to certain conditions specified in the sale agreement, for a period ofone year from the closing date of the transaction.

 

As part of this transaction, ALLTELagreed to indemnify Fidelity National for any damages resulting from ALLTEL’sbreach of warranty or non-fulfillment of certain covenants under the salesagreement, that exceed 1.5 percent of the purchase price, or $15.75 million, upto a maximum of 15 percent of the purchase price, or $157.5 million.  The Company believes because of the lowprobability of being required to pay any amount under this indemnification, thefair value of this obligation is immaterial to the consolidated results ofoperations, cash flows and financial condition of the Company.  Accordingly, the Company has not recorded aliability related to it.

 

ALLTEL also agreed to indemnify FidelityNational from any future tax liability imposed on the financial servicesdivision related to periods prior to the date of sale.  ALLTEL’s obligation to Fidelity Nationalunder this indemnification is not subject to a maximum amount.  The Company has recorded a liability for taxcontingencies of approximately $34.0 million related to the operations of thefinancial services division for periods prior to the date of sale that managementhas assessed as probable and estimable, which should adequately cover anyobligation under this indemnification.

 

 

13

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

          

 

**11.     DiscontinuedOperations, Continued:**

As a result of this transaction, thefinancial services division has been reflected as discontinued operations inthe Company’s interim consolidated statements of income and cash flows for thethree and six months ended June 30, 2003 and 2002.  Assets and liabilities related to the financial services divisionhave been reflected as held for sale in the accompanying unaudited consolidatedbalance sheet as of December 31, 2002. The depreciation of long-lived assets related to the financial servicesdivision ceased as of January 28, 2003, the date of the agreement to sell suchoperations.

 

In January 2003, ALLTEL also completedthe termination of its business venture with Bradford & Bingley Group.  The business venture, ALLTEL MortgageSolutions, Ltd., a majority-owned consolidated subsidiary of ALLTEL, wascreated in 2000 to provide mortgage administration and information technologyproducts in the United Kingdom. Unfortunately, the business climate in the United Kingdom limited theventure’s ability to leverage the business across a broad base ofcustomers.  As a result, the operationsof ALLTEL Mortgage Solutions, Ltd. have also been reflected as discontinuedoperations and as assets held for sale in the Company’s interim consolidatedfinancial statements for all periods presented.

 

The following table includes certainsummary income statement information related to the financial servicesoperations reflected as discontinued operations for the three and six monthsended June 30:

 
|                                            |   | Three Months Ended |                                 | Six Months Ended |   |
|-------------------------------------------------|--------|--------------------|--------------------------------------|------------------|--------|
| (Millions)                                      |   | 2003               |                                 | 2002             |   | 2003 |   | 2002 |   |
| Revenues and  sales                             |   | $                  |      — |             | $      |  225.4 |   | $ |  210.3 |   | $ |  435.4 |   |
| Operating  expenses                             |   | —             |                                 | 187.3            |   | 148.1 |   | 367.2 |   |
| Operating income                                |   | —             |                                 | 38.1             |   | 62.2 |   | 68.2 |   |
| Minority  interest in consolidated partnerships |   | —             |                                 | 1.0              |   | — |   | 1.8 |   |
| Other income  (expense), net                    |   | —             |                                 | 1.4              |   | (0.1 | ) | 2.1 |   |
| Gain on sale of  discontinued operations        |   | 555.1              |                                 | —           |   | 555.1 |   | — |   |
| Pretax income  from discontinued operations     |   | 555.1              |                                 | 40.5             |   | 617.2 |   | 72.1 |   |
| Income tax  expense                             |   | 231.2              |                                 | 16.3             |   | 256.2 |   | 29.0 |   |
| Income from  discontinued operations            |   | $                  |  323.9                          |             | $      |   24.2 |   | $ |  361.0 |   | $ |   43.1 |   |

 

The following table includes certainsummary cash flow statement information related to the financial servicesoperations reflected as discontinued operations for the six months ended June30:

 
| (Millions)                                           |   | 2003  |                   | 2002   |   |
|------------------------------------------------------|--------|-------|------------------------|--------|--------|
| Net cash  provided by operating activities           |   | $     |    29.4 |   | $      |  71.2 |   |
| Net cash  provided by (used in) investing activities |   | 763.4 |  (a)              | (67.4  | )      |
| Net cash used in  financing activities               |   | (0.1  | )                      | (0.3   | )      |
| Net cash  provided by discontinued operations        |   | $     |  792.7            |   | $      |    3.5 |   |

 

(a)   Included cash proceeds of $784.9 millionreceived from the sale of the financial services division to Fidelity

      National.  The cash proceeds included working capital adjustments of$9.9 million.

 

The following table includes the netassets of the discontinued financial services operations that are classified asheld for sale in the accompanying unaudited consolidated balance sheet as ofDecember 31, 2002:

 
| (Millions)                                   |   |   |        |
|----------------------------------------------|--------|--------|-------------|
| Current assets                               |   | $      |  171.2 |   |
| Property, plant  and equipment               |   | 145.0  |        |
| Goodwill                                     |   | 25.8   |        |
| Other assets                                 |   | 196.3  |        |
| Assets held for  sale                        |   | $      |  538.3 |   |
|                                         |   |   |        |
| Current  liabilities                         |   | $      |  109.9 |   |
| Other  liabilities                           |   | 80.6   |        |
| Liabilities  related to assets held for sale |   | $      |  190.5 |   |

 

 

14

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**ALLTELCORPORATION**

**FORM10-Q**

**PART I -FINANCIAL INFORMATION**

 

**Item2.  Management’s****Discussion and Analysis of Financial Condition and Results of Operations**

 

**GENERAL**

The following is adiscussion and analysis of the historical results of operations and financialcondition of ALLTEL Corporation (“ALLTEL” or the “Company”).  This discussion should be read inconjunction with the unaudited consolidated financial statements, including thenotes thereto, for the interim periods ended June 30, 2003 and 2002, and theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

**DISPOSALOF FINANCIAL SERVICES BUSINESS**

On April 1, 2003,ALLTEL completed the sale of the financial services division of its informationservices subsidiary, ALLTEL Information Services, Inc., to Fidelity NationalFinancial Inc. (“Fidelity National”), for $1.05 billion, payable in the form of$775.0 million in cash and $275.0 million in Fidelity National common stock.  As part of this transaction, FidelityNational acquired ALLTEL’s mortgage servicing, retail and wholesale banking andcommercial lending operations, as well as the community/regional bankdivision.  Approximately 5,500 employeesof the Company transitioned to Fidelity National as part of thetransaction.  As a result of thistransaction, the financial services division has been reflected as discontinuedoperations and as assets held for sale in the Company’s consolidated financialstatements for all periods presented. The telecom division of ALLTEL Information Services, Inc. was retainedby the Company and was not part of the sale transaction with FidelityNational.  The operations of theretained telecom division are included in the communications support servicessegment.  In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segmentsof an Enterprise and Related Information”, all prior period segment informationhas been reclassified to conform to this new financial reporting presentation.

 

In January 2003,ALLTEL completed the termination of its business venture with Bradford &Bingley Group.  The business venture,ALLTEL Mortgage Solutions, Ltd., a majority-owned consolidated subsidiary ofALLTEL, was created in 2000 to provide mortgage administration and informationtechnology products in the United Kingdom. Unfortunately, the business climate in the United Kingdom limited theventure’s ability to leverage the business across a broad base ofcustomers.  As a result, the operationsof ALLTEL Mortgage Solutions, Ltd. were also reflected as discontinuedoperations and as assets held for sale in the Company’s consolidated financialstatements for all periods presented. (See Note 11 to the unaudited interim consolidated financial statementsfor additional information regarding the disposal of the financial servicesoperations.)

 

**ACQUISITIONS**

On April 1, 2003, the Company increased its ownershipinterest, to approximately 86 percent, in a wireless property, representingapproximately 145,000 potential customers (“POPs”), in a Wisconsin RuralService Area (“RSA”), for $7.5 million in cash.  Prior to this acquisition, ALLTEL owned approximately 43 percentof this property.  On February 28, 2003,the Company completed its purchase of wireless properties, representingapproximately 370,000 POPs in southern Mississippi, from Cellular XL Associates(“Cellular XL”), a privately held company, for $72.0 million in cash.  Of the total purchase price, ALLTEL paid$64.6 million to Cellular XL at the date of purchase with the remaining cashpayment, subject to adjustments as specified in the purchase agreement, payablewith interest, 12 months after the closing date.  On February 28, 2003, the Company also acquired the remainingownership interest in wireless properties, representing approximately 355,000POPs in two Michigan RSAs for $60.0 million in cash.  Prior to this acquisition, ALLTEL owned approximately 49 percentof the Michigan properties.  Through thecompletion of these transactions, ALLTEL added approximately 141,000customers.  (See Note 4 to the unauditedinterim consolidated financial statements for additional information regardingthese acquisitions.)

 

On August 1, 2002, ALLTEL completed its purchase oflocal telephone properties serving approximately 589,000 wireline customers inKentucky from Verizon Communications, Inc. (“Verizon”) for $1.93 billion incash.  The acquired wireline propertiesoverlapped ALLTEL’s existing wireless service in northeastern Kentucky.  On August 1, 2002, ALLTEL also completed itspurchase of substantially all of the wireless properties owned by CenturyTel,Inc. (“CenturyTel”) for approximately $1.59 billion in cash.  Through the completion of this transaction,ALLTEL added properties representing approximately 8.3 million POPs, acquiredapproximately 762,000 customers, and expanded its wireless footprint into newmarkets across Arkansas, Louisiana, Michigan, Mississippi, Texas andWisconsin.  Also included in thetransaction were minority partnership interests in cellular operationsrepresenting approximately 1.8 million proportionate POPs, and PersonalCommunications Services (“PCS”) licenses covering 1.3 million POPs in Wisconsinand Iowa.  The accounts and results ofoperations of the acquired wireless and wireline properties are included in theaccompanying consolidated financial statements from the dates of acquisition.

 

15

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**ACCOUNTINGCHANGES**

Except for certainwireline subsidiaries as further discussed below, the Company adopted SFAS No.143, “Accounting for Asset Retirement Obligations”, effective January 1,2003.  SFAS No. 143 addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This standard applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the assets.  SFAS No. 143 requires that a liability foran asset retirement obligation be recognized when incurred and reasonablyestimable, recorded at fair value and classified as a liability in the balancesheet.  When the liability is initiallyrecorded, the entity capitalizes the cost and increases the carrying value ofthe related long-lived asset.  Theliability is then accreted to its present value, and the capitalized cost isdepreciated over the estimated useful life of the related asset.  At the settlement date, the entity willrecognize a gain or loss after settlement of the obligation.

 

The Company hasevaluated the effects of SFAS No. 143 on its operations and has determinedthat, for telecommunications and other operating facilities in which theCompany owns the underlying land, ALLTEL has no contractual or legal obligationto remediate the property if the Company were to abandon, sell or otherwisedispose of the property.  ALLTEL issubject to asset retirement obligations associated with its cell site andswitch site operating leases, which are subject to the provisions of SFAS No.143.  Cell site and switch site leaseagreements frequently contain clauses requiring restoration of the leased siteat the end of the lease term, creating an asset retirement obligation.  The Company has concluded that the fairvalue of these obligations cannot be reasonably estimated at this time, becauseneither the settlement date of the asset retirement obligation nor theprobability of enforcement of the remediation clauses is currently determinable.  The Company has insufficient historical datato determine reasonably the extent to which the remediation terms of the leasewould be enforced.  In addition, ALLTEL isunable to estimate a potential range of settlement dates because of its intentand right to renew site leases after the initial lease expiration.  ALLTEL will record a liability for the assetretirement obligation associated with the Company’s cell site and switch siteleases if and when ALLTEL can determine a reasonable estimate of fairvalue.  In addition to cell site andswitch site operating leases, the Company also has leases for office and retaillocations that are subject to the provisions of SFAS No. 143.  The adoption of SFAS No. 143 related to theleased office and retail locations did not have a material impact on ALLTEL’sconsolidated results of operations, financial position or cash flows as of orfor the three and six months ended June 30, 2003.

 

In accordance withfederal and state regulations, depreciation expense for the Company’s wirelineoperations has historically included an additional provision for cost ofremoval.  Effective with the adoption ofSFAS No. 143, the additional cost of removal provision will no longer be includedin depreciation expense, because it does not meet the recognition andmeasurement principles of an asset retirement obligation under SFAS No.143.  On December 20, 2002, the FederalCommunications Commission (“FCC”) notified wireline carriers that they shouldnot adopt the provisions of SFAS No. 143 unless specifically required by theFCC in the future.  As a result of theFCC ruling, ALLTEL will continue to record a regulatory liability for cost ofremoval for its wireline subsidiaries that follow the accounting prescribed bySFAS No. 71 “Accounting for the Effects of Certain Types of Regulation”.  For the acquired Kentucky and Nebraskawireline operations not subject to SFAS No. 71, effective January 1, 2003, theCompany ceased recognition of the cost of removal provision in depreciation expenseand eliminated the cumulative cost of removal included in accumulateddepreciation.  The cumulative effect ofretroactively applying these changes to periods prior to January 1, 2003,resulted in a non-cash credit of $15.6 million, net of income tax benefit of$10.3 million, and was included in net income for the six months ended June 30,2003.  The cessation of the cost ofremoval provision in depreciation expense for the acquired Kentucky andNebraska wireline operations did not have a material impact on the Company’sconsolidated results of operations for the three and six months ended June 30,2003.

 

Effective January 1,2003, the Company adopted Emerging Issues Task Force (“EITF”) Issue 00-21“Accounting for Revenue Arrangements with Multiple Deliverables” for all newarrangements entered into on or after that date.  Issue 00-21 addresses the accounting by a vendor for arrangementsunder which it will perform multiple revenue-generating activities.  Specifically, Issue 00-21 addresses how todetermine whether an arrangement involving multiple deliverables contains oneor more units of accounting and how arrangement consideration should bemeasured and allocated to the separate units of accounting.  Upon adoption, the Company ceased deferralof fees assessed to wireless communications customers to activate service anddirect incremental customer acquisition costs incurred in the activation ofservice.  The adoption of Issue 00-21did not have a material impact on the Company’s consolidated results of operationsfor the three and six months ended June 30, 2003.

