**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D. C.   20549**

 

**FORM 10-Q**

 

**ý**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended  September 30, 2004**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number  1-4996**

 

# **ALLTELCORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                        | **34-0868285**                        |
|-------------------------------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     | (I.R.S. Employer  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) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

YES  ý      NO  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined by Rule 12b-2 of theAct).

YES  ý      NO  o

 

 

Number of common sharesoutstanding as of October 31, 2004: 303,757,567

 

 

The Exhibit Index islocated on page 43.

 

 

----

 

**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                                                                    |   |
|       |                                                                                        |   |
| ** ** | **PART II - OTHER INFORMATION**                                                             |   |
| ** ** | ** **                                                                                  |   |
| Item 1.    | Legal  Proceedings                                                                          | *      |
| Item  2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
| Item 3.    | Defaults Upon  Senior Securities                                                            | *      |
| Item 4.    | Submission of  Matters to Vote of Security Holders                                          | *      |
| Item 5.    | Other  Information                                                                          | *      |
| Item 6.    | Exhibits                                                                                    |   |
| ** ** | ** **                                                                                  |   |
| *          | No reportable  information under this item.                                                 |   |

 

Forward-LookingStatements

ThisReport on Form 10-Q includes, and future filings by the Company on Form 10-K,Form 10-Q and Form 8-K and future oral and written statements by ALLTEL and itsmanagement may include, certain “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject touncertainties that could cause actual future events and results to differmaterially from those expressed in the forward-looking statements.  These forward-looking statements are based onestimates, projections, beliefs, and assumptions and are not guarantees offuture events and results.  Words such as“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.

 

Actualfuture events and results may differ materially from those expressed in theseforward-looking statements as a result of a number of important factors.  Representative examples of these factorsinclude (without limitation) adverse changes in economic conditions in themarkets served by ALLTEL; the extent, timing, and overall effects ofcompetition in the communications business; material changes in thecommunications industry generally that could adversely affect vendorrelationships with equipment and network suppliers and customer relationshipswith wholesale customers; changes in communications technology; the risksassociated with the integration of acquired businesses; adverse changes in theterms and conditions of the Company’s wireless roaming agreements; thepotential for adverse changes in the ratings given to ALLTEL’s debt securitiesby nationally accredited ratings organizations; the availability and cost offinancing in the corporate debt markets; the uncertainties related to ALLTEL’sstrategic investments; the effects of work stoppages; the effects of litigation;and the effects of federal and state legislation, rules, and regulationsgoverning the communications industry.

 

Inaddition to these factors, actual future performance, outcomes and results maydiffer materially because of more general factors including (withoutlimitation) general industry and market conditions and growth rates, economicconditions, and governmental and public policy changes.

 

1

----

 

**ALLTEL CORPORATION**

**FORM 10-Q**

**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**
| **(Dollars in millions, except per share amounts)Assets**                                                                                      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Current Assets:**                                                                                                                            |       |                         |       |                        |       |
| Cash and short-term investments                                                                                                                |       | $                            | 648.4      |                        | $          | 657.8 |   |
| Accounts receivable (less allowance for doubtful accounts  of $53.5 and $46.3, respectively)                                                   |       | 912.0                        |       | 890.0                       |       |
| Inventories                                                                                                                                    |       | 111.2                        |       | 122.1                       |       |
| Prepaid expenses and other                                                                                                                     |       | 67.0                         |       | 59.2                        |       |
| Total current assets                                                                                                                           |       | 1,738.6                      |       | 1,729.1                     |       |
| Investments                                                                                                                                    |       | 744.0                        |       | 722.7                       |       |
| Goodwill                                                                                                                                       |       | 4,759.7                      |       | 4,854.2                     |       |
| Other intangibles                                                                                                                              |       | 1,291.8                      |       | 1,337.0                     |       |
| **Property, Plant and Equipment:**                                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Land                                                                                                                                           |       | 270.7                        |       | 259.2                       |       |
| Buildings and improvements                                                                                                                     |       | 1,103.4                      |       | 1,053.0                     |       |
| Wireline                                                                                                                                       |       | 6,685.4                      |       | 6,514.7                     |       |
| Wireless                                                                                                                                       |       | 5,598.5                      |       | 5,255.8                     |       |
| Information processing                                                                                                                         |       | 1,029.5                      |       | 946.7                       |       |
| Other                                                                                                                                          |       | 485.7                        |       | 482.3                       |       |
| Under construction                                                                                                                             |       | 384.3                        |       | 398.2                       |       |
| Total property, plant and equipment                                                                                                            |       | 15,557.5                     |       | 14,909.9                    |       |
| Less accumulated depreciation                                                                                                                  |       | 8,101.9                      |       | 7,289.1                     |       |
| Net property, plant and equipment                                                                                                              |       | 7,455.6                      |       | 7,620.8                     |       |
| Other assets                                                                                                                                   |       | 379.1                        |       | 397.3                       |       |
| **Total Assets**                                                                                                                               |       | $                            | 16,368.8   |                        | $          | 16,661.1 |   |
|                                                                                                                                           |       |                         |       |                        |       |
| **Liabilities and Shareholders’ Equity**                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current Liabilities:**                                                                                                                       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current maturities of long-term debt                                                                                                           |       | $                            | 226.1      |                        | $          | 277.2 |   |
| Accounts payable                                                                                                                               |       | 386.7                        |       | 479.8                       |       |
| Advance payments and customer deposits                                                                                                         |       | 213.2                        |       | 205.3                       |       |
| Accrued taxes                                                                                                                                  |       | 205.9                        |       | 114.6                       |       |
| Accrued dividends                                                                                                                              |       | 113.3                        |       | 116.2                       |       |
| Accrued interest                                                                                                                               |       | 86.1                         |       | 107.1                       |       |
| Other current liabilities                                                                                                                      |       | 170.0                        |       | 192.5                       |       |
| Total current liabilities                                                                                                                      |       | 1,401.3                      |       | 1,492.7                     |       |
| Long-term debt                                                                                                                                 |       | 5,380.0                      |       | 5,581.2                     |       |
| Deferred income taxes                                                                                                                          |       | 1,612.3                      |       | 1,417.7                     |       |
| Other liabilities                                                                                                                              |       | 977.7                        |       | 1,147.3                     |       |
| **Shareholders’ Equity:**                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Preferred stock, Series C, $2.06, no par value,  12,775 and 13,928 shares issued and outstanding, respectively                                 |       | 0.3                          |       | 0.4                         |       |
| Common stock, par value $1 per share, 1.0 billion  shares authorized, 303,726,333 and 312,643,922 shares issued and outstanding,  respectively |       | 303.7                        |       | 312.6                       |       |
| Additional paid-in capital                                                                                                                     |       | 275.6                        |       | 750.1                       |       |
| Unrealized holding gain on investments                                                                                                         |       | 99.3                         |       | 73.6                        |       |
| Foreign currency translation adjustment                                                                                                        |       | 0.5                          |       | 0.6                         |       |
| Retained earnings                                                                                                                              |       | 6,318.1                      |       | 5,884.9                     |       |
| Total shareholders’ equity                                                                                                                |       | 6,997.5                      |       | 7,022.2                     |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                            |       | $                            | 16,368.8   |                        | $          | 16,661.1 |   |

 

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

2

----

 

**CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)**
| ** **                                                                                                    | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Millions, except per share  amounts)**                                                                     | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues and sales:**                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Service revenues                                                                                              |       | $                                          | 1,885.4    |                                      | $          | 1,836.1 |   | $ | 5,476.9 |   | $ | 5,350.1 |   |
| Product sales                                                                                                 |       | 217.7                                      |       | 214.1                                     |       | 629.5 |   | 616.1 |   |
| Total revenues and sales                                                                                      |       | 2,103.1                                    |       | 2,050.2                                   |       | 6,106.4 |   | 5,966.2 |   |
| **Costs and expenses:**                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Cost of services (excluding depreciation of $232.0,  $229.3, $695.6 and $674.8, respectively, included below) |       | 624.4                                      |       | 602.6                                     |       | 1,769.4 |   | 1,705.6 |   |
| Cost of products sold                                                                                         |       | 262.6                                      |       | 272.4                                     |       | 775.9 |   | 781.4 |   |
| Selling, general, administrative and other                                                                    |       | 373.6                                      |       | 376.3                                     |       | 1,121.7 |   | 1,109.9 |   |
| Depreciation and amortization                                                                                 |       | 324.7                                      |       | 312.2                                     |       | 967.2 |   | 926.4 |   |
| Restructuring and other charges                                                                               |       | —                                     |       | —                                    |       | 51.8 |   | 19.0 |   |
| Total costs and expenses                                                                                      |       | 1,585.3                                    |       | 1,563.5                                   |       | 4,686.0 |   | 4,542.3 |   |
| **Operating income**                                                                                          |       | 517.8                                      |       | 486.7                                     |       | 1,420.4 |   | 1,423.9 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Equity earnings in unconsolidated partnerships                                                                |       | 24.3                                       |       | 13.8                                      |       | 53.5 |   | 48.0 |   |
| Minority interest in consolidated partnerships                                                                |       | (23.7                                      | )          | (22.3                                     | )          | (60.9 | ) | (61.5 | ) |
| Other income, net                                                                                             |       | 15.7                                       |       | 3.4                                       |       | 23.2 |   | 7.5 |   |
| Interest expense                                                                                              |       | (86.7                                      | )          | (91.1                                     | )          | (265.0 | ) | (287.7 | ) |
| Write-down of investments and other                                                                           |       | —                                     |       | —                                    |       | — |   | (13.1 | ) |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Income from continuing operations before income  taxes                                                        |       | 447.4                                      |       | 390.5                                     |       | 1,171.2 |   | 1,117.1 |   |
| Income taxes                                                                                                  |       | 143.7                                      |       | 147.7                                     |       | 415.1 |   | 422.5 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Income from continuing operations                                                                             |       | 303.7                                      |       | 242.8                                     |       | 756.1 |   | 694.6 |   |
| Discontinued operations  (income tax benefit of $19.5 in 2004, net of income taxes of $256.2 in 2003)         |       | 19.5                                       |       | —                                    |       | 19.5 |   | 361.0 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Income before cumulative effect of accounting change                                                          |       | 323.2                                      |       | 242.8                                     |       | 775.6 |   | 1,055.6 |   |
| Cumulative effect of accounting change (net of  income taxes of $10.3)                                        |       | —                                     |       | —                                    |       | — |   | 15.6 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                                                    |       | 323.2                                      |       | 242.8                                     |       | 775.6 |   | 1,071.2 |   |
| Preferred dividends                                                                                           |       | —                                     |       | —                                    |       | 0.1 |   | 0.1 |   |
| Net income applicable to common shares                                                                        |       | $                                          | 323.2      |                                      | $          | 242.8 |   | $ | 775.5 |   | $ | 1,071.1 |   |
| **Earnings per share:**                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Basic:                                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Income from continuing operations                                                                             |       | $                                          | .99        |                                      | $          | .78 |   | $ | 2.45 |   | $ | 2.23 |   |
| Income from discontinued operations                                                                           |       | .06                                        |       | —                                    |       | .06 |   | 1.16 |   |
| Cumulative effect of accounting change                                                                        |       | —                                     |       | —                                    |       | — |   | .05 |   |
| Net income                                                                                                    |       | $                                          | 1.05       |                                      | $          | .78 |   | $ | 2.51 |   | $ | 3.44 |   |
| Diluted:                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income from continuing operations                                                                             |       | $                                          | .99        |                                      | $          | .78 |   | $ | 2.44 |   | $ | 2.23 |   |
| Income from discontinued operations                                                                           |       | .06                                        |       | —                                    |       | .06 |   | 1.15 |   |
| Cumulative effect of accounting change                                                                        |       | —                                     |       | —                                    |       | — |   | .05 |   |
| Net income                                                                                                    |       | $                                          | 1.05       |                                      | $          | .78 |   | $ | 2.50 |   | $ | 3.43 |   |
| Pro forma amounts assuming change in accounting  principle was applied retroactively:                         |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                                                    |       | $                                          | 323.2      |                                      | $          | 242.8 |   | $ | 775.6 |   | $ | 1,055.6 |   |
| Basic earnings per share                                                                                      |       | $                                          | 1.05       |                                      | $          | .78 |   | $ | 2.51 |   | $ | 3.39 |   |
| Diluted earnings per share                                                                                    |       | $                                          | 1.05       |                                      | $          | .78 |   | $ | 2.50 |   | $ | 3.38 |   |

 

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

3

----

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**
| ** **                                                                                     | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(Millions)**                                                                                 | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
|                                                                                           |       |                                      |       |   |   |
| **Cash Provided from Operations:**                                                             |       |                                      |       |   |   |
| Net income                                                                                     |       | $                                         | 775.6      |   | $ | 1,071.2 |   |
| Adjustments to reconcile net income to net cash  provided from operations:                     |       |                                      |       |   |   |
| Income from discontinued operations                                                            |       | (19.5                                     | )          | (361.0 | ) |
| Cumulative effect of accounting change                                                         |       | —                                    |       | (15.6 | ) |
| Depreciation and amortization                                                                  |       | 967.2                                     |       | 926.4 |   |
| Provision for doubtful accounts                                                                |       | 137.3                                     |       | 142.5 |   |
| Non-cash portion of restructuring and other charges                                            |       | 25.6                                      |       | 13.2 |   |
| Write-down of investments                                                                      |       | —                                    |       | 6.0 |   |
| Increase in deferred income taxes                                                              |       | 188.6                                     |       | 141.5 |   |
| Reversal of income tax contingency reserves                                                    |       | (19.7                                     | )          | — |   |
| Other, net                                                                                     |       | (8.5                                      | )          | (1.5 | ) |
| Changes in operating assets and liabilities, net of  effects of acquisitions and dispositions: |       |                                      |       |   |   |
| Accounts receivable                                                                            |       | (164.3                                    | )          | (89.5 | ) |
| Inventories                                                                                    |       | 10.9                                      |       | (4.7 | ) |
| Accounts payable                                                                               |       | (93.0                                     | )          | (31.9 | ) |
| Other current liabilities                                                                      |       | 64.1                                      |       | 42.9 |   |
| Other, net                                                                                     |       | (20.2                                     | )          | 11.1 |   |
| Net cash provided from operations                                                              |       | 1,844.1                                   |       | 1,850.6 |   |
|                                                                                           |       |                                      |       |   |   |
| **Cash Flows from Investing Activities:**                                                      |       |                                      |       |   |   |
| Additions to property, plant and equipment                                                     |       | (757.3                                    | )          | (806.5 | ) |
| Additions to capitalized software development costs                                            |       | (23.6                                     | )          | (44.6 | ) |
| Additions to investments                                                                       |       | (2.8                                      | )          | (10.8 | ) |
| Purchases of property, net of cash acquired                                                    |       | —                                    |       | (160.6 | ) |
| Proceeds from the return on investments                                                        |       | 67.1                                      |       | 34.3 |   |
| Other, net                                                                                     |       | (0.6                                      | )          | 16.0 |   |
| Net cash used in investing activities                                                          |       | (717.2                                    | )          | (972.2 | ) |
|                                                                                           |       |                                      |       |   |   |
| **Cash Flows from Financing Activities:**                                                      |       |                                      |       |   |   |
| Dividends on preferred and common stock                                                        |       | (345.3                                    | )          | (327.2 | ) |
| Reductions in long-term debt                                                                   |       | (255.0                                    | )          | (744.3 | ) |
| Repurchases of common stock                                                                    |       | (506.9                                    | )          | — |   |
| Distributions to minority investors                                                            |       | (49.7                                     | )          | (44.4 | ) |
| Common stock issued                                                                            |       | 20.7                                      |       | 30.9 |   |
| Net cash used in financing activities                                                          |       | (1,136.2                                  | )          | (1,085.0 | ) |
|                                                                                           |       |                                      |       |   |   |
| Net cash provided from discontinued operations                                                 |       | —                                    |       | 638.2 |   |
|                                                                                           |       |                                      |       |   |   |
| Effect of exchange rate changes on cash and  short-term investments                            |       | (0.1                                      | )          | 0.7 |   |
|                                                                                           |       |                                      |       |   |   |
| Increase (decrease) in cash and short-term  investments                                        |       | (9.4                                      | )          | 432.3 |   |
|                                                                                           |       |                                      |       |   |   |
| **Cash and Short-term Investments:**                                                           |       |                                      |       |   |   |
| Beginning of the period                                                                        |       | 657.8                                     |       | 134.6 |   |
| End of period                                                                                  |       | $                                         | 648.4      |   | $ | 566.9 |   |
|                                                                                           |       |                                      |       |   |   |
| **Non-Cash Investing and Financing Activity:**                                                 |       |                                      |       |   |   |
| Change in fair value of investments in equity  securities                                      |       | $                                         | 32.2       |   | $ | 31.5 |   |
| Change in fair value of interest rate swap  agreements                                         |       | $                                         | (2.0       |  ) | $ | (5.5 | ) |

 

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

4

----

 