 

 

16

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**CONSOLIDATEDRESULTS OF OPERATIONS**
|                                                         |   | Three Months Ended |                    | Six Months Ended |   |
|--------------------------------------------------------------|--------|--------------------|-------------------------|------------------|--------|
|                                                         |   | June 30,           |                    | June 30,         |   |
| (Millions,  except per share amounts)                        |   | 2003               |                    | 2002             |   | 2003 |   | 2002 |   |
| Revenues and  sales:                                         |   |               |                    |             |   |   |   |   |   |
| Service revenues                                             |   | $                  |  1,797.5           |             | $      |  1,524.3 |   | $ |  3,514.0 |   | $ |  3,003.2 |   |
| Product sales                                                |   | 212.7              |                    | 174.7            |   | 402.0 |   | 318.7 |   |
| Total revenues  and sales                                    |   | 2,010.2            |                    | 1,699.0          |   | 3,916.0 |   | 3,321.9 |   |
| Costs and  expenses:                                         |   |               |                    |             |   |   |   |   |   |
| Cost of services                                             |   | 541.4              |                    | 490.3            |   | 1,068.8 |   | 940.6 |   |
| Cost of products  sold                                       |   | 271.3              |                    | 224.3            |   | 509.0 |   | 433.0 |   |
| Selling,  general, administrative and other                  |   | 396.7              |                    | 319.6            |   | 767.8 |   | 615.2 |   |
| Depreciation and  amortization                               |   | 310.7              |                    | 257.8            |   | 614.2 |   | 505.3 |   |
| Integration  expenses and other charges                      |   | 19.0               |                    | 9.0              |   | 19.0 |   | 51.9 |   |
| Total costs and  expenses                                    |   | 1,539.1            |                    | 1,301.0          |   | 2,978.8 |   | 2,546.0 |   |
| Operating income                                             |   | 471.1              |                    | 398.0            |   | 937.2 |   | 775.9 |   |
| Non-operating  income (expense), net                         |   | (1.0               | )                       | 0.6              |   | (0.9 | ) | (4.6 | ) |
| Interest expense                                             |   | (93.2              | )                       | (77.5            | )      | (196.6 | ) | (138.4 | ) |
| Write-down of  investments and other                         |   | (13.1              | )                       | (13.7            | )      | (13.1 | ) | (13.7 | ) |
| Income from  continuing operations before income taxes       |   | 363.8              |                    | 307.4            |   | 726.6 |   | 619.2 |   |
| Income taxes                                                 |   | 139.6              |                    | 115.4            |   | 274.8 |   | 232.3 |   |
| Income from  continuing operations                           |   | 224.2              |                    | 192.0            |   | 451.8 |   | 386.9 |   |
| Income from  discontinued operations, net of income taxes    |   | 323.9              |                    | 24.2             |   | 361.0 |   | 43.1 |   |
| Cumulative  effect of accounting change, net of income taxes |   | —             |                    | —           |   | 15.6 |   | — |   |
| Net income                                                   |   | $                  |    548.1 |             | $      |    216.2 |   | $ |    828.4 |   | $ |    430.0 |   |
| Basic earnings  per share:                                   |   |               |                    |             |   |   |   |   |   |
| Income from  continuing operations                           |   | $                  |   .72         |             | $      | .62 |   | $ | 1.45 |   | $ | 1.24 |   |
| Income from  discontinued operations                         |   | 1.04               |                    | .08              |   | 1.16 |   | .14 |   |
| Cumulative effect  of accounting change                      |   | —             |                    | —           |   | .05 |   | — |   |
| Net income                                                   |   | $                  | 1.76                    |             | $      | .70 |   | $ | 2.66 |   | $ | 1.38 |   |
| Diluted earnings  per share:                                 |   |               |                    |             |   |   |   |   |   |
| Income from  continuing operations                           |   | $                  |   .72         |             | $      | .61 |   | $ | 1.45 |   | $ | 1.24 |   |
| Income from  discontinued operations                         |   | 1.03               |                    | .08              |   | 1.15 |   | .14 |   |
| Cumulative  effect of accounting change                      |   | —             |                    | —           |   | .05 |   | — |   |
| Net income                                                   |   | $                  | 1.75                    |             | $      | .69 |   | $ | 2.65 |   | $ | 1.38 |   |

 

Revenues and salesincreased 18 percent, or $311.2 million and $594.1 million, and servicerevenues increased $273.2 million, or 18 percent, and $510.8 million, or 17percent, for the three and six month periods ended June 30, 2003, respectively,compared to the same periods of 2002. The increases in service revenues in both 2003 periods reflected growthin ALLTEL’s communications customer base resulting primarily from acquisitionsand the corresponding increase in access revenues.  The acquisitions of wireless properties from CenturyTel, CellularXL and in Michigan and Wisconsin, along with the wireline properties acquiredfrom Verizon, accounted for $232.4 million and $436.3 million of the overallincreases in service revenues and $241.3 million and $452.4 million of theoverall increases in total revenues and sales in the three and six monthperiods ended June 30, 2003, respectively. In addition to the effects of the acquisitions, service revenues forboth 2003 periods also reflected growth in wireless access revenues resultingfrom nonacquisition-related customer growth, increased sales of ALLTEL'shigher-yield national rate plans and improvements in postpaid customer churn.Growth in the Company’s Internet and long-distance operations and increasedrevenues derived from wireless data services and from the sale of enhancedcommunication services, including caller identification, call waiting, callforwarding, voice mail and communications equipment protection plans alsocontributed to the increase in services revenues in both 2003 periods.  The increases in service revenuesattributable to acquisitions, growth in wireless data and enhancedcommunication services, Internet and long-distance services were partiallyoffset by lower wireless retail roaming revenues compared to 2002 and the lossof wireline access lines due, in part, to broadband and wireless substitution.

 

Product sales increased$38.0 million, or 22 percent, and $83.3 million, or 26 percent, for the threeand six month periods ended June 30, 2003, respectively, compared to the sameperiods of 2002.  The increases inproduct sales in both 2003 periods primarily resulted from higher retail pricesrealized on the sale of wireless handsets and accessories driven by growth ingross customer additions and increased retention efforts by the Company.  The wireless and wireline acquisitions discussedabove accounted for approximately $8.9 million and $16.1 million of the overallincreases in product sales in the

 

17

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three and six monthperiods of 2003, respectively.  Productsales also reflected increased sales of telecommunications and data products tonon-affiliates of $12.8 million and $28.7 million in the three and six monthperiods of 2003, respectively, primarily reflecting increased sales of wirelesshandsets to retailers and other distributors. These increases were partially offset by decreases in directorypublishing and telecommunications information services revenues.

 

Cost of servicesincreased $51.1 million, or 10 percent, and $128.2 million, or 14 percent, forthe three and six month periods ended June 30, 2003, respectively, compared tothe same periods of 2002.  The wirelessand wireline property acquisitions accounted for approximately $74.0 millionand $147.3 million of the overall increases in cost of services in the threeand six month periods of 2003, respectively. In addition to the effects of the acquisitions, cost of services forboth 2003 periods also reflected increases in network-related costs for thewireless operations resulting from increased customer usage.  The increases in cost of servicesattributable to acquisitions and increased wireless network-related costs werepartially offset by reductions in bad debt expense.  Losses sustained from bad debts decreased $36.7 million and $38.1million in the three and six month periods of 2003, respectively, primarilyreflecting the Company’s continued efforts to monitor its customer creditpolicies, evaluate minimum deposit requirements for high-credit risk customersand improve collection practices by adding new technologies and proactivelymanaging the efforts of its collection agencies.

 

Cost of products soldincreased $47.0 million, or 21 percent, and $76.0 million, or 18 percent, forthe three and six month periods ended June 30, 2003, respectively, compared tothe same periods of 2002.  The increasesin cost of products sold in both 2003 periods were consistent with the growthin wireless customer activations and the Company’s continued retentionefforts.  In addition, the wireless andwireline property acquisitions accounted for $16.2 million and $30.2 million ofthe overall increases in cost of products sold in the three and six monthperiods of 2003, respectively.

 

Selling, general,administrative and other expenses increased $77.1 million, or 24 percent, and$152.6 million, or 25 percent, for the three and six month periods ended June30, 2003, respectively, compared to the same periods of 2002.  The wireless and wireline propertyacquisitions accounted for approximately $48.6 million and $89.5 million of theoverall increases in selling, general, administrative and other expenses in thethree and six month periods of 2003, respectively.  Increases in advertising costs, primarily related to a newbranding campaign, also contributed to the increases in selling, general, administrativeand other expenses for both 2003 periods. In addition to the effects of the acquisitions and increased advertisingcosts, the increase in the six month period of 2003 also reflected increasedwireless general and administrative expenses primarily as a result ofadditional costs incurred to complete, for various pre-2003 acquisitions, theconversion of these operations to the Company’s billing and operational supportsystems.

 

Depreciation andamortization expense increased $52.9 million, or 21 percent, and $108.9million, or 22 percent, for the three and six month periods ended June 30,2003, respectively, compared to the same periods of 2002.  The wireless and wireline propertyacquisitions accounted for approximately $38.7 million and $74.3 million of theoverall increases in depreciation and amortization expense in the three and sixmonth periods of 2003, respectively.  Inaddition to the effects of the acquisitions, depreciation and amortizationexpense increased $14.2 million and $34.6 million in the three and six monthperiods of 2003, respectively, primarily as a result of growth incommunications plant in service.

 

Operating incomeincreased $73.1 million, or 18 percent, and $161.3 million, or 21 percent, forthe three and six month periods ended June 30, 2003, respectively, compared tothe same periods of 2002.  The wirelessand wireline property acquisitions accounted for approximately $63.8 millionand $111.1 million of the overall increases in operating income in the threeand six month periods of 2003, respectively. Operating income for the three and six months ended June 30, 2003 and2002 also included the effects of integration expenses and other charges, asfurther discussed below.

 

Integration Expenses andOther Charges

Set forth below is asummary of the integration expenses and other charges recorded for the threeand six month periods ended June 30:
|                                                    |   | Three Months Ended |      | Six Months Ended |   |
|---------------------------------------------------------|--------|--------------------|-----------|------------------|--------|
| (Millions)                                              |   | 2003               |      | 2002             |   | 2003 |   | 2002 |   |
| Severance and  employee benefit costs                   |   | $                  |  6.3 |             | $      |  — |   | $ |  6.3 |   | $ |  13.4 |   |
| Lease and contract  termination costs                   |   | (0.5               | )         | —           |   | (0.5 | ) | 12.4 |   |
| Write-down of  cell site equipment                      |   | —             |      | —           |   | — |   | 7.1 |   |
| Write-down of  software development costs               |   | 13.2               |      | —           |   | 13.2 |   | 4.4 |   |
| Computer system  conversion and other integration costs |   | —             |      | 9.0              |   | — |   | 12.4 |   |
| Equipment  removal and other disposal costs             |   | —             |      | —           |   | — |   | 2.2 |   |
| Total  integration expenses and other charges           |   | $                  | 19.0      |             | $      | 9.0 |   | $ | 19.0 |   | $ | 51.9 |   |

 

 

18

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During the secondquarter of 2003, the Company recorded a restructuring charge of $8.5 millionconsisting of severance and employee benefit costs related to a plannedworkforce reduction, primarily resulting from the closing of certain callcenter locations.  As of June 30, 2003,the Company had paid $5.4 million in severance and employee-related expenses,and all of the employee reductions had been completed.  The Company also recorded a $2.7 millionreduction in the liabilities associated with various restructuring activities initiatedprior to 2003, consisting of $2.2 million in severance and employee benefitcosts and $0.5 million in leasetermination costs.  The reductionprimarily reflected differences between estimated and actual costs paid incompleting the previous planned workforce reductions and lease terminations.  During the second quarter of 2003, ALLTELalso wrote off certain capitalized software development costs that had noalternative future use or functionality.

 

During the first twoquarters of 2002, ALLTEL incurred expenses related to its pending acquisitionsof wireline properties in Kentucky from Verizon and wireless properties fromCenturyTel.  These expenses includedinternal payroll and employee benefit costs, contracted services, branding andother computer programming costs incurred in connection with expanding ALLTEL’scustomer service and operations support functions to handle increased customervolumes resulting from the acquisitions and to convert Verizon’s customerbilling and operations support systems to ALLTEL’s internal systems.

 

During the evaluation ofits existing Competitive Local Exchange Carrier (“CLEC”) operations in 2001,ALLTEL determined that a business model that relied heavily on interconnectionwith other carriers had limited potential for profitably acquiring market share.  Accordingly, in January 2002, the Companyannounced its plans to exit its CLEC operations in seven states representingless than 20 percent of ALLTEL’s CLEC access lines.  In the course of exiting these markets, ALLTEL honored allexisting customer contracts, licenses and other obligations and worked tominimize the inconvenience to affected customers by migrating these customersto other service providers.  In thefirst quarter of 2002, the Company also consolidated its call center and retailstore operations.  In connection withthese activities, the Company recorded a restructuring charge consisting ofseverance and employee benefit costs related to a planned workforce reduction,costs associated with terminating certain CLEC transport agreements and leasetermination fees incurred with the closing of certain retail and call centerlocations.  In exiting the CLECoperations, the Company also incurred costs to disconnect and remove switchingand other transmission equipment from central office facilities and expenses tonotify and migrate customers to other service providers.  ALLTEL also wrote off certain capitalizedsoftware development costs that had no alternative future use or functionality.  The restructuring plans, completed in March2002, provided for the elimination of 910 employees primarily in the Company’ssales, customer service and network operations support functions.  During the fourth quarter of 2002, ALLTELreduced the liabilities associated with these restructuring plans by $2.5million.  The reduction primarilyreflected differences between estimated and actual costs to exit certain CLECmarkets and consisted of $2.0 million in lease termination costs and $0.5million in severance and employee benefit costs.  As of June 30, 2003, the Company had paid $11.9 million inseverance and employee-related expenses, and all of the employee reductions hadbeen completed.

 

The $12.4 million oflease and contract termination costs consisted of $5.0 million representing theestimated minimum contractual commitments over the next one to five years for31 operating locations that the Company has abandoned, net of anticipatedsublease income.  The lease and contracttermination costs also included $3.6 million of costs to terminate transportagreements with six interexchange carriers. The Company also recorded an additional $2.8 million to reflect therevised estimated costs, net of anticipated sublease income, to terminateleases associated with four operating locations.  ALLTEL had previously recorded $6.3 million in lease terminationcosts related to these four locations in 1999. The additional charge reflected a reduction in expected sublease incomeprimarily attributable to softening demand in the commercial real estate marketand the bankruptcy filings by two sublessees. Finally, the lease termination costs also included $1.0 million ofunamortized leasehold improvement costs related to the abandoned locations.

 

During the first quarterof 2002, the Company also recorded the final write-down to fair value of thecarrying value of certain cell site equipment. In conjunction with a product replacement program initiated by a vendorin 2001, the Company exchanged certain used cell site equipment for newequipment.  The exchange of cell siteequipment began during the third quarter of 2001 and continued through thefirst quarter of 2002.  As the equipmentexchanges were completed, the Company recorded write-downs to fair value of thecarrying value of the used cell site equipment.

 

During the third quarterof 2002, the Company recorded a restructuring charge of $4.1 million consistingof severance and employee benefit costs of $1.9 million related to a plannedworkforce reduction and $2.2 million of lease termination costs primarilyrelated to the closing of seven product distribution centers.  The lease termination costs consisted of$1.2 million, primarily representing the estimated minimum contractualcommitments over the ensuing one to four years for operating locations that theCompany abandoned, net of anticipated sublease income.  The lease termination costs also included anadditional $1.0 million to reflect the revised estimated costs, net ofanticipated sublease income, to terminate leases

 

19

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associated with fouroperating locations.  ALLTEL hadpreviously recorded $9.1 million in lease termination costs related to thesefour locations ($2.8 million during the first quarter of 2002 and $6.3 millionin 1999).  The additional chargereflected a further reduction in expected sublease income attributableprimarily to softening demand in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 130 employees primarily in theCompany’s product distribution operations. As of June 30, 2003, the Company had paid $1.9 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.

 

At June 30, 2003, theunpaid liability related to ALLTEL’s integration and restructuring activitieswas $9.9 million, consisting of severance and employee-related expenses of $4.6million and lease cancellation costs of $5.3 million.  Cash outlays for the remaining unpaid liability are to be paid overthe next 12 to 48 months out of operating cash flows.

 

Non-OperatingIncome (Expense), Net
|                                            |   | Three Months   |             | Six Months     |   |
|-------------------------------------------------|--------|----------------|------------------|----------------|--------|
|                                            |   | Ended June 30, |             | Ended June 30, |   |
| (Millions)                                      |   | 2003           |             | 2002           |   | 2003 |   | 2002 |   |
| Equity earnings  in unconsolidated partnerships |   | $              |  16.7       |           | $      |  13.8 |   | $ |  34.2 |   | $ |  22.4 |   |
| Minority interest  in consolidated partnerships |   | (21.4          | )                | (18.7          | )      | (39.2 | ) | (33.7 | ) |
| Other income,  net                              |   | 3.7            |             | 5.5            |   | 4.1 |   | 6.7 |   |
| Non-operating  income (expense), net            |   | $              |   (1.0 | )              | $      |   0.6 |   | $ |  (0.9 | ) | $ |  (4.6 | ) |

 

As indicated in thetable above, non-operating expense, net increased $1.6 million, or 267 percent,and decreased $3.7 million, or 80 percent, in the three and six months endedJune 30, 2003, respectively, compared to the same periods of 2002.  Equity earnings in unconsolidatedpartnerships in the three and six month periods of 2003 included $7.7 millionand $12.4 million, respectively, of additional income resulting from theacquisition of certain minority partnership interests from CenturyTel, aspreviously discussed.  These increaseswere partially offset by the 2003 acquisitions of the remaining ownershipinterest in wireless properties in Michigan and Wisconsin, in which the Companypreviously held a minority ownership interest. Minority interest expense for the three and six month periods of 2003included $2.2 million and $3.3 million, respectively, of additional expenseresulting from the acquisition of certain non-wholly owned partnershipinterests from CenturyTel.  In additionto the effects of the CenturyTel acquisition, minority interest expense for thesix month period of 2003 also reflected improved earnings in ALLTEL’smajority-owned wireless operations. Other income, net for both 2003 periods included additional dividendincome of $2.4 million earned on the Company’s investment in Fidelity Nationalcommon stock.  Conversely, other income,net for both 2002 periods included additional interest income of $4.3 millionfrom investing the cash proceeds from ALLTEL’s 2002 equity unit and long-termdebt offerings, as further discussed below.

 

During the second quarterof 2002, to finance the cost of its acquisition of wireline properties inKentucky and wireless properties from CenturyTel completed in the third quarterof 2002, ALLTEL sold 27.7 million equity units and received net proceeds of$1.34 billion.  The equity units had astated amount of $50 per unit and included a purchase contract pursuant towhich the holder agreed to purchase shares of ALLTEL common stock on May 17,2005.  ALLTEL will make quarterlycontract adjustment payments to the holders at the rate of 1.50 percent of thestated amount per year.  The number ofshares to be purchased will be determined at the time the purchase contractsare settled based on the then current price of ALLTEL’s common stock and willrange between 0.8280 and 1.0101 shares of ALLTEL common stock per equityunit.  The equity units also included$50 principal amount of senior notes, which bear interest at 6.25 percent andmature on May 17, 2007.  In June 2002,the Company also issued $1.5 billion of unsecured long-term debt consisting of$800.0 million of 7.0 percent senior notes due July 1, 2012 and $700.0 millionof 7.875 percent senior notes due July 1, 2032.  Net proceeds from the debt issuance were $1.47 billion, afterdeducting the underwriting discount and other offering expenses.  The net proceeds from the issuance of theequity units and debt securities of $2.81 billion were invested untilcompletion of the acquisitions and were included in cash and short-terminvestments as of June 30, 2002.

 

Interest Expense

Interest expenseincreased $15.7 million, or 20 percent, and $58.2 million, or 42 percent, inthe three and six month periods ended June 30, 2003, respectively, compared tothe same periods of 2002.  The increasesin both 2003 periods primarily reflected the additional interest expenseresulting from ALLTEL’s equity unit and long-term debt offerings discussedabove.  The increases were partiallyoffset by the repayment of $565.6 million of long-term debt during the secondquarter of 2003, primarily consisting of $310.0 million of borrowingsoutstanding under ALLTEL’s commercial paper program and $249.1 million oflong-term debt outstanding under the Rural Utilities Services, Rural TelephoneBank and Federal Financing Bank programs. The repayment of long-term debt was funded primarily from the cashproceeds received from the sale of the financial services division to FidelityNational previously discussed.

 

20

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Write-down of Investmentsand Other

In the second quarter of2003, ALLTEL recorded pretax write-downs totaling $6.0 million to reflectother-than-temporary declines in the fair value of certain investments inunconsolidated limited partnerships.  Aspreviously discussed, during the second quarter of 2003, the Company retired,prior to stated maturity dates, $249.1 million of long-term debt, representingall of the debt outstanding under the Rural Utilities Services, Rural TelephoneBank and Federal Financing Bank programs. In connection with the early retirement of this debt, the Companyincurred pretax termination fees of $7.1 million.

 

In the second quarter of2002, ALLTEL recorded a pretax write-down of $12.5 million on its investment inHughes Tele.com Limited (“HTCL”), a public company and provider of communicationsservices in India.  The write-down wasrecorded in connection with HTCL’s agreement to merge with a major Indiantelecommunications company and an other-than-temporary declinein the fair value of HTCL’s common stock. In addition, the Company also recorded a pretax write-down of $1.2million related to an other-than-temporary decline in ALLTEL’s investment inAirspan Networks, Inc., a provider of wireless telecommunications equipment.

 

Income Taxes

Income tax expenseincreased $24.2 million, or 21 percent, and $42.5 million, or 18 percent, forthe three and six month periods ended June 30, 2003, respectively, compared tothe same periods of 2002.  The increasesin income tax expense in both periods of 2003 were consistent with the overallgrowth in the Company’s earnings from continuing operations.

 

Average Common SharesOutstanding

The average number ofcommon shares outstanding increased slightly in the three and six month periodsended June 30, 2003, compared to the same periods of 2002.  The increases primarily reflected additionalshares issued upon the exercise of options granted under ALLTEL’s employeestock-based compensation plans.

 

DiscontinuedOperations

As previously discussed, as a result of the April 1, 2003 sale of thefinancial services division to Fidelity National and the January 2003termination of ALLTEL’s business venture with Bradford & Bingley Group, theCompany’s financial services operations have been reflected as discontinuedoperations in ALLTEL’s interim consolidated financial statements.  The following table includes certain summaryincome statement information related to the financial services operationsreflected as discontinued operations for the three and six months ended June30:

 
|                                            |   | Three Months Ended |                           | Six Months Ended |   |
|-------------------------------------------------|--------|--------------------|--------------------------------|------------------|--------|
| (Millions)                                      |   | 2003               |                           | 2002             |   | 2003 |   | 2002 |   |
| Revenues and  sales                             |   | $                  |     — |             | $      |  225.4 |   | $ |  210.3 |   | $ |  435.4 |   |
| Operating  expenses                             |   | —             |                           | 187.3            |   | 148.1 |   | 367.2 |   |
| Operating income                                |   | —             |                           | 38.1             |   | 62.2 |   | 68.2 |   |
| Minority  interest in consolidated partnerships |   | —             |                           | 1.0              |   | — |   | 1.8 |   |
| Other income  (expense), net                    |   | —             |                           | 1.4              |   | (0.1 | ) | 2.1 |   |
| Gain on sale of  discontinued operations        |   | 555.1              |                           | —           |   | 555.1 |   | — |   |
| Pretax income  from discontinued operations     |   | 555.1              |                           | 40.5             |   | 617.2 |   | 72.1 |   |
| Income tax  expense                             |   | 231.2              |                           | 16.3             |   | 256.2 |   | 29.0 |   |
| Income from  discontinued operations            |   | $                  |  323.9                    |             | $      |   24.2 |   | $ |  361.0 |   | $ |   43.1 |   |

 

See Note 11 to theunaudited interim consolidated financial statements for additional informationregarding the discontinued operations.

 

 

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**RESULTSOF OPERATIONS BY BUSINESS SEGMENT**

Communications-WirelessOperations
|                                        |   | Three Months Ended |                    | Six Months Ended |   |
|---------------------------------------------|--------|--------------------|-------------------------|------------------|--------|
|                                        |   | June 30,           |                    | June 30,         |   |
| (Millions,  except customers in thousands)  |   | 2003               |                    | 2002             |   | 2003 |   | 2002 |   |
| Revenues and sales:                         |   |               |                    |             |   |   |   |   |   |
| Service revenues                            |   | $                  |  1,127.6           |             | $      |    965.6 |   | $ |  2,174.6 |   | $ |  1,880.3 |   |
| Product sales                               |   | 67.8               |                    | 37.1             |   | 128.6 |   | 66.5 |   |
| Total revenues  and sales                   |   | 1,195.4            |                    | 1,002.7          |   | 2,303.2 |   | 1,946.8 |   |
| Costs and  expenses:                        |   |               |                    |             |   |   |   |   |   |
| Cost of services                            |   | 316.9              |                    | 297.0            |   | 624.4 |   | 565.3 |   |
| Cost of products  sold                      |   | 141.2              |                    | 103.5            |   | 263.7 |   | 213.3 |   |
| Selling,  general, administrative and other |   | 309.9              |                    | 240.3            |   | 590.6 |   | 454.9 |   |
| Depreciation and  amortization              |   | 165.4              |                    | 137.6            |   | 326.5 |   | 268.8 |   |
| Total costs and  expenses                   |   | 933.4              |                    | 778.4            |   | 1,805.2 |   | 1,502.3 |   |
| Segment income                              |   | $                  |    262.0 |             | $      |    224.3 |   | $ |    498.0 |   | $ |    444.5 |   |
| Customers                                   |   | 7,872.3            |                    | 6,843.4          |   | — |   | — |   |
| Gross customer  additions (a)               |   | 686.1              |                    | 558.9            |   | 1,454.1 |   | 1,127.7 |   |
| Net customer  additions (a)                 |   | 111.4              |                    | 80.2             |   | 270.6 |   | 160.5 |   |
| Market  penetration                         |   | 13.1               | %                       | 13.4             | %      | — |   | — |   |
| Postpaid  customer churn                    |   | 2.03               | %                       | 2.19             | %      | 2.10 | % | 2.25 | % |
| Total churn                                 |   | 2.45               | %                       | 2.35             | %      | 2.55 | % | 2.39 | % |
| Average revenue  per customer per month     |   | $                  | 48.01                   |             | $      | 47.30 |   | $ | 46.82 |   | $ | 46.44 |   |
| Cost to acquire  a new customer (b)         |   | $                  | 322                     |             | $      | 321 |   | $ | 303 |   | $ | 318 |   |

 

Notes:

  (a)   Excludesreseller customers for all periods presented.

 

  (b)   Costto acquire a new customer is calculated by dividing the sum of sales andmarketing expenses and net equipment subsidies (included within “Selling,general, administrative and other” and “Cost of products sold”, respectively,as reported above), by the number of internal gross customer additions in theperiod.