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(UNAUDITED)**
| **(Millions)**                                       | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Unrealized  Holding  Gain On  Investments** | ** ** | **Foreign  Currency  Translation  Adjustment** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|-----------|------------|
| Balance at December 31, 2003                    |       | $                    | 0.4        |              | $          | 312.6                            |       | $                                             | 750.1      |                                           | $          | 73.6                   |       | $         | 0.6        |   | $ | 5,884.9 |   | $ | 7,022.2 |   |
| Net income                                           |       | —               |       | —            |       | —                           |       | —                                        |       | —                                         |       | 775.6                  |       | 775.6     |       |
| Other comprehensive income, net of tax: (See Note 6) |       |                 |       |              |       |                             |       |                                          |       |                                           |       |                   |       |      |       |
| Unrealized holding gains on investments,             |       |                 |       |              |       |                             |       |                                          |       |                                           |       |                   |       |      |       |
| Net of reclassification adjustments                  |       | —               |       | —            |       | —                           |       | 25.7                                          |       | —                                         |       | —                 |       | 25.7      |       |
| Foreign currency translation adjustment              |       | —               |       | —            |       | —                           |       | —                                        |       | (0.1                                           | )          | —                 |       | (0.1      | )          |
| Comprehensive income                                 |       | —               |       | —            |       | —                           |       | 25.7                                          |       | (0.1                                           | )          | 775.6                  |       | 801.2     |       |
| Employee plans, net                                  |       | —               |       | 0.5               |       | 20.1                             |       | —                                        |       | —                                         |       | —                 |       | 20.6      |       |
| Restricted stock, net of unearned compensation       |       | —               |       | 0.2               |       | 2.1                              |       | —                                        |       | —                                         |       | —                 |       | 2.3       |       |
| Tax benefit for non-qualified stock options          |       | —               |       | —            |       | 0.5                              |       | —                                        |       | —                                         |       | —                 |       | 0.5       |       |
| Conversion of preferred stock                        |       | (0.1                 | )          | 0.1               |       | —                           |       | —                                        |       | —                                         |       | —                 |       | —    |       |
| Repurchases of stock                                 |       | —               |       | (9.7              | )          | (497.2                           | )          | —                                        |       | —                                         |       | —                 |       | (506.9    | )          |
| Dividends:                                           |       |                 |       |              |       |                             |       |                                          |       |                                           |       |                   |       |      |       |
| Common - $1.48 per share                             |       | —               |       | —            |       | —                           |       | —                                        |       | —                                         |       | (342.3                 | )          | (342.3    | )          |
| Preferred                                            |       | —               |       | —            |       | —                           |       | —                                        |       | —                                         |       | (0.1                   | )          | (0.1      | )          |
| Balance at September 30, 2004                   |       | $                    | 0.3        |              | $          | 303.7                            |       | $                                             | 275.6      |                                           | $          | 99.3                   |       | $         | 0.5        |   | $ | 6,318.1 |   | $ | 6,997.5 |   |

 

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

5

----

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATEDFINANCIAL STATEMENTS**

----

 

**1.****                      General:**

Basisof Presentation – The consolidatedfinancial statements at September 30, 2004 and 2003 and for the three andnine month periods then ended of ALLTEL Corporation (“ALLTEL” or the “Company”)are unaudited.  The consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial reporting and Securities andExchange Commission rules and regulations. Certain information and footnote disclosures have been condensed oromitted in accordance with those rules and regulations.  The consolidated financial statements reflectall adjustments (consisting only of normal recurring adjustments) which are, inthe opinion of management, necessary for a fair presentation of the financialposition and operating results for the interim periods presented.

 

**2.****                      AccountingChanges:**

Changein Accounting Principle – Except for certainwireline subsidiaries as further discussed below, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 143, “Accounting for AssetRetirement 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 for anasset 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, the entitywill settle the obligation for its recorded amount and recognize a gain or lossupon settlement.  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.  Certain of theCompany’s cell site and switch site operating lease agreements contain clausesrequiring restoration of the leased site at the end of the lease term.  Similarly, certain of the Company’s leaseagreements for office and retail locations require restoration of the leasedsite upon expiration of the lease term. Accordingly, ALLTEL is subject to asset retirement obligationsassociated with these leased facilities under the provisions of SFAS No.143.  The application of SFAS No. 143 tothe Company’s cell site and switch site leases and leased office and retaillocations did not have a material impact on ALLTEL’s consolidated results ofoperations, financial position, or cash flows as of and for the three and ninemonths ended September 30, 2004 or 2003.

 

Inaccordance with federal and state regulations, depreciation expense for ALLTEL’swireline operations has historically included an additional provision for costof removal.  The additional cost ofremoval provision does not meet the recognition and measurement principles ofan asset retirement obligation under SFAS No. 143.  In December 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 continues 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 $168.8 million and $156.0million at September 30, 2004 and 2003, respectively.  For the acquired Kentucky and Nebraskawireline operations not subject to SFAS No. 71, effective January 1, 2003,the Company 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, 2003resulted 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 nine months ended September 30,2003.

 

Changein Accounting Estimate – The Company isroutinely audited by federal, state and foreign taxing authorities.  The outcome of these audits may result in theCompany being assessed taxes in addition to amounts previously paid.  Accordingly, ALLTEL maintains tax contingencyreserves for such potential assessments. The reserves are determined based upon the Company’s best estimate ofpossible assessments by the Internal Revenue Service ("IRS") or other taxingauthorities resulting from existing tax exposures and are adjusted, from time to time, based upon changing factsand circumstances.  During the thirdquarter of 2004, the  IRS completed its fieldworkrelated to the audits of the Company’s consolidated federal income tax returnsfor the fiscal years 1997 through 2001. As a result of the IRS issuing its proposed audit adjustments related tothe periods under examination, ALLTEL reassessed its income tax contingency reservesto reflect the IRS findings.  Based uponthis reassessment, ALLTEL recorded a $129.3 million reduction in these reservesin the third quarter of 2004.  Thereserve adjustments primarily related to acquisition-related issues andincluded interest charges on potential assessments.  The corresponding effects of the adjustmentsto the tax contingency reserves resulted in a reduction in goodwill of $94.5million (see Note 3) and a reduction in income tax expense associated withcontinuing operations of $19.7 million. In addition, $15.1 million of the adjustments to the tax contingencyreserves related to the financial services division of ALLTEL’s information 

 

6

----

 

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

----

 

**2.****                      AccountingChanges, Continued:**

services subsidiary, ALLTEL Information Services, Inc., that was sold toFidelity National Financial Inc. ("Fidelity National") on April 1, 2003.  (See Note 11.) Pursuant to the terms of the sale agreement, ALLTEL retained, as of the date ofsale, all income tax liabilities related to the sold operations and agreed toindemnify Fidelity National from any future tax liability imposed on thefinancial services division for periods prior to the date of sale.  Theadjustment of the tax contingency reserves related to the disposed financialservices division has been reported as "discontinued operations" in theCompany's interim consolidated financial statements for the three and ninemonths ended September 30, 2004.

 

**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. As of January 1, 2004, ALLTEL completed the annual impairmentreviews of its goodwill and other indefinite-lived intangible assets anddetermined that no write-down in the carrying value of these assets wasrequired.  The changes in the carryingamount of goodwill by business segment for the nine months ended September 30,2004 were as follows:

 
| **(Millions)**                                           | ** ** | **Wireless** | ** ** | **Wireline** | ** ** | **Communications  Support  Services** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|--------------|------------|---------------------------------------|------------|-----------|------------|
| Balance at December 31, 2003                        |       | $            | 3,604.3    |         | $          | 1,247.6                               |       | $         | 2.3        |   | $ | 4,854.2 |   |
| Other – reversal of income tax contingency reserves |       | (94.5        | )          | —       |       | —                                |       | (94.5     | )          |
| Balance at September 30, 2004                       |       | $            | 3,509.8    |         | $          | 1,247.6                               |       | $         | 2.3        |   | $ | 4,759.7 |   |

 

The carrying values ofindefinite-lived intangible assets other than goodwill were as follows:

 
| **(Millions)**                            | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Cellular licenses                         |       | $                            | 761.6      |                        | $          | 761.6 |   |
| Personal Communications Services licenses |       | 78.5                         |       | 78.5                        |       |
| Franchise rights – wireline          |       | 265.0                        |       | 265.0                       |       |
|                                      |       | $                            | 1,105.1    |                        | $          | 1,105.1 |   |

 

Intangible assetssubject to amortization were as follows:

 
| ** **             | ** ** | **September 30, 2004** | ** ** |
|------------------------|------------|-----------------------------|------------|
| **(Millions)**         | ** ** | **Gross  Cost**             | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Value** | ** ** |
| Customer lists         |       | $                           | 382.4      |   | $ | (203.7 | ) | $ | 178.7 |   |
| Franchise rights       |       | 22.5                        |       | (14.5 | ) | 8.0 |   |
| Non-compete agreements |       | 2.9                         |       | (2.9 | ) | — |   |
|                   |       | $                           | 407.8      |   | $ | (221.1 | ) | $ | 186.7 |   |

 
| ** **             | ** ** | **December 31, 2003** | ** ** |
|------------------------|------------|----------------------------|------------|
| **(Millions)**         | ** ** | **Gross  Cost**            | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Value** | ** ** |
| Customer lists         |       | $                          | 382.4      |   | $ | (159.6 | ) | $ | 222.8 |   |
| Franchise rights       |       | 22.5                       |       | (13.4 | ) | 9.1 |   |
| Non-compete agreements |       | 2.9                        |       | (2.9 | ) | — |   |
|                   |       | $                          | 407.8      |   | $ | (175.9 | ) | $ | 231.9 |   |

 

Amortizationexpense for intangible assets subject to amortization was $15.0 million and$45.2 million for the three and nine month periods ended September 30,2004, compared to $15.2 million and $45.2 million for the same periods of2003.  Amortization expense forintangible assets subject to amortization is estimated to be $60.3 million in2004, $59.6 million in 2005, $41.0 million in 2006, $24.3 million in 2007 and$18.1 million in 2008.