 

The total number ofwireless customers served by ALLTEL increased by over 1.0 million customers, or15 percent, during the twelve month period ended June 30, 2003, primarilyresulting from wireless property acquisitions. As previously discussed, on August 1, 2002, the Company completed thepurchase of substantially all of the wireless assets of CenturyTel.  In addition, on February 28, 2003, theCompany completed the purchase of wireless properties in Michigan andMississippi, and on April 1, 2003, the Company completed the purchase of awireless property in Wisconsin.  These acquisitionsaccounted for approximately 903,000 of the overall increase in wirelesscustomers that occurred during the foregoing twelve month period ended June 30,2003.  Overall, the Company’s wirelessmarket penetration rate (number of customers as a percent of the totalpopulation in ALLTEL’s service areas) decreased slightly to 13.1 percent as ofJune 30, 2003, primarily because of lower penetration levels in the marketsacquired from CenturyTel.

 

Excluding the effects ofthe acquisitions, net customer additions were approximately 81,000 and 129,000for the three and six month periods ended June 30, 2003, respectively, comparedto approximately 80,000 and 160,000 for the corresponding periods in 2002.  Heightened competition and increasedpenetration levels continued to affect customer growth rates in the wirelessindustry during the first six months of 2003. The level of customer growth during the balance of 2003 will bedependent upon the Company’s ability to attract new customers in anincreasingly competitive marketplace currently supporting up to sevencompetitors in each market.  The Companywill continue to focus its efforts on sustaining value-added customer growth bymanaging its distribution channels and customer segments, offering attractivelypriced rate plans and enhanced services and other features, selling additionalphones lines and services to existing customers and pursuing strategicacquisitions.

 

The Company continues tofocus its efforts on lowering postpaid customer churn (average monthly rate ofcustomer disconnects).  During thesecond quarter of 2003, the Company launched a new advertising campaign focusedon ALLTEL’s commitment to improve overall service quality to its customers.  To improve customer retention, the Companyoffers competitively priced rate plans, proactively analyzes customer usagepatterns and migrates customers to digital handsets.  The Company also continues to upgrade its telecommunicationsnetwork in order to offer expanded network coverage and quality and to provideenhanced service offerings to its customers. Postpaid customer churn decreased in both the three month and the sixmonth periods ended June 30, 2003, compared to the same periods of 2002, 

 

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 andprimarily resulted from lower disconnects among the Company’s national rateplan customers, fewer involuntary disconnects and theeffects of the new advertising campaign. Total churn increased in both 2003 periods primarily resulting from anincrease in the actual number of prepaid customer disconnects during the threeand six month periods ended June 30, 2003, as compared to the same periods in2002.

 

Wireless revenues andsales increased $192.7 million, or 19 percent, and $356.4 million, or 18percent, for the three and six months ended June 30, 2003, respectively,compared to the same periods of 2002. Service revenues increased $162.0 million, or 17 percent, and $294.3million, or 16 percent, and product sales revenues increased $30.7 million, or83 percent, and $62.1 million, or 93 percent, in the three and six monthperiods ended June 30, 2003, respectively, when compared to the same periods of2002.

 

Service revenuesincreased in both 2003 periods primarily resulting from growth in ALLTEL’scustomer base mainly attributable to wireless property acquisitions and theresulting increases in access revenues. The acquisitions of wireless properties in Michigan, Mississippi,Wisconsin and from CenturyTel accounted for approximately $125.8 million and$222.3 million of the overall increases in service revenues for the three andsix month periods ended June 30, 2003, respectively.  In addition to the effects of the acquisitions, access revenuesincreased $42.7 million and $96.3 million in the three and six month periods of2003, respectively, primarily because of nonacquisition-related customergrowth, increased sales of the Company’s higher-yield Total and NationalFreedom rate plans and improvements in postpaid customer churn rates.  Service revenues in both 2003 periods alsoreflected increases in revenues earned from data messaging services and fromthe sale of enhanced services, including call waiting, call forwarding,voicemail and equipment protection plans. Revenues from data and enhanced services increased $10.5 million and$21.0 million in the three and six month periods ended June 30, 2003,respectively, reflecting increased demand for these service offerings.

 

Service revenue growthin the three and six month periods ended June 30, 2003 attributable to customergrowth, acquisitions, increased access revenues and additional revenues earnedfrom data and enhanced services was partially offset by lower retail roamingrevenues of $33.8 million and $62.0 million, respectively.  The decrease in retail roaming revenuesprimarily reflected the expansion of local, regional and national calling areasand a decrease in wholesale roaming rates.

 

Average revenue percustomer per month in the three and six month periods ended June 30, 2003increased compared to the corresponding periods of 2002 primarily resultingfrom the increased sales of the Company’s higher-yield Total and NationalFreedom rate plans, partially offset by decreased wholesale roaming rates andslightly dilutive effects of migrating the acquired CenturyTel markets toALLTEL’s roaming rate structure.  Growthin service revenues and average revenue per customer per month during 2003 willdepend upon ALLTEL’s ability to maintain market share in an increasingly competitivemarketplace by adding new customers, retaining existing customers, increasingcustomer usage, and selling data and additional enhanced services.

 

The increases in productsales in both 2003 periods primarily resulted from higher retail prices, growthin gross customer additions and increased retention efforts by the Companyfocused on migrating existing wireless customers to new digitaltechnologies.  In addition, theacquisitions of wireless properties discussed above accounted for approximately$7.2 million and $11.6 million of the overall increases in product sales in thethree and six month periods ended June 30, 2003, respectively.

 

Cost of servicesincreased $19.9 million and $59.1 million, or 7 percent and 10 percent, for thethree and six month periods ended June 30, 2003, respectively, compared to thesame periods in 2002.  The wirelessproperty acquisitions accounted for $35.9 million and $69.6 million of theoverall increases in cost of services in the three and six month periods endedJune 30, 2003, respectively.  Inaddition to the effects of the acquisitions, cost of services reflectedincreases in network-related costs of $9.4 million and $23.5 million in thethree and six months ended June 30, 2003, respectively, primarily as a resultof increased network traffic from customer growth and expansion of callingareas.  The increases in cost ofservices in both 2003 periods attributable to acquisitions and increasednetwork-related costs were partially offset by decreases in bad debt expense.  Compared to the same periods of 2002, baddebt expense decreased $23.0 million and $32.8 million in the three and sixmonth periods ended June 30, 2003, respectively.  The reductions in bad debt expense in both 2003 periods primarilyresulted from the Company’s continued efforts to reduce losses sustained frombad debts by monitoring its customer credit policies, evaluating minimumdeposit requirements for high-credit risk customers, and improving collectionpractices by adding new technologies and proactively managing the efforts ofthe Company’s collection agencies.

 

 

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Cost of products soldincreased $37.7 million and $50.4 million, or 36 percent and 24 percent, forthe three and six month periods ended June 30, 2003, respectively, compared tothe same periods of 2002.  Theacquisitions of wireless properties accounted for approximately $14.7 millionand $26.4 million of the overall increases in cost of products sold in thethree and six month periods ended June 30, 2003, respectively.  In addition to the effects of theacquisitions, cost of products sold increased in both 2003 periods primarily asa result of growth in gross customer activations, the selling of higher-priceddigital phones and the Company’s continuing efforts to migrate customers fromanalog to digital equipment as part of ALLTEL’s customer retention efforts.

 

Selling, general,administrative and other expenses increased $69.6 million and $135.7 million,or 29 percent and 30 percent, for the three and six month periods ended June30, 2003, respectively, compared to the same periods of 2002.  The acquisitions of wireless propertiesaccounted for approximately $38.0 million and $67.4 million of the overallincreases in selling, general, administrative and other expenses in the threeand six month periods ended June 30, 2003, respectively.  In addition to the effects of theacquisitions, selling, general, administrative and other expenses for the sixmonth period of 2003 also reflected increased general and administrativeexpenses of $26.9 million.  The increasein general and administrative expenses primarily resulted from additional costsincurred to complete, for various pre-2003 acquisitions, the conversion ofthese operations to ALLTEL’s billing and operational support systems.  Advertising costs also increased $6.5 millionand $10.6 million in the three and six month periods ended June 30, 2003,respectively, primarily due to increased promotional activities, including thelaunch of a new advertising campaign, as previously discussed.

 

Depreciation andamortization expense increased $27.8 million and $57.7 million, or 20 percentand 21 percent, for the three and six month periods ended June 30, 2003,respectively, compared to the same periods of 2002.  The acquisitions of wireless properties accounted forapproximately $14.4 million and $26.1 million of the overall increases indepreciation and amortization expense in the three and six month periods endedJune 30, 2003, respectively.  In additionto the effects of the acquisitions, depreciation and amortization expenseincreased in both 2003 periods primarily as a result of growth in wirelessplant in service consistent with the Company’s plans to expand and upgrade itsnetwork facilities.

 

Primarily as a result ofgrowth in revenues and sales as discussed above, wireless segment incomeincreased $37.7 million and $53.5 million, or 17 percent and 12 percent, forthe three and six month periods ended June 30, 2003, respectively, compared tothe same periods of 2002.  Theacquisitions of wireless properties accounted for approximately $30.0 millionand $44.4 million of the overall increases in wireless segment income in thethree and six month periods ended June 30, 2003, respectively.

 

Cost to acquire a newcustomer is used to measure the average cost of adding a new customer andrepresents sales, marketing and advertising costs and the net equipment cost,if any, for each new customer added. Cost to acquire a new customer in the three month period ended June 30,2003 remained basically unchanged compared to the same period in 2002.  The decrease in the cost to acquire a newcustomer in the six month period ended June 30, 2003 primarily reflectedreduced subsidies on the sale of wireless handsets to new customers, partiallyoffset by the increase in advertising costs previously discussed.  The improved margins on the sale of wirelesshandsets primarily reflected increased retail prices associated with theselling of higher-priced digital phones and the effects of increased vendorrebates and purchase volume discounts received by ALLTEL.

 

Set forth below is a summary of the integrationexpenses and other charges related to the wireless operations that were notincluded in the determination of segment income for the three and six months endedJune 30:

 
|                                                    |   | Three Months Ended |      | Six Months Ended |   |
|---------------------------------------------------------|--------|--------------------|-----------|------------------|--------|
| (Millions)                                              |   | 2003               |      | 2002             |   | 2003 |   | 2002 |   |
| Severance and  employee benefit costs                   |   | $                  |  1.3 |             | $      |  — |   | $ |  1.3 |   | $ |  6.2 |   |
| Lease and  contract termination costs                   |   | —             |      | —           |   | — |   | 5.5 |   |
| Write-down of  cell site equipment                      |   | —             |      | —           |   | — |   | 7.1 |   |
| Write-down of  software development costs               |   | 7.6                |      | —           |   | 7.6 |   | 0.3 |   |
| Computer system  conversion and other integration costs |   | —             |      | 1.9              |   | — |   | 1.9 |   |
| Total  integration expenses and other charges           |   | $                  |  8.9 |             | $      |  1.9 |   | $ |  8.9 |   | $ | 21.0 |   |

 

RegulatoryMatters-Wireless Operations

The Company is subject toregulation by the FCC as a provider of wireless communications services.  The Telecommunications Act of 1996 (the “96Act”) provides wireless carriers numerous opportunities to provide an alternativeto the long-distance and local exchange services provided by local exchangetelephone companies and interexchange carriers.  Wireless carriers are also entitled to compensation from othertelecommunications carriers

 

 

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for calls transmittedfrom the other carriers’ networks and terminated on the wireless carriers’networks.  Presently, the Company’swireless operations do not bill access charges to interexchange carriers,although a FCC decision noted that wireless operators are not precluded frombilling these access charges.  In April2001, the FCC released a notice of proposed rulemaking addressing inter-carriercompensation issues.  Under thisrulemaking, the FCC has proposed a “bill and keep” compensation method thatwould overhaul the existing rules governing reciprocal compensation and accesscharge regulation.  Individual wirelesscarriers have filed a number of petitions with the FCC seeking determinationsas to the type and amount of compensation due to and from local exchangecarriers and/or interexchange carriers for the termination of traffic.  Further, various wireline companies haveinitiated a number of state proceedings to address inter-carrier compensationfor traffic that originates or terminates on wireless carriers.  The outcome of the FCC and state proceedingscould change the way ALLTEL receives compensation from and pays compensation toother carriers as well as its wireless customers.  At this time, ALLTEL cannot estimate whether any such changeswill occur or, if they do, what the effect of the changes on its wirelessrevenues and expenses would be.

 

Under rules establishedby the FCC, Cellular Radiotelephone Service (“CRS”) and PCS providers wererequired, as of November 24, 2002, to participate in a nationwide numberconservation program known as thousand block number pooling in accordance withroll-out schedules established by the FCC. These providers must modify their networks to comply with FCC andindustry performance criteria for number pooling, including support for roamingcustomers.  Number pooling is anFCC-mandated program intended to alleviate the shortage of available telephonenumbers by requiring carriers to return unused numbers in their inventory to acentrally administered pool and taking assignment of new numbers in blocks of1,000 instead of the 10,000 number blocks previously assigned.  In a decision released June 18, 2003, theFCC affirmed that all carriers must participate in the nationwide poolingroll-out.  The FCC exempted small andrural Commercial Mobile Radio Services (“CMRS”) and local exchange carriersfrom the pooling requirement until such time as they implement local numberportability in response to a specific request from another carrier.

 

FCC rules also requirethat CMRS providers implement wireless local number portability, to permitcustomers to retain their existing telephone number when moving from onetelecommunications carrier to another. On July 26, 2002, the FCC extended the date for compliance with the FCCrequirements for wireless local number portability by one year to November 24,2003.  The FCC, on June 18, 2003,released the rules governing the number of Metropolitan Statistical Areas(“MSAs”) in which wireless local number portability must be deployed, as wellas the process for triggering a carrier’s obligation to provide wireless localnumber portability in markets both within those MSAs and otherwise.  The FCC retained the requirement that carriersimplement wireless local number portability based upon the specific request ofanother carrier and gave the state public service commissions authority torequire CMRS carriers to implement wireless local number portability in anymarket within the top 100 MSAs in which they provide service and for which arequest was not received from a competing carrier.

 

On June 6, 2003, theU.S. Court of Appeals for the District of Columbia Circuit (the “Court”) ruledon the appeal of the FCC’s decision denying Verizon Wireless’ petition seekingforbearance of the CMRS carriers’ obligation to provide wireless numberportability.  The Court found that theFCC’s refusal to forbear was reasonable inasmuch as wireless number portabilitywas useful and necessary to further the public interest under Section 10 of theCommunications Act of 1934.  The Court,however, did not rule on whether the FCC was empowered by Congress to requirewireless local number portability, finding that challenge to the FCC’sauthority was not properly placed before the Court.  Since the Court’s decision, numerous petitions have been filedwith the FCC seeking guidance on the terms and conditions under which carrierswill implement wireless local number portability, as well as questioning theFCC’s underlying authority to require implementation, and further appeals ofthe wireless local number portability mandate are likely.  Although the current implementation date ofNovember 24, 2003 remains in effect, the Company at this time cannot fully quantifythe effects on its communications operations of implementing wireless localnumber portability.  ALLTEL believesthese requirements would result in a significant increase in both its operatingcosts and customer churn rates.

 

In addition, wirelessservice carriers must also provide enhanced 911 emergency service (“E-911”) ina two-phased approach.  In phase one,carriers must, within six months of receiving a request from a phase oneenabled Public Safety Answering Point (“PSAP”), deliver both the caller’snumber and the location of the cell site to the PSAP serving the geographicterritory from which the E-911 call originated.  A phase one enabled PSAP is generally one that is capable ofreceiving and utilizing the number and location data transmitted by thecarrier.  ALLTEL has generally compliedwith the phase one requirements and provides service to phase one capablePSAPs.  Due to the status of the PSAPs,as well as other technology and deployment issues, the six month window inwhich service is to be provided under the FCC rules has, in certain instances,been extended by mutual agreement between ALLTEL and the particular PSAPsinvolved.  In phase two, CMRS carriersopting for a handset-based solution, as the Company has, must determine fororiginated calls the location of the caller within fifty meters for 67 percentof the originated calls and 150 meters for 95 percent of the originated calls.The phase two requirements were set to begin by October 1, 2001, but, due totechnology unavailability and other factors,

 

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the Company requested alimited waiver of these requirements, as did virtually every othercarrier.  On July 26, 2002, the FCCreleased an order granting a temporary stay of the E-911 emergencyimplementation rules as they applied to the Company.  The FCC order provides for a phased-in deployment of AutomaticLocation Identification (“ALI”) capable network or handset-based technologythat began on March 1, 2003.  ALIcapability will permit immediate identification of the caller’s location byPSAPs.  Under the FCC order, theCompany, which has chosen to employ handset-based ALI technology,  (1) is selling and activating ALI-capablehandsets; (2) is ensuring that at least 25 percent of all new handsetsactivated are ALI-capable; (3) will ensure that at least 50 percent of all newhandsets activated are ALI-capable no later than November 30, 2003; (4) willensure that 100 percent of its digital handsets activated are ALI-capable byMay 31, 2004; and (5) will ensure that penetration of ALI-capable handsetsamong its customers reaches 95 percent no later than December 31, 2005.  ALLTEL began selling ALI-capable handsets inJune 2002 and has complied with the handset deployment thresholds under theFCC’s order.  ALLTEL fully expects tocomply with the remaining requirements. Although at this time, the Company cannot fully quantify the effects onits communications operations of implementing ALI technology, ALLTEL believesthese requirements, when fully implemented, could result in a significantincrease in its operating costs.

 

On April 14, 2003, theCompany filed petitions with the FCC seeking status as an EligibleTelecommunications Carrier (“ETC”) in the states of Alabama and Virginia inorder to obtain high cost loop support for both rural and non-rural areas fromthe federal Universal Service Fund (“USF”). Various carriers and associations have submitted comments to the FCC onthese applications both in support and opposition to ALLTEL’s requested ETCstatus.  Additional filings with the FCCfor the states of Florida, Georgia and North Carolina are expected to be madeshortly.  Further, ALLTEL is currentlypursuing ETC designation by the state commission in eight other states in whichthe Company provides wireless service, and anticipates filing in other statesvery soon.  Although status as an ETCwould qualify the Company for USF funds, any resulting subsidies would likelynot be received by ALLTEL until the beginning of 2004.  The FCC, in conjunction with theFederal/State Joint Board on Universal Service, is considering changes to theUSF program, including the services qualified for USF support and thequalifications of ETCs.  At this time,ALLTEL cannot estimate whether any such changes will occur or, if they do, whatthe effect of the changes on its wireless revenues and expenses would be.

 

Communications-WirelineOperations
|                                        |   | Three Months Ended |        | Six Months Ended |   |
|---------------------------------------------|--------|--------------------|-------------|------------------|--------|
|                                        |   | June 30,           |        | June 30,         |   |
| (Millions,  access lines in thousands)      |   | 2003               |        | 2002             |   | 2003 |   | 2002 |   |
| Revenues and  sales:                        |   |               |        |             |   |   |   |   |   |
| Local service                               |   | $                  |  284.3 |             | $      |  231.7 |   | $ |   570.2 |   | $ |  462.8 |   |
| Network access  and long-distance           |   | 261.5              |        | 214.5            |   | 523.7 |   | 431.9 |   |
| Miscellaneous                               |   | 60.4               |        | 51.0             |   | 121.2 |   | 101.6 |   |
| Total revenues  and sales                   |   | 606.2              |        | 497.2            |   | 1,215.1 |   | 996.3 |   |
| Costs and  expenses:                        |   |               |        |             |   |   |   |   |   |
| Cost of services                            |   | 185.5              |        | 157.0            |   | 367.6 |   | 298.3 |   |
| Cost of products  sold                      |   | 6.3                |        | 5.7              |   | 14.2 |   | 11.0 |   |
| Selling,  general, administrative and other |   | 64.2               |        | 56.9             |   | 130.4 |   | 116.0 |   |
| Depreciation and  amortization              |   | 133.4              |        | 107.1            |   | 263.3 |   | 210.4 |   |
| Total costs and  expenses                   |   | 389.4              |        | 326.7            |   | 775.5 |   | 635.7 |   |
| Segment income                              |   | $                  |  216.8 |             | $      |  170.5 |   | $ |    439.6 |   | $ |  360.6 |   |
| Access lines in  service                    |   | 3,133.7            |        | 2,611.9          |   | — |   | — |   |

 

Wireline operations consist of the Company’s IncumbentLocal Exchange Carrier (“ILEC”), CLEC and Internet operations.  Wireline revenues and sales increased 22percent, in both the three and six month periods ended June 30, 2003, or $109.0million and $218.8 million, respectively, compared to the same periods in2002.  As previously discussed, onAugust 1, 2002, the Company completed the purchase from Verizon of wirelineproperties in Kentucky.  Thisacquisition accounted for approximately 589,000 of the overall increase inwireline customers that occurred during the twelve months ended June 30,2003.  Excluding the effects of theacquisition, customer access lines decreased approximately 3 percent during thetwelve months ended June 30, 2003, reflecting declines in both primary and secondaccess lines and ALLTEL’s decision to exit CLEC markets in seven states, aspreviously discussed.  The Company lostapproximately 26,000 and 33,000 access lines during the three and six monthsperiod ended June 30, 2003, respectively. The declines in access lines in both 2003 periods reflected seasonallyhigher disconnects and the effects of wireless and broadband substitution forthe Company’s wireline services.  TheCompany expects access line growth in 2003 to continue to be affected bywireless and broadband substitution.

 

 

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To maintain revenue growth in 2003, the Company willcontinue to emphasize sales of enhanced services and bundling of its variousproduct offerings including Internet, long-distance and high-speed datatransport services (digital subscriber line or “DSL”).  Deployment of DSL service is an importantstrategic initiative for ALLTEL. Currently, DSL service is available to approximately 1.8 million of theCompany’s wireline customers.  Duringthe twelve month period ended June 30, 2003, the number of DSL customers nearlytripled to approximately 105,000 customers. The growth in the Company’s DSL customers significantly outpaced therate of decline in customer access lines discussed above.

 

Local service revenues increased 23 percent, in boththe three and six months ended June 30, 2003, or $52.6 million and $107.4million, respectively, compared to the same periods of 2002.  The acquisition of wireline properties inKentucky accounted for $53.0 million and $106.7 million of the overallincreases in local service revenues in the three and six months ended June 30,2003, respectively.  In addition to theeffects of the acquisition, local service revenues in both 2003 periods alsoreflected growth in revenues derived from the sales of enhanced products andservices, reflecting increased demand for these services.  Revenues from these enhanced servicesincreased $2.3 million and $4.9 million in the three and six months ended June30, 2003, respectively, compared to the same periods of 2002.

 

Network access and long-distance revenues increased$47.0 million, or 22 percent, and $91.8 million, or 21 percent, in the threeand six months ended June 30, 2003, respectively, compared to the same periodsof 2002.  The acquisition of wirelineproperties in Kentucky accounted for $47.8 million and $95.4 million of theoverall increases in network access and long-distance revenues in the three andsix months ended June 30, 2003, respectively. In addition to the effects of the acquisition, network access andlong-distance revenues in 2003 also reflected growth in revenues from dataservices of $3.4 million and $5.7 million in the three and six months endedJune 30, 2003, respectively, reflecting increased demand for these services.  The increases in network access andlong-distance revenues attributable to the acquisition and growth in dataservices were partially offset by reductions in intrastate network access usageand toll revenues, which decreased $4.9 million and $10.9 million in the threeand six months ended June 30, 2003, respectively, consistent with the overalldecline in primary and second access lines discussed above.

 

Miscellaneous revenues primarily consist of chargesfor billing and collections services provided to long-distance companies,customer premise equipment sales, directory advertising and revenues derivedfrom Internet services.  Miscellaneousrevenues increased $9.4 million, or 18 percent, and $19.6 million, or 19percent, in the three and six month periods ended June 30, 2003, respectively,compared to the same periods of 2002. The acquisition of wireline properties in Kentucky accounted for $7.5million and $16.4 million of the overall increases in miscellaneous revenues inthe three and six months ended June 30, 2003, respectively.  In addition to the effects of theacquisition, miscellaneous revenues in 2003 also reflected growth in Internetservices, which increased $2.8 million and $5.2 million in the three and sixmonths ended June 30, 2003, respectively, primarily due to customer growth.

 

Cost of services increased $28.5 million, or 18percent, and $69.3 million, or 23 percent, in the three and six months endedJune 30, 2003, respectively, compared to the same periods of 2002.  The acquisition of wireline properties inKentucky accounted for $38.1 million and $77.7 million of the overall increasesin cost of services in the three and six months ended June 30, 2003,respectively.  Included in cost ofservices for the acquired wireline properties in Kentucky were $6.0 million ofadditional maintenance costs incurred during the first quarter of 2003 torepair damage caused by severe winter storms. Cost of services for both the three and six months ended June 30, 2003also included incremental expenses associated with a strike that began in earlyJune by approximately 400 employees in Kentucky who arerepresented by the Communications Workers of America. Such incremental expenseswere not significant to the operating results of the wireline segment duringthe second quarter of 2003; however, future operating results could beadversely affected by strike-related costs if the labor dispute is notresolved. Cost of services for both the three and six months ended June 30,2002 included a $10.9 million write-down of receivables due to an interexchangecarrier’s bankruptcy filing.

 

Compared to the same periods of 2002, cost of productssold increased slightly in the three month period and increased $3.2 million,or 29 percent, in the six month period ended June 30, 2003.  The acquisition of wireline properties inKentucky accounted for $3.8 million of the overall increase in cost of productssold in the six month period of 2003. Selling, general, administrative and other expenses increased $7.3million, or 13 percent, and $14.4 million, or 12 percent, in the three and sixmonths ended June 30, 2003, respectively, compared to the same periods of2002.  The acquisition of wirelineproperties in Kentucky accounted for $10.6 million and $22.1 million of theoverall increases in selling, general, administrative and other expenses in thethree and six month periods of 2003, respectively.  The increases attributable to the acquisition were partiallyoffset by reductions in data processing charges, which decreased $4.5 millionand $8.8 million in the three and six months ended June 30, 2003,respectively.  Depreciation andamortization expense increased 25 percent, in both the three and six monthsended June 30, 2003, or $26.3 million and $52.9 million, respectively.  Depreciation expense increased in bothperiods of 2003 due to growth in wireline plant in 

 

27

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 service and additionaldepreciation attributable to the acquisition of wireline properties inKentucky.  The acquisition accounted for $24.3 million and $48.2 million of theoverall increases in depreciation and amortization expense in the three and sixmonths ended June 30, 2003, respectively.

 

Wireline segment income increased $46.3 million, or 27percent, and $79.0 million, or 22 percent, in the three and six months endedJune 30, 2003, respectively, compared to the same periods of 2002.  The increases in wireline segment income inboth 2003 periods reflected growth in wireline revenues and sales noted aboveprimarily attributable to the acquisition of wireline properties inKentucky.  This acquisition accountedfor $33.8 million and $66.7 million of the overall increases in segment incomein the three and six month periods of 2003, respectively.