 

7

----

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**

----

 

**4.****                      Restructuringand Other Charges:**

A summary of the restructuring and othercharges recorded during the nine months ended September 30, 2004 was asfollows:

 
| **(Millions)**                                          | ** ** | **Wireless** | ** ** | **Wireline** | ** ** | **Communications  Support  Services** | ** ** | **Corporate  Operations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|--------------|------------|--------------|------------|---------------------------------------|------------|---------------------------|------------|-----------|------------|
| Severance and employee benefit costs                    |       | $            | 8.8        |         | $          | 11.2                                  |       | $                         | 0.5        |      | $          | 2.1 |   | $ | 22.6 |   |
| Relocation costs                                        |       | 3.2          |       | 1.4          |       | 0.1                                   |       | 0.1                       |       | 4.8       |       |
| Lease and contract termination costs                    |       | 0.5          |       | (1.9         | )          | —                                |       | (0.1                      | )          | (1.5      | )          |
| Write-down in  the carrying value of certain facilities |       | 0.7          |       | —       |       | —                                |       | 24.1                      |       | 24.8      |       |
| Other exit costs                                        |       | 0.4          |       | 0.7          |       | —                                |       | —                    |       | 1.1       |       |
| Total restructuring and other charges                   |       | $            | 13.6       |         | $          | 11.4                                  |       | $                         | 0.6        |      | $          | 26.2 |   | $ | 51.8 |   |

 

InJanuary 2004, the Company announced its plans to reorganize its operationsand support teams.  Also, during February 2004,the Company announced its plans to exit its Competitive Local Exchange Carrier(“CLEC”) operations in the Jacksonville, Florida market due to the continuedunprofitability of these operations.  Inconnection with these activities, the Company recorded a restructuring chargeof $29.3 million consisting of $22.9 million in severance and employee benefitcosts related to a planned workforce reduction, $4.8 million of employeerelocation expenses, $0.5 million in lease termination costs and $1.1 millionof other exit costs.  The severance andemployee benefit costs included a $1.2 million payment to a former employee ofthe Company’s sold financial services division that became payable in the firstquarter of 2004 pursuant to the terms of a change in control agreement betweenthe employee and ALLTEL.  As of September 30,2004, the Company had paid $22.2 million in severance and employee-relatedexpenses, and all of the employee reductions had been completed.  ALLTEL also recorded a $2.3 million reductionin the liabilities associated with various restructuring activities initiatedprior to 2003, consisting of $2.0 million in lease and contract terminationcosts and $0.3 million in severance and employee benefit costs.  The reductions primarily reflecteddifferences between estimated and actual costs paid in completing the previousplanned workforce reductions and lease and contract terminations.  During the first quarter of 2004, the Companyalso recorded a write-down in the carrying value of certain corporate andregional facilities to fair value in conjunction with the 2004 organizationalchanges and the 2003 sale of the Company’s financial services division toFidelity National, as further discussed in Note 11 to the unaudited interimconsolidated financial statements.

 

Asummary of the restructuring and other charges recorded during the nine monthsended September 30, 2003 was as follows:

 
| **(Millions)**                           | ** ** | **Wireless** | ** ** | **Wireline** | ** ** | **Communications  Support  Services** | ** ** | **Corporate  Operations** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|--------------|------------|--------------|------------|---------------------------------------|------------|---------------------------|------------|-----------|------------|
| Severance and employee benefit costs     |       | $            | 1.3        |         | $          | 7.0                                   |       | $                         | —     |      | $          | (2.0 | ) | $ | 6.3 |   |
| Lease and contract termination costs     |       | —       |       | —       |       | (0.5                                  | )          | —                    |       | (0.5      | )          |
| Write-down of software development costs |       | 7.6          |       | 1.8          |       | 3.8                                   |       | —                    |       | 13.2      |       |
| Total restructuring and other charges    |       | $            | 8.9        |         | $          | 8.8                                   |       | $                         | 3.3        |      | $          | (2.0 | ) | $ | 19.0 |   |

 

Duringthe second quarter of 2003, the Company recorded a restructuring charge of $8.5million consisting of severance and employee benefit costs related to a plannedworkforce reduction, primarily resulting from the closing of certain callcenter locations.  As of September 30,2004, the Company had paid $8.5 million in severance and employee-relatedexpenses, and all of the employee reductions had been completed.  The Company also recorded a $2.7 millionreduction in the liabilities associated with various restructuring activitiesinitiated prior to 2003, consisting of $2.2 million in severance and employeebenefit costs and $0.5 million in lease termination costs.  The reduction primarily reflected differencesbetween estimated and actual costs paid in completing the previous plannedworkforce reductions and lease terminations. During the second quarter of 2003, ALLTEL also wrote off certaincapitalized software development costs that had no alternative future use orfunctionality.

 

8

----

 

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

----

**4.****                      Restructuringand Other Charges, Continued:**

Thefollowing is a summary of activity related to the liabilities associated withthe Company’s restructuring and other charges for the nine months ended September 30,2004:

 
| **(Millions)**                        | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|------------|
| Balance as of December 31, 2003  |       | $          | 3.8        |       |
| Restructuring and other charges       |       | 54.1       |       |
| Reversal of accrued liabilities       |       | (2.3       | )          |
| Non-cash write-down of assets         |       | (25.6      | )          |
| Cash outlays                          |       | (27.9      | )          |
| Balance as of September 30, 2004 |       | $          | 2.1        |       |

 

AtSeptember 30, 2004, the remaining unpaid liability related to the Company’sintegration and restructuring activities consisted of severance andemployee-related expenses of $0.9 million, relocation expenses of $0.8 millionand lease and contract termination costs of $0.4 million and is included inother current liabilities in the accompanying consolidated balance sheets.

 

**5.****                      Write-downof Investments and Other:**

Inthe second quarter of 2003, ALLTEL recorded pretax write-downs totaling $6.0million to reflect other-than-temporary declines in the fair value of certaininvestments in unconsolidated limited partnerships.  In addition, during the second quarter of2003, the Company retired, prior to stated maturity dates, $249.1 million oflong-term debt, representing all of the long-term debt outstanding under theRural Utilities Services, Rural Telephone Bank and Federal Financing Bankprograms.  In connection with the earlyretirement of the debt, the Company incurred pretax termination fees of $7.1million.

 

**6.****                      ComprehensiveIncome:**

Comprehensiveincome was as follows for the three and nine month periods ended September 30:

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                                                                 | ** ** | ** **             | **2004**   | ** **            | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                                     |       | $                      | 323.2      |                  | $          | 242.8 |   | $ | 775.6 |   | $ | 1,071.2 |   |
| Other comprehensive income (loss):                                             |       |                   |       |                  |       |   |   |   |   |
| Unrealized holding gains (losses) on investments arising  in the period        |       | 8.5                    |       | (7.0                  | )          | 32.2 |   | 31.5 |   |
| Income tax expense (benefit)                                                   |       | 3.0                    |       | (2.7                  | )          | 6.5 |   | 12.3 |   |
|                                                                           |       | 5.5                    |       | (4.3                  | )          | 25.7 |   | 19.2 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| Foreign currency translation adjustment for the  period                        |       | —                 |       | —                |       | (0.1 | ) | 0.8 |   |
| Reclassification adjustments for losses included in  net income for the period |       | —                 |       | —                |       | — |   | 6.7 |   |
|                                                                           |       | —                 |       | —                |       | (0.1 | ) | 7.5 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| Other comprehensive income (loss) before tax                                   |       | 8.5                    |       | (7.0                  | )          | 32.1 |   | 39.0 |   |
| Income tax expense (benefit)                                                   |       | 3.0                    |       | (2.7                  | )          | 6.5 |   | 12.3 |   |
| Other comprehensive income (loss)                                              |       | 5.5                    |       | (4.3                  | )          | 25.6 |   | 26.7 |   |
| Comprehensive income                                                           |       | $                      | 328.7      |                  | $          | 238.5 |   | $ | 801.2 |   | $ | 1,097.9 |   |
|                                                                                |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

----

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**

----

**7.****                      Earnings perShare:**

Basicearnings per share of common stock was computed by dividing net incomeapplicable to common shares by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share reflects the potential dilution that could occur assumingconversion or exercise of all dilutive unexercised stock options andoutstanding preferred stock.  Thedilutive effects of stock options and preferred stock were determined using thetreasury stock method.

 

Areconciliation of the net income and number of shares used in computing basicand diluted earnings per share was as follows for the three and nine monthperiods ended September 30:

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions, except per share  amounts)**                                      | ** ** | ** **             | **2004**   | ** **            | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Basic earnings per share:**                                                  |       |                   |       |                  |       |   |   |   |   |
| Income from continuing operations                                              |       | $                      | 303.7      |                  | $          | 242.8 |   | $ | 756.1 |   | $ | 694.6 |   |
| Income from discontinued operations                                            |       | 19.5                   |       | —                |       | 19.5 |   | 361.0 |   |
| Cumulative effect of accounting change                                         |       | —                 |       | —                |       | — |   | 15.6 |   |
| Less preferred dividends                                                       |       | —                 |       | —                |       | (0.1 | ) | (0.1 | ) |
| Net income applicable to common shares                                         |       | $                      | 323.2      |                  | $          | 242.8 |   | $ | 775.5 |   | $ | 1,071.1 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| Weighted average common shares outstanding for the  period                     |       | 306.8                  |       | 312.0                 |       | 308.8 |   | 311.6 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| Basic earnings per share:                                                      |       |                   |       |                  |       |   |   |   |   |
| From continuing operations                                                     |       | $                      | .99        |                  | $          | .78 |   | $ | 2.45 |   | $ | 2.23 |   |
| From discontinued operations                                                   |       | .06                    |       | —                |       | .06 |   | 1.16 |   |
| Cumulative effect of accounting change                                         |       | —                 |       | —                |       | — |   | .05 |   |
| Net income                                                                     |       | $                      | 1.05       |                  | $          | .78 |   | $ | 2.51 |   | $ | 3.44 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| **Diluted earnings per share:**                                                |       |                   |       |                  |       |   |   |   |   |
| Net income applicable to common shares                                         |       | $                      | 323.2      |                  | $          | 242.8 |   | $ | 775.5 |   | $ | 1,071.1 |   |
| Adjustment for convertible preferred stock dividends                           |       | —                 |       | —                |       | 0.1 |   | 0.1 |   |
| Net income applicable to common shares assuming  conversion of preferred stock |       | $                      | 323.2      |                  | $          | 242.8 |   | $ | 775.6 |   | $ | 1,071.2 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| Weighted average common shares outstanding for the  period                     |       | 306.8                  |       | 312.0                 |       | 308.8 |   | 311.6 |   |
| Increase in shares resulting from the assumed:                                 |       |                   |       |                  |       |   |   |   |   |
| Exercise of stock options                                                      |       | 0.7                    |       | 0.6                   |       | 0.7 |   | 0.7 |   |
| Conversion of preferred stock                                                  |       | 0.3                    |       | 0.3                   |       | 0.3 |   | 0.3 |   |
| Weighted average common shares assuming conversion                             |       | 307.8                  |       | 312.9                 |       | 309.8 |   | 312.6 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| Diluted earnings per share:                                                    |       |                   |       |                  |       |   |   |   |   |
| From continuing operations                                                     |       | $                      | .99        |                  | $          | .78 |   | $ | 2.44 |   | $ | 2.23 |   |
| From discontinued operations                                                   |       | .06                    |       | —                |       | .06 |   | 1.15 |   |
| Cumulative effect of accounting change                                         |       | —                 |       | —                |       | — |   | .05 |   |
| Net income                                                                     |       | $                      | 1.05       |                  | $          | .78 |   | $ | 2.50 |   | $ | 3.43 |   |
|                                                                                |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

10

----

 

**NOTES TOUNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**

----

**8.****                      BusinessSegment Information:**

ALLTELmanages its business operations based on differences in products andservices.  The Company evaluatesperformance of the segments based on segment income, which is computed asrevenues and sales less operating expenses, excluding the effects of the itemsdiscussed in Notes 2, 4 and 5, respectively. These items are not allocated to the segments and are included incorporate operations.  Segment operatingresults were as follows for the three and nine month periods ended September 30:

 
| ** **                                             |       | **Three Months Ended** | ** ** | **Nine Months Ended** |     |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|----------|
| **(Millions)**                                         | ** ** |                   | **2004**   | ** **            | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues and Sales from External Customers:**        |       |                   |       |                  |     |   |   |   |   |
| Wireless                                               |       | $                      | 1,313.7    |                  | $        | 1,233.2 |   | $ | 3,751.3 |   | $ | 3,536.4 |   |
| Wireline                                               |       | 562.6                  |       | 568.4                 |     | 1,688.7 |   | 1,709.8 |   |
| Communications support services                        |       | 149.3                  |       | 161.0                 |     | 440.3 |   | 462.5 |   |
| Total business segments                                |       | $                      | 2,025.6    |                  | $        | 1,962.6 |   | $ | 5,880.3 |   | $ | 5,708.7 |   |
|                                                   |       |                   |       |                  |     |   |   |   |   |
| **Intersegment Revenues and Sales:**                   |       |                   |       |                  |     |   |   |   |   |
| Wireless                                               |       | $                      | —     |                  | $        | — |   | $ | — |   | $ | — |   |
| Wireline                                               |       | 40.3                   |       | 36.8                  |     | 123.3 |   | 110.5 |   |
| Communications support services                        |       | 77.9                   |       | 83.0                  |     | 235.1 |   | 249.4 |   |
| Total business segments                                |       | $                      | 118.2      |                  | $        | 119.8 |   | $ | 358.4 |   | $ | 359.9 |   |
|                                                   |       |                   |       |                  |     |   |   |   |   |
| **Total Revenues and Sales:**                          |       |                   |       |                  |     |   |   |   |   |
| Wireless                                               |       | $                      | 1,313.7    |                  | $        | 1,233.2 |   | $ | 3,751.3 |   | $ | 3,536.4 |   |
| Wireline                                               |       | 602.9                  |       | 605.2                 |     | 1,812.0 |   | 1,820.3 |   |
| Communications support services                        |       | 227.2                  |       | 244.0                 |     | 675.4 |   | 711.9 |   |
| Total business segments                                |       | 2,143.8                |       | 2,082.4               |     | 6,238.7 |   | 6,068.6 |   |
| Less intercompany eliminations                         |       | (40.7                  | )          | (32.2                 | )        | (132.3 | ) | (102.4 | ) |
| Total revenues and sales                               |       | $                      | 2,103.1    |                  | $        | 2,050.2 |   | $ | 6,106.4 |   | $ | 5,966.2 |   |
|                                                   |       |                   |       |                  |     |   |   |   |   |
| **Segment Income:**                                    |       |                   |       |                  |     |   |   |   |   |
| Wireless                                               |       | $                      | 287.6      |                  | $        | 268.4 |   | $ | 760.1 |   | $ | 766.4 |   |
| Wireline                                               |       | 227.7                  |       | 207.4                 |     | 690.3 |   | 647.0 |   |
| Communications support services                        |       | 11.5                   |       | 20.3                  |     | 48.8 |   | 58.8 |   |
| Total segment income                                   |       | 526.8                  |       | 496.1                 |     | 1,499.2 |   | 1,472.2 |   |
| Corporate expenses                                     |       | (9.0                   | )          | (9.4                  | )        | (27.0 | ) | (29.3 | ) |
| Restructuring and other charges                        |       | —                 |       | —                |     | (51.8 | ) | (19.0 | ) |
| Equity earnings in unconsolidated partnerships         |       | 24.3                   |       | 13.8                  |     | 53.5 |   | 48.0 |   |
| Minority interest in consolidated partnerships         |       | (23.7                  | )          | (22.3                 | )        | (60.9 | ) | (61.5 | ) |
| Other income, net                                      |       | 15.7                   |       | 3.4                   |     | 23.2 |   | 7.5 |   |
| Interest expense                                       |       | (86.7                  | )          | (91.1                 | )        | (265.0 | ) | (287.7 | ) |
| Write-down of investments and other                    |       | —                 |       | —                |     | — |   | (13.1 | ) |
| Income from continuing operations before income  taxes |       | $                      | 447.4      |                  | $        | 390.5 |   | $ | 1,171.2 |   | $ | 1,117.1 |   |
|                                                        |            |                        |            |                       |          |  |  |  |  |  |  |  |  |  |

 

Segment assetswere as follows:

 
| **(Millions)**                                           | ** ** | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------|------------|------------|------------------------------|------------|-----------------------------|------------|
| Wireless                                                 |       | $          | 9,559.2                      |       | $                           | 9,673.9    |   |
| Wireline                                                 |       | 5,050.0    |                         | 5,212.9    |                        |
| Communications support services                          |       | 484.8      |                         | 518.6      |                        |
| Total business segments                                  |       | 15,094.0   |                         | 15,405.4   |                        |
| Corporate headquarters assets not allocated to  segments |       | 1,315.0    |                         | 1,319.3    |                        |
| Less elimination of intersegment receivables             |       | (40.2      | )                            | (63.6      | )                           |
| Total consolidated assets                                |       | $          | 16,368.8                     |       | $                           | 16,661.1   |   |
|                                                          |            |            |                              |            |                             |            |  |  |  |  |

 

11

----

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**

----

**8.****                    BusinessSegment Information, Continued:**

Supplementalinformation pertaining to the communications support services segment was asfollows for the three and nine month periods ended September 30:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                                  | ** ** | ** **             | **2004**   | ** **            | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues and Sales from External Customers:** |       |                   |       |                  |       |   |   |   |   |
| Product distribution                            |       | $                      | 80.4       |                  | $          | 74.9 |   | $ | 221.9 |   | $ | 202.4 |   |
| Long-distance and network management services   |       | 49.7                   |       | 51.0                  |       | 144.7 |   | 150.1 |   |
| Directory publishing                            |       | 9.5                    |       | 6.3                   |       | 37.6 |   | 29.0 |   |
| Telecommunications information services         |       | 9.7                    |       | 28.8                  |       | 36.1 |   | 81.0 |   |
| Total                                           |       | $                      | 149.3      |                  | $          | 161.0 |   | $ | 440.3 |   | $ | 462.5 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| **Intersegment Revenues and Sales:**            |       |                   |       |                  |       |   |   |   |   |
| Product distribution                            |       | $                      | 28.8       |                  | $          | 32.4 |   | $ | 82.3 |   | $ | 98.8 |   |
| Long-distance and network management services   |       | 27.5                   |       | 29.0                  |       | 84.4 |   | 92.0 |   |
| Directory publishing                            |       | 21.6                   |       | 21.6                  |       | 68.4 |   | 58.6 |   |
| Telecommunications information services         |       | —                 |       | —                |       | — |   | — |   |
| Total                                           |       | $                      | 77.9       |                  | $          | 83.0 |   | $ | 235.1 |   | $ | 249.4 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| **Total Revenues and Sales:**                   |       |                   |       |                  |       |   |   |   |   |
| Product distribution                            |       | $                      | 109.2      |                  | $          | 107.3 |   | $ | 304.2 |   | $ | 301.2 |   |
| Long-distance and network management services   |       | 77.2                   |       | 80.0                  |       | 229.1 |   | 242.1 |   |
| Directory publishing                            |       | 31.1                   |       | 27.9                  |       | 106.0 |   | 87.6 |   |
| Telecommunications information services         |       | 9.7                    |       | 28.8                  |       | 36.1 |   | 81.0 |   |
| Total revenues and sales                        |       | $                      | 227.2      |                  | $          | 244.0 |   | $ | 675.4 |   | $ | 711.9 |   |
|                                                 |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