 

Set forth below is a summary of the integrationexpenses and other charges related to the wireline operations that were notincluded in the determination of segment income for the three and six monthsended June 30:

 
|                                                    |   | Three Months Ended |      | Six Months Ended |   |
|---------------------------------------------------------|--------|--------------------|-----------|------------------|--------|
| (Millions)                                              |   | 2003               |      | 2002             |   | 2003 |   | 2002 |   |
| Severance and  employee benefit costs                   |   | $                  |  7.0 |             | $      |  — |   | $ |  7.0 |   | $ |   7.0 |   |
| Lease and  contract termination costs                   |   | —             |      | —           |   | — |   | 4.1 |   |
| Write-down of  software development costs               |   | 1.8                |      | —           |   | 1.8 |   | 4.1 |   |
| Computer system  conversion and other integration costs |   | —             |      | 7.1              |   | — |   | 10.5 |   |
| Equipment  removal and other disposal costs             |   | —             |      | —           |   | — |   | 2.2 |   |
| Total  integration expenses and other charges           |   | $                  |  8.8 |             | $      |  7.1 |   | $ |  8.8 |   | $ | 27.9 |   |

 

Regulatory Matters -Wireline Operations

Except for the Kentucky properties acquired fromVerizon and the Nebraska operations acquired in 1999, ALLTEL’s ILEC operationsfollow the accounting for regulated enterprises prescribed by SFAS No. 71,“Accounting for the Effects of Certain Types of Regulation”.  Criteria that would give rise to thediscontinuance of SFAS No. 71 include (1) increasing competition restrictingthe ILEC subsidiaries’ ability to establish prices to recover specific costsand (2) significant changes in the manner in which rates are set by regulatorsfrom cost-based regulation to another form of regulation.  The Company periodically reviews thecriteria to determine whether the continuing application of SFAS No. 71 isappropriate.  ALLTEL’s ILEC operationshave begun to experience some competition in their local service areas.  Sources of competition to ALLTEL’s localexchange business include, but are not limited to, resellers of local exchangeservices, interexchange carriers, satellite transmission services, wirelesscommunications providers, cable television companies, and competitive serviceproviders including those utilizing Unbundled Network Elements-Platform(“UNE-P”).  Through June 30, 2003, thiscompetition has not had a material adverse effect on the results of operationsof ALLTEL’s ILEC operations.

 

Although the Company believes that the application ofSFAS No. 71 continues to be appropriate, it is possible that changes inregulation, legislation or competition could result in the Company’s ILECoperations no longer qualifying for the application of SFAS No. 71 in thefuture.  If ALLTEL’s ILEC operations nolonger qualified for the application of SFAS No. 71, the accounting impact tothe Company would be an extraordinary non-cash credit to operations.  The non-cash credit would consist primarilyof the reversal of the regulatory liability for cost of removal included inaccumulated depreciation, which amounted to $151.6 million as of June 30,2003.  ALLTEL does not expect to recordany impairment charge related to the carrying value of its ILEC plant.  Under SFAS No. 71, ALLTEL currentlydepreciates its ILEC plant based upon asset lives approved by regulatoryagencies or as otherwise allowed by law. Upon discontinuance of SFAS No. 71, ALLTEL would be required to revisethe lives of its property, plant and equipment to reflect the estimated usefullives of the assets.  The Company doesnot expect any revisions in asset lives to have a material adverse effect onits ILEC operations.

 

Most states in which the Company’s ILEC subsidiariesoperate have adopted alternatives to rate-of-return regulation, either throughlegislative or state public service commission actions.  The Company has elected alternativeregulation for certain of its ILEC subsidiaries in Alabama, Arkansas, Florida,Georgia, Kentucky, Missouri, Nebraska, North Carolina, Pennsylvania, SouthCarolina and Texas.  The Companycontinues to evaluate alternative regulation options in other states where itsILEC subsidiaries operate.  The NebraskaILEC properties and the recently acquired Kentucky properties operate underinterstate price cap regulation pursuant to waivers granted by the FCC.  On April 17, 2002, the FCC extended ALLTEL’swaiver of price cap regulation associated with its Nebraska ILEC propertiesand, in the same order, the FCC granted ALLTEL a waiver with respect to theKentucky properties.  Both waivers willremain in effect until the FCC completes its pending review to either modify oreliminate the “all-or-nothing” rule. The “all-or-nothing” rule was originally intended to ensure that allstudy areas of a carrier and its affiliates are subject to a single form ofpricing regulation.

 

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In April 2001, the FCC released a notice of proposedrulemaking addressing inter-carrier compensation.  Under this rulemaking, the FCC asked for comment on a “bill andkeep” compensation method that would overhaul the existing rules governingreciprocal compensation and access charge regulation.  A number of state proceedings have been initiated by variouswireline companies to address compensation with respect to traffic thatoriginates or terminates on wireless carriers. The outcome of the FCC and stateproceedings could change the way ALLTEL receives compensation from, and remitscompensation to, other carriers and its end users.  ALLTEL cannot estimate whether or when any such changes willoccur or, if they occur, what would be the impact of the changes on its ILECrevenues and expenses.

 

In May 2001, the FCC adopted the Rural Task ForceOrder that established an interim universal service mechanism that will governcompensation for rural telephone companies for the ensuing five years.  At this time, ALLTEL cannot estimate theeffect of the changes to its universal service support, if any, that may occuronce the FCC adopts a permanent plan for rural carriers.  On December 13, 2002, the FCC released itsinterim USF contribution report and order and further notice of proposedrulemaking.  Under this ruling, themethod for providing federal USF contributions changed from the historicalinterstate revenue-based arrangement to contributions based on projectedrevenues.  In addition, on April 1,2003, the USF line item on the customer bill was adjusted to reflect only theUSF contribution obligation of the carrier. In the further notice of proposed rulemaking, the FCC has indicated itcontinues to consider adopting a permanent plan for USF contributions andassessment methodology.  Three“connections-based” proposals have been offered as long-term replacements inaddition to the continuation of a revenue-based assessment methodology.  The proposed connection-based methods wouldestablish a universal service charge based either on the number of customerconnections, the capacity and nature of the connection, or on working telephonenumbers.  The interim universal servicechanges have not had a material adverse effect on the Company’s wirelineoperations.

 

On November 8, 2002, the FCC requested that theFederal/State Joint Board on Universal Service (the “Joint Board”) reviewcertain of the FCC’s rules relating to the high-cost universal supportmechanism and the process by which carriers are designated ETCs.  On February 7, 2003, the Joint Board soughtcomment on these matters, but has yet to issue a recommended decision.  At this time, ALLTEL cannot estimate whatimpact, if any, this proceeding may have on its universal service funding.

 

On July 10, 2002, the Joint Board recommended that theFCC not modify the existing list of services supported by universalservice.  On July 10, 2003, the FCCadopted the Joint Board’s recommendation to retain the existing list ofservices supported by universal service. The FCC decided to consider whether equal access should be included inthe list of USF supported services as part of the high-cost universal servicesupport and ETC designation proceeding pending before the Joint Board.

 

In October 2001, the FCC adopted rate-of-return accesscharge reform and initiated a further round of rulemaking to consider otherrate-of-return carrier issues.  Theorder lowered traffic sensitive switched access rates, increased the subscriberline charge (“SLC”) over time to bring it in line with SLCs adopted for pricecap carriers, phased out carrier common line charges in favor of a new portable“Interstate Common Line Support” universal service mechanism, and retained theauthorized 11.25 percent rate of return. The residential and single-line business SLC cap phase-in began onJanuary 1, 2002.  The final scheduledincrease occurred on July 1, 2003.  TheCompany does not expect that this order will have a material adverse effect onits consolidated financial results during 2003.

 

On December 20, 2001, the FCC released a notice ofproposed rulemaking initiating the first triennial review of the FCC’s policieson unbundled network elements (“UNEs”) including UNE-P.  UNE-P is created when a competing carrierobtains all the network elements needed to provide service from the ILEC at adiscounted rate.  The rulemaking askswhether the FCC should retain, modify, or eliminate its existing definitionsand requirements for unbundled network elements.  On February 20, 2003, and in response to the remand of the UnitedStates Court of Appeals for the District of Columbia circuit, the FCC indicatedit was adopting new rules governing the obligations of ILECs to unbundle theelements of their local networks for use by competitors.  The FCC’s order has not been publiclyreleased, therefore, the details of the new rules are not yet known.  Generally, the FCC indicated it wouldmaintain the obligations of ILECs to unbundle their circuit switched networksfor mass market customers, remove the obligation for business customers andderegulate the ILECs provisioning of broadband packet switched networks.  The FCC is expected to establish standardsfor determining when a requesting competing carrier’s provision of service isimpaired and provide for a substantial role for the state public utilitycommissions (“PUCs”) in applying these standards to specific requests for ILECinterconnection and network elements. The FCC also opened a further notice of proposed rulemaking to considerthe “pick and choose” rules under which a competing carrier may select fromamong the various terms of interconnection offered by an ILEC in its variousinterconnection agreements.

 

 

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In addition, the FCCindicated it would take the following actions:

 

•      Switching for business customers served byhigh-capacity loops would no longer be unbundled based on a presumptive findingof no impairment.  Under this framework,states will have 90 days to rebut the national finding. As to all other uses ofunbundled switching, PUCs must, within 9 months, complete a granular analysisof exchanges to determine if switching impairment exists.  Upon a state finding of no impairment, athree year period for carriers to transition off UNE-P would apply.

 

•      ILECs would not be required to unbundlepacket switching as a stand-alone network element.

 

•      The order is expected to clarify two keycomponents of the FCC’s total element long-run incremental cost methodology(“TELRIC”) pricing rules.  First, theFCC will clarify that the risk-adjusted cost of capital used in calculating UNEprices should reflect the risks associated with a competitive market.  Second, the FCC will decline to mandate theuse of any particular set of asset lives for depreciation, but clarify that theuse of an accelerated depreciation mechanism may present a more accurate methodof calculating economic depreciation.

 

•      The FCC will continue its prior positionof not permitting CLECs to avoid any liability under contractual earlytermination clauses in the event a competitive local exchange carrier convertsa special access circuit to an UNE.

 

ALLTEL cannot estimatethe prospective impact of this order on its ILEC operations until the FCCreleases the full text of its order, state commissions take any actions thatmay be necessary on their part to establish rules or make determinations as directedby the FCC order, and the Company evaluates the FCC and state commissiondecisions.

 

During the first quarterof 2002, the FCC initiated a rulemaking to evaluate the appropriate frameworkfor broadband access to the Internet over wireline facilities.  In the notice of proposed rulemaking, theFCC tentatively concluded that wireline broadband Internet access should beclassified as an information service rather than a telecommunications serviceand, therefore, should not be subject to common carrier regulation.  The FCC sought comments on their tentativeconclusion, but has not reached a final order. At this time, ALLTEL cannot estimate whether or when any such changes willoccur or, if they occur, what the impact of the changes on its ILEC revenuesand expenses would be.

 

Because certain of theregulatory matters discussed above are under FCC or judicial review, resolutionof these matters continues to be uncertain, and ALLTEL cannot predict at thistime the specific effects, if any, that the 96 Act, regulatory decisions andrulemakings, and future competition will ultimately have on its ILECoperations.

 

CommunicationsSupport Services
|                                           |   | Three Months Ended |             | Six Months Ended |   |
|------------------------------------------------|--------|--------------------|------------------|------------------|--------|
|                                           |   | June 30,           |             | June 30,         |   |
| (Millions,  except customers in thousands)     |   | 2003               |             | 2002             |   | 2003 |   | 2002 |   |
| Revenues and  sales:                           |   |               |             |             |   |   |   |   |   |
| Product  distribution                          |   | $                  |  100.8      |             | $      |   94.0 |   | $ |  193.9 |   | $ |  174.9 |   |
| Long-distance  and network management services |   | 81.1               |             | 79.6             |   | 162.1 |   | 154.3 |   |
| Telecommunications  information services       |   | 25.6               |             | 30.6             |   | 52.2 |   | 59.8 |   |
| Directory  publishing                          |   | 35.3               |             | 35.7             |   | 59.7 |   | 62.7 |   |
| Total revenues  and sales                      |   | 242.8              |             | 239.9            |   | 467.9 |   | 451.7 |   |
| Costs and  expenses:                           |   |               |             |             |   |   |   |   |   |
| Cost of services                               |   | 72.0               |             | 75.7             |   | 144.7 |   | 146.8 |   |
| Cost of products  sold                         |   | 124.1              |             | 115.8            |   | 231.8 |   | 210.4 |   |
| Selling,  general, administrative and other    |   | 17.1               |             | 18.0             |   | 34.8 |   | 36.2 |   |
| Depreciation and  amortization                 |   | 8.8                |             | 9.4              |   | 18.1 |   | 18.5 |   |
| Total costs and  expenses                      |   | 222.0              |             | 218.9            |   | 429.4 |   | 411.9 |   |
| Segment income                                 |   | $                  |   20.8 |             | $      |   21.0 |   | $ |   38.5 |   | $ |   39.8 |   |
| Long-distance  customers                       |   | 1,644.4            |             | 1,363.8          |   | — |   | — |   |

 

Communications support services revenues and salesincreased $2.9 million, or 1 percent, and $16.2 million, or 4 percent, for thethree and six month periods ended June 30, 2003, respectively, compared to thesame periods of 2002.  As noted in thetable above, the increases in revenues and sales in the three and six monthperiods of 2003 reflected growth in sales of telecommunications and dataproducts and increased revenues from long-distance and network managementservices, partially offset by reductions in telecommunications informationservices and directory publishing revenues. Sales of 

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 telecommunications and data products increased $6.8 million and$19.0 million in the three and six month periods of 2003,

respectively, compared to the same periods of2002.  Sales to non-affiliates increased$12.8 million and $28.7 million, in the three and six month periods of 2003,respectively, primarily reflecting increased sales of wireless handsets toretailers and other distributors. Conversely, the general reduction in capital spending bytelecommunications companies adversely affected sales to non-affiliates in both2003 periods, reflecting current economic conditions and the industry’semphasis on controlling costs.  For thethree and six month periods of 2003, sales to affiliates decreased $6.0 millionand $9.7 million, respectively, primarily due to timing differences in thepurchases of materials and equipment related to long-term constructionprojects.  Revenues from long-distanceand network management services increased $1.5 million and $7.8 million in thethree and six month periods of 2003, respectively, primarily driven by growthin ALLTEL’s customer base for these services, partially offset by a decrease incustomer billing rates due to competition. Telecommunications information services revenues decreased $5.0 millionand $7.6 million in the three and six month periods of 2003, respectively,compared to the same periods of 2002. The decreases reflected a reduction in programming services provided toone customer, lost operations resulting from a contract termination and thecompletion in 2002 of customer specific conversion projects and othertransitional services.  The decreases indirectory publishing revenues in both 2003 periods primarily resulted from achange in accounting for directory contracts in which the Company has asecondary delivery obligation.  ALLTELbegan deferring a portion of its revenues and related costs to provide forsecondary delivery effective January 1, 2003.