**9.****                      Stock-BasedCompensation:**

Underthe Company’s stock-based compensation plans, ALLTEL may grant fixed andperformance-based incentive and non-qualified stock options, restricted stock,and other equity securities to officers and other management employees.  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.  For fixed stock optionsgranted under these plans, the exercise price of the option equals the marketvalue of ALLTEL’s common stock on the date of grant.  Accordingly, ALLTEL does not recordcompensation expense for any of the fixed stock options granted, and nocompensation expense related to stock options was recognized in the three andnine month periods ended September 30, 2004 or 2003.  In January 2004, the Company granted173,000 shares of restricted stock to certain senior management employees.  The restricted shares will vest in equalincrements over a three-year period from the date of grant.  Compensation expense related to theserestricted shares amounted to $0.7 million and $2.1 million for the three andnine month periods ended September 30, 2004.  Unrecognized compensation expense for therestricted shares amounted to $6.4 million and was included in additionalpaid-in capital in the accompanying consolidated balance sheet and consolidatedstatement of shareholders' equity as of September 30,2004.  The following table illustratesthe effects on net income and earnings per share had the Company applied thefair value recognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation”, to its stock-based employee compensation plans for the three andnine months ended September 30:

 
|                                                                                                                            | **Three Months Ended** | ** ** | **Nine Months Ended** |     |
|---------------------------------------------------------------------------------------------------------------------------------|------------------------|------------|-----------------------|----------|
| **(Millions, except per share  amounts)**                                                                                       |                   | **2004**   | ** **            | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as reported                                                                                                          | $                      | 323.2      |                  | $        | 242.8 |   | $ | 775.6 |   | $ | 1,071.2 |   |
| Add stock-based compensation expense included in net  income, net of related tax effects                                        | 0.5                    |       | —                |     | 1.4 |   | — |   |
| Deduct stock-based employee compensation expense  determined under fair value method for all awards, net of related tax effects | (7.0                   | )          | (7.0                  | )        | (19.9 | ) | (18.3 | ) |
| Pro forma net income                                                                                                            | $                      | 316.7      |                  | $        | 235.8 |   | $ | 757.1 |   | $ | 1,052.9 |   |
| Basic earnings per share:                                                                                                       | As reported            | $          | 1.05                  |     | $ | .78 |   | $ | 2.51 |   | $ | 3.44 |   |
|                                                                                                                            | Pro forma              | $          | 1.03                  |     | $ | .76 |   | $ | 2.45 |   | $ | 3.38 |   |
| Diluted earnings per share:                                                                                                     | As reported            | $          | 1.05                  |     | $ | .78 |   | $ | 2.50 |   | $ | 3.43 |   |
|                                                                                                                            | Pro forma              | $          | 1.03                  |     | $ | .75 |   | $ | 2.44 |   | $ | 3.37 |   |
|                                                                                                                                 |                        |            |                       |          |  |  |  |  |  |  |  |  |  |  |

 

12

----

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**

----

**9.****                      Stock-BasedCompensation, Continued:**

Thepro forma amounts presented above may not be representative of the futureeffects on reported net income and earnings per share, since the pro formacompensation expense is allocated over the periods in which options becomeexercisable, and new option awards may be granted each year.

 

**10.****               Employee BenefitPlans and Postretirement Benefits Other Than Pensions:**

TheCompany maintains a qualified defined benefit pension plan, which coverssubstantially all employees other than employees of ALLTEL’s directorypublishing subsidiary.  The Company alsomaintains a supplemental executive retirement plan that provides unfunded,non-qualified supplemental retirement benefits to a select group of managementemployees.  In addition, the Company hasentered into individual retirement agreements with certain retired executivesproviding for unfunded supplemental pension benefits.  The Company funds the accrued costs of theunfunded plans as benefits are paid.  Thecomponents of pension expense, including provision for executive retirementagreements, were as follows for the three and nine month periods ended September 30:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                              | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Benefits earned during the year             |       | $                      | 7.7        |                  | $          | 6.6 |   | $ | 23.1 |   | $ | 19.9 |   |
| Interest cost on benefit obligation         |       | 13.0                   |       | 13.1                  |       | 38.9 |   | 39.2 |   |
| Amortization of transition asset            |       | —                 |       | (0.3                  | )          | — |   | (0.9 | ) |
| Amortization of prior service cost (credit) |       | —                 |       | —                |       | 0.2 |   | (0.1 | ) |
| Recognized net actuarial loss               |       | 5.0                    |       | 5.2                   |       | 14.8 |   | 15.6 |   |
| Expected return on plan assets              |       | (17.6                  | )          | (14.3                 | )          | (52.8 | ) | (42.9 | ) |
| Net periodic benefit expense                |       | $                      | 8.1        |                  | $          | 10.3 |   | $ | 24.2 |   | $ | 30.8 |   |

 

ALLTEL disclosed in its financial statements for theyear ended December 31, 2003 that it expected to contribute $5.0 millionfor retirement benefits in 2004 consisting solely of amounts necessary to fundthe expected benefit payments related to the unfunded supplemental retirementplans.  Primarily due to the timing ofthe required contributions to fund the supplemental retirement plans, actualcontributions were $4.2 million for the nine months ended September 30,2004.  ALLTEL does not expect that anycontribution to the qualified defined pension plan calculated in accordancewith the minimum funding requirements of the Employee Retirement IncomeSecurity Act of 1974 will be required in 2004. Future discretionary contributions to the plan will depend on variousfactors, including future investment performance, changes in future discountrates and changes in the demographics of the population participating in ALLTEL’squalified pension plan.

 

TheCompany provides postretirement healthcare and life insurance benefits foreligible employees.  Employees share inthe cost of these benefits.  The Companyfunds the accrued costs of these plans as benefits are paid.  The components of postretirement expense wereas follows for the three and nine month periods ended September 30:

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                        | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Benefits earned during the year       |       | $                      | 0.1        |                  | $          | 0.2 |   | $ | 0.5 |   | $ | 0.5 |   |
| Interest cost on benefit obligation   |       | 3.9                    |       | 3.7                   |       | 11.8 |   | 11.1 |   |
| Amortization of transition obligation |       | 0.2                    |       | 0.2                   |       | 0.6 |   | 0.6 |   |
| Amortization of prior service cost    |       | 0.4                    |       | 0.4                   |       | 1.2 |   | 1.2 |   |
| Recognized net actuarial loss         |       | 2.3                    |       | 1.8                   |       | 6.7 |   | 5.4 |   |
| Expected return on plan assets        |       | —                 |       | —                |       | — |   | — |   |
| Net periodic benefit expense          |       | $                      | 6.9        |                  | $          | 6.3 |   | $ | 20.8 |   | $ | 18.8 |   |

 

Underthe Medicare Prescription Drug, Improvement and Modernization Act of 2003, (the“Act”) beginning in 2006, the Act will provide a prescription drug benefitunder Medicare Part D, as well as a federal subsidy to plan sponsors of retireehealthcare plans that provide a prescription drug benefit to their participantsthat is at least actuarially equivalent to the benefit that will be availableunder Medicare.  The amount of thefederal subsidy will be based on 28 percent of an individual beneficiary’sannual eligible prescription drug costs ranging between $250 and $5,000.  On May 19, 2004, the Financial AccountingStandards Board issued Staff Position No. 106-2, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” (“FSP No. 106-2”). FSP No. 106-2 clarified that the federal subsidy provided under the Actshould be accounted for as an actuarial gain in calculating the accumulatedpostretirement benefit obligation and annual postretirement expense.  The Department of Health and Human Serviceshas yet to issue final regulations on the determination of actuarialequivalence and the federal subsidy. Based on its current

 

13

----

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**

----

**10.****             Employee BenefitPlans and Postretirement Benefits Other Than Pensions, Continued:**

understanding of the Act, ALLTEL believes that asubstantial portion of the prescription drug benefits provided under itspostretirement benefit plan would be deemed actuarially equivalent to thebenefits provided under Medicare Part D.  Effective July 1, 2004, ALLTELprospectively adopted FSP No. 106-2 and remeasured its accumulatedpostretirement benefit obligation as of that date to account for the federalsubsidy, the effects of which resulted in an approximate $16.5 millionreduction in the Company’s accumulated postretirement benefit obligation.  The adoption of FSP No. 106-2 and subsequentremeasurement did not have a material impact on the Company’s 2004postretirement expense.  Once the finalfederal regulations are issued, ALLTEL will re-evaluate the effects of the Acton its future benefit costs and accumulated postretirement benefit obligation.