 

Although revenues and sales increased in both thethree and six month periods of 2003 compared to the same periods of 2002,communications support services segment income decreased in both 2003 periodsprimarily due to lower profit margins realized by the product distribution anddirectory publishing operations.  Profitmargins for the product distribution operations decreased in both 2003 periodsdue to a shift in the mix of products sold to non-affiliates, as aproportionately higher percentage of these sales consisted of lower marginwireless handsets as noted above. Profit margins for the directory publishing operations reflectedincreased selling, marketing and other start-up costs incurred in order for theCompany’s publishing subsidiary to begin providing all directory publishingservices, except printing, for a limited number of directory contracts to bepublished in 2003.  Currently, thesedirectory publishing services are contracted out to a third party.

 

Set forth below is a summary of the integrationexpenses and other charges related to the communications support servicesoperations that were not included in the determination of segment income forthe three and six months ended June 30:

 
|                                          |   | Three Months Ended |               | Six Months Ended |   |
|-----------------------------------------------|--------|--------------------|--------------------|------------------|--------|
| (Millions)                                    |   | 2003               |               | 2002             |   | 2003 |   | 2002 |   |
| Severance and  employee benefit costs         |   | $                  |   — |             | $      |  — |   | $ |   — |   | $ |  0.2 |   |
| Lease and  contract termination costs         |   | (0.5               | )                  | —           |   | (0.5 | ) | 2.8 |   |
| Write-down of  software development costs     |   | 3.8                |               | —           |   | 3.8 |   | — |   |
| Total  integration expenses and other charges |   | $                  |  3.3          |             | $      |  — |   | $ |  3.3 |   | $ |  3.0 |   |

 

CorporateOperations
|                                    |   | Three Months   |            | Six Months     |   |
|-----------------------------------------|--------|----------------|-----------------|----------------|--------|
|                                    |   | Ended June 30, |            | Ended June 30, |   |
| (Millions)                              |   | 2003           |            | 2002           |   | 2003 |   | 2002 |   |
| Corporate  expenses                     |   | $              |   9.5 |           | $      |   8.8 |   | $ | 19.9 |   | $ | 17.1 |   |
| Integration  expenses and other charges |   | 19.0           |            | 9.0            |   | 19.0 |   | 51.9 |   |
| Total corporate  operations             |   | $              | 28.5            |           | $      | 17.8 |   | $ | 38.9 |   | $ | 69.0 |   |

 

As indicated in the table above, corporate operationsincluded integration expenses and other charges that are not allocated to theCompany’s business segments, as previously discussed.  Corporate expenses increased in the three and six month periodsof 2003 primarily resulting from increases in employee-related benefit costs.

 

 

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**FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL RESOURCES**
|                                       |   | Six Months Ended                     |   |
|--------------------------------------------|--------|--------------------------------------|--------|
|                                       |   | June 30,                             |   |
| (Millions,  except per share amounts)      |   | 2003                                 |   | 2002 |   |
| Cash flows from  (used in):                |   |                                 |   |   |   |
| Operating  activities                      |   | $  1,210.1                 |   | $  1,105.2 |   |
| Investing  activities                      |   | (677.9                               | )      | (564.9 | ) |
| Financing  activities                      |   | (963.9                               | )      | 2,332.6 |   |
| Discontinued  operations                   |   | 792.7                                |   | 3.5 |   |
| Effect of  exchange rate changes           |   | 0.8                                  |   | 2.6 |   |
| Change in cash  and short-term investments |   | $     361.8 |   | $  2,879.0 |   |
| Total capital  structure (a)               |   | $12,598.2                            |   | $12,277.2 |   |
| Percent of  equity to total capital (b)    |   | 52.9                                 | %      | 46.5 | % |
| Book value per  share (c)                  |   | $     21.37 |   | $     18.37 |   |

 

Notes:

  (a)   Computedas the sum of long-term debt including current maturities, redeemable preferredstock and total shareholders’ equity.

  (b)   Computedby dividing total shareholders’ equity by total capital structure as computedin (a) above.

  (c)   Computedby dividing total shareholders’ equity less preferred stock by the total numberof common shares outstanding at the end of the period.

 

OperatingActivities

Cash provided from operations continued to be ALLTEL’sprimary source of liquidity.  Theincrease in the six month period ended June 30, 2003 reflected growth inearnings of the Company before depreciation and amortization, interest expenseand income taxes.  The increase in cashprovided from operations resulting from earnings growth in 2003 was partially offsetby changes in working capital requirements, including timing differences inpayment of trade payables and other accrued liabilities.

 

InvestingActivities

Capital expenditures continued to be ALLTEL’s primaryuse of capital resources.  Capitalexpenditures for the six months ended June 30, 2003 were $531.4 millioncompared to $524.6 million for the same period in 2002.  The increase in 2003 primarily reflectedadditional spending by ALLTEL to construct additional network facilities, todeploy digital wireless technology in the Company’s existing and newly acquiredwireless markets and to upgrade ALLTEL’s telecommunications network in order tooffer other communications services, including long-distance, Internet, DSL andlocal competitive access services.  TheCompany funded most of its capital expenditures through internally generatedfunds.  Investing activities alsoincluded outlays for capitalized software development costs.  Additions to capitalized software for thesix months ended June 30, 2003 were $28.4 million compared to $37.3 million forthe same period in 2002.  Capitalizedsoftware development costs for 2002 included additional spending for thedevelopment and enhancement of internal use software to support the Company’sretail operations.  Spending levels in2003 for capitalized software development costs reflected the completion ofthese projects during 2002.  The Companyexpects capital expenditures including capitalized software development coststo be approximately $1.2 to $1.3 billion for 2003, which will be fundedprimarily from internally generated funds.

 

Cash outlays for the purchase of property were $132.1million for the six months ended June 30, 2003, compared to $19.7 million forthe same period of 2002.  During thefirst six months of 2003, ALLTEL purchased wireless properties in Mississippifor $64.6 million in cash, acquired the remaining ownership interest in twowireless properties in Michigan for $60.0 million in cash, and purchased anadditional ownership interest in a Wisconsin wireless property for $7.5 millionin cash.  Conversely, during the firstsix months of 2002, ALLTEL purchased a wireline property in Georgia for $18.0million and acquired an additional ownership interest in a Texas wirelessproperty for $1.7 million.

 

Cash flows from investing activities for the sixmonths ended June 30, 2002 included $7.5 million of advance lease paymentsreceived from American Tower for the leasing of cell site towers.  In December 2000, ALLTEL signed an agreementto lease American Tower certain of the Company’s cell site towers in exchangefor cash paid in advance.  In turn,ALLTEL is obligated to pay American Tower a monthly fee per tower formanagement and maintenance services for the duration of the fifteen-year leaseagreement.  During February 2002, theCompany closed on the remaining towers under this agreement.  Upon completion of this transaction, ALLTELhad leased 1,773 cell site towers to American Tower.

 

 

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Investing activities for the six months ended June 30,2003 and 2002 also included proceeds from the return on investments of $17.6million and $19.7 million, respectively. These amounts primarily consisted of cash distributions received fromALLTEL’s wireless minority investments. The decrease in 2003 primarily reflected ALLTEL’s acquisitions of theremaining ownership interest in two wireless properties in Michigan and of acontrolling interest in a Wisconsin wireless partnership completed during thefirst six months of 2003, as previously discussed.

 

FinancingActivities

Dividend payments remain a significant use of capitalresources for ALLTEL.  Common andpreferred dividend payments were $218.1 million for the six months ended June30, 2003 compared to $211.4 million for the same period in 2002.  The increase in dividend payments in 2003primarily reflected growth in the annual dividend rate on ALLTEL’s commonstock.  In October 2002, the Company’sBoard of Directors approved an increase in the quarterly common stock dividendrate from $.34 to $.35 per share, raising the annual dividend rate to $1.40 pershare.  The Company expects to continuethe payment of cash dividends during the balance of 2003.

 

ALLTEL’s maximum borrowing capacity under itscommercial paper program is $1.5 billion. ALLTEL classifies commercial paper borrowings as long-term debt, becausethey are intended to be maintained on a long-term basis and are supported bythe Company’s revolving credit agreements. ALLTEL has a $1.0 billion line of credit under a revolving creditagreement of which $50.0 million will expire in October 2003 and $950.0 millionwill expire in October 2005.  On July31, 2002, the Company entered into an additional $500.0 million, 364-dayrevolving credit agreement that expired on July 30, 2003.  On that same day, the Company entered into anew $500.0 million, 364-day revolving credit agreement that will expire on July28, 2004, and allows the Company to convert any outstanding borrowings underthis agreement into term loans maturing in 2005.  No borrowings were outstanding under the revolving creditagreements as of June 30, 2003, December 31, 2002 or June 30, 2002.

 

Under the commercial paper program, commercial paperborrowings are fully supported by the available borrowings under the revolvingcredit agreements.  Accordingly, thetotal amount outstanding under the commercial paper program and theindebtedness incurred under the revolving credit agreements may not exceed $1.5billion.  No commercial paper borrowingswere outstanding at either June 30, 2003 or June 30, 2002.  Commercial paper borrowings outstanding atDecember 31, 2002 and December 31, 2001 were $25.0 million and $230.1 million,respectively.  During 2003, the Companyincurred additional commercial paper borrowings to fund the wireless propertyacquisitions in Mississippi and Michigan, as previously discussed, and toretire a $450.0 million, 7.125 percent senior unsecured note that was due March1, 2003.  As previously discussed,during the second quarter of 2003, the Company repaid all borrowings outstandingunder its commercial paper program utilizing a portion of the cash proceedsALLTEL received in connection with the April 1, 2003, sale of the financialservices division of its information services subsidiary to Fidelity National.  ALLTEL used a portion of the cash proceedsfrom the sale to retire all long-term debt outstanding under the RuralUtilities Services, Rural Telephone Bank and Federal Financing Bank programs asfurther discussed below.

 

Retirements of long-term debt were $740.5 million and$253.0 million for the six months ended June 30, 2003 and 2002,respectively.  Retirements of long-termdebt in 2003 included the repayment of a $450.0 million unsecured note dueMarch 1, 2003 and the retirement of $249.1 million of long-term debt outstandingunder the Rural Utilities Services, Rural Telephone Bank and Federal FinancingBank programs.  Retirements of long-termdebt in 2003 also included the net reduction from December 31, 2002 incommercial paper borrowings of $25.0 million. The net reduction from December 31, 2001 in commercial paper borrowingsof $230.1 million represented the majority of the long-term debt retired in thesix month period of 2002.  Scheduledlong-term debt retirements, net of commercial paper activity and the prepaymentof long-term debt, amounted to $16.4 million for the six month period of 2003compared to $22.9 million for the same period of 2002.

 

Cash flows from financing activities also includeddistributions to minority investors, which amounted to $28.3 million and $25.8million for the six months ended June 30, 2003 and 2002, respectively.

 

Liquidity andCapital Resources

The Company believes it has adequate operating cashflows to finance its ongoing operating requirements including capitalexpenditures and the payment of dividends. Additional sources of funding available to ALLTEL include (1) additionalborrowings available to the Company under its commercial paper program andrevolving credit agreements, (2) additional debt or equity securities under theCompany’s March 28, 2002, $5.0 billion shelf registration statement, of whichapproximately $730 million remained available for issuance at June 30, 2003 and(3) additional debt securities issued in the private placement market.

 

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ALLTEL’s commercial paper and long-term credit ratingswith Moody’s Investors Service (“Moody’s”), Standard & Poor’s Corporation(“Standard & Poor”) and Fitch Ratings were unchanged from December 31, 2002and were as follows:

 
| Description                     |   | Moody’s |   | Standard   & Poor’s |   | Fitch  |   |
|---------------------------------|--------|--------------|--------|------------------------------|--------|--------|--------|
| Commercial paper  credit rating |   | Prime-1      |   | A-1                          |   | F1     |   |
| Long-term debt  credit rating   |   | A2           |   | A                            |   | A      |   |
| Outlook                         |   | Stable       |   | Negative                     |   | Stable |   |

 

Factors that could affect ALLTEL’s short and long-termcredit ratings would include, but not be limited to, a material decline in theCompany’s operating results and increased debt levels relative to operatingcash flows resulting from future acquisitions or increased capital expenditurerequirements.  If ALLTEL’s creditratings were to be downgraded from current levels, the Company would incurhigher interest costs on new borrowings, and the Company’s access to the publiccapital markets could be adversely affected. A downgrade in ALLTEL’s current short or long-term credit ratings wouldnot accelerate scheduled principal payments of ALLTEL’s existing long-termdebt.

 

During the third quarter of 2002, the Company amendedits $1.0 billion revolving credit agreement to conform certain of itsprovisions to corresponding provisions of the Company’s 364-day revolvingcredit agreement.  The revolving creditagreements contain various covenants and restrictions including a requirementthat, as of the end of each calendar quarter, ALLTEL maintain a totaldebt-to-capitalization ratio of less than 65 percent.  For purposes of calculating this ratio under the revolving creditagreements, total debt would include amounts classified as long-term debt(excluding mark-to-market adjustments for interest rate swaps), currentmaturities of long-term debt outstanding, short-term debt and any letters ofcredit or other guarantee obligations. As of June 30, 2003, the Company’s total debt to capitalization ratiowas 46.6 percent.

 

At June 30, 2003, current maturities of long-term debtwere $276.5 million and included a $250.0 million, 7.25 percent seniorunsecured note due April 1, 2004.  TheCompany expects to fund the payment of this note at maturity through eitheroperating cash flows, available cash on hand or refinancing all or a portion ofthe obligation through the issuance of additional commercial paper borrowingsor other unsecured long-term debt.