 

**11.****               DiscontinuedOperations:**

Pursuantto an agreement dated January 28, 2003, on April 1, 2003, ALLTEL soldthe financial services division of its information services subsidiary, ALLTELInformation Services, Inc., to Fidelity National for $1.05 billion received as$775.0 million in cash and $275.0 million in Fidelity National commonstock.  Approximately 5,500 employees ofthe Company transitioned to Fidelity National as part of the transaction.  As a result of this transaction, ALLTELrecorded an after tax gain of $323.9 million. The after-tax proceeds from the sale were used primarily to reduceborrowings outstanding under the Company’s commercial paper program and toretire all long-term debt outstanding under the Rural Utilities Services, RuralTelephone Bank and Federal Financing Bank programs.  The Fidelity National common stock acquiredin this transaction currently represents an approximate seven percent interestin Fidelity National.

 

Asa result of this transaction, the financial services division has beenreflected as discontinued operations in the Company’s interim consolidatedstatements of income and cash flows for the period ended September 30,2003.  The depreciation of long-livedassets related to the financial services division ceased as of January 28,2003, the date of the agreement to sell such operations.

 

InJanuary 2003, ALLTEL also completed the termination of its businessventure with Bradford & Bingley Group. The business venture, ALLTEL Mortgage Solutions, Ltd., a majority-ownedconsolidated subsidiary of ALLTEL, was created in 2000 to provide mortgageadministration and information technology products in the United Kingdom.  Unfortunately, the business climate in theUnited Kingdom limited the venture’s ability to leverage the business across abroad base of customers. As a result, the operations of ALLTEL MortgageSolutions, Ltd. have also been reflected as discontinued operations in theCompany’s interim consolidated statements of operations and cash flows for theperiod ended September 30, 2003.

 

Thefollowing table includes certain summary income statement information relatedto the financial services operations reflected as discontinued operations forthe three and nine months ended September 30:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                             | ** ** | ** **             | **2004**   | ** **            | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues and sales                         |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | 210.3 |   |
| Operating expenses                         |       | —                 |       | —                |       | — |   | 148.1 |   |
| Operating income                           |       | —                 |       | —                |       | — |   | 62.2 |   |
| Other expense, net                         |       | —                 |       | —                |       | — |   | (0.1 | ) |
| Gain on sale of discontinued operations    |       | —                 |       | —                |       | — |   | 555.1 |   |
| Pretax income from discontinued operations |       | —                 |       | —                |       | — |   | 617.2 |   |
| Income tax expense (benefit)               |       | (19.5                  | )          | —                |       | (19.5 | ) | 256.2 |   |
| Income from discontinued operations        |       | $                      | 19.5       |                  | $          | — |   | $ | 19.5 |   | $ | 361.0 |   |
|                                            |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Note:    Theincome tax benefit recorded in the third quarter of 2004 included the reversalof $15.1 million of federal income tax contingency reserves attributable to thesold financial services division, as previously discussed in Note 2.  In connection with the IRS audits of theCompany’s consolidated federal income tax returns for the fiscal years 1997through 2001, the Company also recorded a foreign tax credit carryback benefitof $4.4 million.

 

14

----

 

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

----

**11.****               DiscontinuedOperations, Continued:**

Thefollowing table includes certain summary cash flow statement informationrelated to the financial services operations reflected as discontinuedoperations for the nine months ended September 30, 2003:

 
| **(Millions)**                               | ** ** | ** ** | ** **      |
|----------------------------------------------|------------|------------|-----------------|
| Net cash used in operating activities        |       | $          | (125.1          | ) (a) |
| Net cash provided by investing activities    |       | 763.4      |   (b) |
| Net cash used in financing activities        |       | (0.1       | )               |
| Net cash provided by discontinued operations |       | $          | 638.2           |   |

 

Notes:

(a)          Includedestimated tax payments of $154.5 million related to the gain realized from thesale of the financial services division to Fidelity National.

 

(b)         Includedcash proceeds of $784.9 million received from the sale of the financialservices division to Fidelity National. The cash proceeds included working capital adjustments of $9.9 million.

 

**12.****               Commitments andContingencies:**

TheCompany currently has outstanding various indemnifications related either tothe sale of the financial services division to Fidelity National (see Note 11)or the sale of certain assets and related liabilities, including selectedcustomer contracts and capitalized software development costs, associated withthe telecommunications information services operations to Convergys InformationManagement Group, Inc. (“Convergys”) during the fourth quarter of 2003.

 

Inconjunction with the sale of the financial services division, ALLTEL agreed toindemnify Fidelity National for any damages resulting from ALLTEL’s breach ofwarranty or non-fulfillment of certain covenants under the sales agreement,that exceed 1.5 percent of the purchase price, or $15.75 million, up to amaximum of 15 percent of the purchase price, or $157.5 million.  Because of the low probability of beingrequired to pay any amount under this indemnification, ALLTEL determined thefair value of this obligation to be 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 alsoagreed to indemnify Fidelity National from any future tax liability imposed onthe financial services division related to periods prior to the date ofsale.  ALLTEL’s obligation to FidelityNational under this indemnification is not subject to a maximum amount.  As of September 30, 2004, the Companyhas recorded income tax liabilities of approximately $11.3 million related tothe operations of the financial services division for periods prior to the dateof sale that management has assessed as probable and estimable, which shouldadequately cover any obligation under this indemnification.

 

Inconnection with the sale of assets to Convergys, ALLTEL agreed to indemnifyConvergys for any damages resulting from ALLTEL’s breach of warranty under thesales agreement that exceed $500,000, up to a maximum of $10.0 million.  In addition, the Company agreed to indemnifyConvergys from any damages resulting from non-fulfillment of certain covenantsor liabilities arising from the ownership, operation or use of the assetsincluded in the sale.  Thisindemnification is not subject to a maximum obligation.  Because of the low probability of beingrequired to pay any amount under these indemnifications, ALLTEL determined thefair value of these obligations to be immaterial to the consolidated results ofoperations, cash flows and financial condition of the Company.  Accordingly, the Company has not recorded aliability related to these indemnifications.

 

15

----

 

**ALLTEL CORPORATION**

**FORM 10-Q**

**PART I - FINANCIAL INFORMATION**

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**GENERAL**

Thefollowing is a discussion and analysis of the historical results of operationsand financial condition of ALLTEL Corporation (“ALLTEL” or the “Company”).  This discussion should be read in conjunctionwith the unaudited consolidated financial statements, including the notesthereto, for the interim periods ended September 30, 2004 and 2003, andthe Company’s Annual Report on Form 10-K for the year ended December 31,2003.

 

###### **EXECUTIVE SUMMARY**

ALLTEL is a customer-focusedcommunications company providing wireless, local telephone, long-distance,Internet and high-speed data services to more than 13 million residential andbusiness customers in 26 states.  Amongthe highlights in the third quarter of 2004:

 

•                  Wireless postpay customer growthremained strong as ALLTEL added more than 100,000 net postpay customers duringthe third quarter.  Primarily due toALLTEL’s proactive retention strategies and customer contract extensions,wireless postpay churn decreased 40 basis points from the same period a yearago to 1.80 percent.  As a result oflower prepay customer additions, total gross customer additions decreased 9percent from the same period a year ago to 642,000.  Total churn, which includes prepay customerlosses, was 2.33 percent for the quarter resulting in total wireless netcustomer additions of 58,000.

 

•                  Wireless service revenues increased 6percent from the same period a year ago driven by an 8 percent increase inretail revenues.  Retail minutes of useper wireless customer per month increased 33 percent from the same period ayear ago to 516 minutes.

 

•                  Wireless segment income for the thirdquarter of 2004 increased 7 percent from the same period a year ago, reflectinggrowth in retail revenues, higher retail prices realized on the sale ofwireless handsets and the effects of rebates earned by ALLTEL for attainingspecified purchase volumes with its handset vendors.  The growth in wireless segment incomeattributable to these factors was partially offset by a decline in wholesalewireless revenues and increased network costs attributable to the significantgrowth in customer usage.  Wirelesswholesale revenues decreased 4 percent year-over-year, primarily due to loweranalog and TDMA minutes of use by other carriers’ customers roaming on ALLTEL’swireless network, partially offset by continued growth in CDMA minutes of use.

 

•                  In its wireline business, ALLTELadded more than 22,000 high-speed data customers, increasing ALLTEL’s DSLcustomer base to approximately 217,000.  During thequarter, the Company lost approximately 26,000 wireline access lines bringingthe total year-over-year decline to approximately 2.5 percent.  Average revenue per wireline customerincreased 2 percent from a year ago to $65.84 due primarily to growth in DSLrevenues and selling additional services and features to existing wirelinecustomers.  Wireline segment incomecomparisons for the third quarter of 2004 were favorably affected by theeffects of strike-related expenses of $10.6 million incurred in the thirdquarter of 2003.  As a result of ALLTEL’scontinued focus on controlling operating expenses and the favorableyear-over-year comparisons attributable to the strike-related expenses,wireline segment income for the third quarter of 2004 increased 10 percent fromthe same period a year ago.