 

In connection with the leasing of 1,773 cell sitetowers to American Tower during 2001 and 2002, the Company received $531.9million of cash in advance as prepaid rent and is recognizing the proceeds asrevenue on a straight-line basis over the fifteen-year lease term.  Participants in the telecommunications andcell tower industry currently are experiencing a more difficult operating andfinancial environment than when the tower transaction with ALLTEL wascompleted.  Accordingly, although ALLTELcurrently considers the likelihood to be remote, in the event ALLTEL’s towerlessee were to file or become subject to bankruptcy proceedings, it is possiblethat the bankruptcy court could require that the tower transaction be rescindedand ALLTEL be required to refund the unutilized portion of the prepaidrent.  At June 30, 2003, deferred rentalincome was $464.4 million and was included in other liabilities in the accompanyingunaudited consolidated balance sheet.

 

Under the Company’s long-term debt borrowingagreements, acceleration of principal payments would occur upon paymentdefault, violation of debt covenants or breach of certain other conditions setforth in the borrowing agreements. At June 30, 2003, the Company was incompliance with all of its debt covenants. There are no provisions within the Company’s leasing agreements thatwould trigger acceleration of future lease payments.

 

The Company does not use securitization of tradereceivables, affiliation with special purpose entities or synthetic leases tofinance its operations.  Additionally,the Company has not entered into any material arrangement requiring the Companyto guarantee payment of third party debt or to fund losses of an unconsolidatedspecial purpose entity.

 

Recently IssuedAccounting Pronouncements

In April 2003, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities”. SFAS No. 149 amends and clarifies the accounting guidance on derivativeinstruments (including certain derivatives embedded in other contracts) andhedging activities that fall within the scope of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities”.  SFAS No. 149 is effective for contracts entered into or modifiedafter June 30, 2003 and hedging relationships designated after June 30, 2003,with certain exceptions.  The Companydoes not expect that this standard will have a material effect on itsconsolidated financial statements.

 

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In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 establishesstandards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity.  Specifically, SFAS 150 requires liabilitypresentation for mandatorily redeemable securities, obligations to repurchaseequity shares through a transfer of assets, and unconditional obligations toissue a variable number of shares that are based solely or predominantly oneither a fixed monetary amount known at inception, variations in somethingother than the fair value of the issuer’s equity shares, or variationsinversely related to changes in the fair value of the issuer’s equityshares.  The Company has evaluated theeffects of SFAS 150 on its consolidated financial statements, and determinedthat the Company has not issued any financial instruments that are within thescope of SFAS 150.

 

Critical AccountingPolicies

ALLTEL prepares its consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates.  In its Annual Report on Form10-K for the year ended December 31, 2002, ALLTEL identified the criticalaccounting policies which affect its more significant estimates and assumptionsused in preparing the Company’s consolidated financial statements.  These critical accounting policies includeaccounting for service revenues, evaluating the collectibility of tradereceivables, assessing the recoverability of capitalized software developmentcosts, accounting for pension and other postretirement benefits, andcalculating depreciation and amortization expense.  There have been no material changes to ALLTEL’s criticalaccounting policies during the six-month period ended June 30, 2003, except forthe January 1, 2003 adoption of SFAS No. 143 and EITF Issue 00-21, aspreviously discussed under the caption “Accounting Changes”.

 

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| **ALLTEL  CORPORATION**                  |
|------------------------------------------|
| **FORM  10-Q**                           |
| **PART I  — FINANCIAL INFORMATION** |

 

**Item3.  Quantitative****andQualitative Disclosures About Market Risk**

The Company’s market risks at June 30, 2003 aresimilar to the market risks discussed in ALLTEL’s Annual Report on Form 10-Kfor the year ended December 31, 2002. The Company is exposed to market risk from changes in marketable equitysecurity prices, interest rates, and foreign exchange rates.  The Company has estimated its market riskusing sensitivity analysis.  Formarketable equity securities, market risk is defined as the potential change infair value attributable to a hypothetical adverse change in market prices.  For all other financial instruments, marketrisk is defined as the potential change in earnings resulting from ahypothetical adverse change in market prices or interest rates.  The results of the sensitivity analysis usedto estimate market risk are presented below, although the actual results maydiffer from these estimates.

 

Equity Price Risk

Changes in equity prices primarily affect the fairvalue of ALLTEL’s investments in marketable equity securities.  Fair value for investments was determinedusing quoted market prices, if available, or the carrying amount of theinvestment, if no quoted market price was available.  At June 30, 2003, investments of the Company were recorded at fairvalue of $640.0 million, compared to $327.4 million at December 31, 2002.  The increase in fair value primarilyreflected the value of the Fidelity National common stock acquired by ALLTEL inconnection with the April 1, 2003 sale of its financial services division, aspreviously discussed.  Marketable equitysecurities amounted to $313.7 million and included unrealized holding gains of$23.5 million at June 30, 2003.  Ahypothetical 10 percent decrease in quoted market prices would result in a$31.4 million decrease in the fair value of these securities at June 30, 2003.

 

Interest Rate Risk

The Company’s earnings are affected by changes invariable interest rates related to ALLTEL’s issuance of short-term commercialpaper and interest rate swap agreements. The Company enters into interest rate swap agreements to obtain atargeted mixture of variable and fixed-interest-rate debt such that the portionof debt subject to variable rates does not exceed 30 percent of ALLTEL’s totaldebt outstanding.  The Company hasestablished policies and procedures for risk assessment and the approval,reporting, and monitoring of interest rate swap activity.  ALLTEL does not enter into interest rateswap agreements, or other derivative financial instruments, for trading or speculativepurposes.  Management periodicallyreviews ALLTEL’s exposure to interest rate fluctuations and implementsstrategies to manage the exposure.

 

As of June 30, 2003, the Company had no borrowingsoutstanding under its commercial paper program.  The Company has entered into six, pay variable receive fixed,interest rate swap agreements on notional amounts totaling $1.0 billion toconvert fixed interest rate payments to variable as of June 30, 2003.  The maturities of the six interest rateswaps range from March 1, 2006 to November 1, 2013.  The weighted average fixed rate received by ALLTEL on these swapsis 5.5 percent, and the variable rate paid by ALLTEL is the three month LIBOR(London-Interbank Offered Rate).  Theweighted average variable rate paid by ALLTEL was 1.3 percent at June 30,2003.  A hypothetical increase of 100basis points in variable interest rates would reduce annual pre-tax earnings byapproximately $10.0 million. Conversely, a hypothetical decrease of 100 basis points in variableinterest rates would increase annual pre-tax earnings by approximately $10.0million.

 

Foreign Exchange Risk

The Company’s business operations in foreign countriesare not material to the Company’s consolidated operations, financial conditionand liquidity.  Foreign currencytranslation gains and losses were not material to the Company’s consolidatedresults of operations for the three and six months ended June 30, 2003 and2002.  Additionally, the Company is notcurrently subject to material foreign currency exchange rate risk from theeffects that exchange rate movements of foreign currency would have on theCompany’s future costs or on future cash flows it would receive from itsforeign subsidiaries.  The Company hasnot entered into any significant foreign currency forward exchange contracts orother derivative financial instruments to hedge the effects of adversefluctuations in foreign currency exchange rates.

 

 

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| **ALLTEL  CORPORATION**                  |
|------------------------------------------|
| **FORM  10-Q**                           |
| **PART I  — FINANCIAL INFORMATION** |

 

**Item 4.    Controls and Procedures**

 

(a)         Evaluationof disclosure controls and procedures.

 

Theterm “disclosure controls and procedures” (defined in SEC Rule 13a-15(e))refers to the controls and other procedures of a company that are designed toensure that information required to be disclosed by a company in the reportsthat it files under the Securities Exchange Act of 1934 (the “Exchange Act”) isrecorded, processed, summarized and reported within required time periods.ALLTEL’s management, with the participation of the Chief Executive Officer andChief Financial Officer, have evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by this quarterly report (the “EvaluationDate”).   Based on that evaluation, ALLTEL’sChief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls andprocedures were effective.

 

(b)         Changesin internal controls.

 

Theterm “internal control over financial reporting” (defined in SEC Rule13a-15(f)) refers to the process of a company that is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. ALLTEL’s management, with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, have evaluated any changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this quarterly report, and they have concluded that there wasno change to ALLTEL’s internal control over financial reporting that hasmaterially affected, or is reasonably likely to materially affect, ALLTEL’sinternal control over financial reporting.

 

 

 
| **PART II — OTHER INFORMATION** |
|--------------------------------------|

 

**Item 1.    Legal****Proceedings**

On October 3, 2002, the Environmental ProtectionAgency (“EPA”) served the Company with Notices of Violation of the federalClean Air Act, the Clean Water Act and theEmergency Planning and Community Right to Know Act.  These notices resulted from an industry-wide investigation intoenvironmental practices conducted by the EPA during 1998 to 2000 and allegedviolations by the Company, dating from 1997, regarding filing andrecord-keeping requirements for fuel storage tanks, as well as generators andbatteries used to supply emergency power at certain ALLTEL facilities.  The Company is conducting settlementdiscussions with the EPA.  Management ofALLTEL believes that a settlement during 2003 is reasonably likely and mayrequire the Company to pay penalties currently estimated at approximately $1.0million and to implement a centralized environmental management system.

 

The Company is party to various other legalproceedings arising from the ordinary course of business.  Although the ultimate resolution of thesevarious proceedings cannot be determined at this time, management of ALLTELdoes not believe that such proceedings, individually or in the aggregate, willhave a material adverse effect on the future consolidated results of operationsor financial condition of the Company. To the knowledge of ALLTEL’s management, no other material legalproceedings, either private or governmental, currently are contemplated orthreatened.

 

 

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| **ALLTEL  CORPORATION**               |
|---------------------------------------|
| **FORM  10-Q**                        |
| **PART  II — OTHER INFORMATION** |

 

**Item 4.    Submission****of Matters to a Vote of Security Holders**

 

TheCompany’s 2003 Annual Meeting of Stockholders was held on April 24, 2003.  At the meeting, the following items weresubmitted to a vote of stockholders:

 

(1)   Theelection of five directors, constituting the class of the Board of Directors,who will serve a three-year term expiring at the 2006 Annual Meeting ofStockholders:

 
| Nominee           |   | Votes For   |   | Votes Withheld |
|-------------------|--------|-------------|--------|----------------|
| Joe T. Ford       |   | 271,579,621 |   | 5,404,253      |
| Dennis E. Foster  |   | 273,577,114 |   | 3,406,760      |
| John P. McConnell |   | 273,527,394 |   | 3,456,480      |
| Josie C. Natori   |   | 273,502,198 |   | 3,481,676      |
| Fred W. Smith     |   | 273,527,217 |   | 3,456,657      |

 

(2)   Astockholder proposal to change ALLTEL Corporation’s employment opportunitypolicy was defeated with 25,871,623 votes for, 194,800,569 votes against,14,746,301 abstentions, and 41,565,381 broker non-votes.

 

**Item 6.    Exhibits****and Reports on Form 8-K**

 

    (a)       See the exhibits specified on the Index ofExhibits located at Page 40.

 

    (b)       Reports on Form 8-K:

 
|   | Current Report on Form 8-K dated April 1, 2003,  reporting under Item 5, Other Events, the Company’s Press Release announcing  that ALLTEL had completed the sale of the financial services division of  ALLTEL Information Services, Inc. to Fidelity National Financial Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | Current Report on Form 8-K dated April 24, 2003,  reporting under Item 9, Regulation FD Disclosure, that the Company furnished  under Item 12 “Disclosure of Results of Operations and Financial Condition”,  the Company’s Press Release announcing ALLTEL’s first quarter 2003 unaudited  consolidated results of operations.   On April 24, 2003, the Company also released quarterly supplemental  financial information of ALLTEL for the years ended December 31, 2002 and  2001 and for the quarter ended March 31, 2003.  This supplemental financial information reflected the financial  services division of ALLTEL Information Services, Inc., which was sold on  April 1, 2003 to Fidelity National Financial Inc., as discontinued  operations. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | Current Report on Form 8-K dated July 24, 2003,  reporting under Item 9, Regulation FD Disclosure, that the Company furnished  under Item 12 “Disclosure of Results of Operations and Financial Condition”,  the Company’s Press Release announcing ALLTEL’s second quarter 2003 unaudited  consolidated results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | No other reports on Form 8-K have been filed during  the quarter for which this report is filed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

 

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SIGNATURE

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

 

 
|                  ALLTEL CORPORATION                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Registrant)                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                             |
|                   /s/ Jeffery R. Gardner                     |
| Jeffery R. Gardner                                                                                                                                                                                                                               |
| Executive Vice President — Chief Financial Officer                                                                                                                                                                                          |
| (Principal Financial Officer)                                                                                                                                                                                                                    |
| August 13, 2003                                                                                                                                                                                                                                  |

 

 

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| **ALLTEL  CORPORATION** |
|-------------------------|
| **FORM  10-Q**          |
| **INDEX OF EXHIBITS**   |

 

 
| Form 10-Q   |                                                                                                                                                                                                                                                                                                       |   |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Exhibit No. | Description of Exhibits                                                                                                                                                                                                                                                                                    |   |
| (10)(a)(1)  | 364 Day Revolving Credit Agreement dated as of July  30, 2003 between ALLTEL Corporation and Bank of America, N.A., Banc of  America Securities LLC, Merrill Lynch, Pierce, Fenner & Smith  Incorporated, Citibank, N.A., Wachovia Bank, National Association, Bank One,  NA, and JPMorgan Chase Bank. |   |
|        |                                                                                                                                                                                                                                                                                                       |   |
| (10)(k)(4)  | Amendment No. 3 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement).                                                                                                                                                                                                                         |   |
|        |                                                                                                                                                                                                                                                                                                       |   |
| (10)(o)(4)  | Amendment No. 3 to ALLTEL Corporation 401(k) Plan  (January 1, 2001 Restatement).                                                                                                                                                                                                                          |   |
|        |                                                                                                                                                                                                                                                                                                       |   |
| 31(a)       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |   |
|        |                                                                                                                                                                                                                                                                                                       |   |
| 31(b)       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |   |
|        |                                                                                                                                                                                                                                                                                                       |   |
| 32(a)       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                       |   |
|        |                                                                                                                                                                                                                                                                                                       |   |
| 32(b)       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                       |   |

 

 

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