 

•                  ALLTEL maintained its strongfinancial position while repurchasing 4.85 million of its common shares at acost of $263.9 million.  During the year,ALLTEL has repurchased 9.7 million of its common shares at a total cost of$506.9 million, leaving $243.1 million remaining under the Company’s $750.0million stock repurchase program that expires at the end of 2005.  At September 30, 2004, the Company hadavailable more than $1 billion in cash and marketable securities.

 

Throughout the remainderof 2004, the Company will continue to face significant challenges resultingfrom continued competition in the telecommunications industry and changes inthe regulatory environment, including the effects of potential changes to therules governing universal service and inter-carrier compensation.  In addressing these challenges, ALLTEL willcontinue to focus its efforts on improving customer service, enhancing thequality of its networks and expanding its product and service offerings.

 

16

----

 

**CONSOLIDATEDRESULTS OF OPERATIONS**

 
|                                                         |       | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** |       |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Millions, except per share  amounts)**                    | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues and sales:                                          |       |                                       |       |                                      |       |   |   |   |   |
| Service revenues                                             |       | $                                          | 1,885.4    |                                      | $          | 1,836.1 |   | $ | 5,476.9 |   | $ | 5,350.1 |   |
| Product sales                                                |       | 217.7                                      |       | 214.1                                     |       | 629.5 |   | 616.1 |   |
| Total revenues and sales                                     |       | 2,103.1                                    |       | 2,050.2                                   |       | 6,106.4 |   | 5,966.2 |   |
| Costs and expenses:                                          |       |                                       |       |                                      |       |   |   |   |   |
| Cost of services                                             |       | 624.4                                      |       | 602.6                                     |       | 1,769.4 |   | 1,705.6 |   |
| Cost of products sold                                        |       | 262.6                                      |       | 272.4                                     |       | 775.9 |   | 781.4 |   |
| Selling, general, administrative and other                   |       | 373.6                                      |       | 376.3                                     |       | 1,121.7 |   | 1,109.9 |   |
| Depreciation and amortization                                |       | 324.7                                      |       | 312.2                                     |       | 967.2 |   | 926.4 |   |
| Restructuring and other charges                              |       | —                                     |       | —                                    |       | 51.8 |   | 19.0 |   |
| Total costs and expenses                                     |       | 1,585.3                                    |       | 1,563.5                                   |       | 4,686.0 |   | 4,542.3 |   |
| Operating income                                             |       | 517.8                                      |       | 486.7                                     |       | 1,420.4 |   | 1,423.9 |   |
| Non-operating income (expense), net                          |       | 16.3                                       |       | (5.1                                      | )          | 15.8 |   | (6.0 | ) |
| Interest expense                                             |       | (86.7                                      | )          | (91.1                                     | )          | (265.0 | ) | (287.7 | ) |
| Write-down of investments and other                          |       | —                                     |       | —                                    |       | — |   | (13.1 | ) |
| Income from continuing operations before income  taxes       |       | 447.4                                      |       | 390.5                                     |       | 1,171.2 |   | 1,117.1 |   |
| Income taxes                                                 |       | 143.7                                      |       | 147.7                                     |       | 415.1 |   | 422.5 |   |
| Income from continuing operations                            |       | 303.7                                      |       | 242.8                                     |       | 756.1 |   | 694.6 |   |
| Income from discontinued operations, net of income  taxes    |       | 19.5                                       |       | —                                    |       | 19.5 |   | 361.0 |   |
| Cumulative effect of accounting change, net of  income taxes |       | —                                     |       | —                                    |       | — |   | 15.6 |   |
| Net income                                                   |       | $                                          | 323.2      |                                      | $          | 242.8 |   | $ | 775.6 |   | $ | 1,071.2 |   |
| Basic earnings per share:                                    |       |                                       |       |                                      |       |   |   |   |   |
| Income from continuing operations                            |       | $                                          | .99        |                                      | $          | .78 |   | $ | 2.45 |   | $ | 2.23 |   |
| Income from discontinued operations                          |       | .06                                        |       | —                                    |       | .06 |   | 1.16 |   |
| Cumulative effect of accounting change                       |       | —                                     |       | —                                    |       | — |   | .05 |   |
| Net income                                                   |       | $                                          | 1.05       |                                      | $          | .78 |   | $ | 2.51 |   | $ | 3.44 |   |
| Diluted earnings per share:                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income from continuing operations                            |       | $                                          | .99        |                                      | $          | .78 |   | $ | 2.44 |   | $ | 2.23 |   |
| Income from discontinued operations                          |       | .06                                        |       | —                                    |       | .06 |   | 1.15 |   |
| Cumulative effect of accounting change                       |       | —                                     |       | —                                    |       | — |   | .05 |   |
| Net income                                                   |       | $                                          | 1.05       |                                      | $          | .78 |   | $ | 2.50 |   | $ | 3.43 |   |

 

Servicerevenues increased $49.3 million, or 3 percent, and $126.8 million, or 2percent, for the three and nine months ended September 30, 2004,respectively, compared to the same prior year periods.  The increases in service revenues primarilyreflected growth in ALLTEL’s wireless customer base and the correspondingincreases in wireless access revenues, which increased $85.2 million and $244.7million in the three and nine month periods in 2004, respectively, as comparedto the same 2003 periods.  Servicerevenues for both 2004 periods also reflected growth in revenues derived fromwireless and wireline data services and from the sale of enhanced communicationservices, including caller identification, call waiting, call forwarding, voicemail, and wireless equipment protection plans. Revenues from data and enhanced services increased $17.4 million and$55.2 million in the three and nine month periods of 2004, respectively, as comparedto the same periods in 2003, primarily reflecting continued demand for theseservices.  Wireless service revenues alsoincluded increases in regulatory and other fees of $19.8 million and $41.4million in the three and nine month periods of 2004, respectively.  Regulatory fees in 2004 included UniversalService Fund (“USF”) support received by ALLTEL pursuant to its certificationin five states as an Eligible Telecommunications Carrier (“ETC”), and accountedfor $9.7 million and $24.9 million of the overall increases in regulatory feesin the three and nine month periods of 2004, respectively.  The increase in regulatory fees in the ninemonth period of 2004 also reflected additional amounts billed to customers tooffset costs related to certain regulatory mandates, including universal servicefunding, primarily resulting from changes in Federal Communications Commission(“FCC”) regulations applicable to universal service fees that were effective onApril 1, 2003.

 

Theabove increases in service revenues were partially offset by lower wirelessairtime, retail roaming and wholesale revenues, reductions in revenues derivedfrom telecommunications information services and decreases in wireline accessand toll service revenues.  Compared tothe same periods of 2003, wireless airtime and retail roaming revenuesdecreased $34.4 million and $96.2 million in the three and nine months ended September 30,2004, respectively.   The decreases inwireless airtime and retail roaming revenues primarily reflected the effects ofcustomers migrating to rate plans with a larger number of packagedminutes.  For a flat monthly service fee,such rate plans provide customers with a specified number of airtime minutesand include unlimited weekend, nighttime and mobile-to-mobile minutes at noextra charge.

 

17

----

 

Wholesalewireless revenues declined $4.5 million and $18.1 million in the three and ninemonth periods ended September 30, 2004, respectively, as compared to thesame periods in 2003.  The decline inwholesale wireless revenues was principally due to lower analog and TDMAminutes of use by other carriers’ customers roaming on ALLTEL’s wirelessnetwork, partially offset by growth in CDMA minutes of use as other CDMAcarriers direct wholesale traffic to ALLTEL’s network.  Telecommunications information servicesrevenues decreased $19.1 million and $44.9 million in the three and nine monthperiods ended September 30, 2004, respectively, compared to the sameperiods in 2003.  The decreases inrevenues attributable to telecommunications information services primarilyresulted from the December 2003 sale of certain assets and relatedliabilities, including selected customer contracts and capitalized softwaredevelopment costs, to Convergys Information Management Group, Inc. (“Convergys”).  Revenues from long-distance and networkmanagement services decreased $2.8 million and $13.0 million in the three andnine month periods of 2004, respectively, primarily due to declining usage byresidential customers and a reduction in intercompany and residential customerbilling rates.  Wireline local accessservice and intrastate network access and toll revenues decreased $8.6 millionand $31.7 million in the three and nine months ended September 30, 2004,respectively, primarily as a result of the loss of wireline access lines due,in part, to broadband and wireless substitution.

 

Productsales increased 2 percent in both the three and nine month periods ended September 30,2004 compared to the same periods in 2003, or $3.6 million and $13.4 million,respectively.  The increases in productsales in both 2004 periods were primarily driven by higher retail pricesrealized on the sale of wireless handsets that include advanced features, suchas picture messaging, and that are capable of downloading games, entertainmentcontent, weather and office applications.

 

Costof services increased 4 percent in both the three and nine months ended September 30,2004 compared to the same periods in 2003, or $21.8 million and $63.8 million,respectively.  Cost of services for thethree and nine month periods of 2004 reflected increases in wirelessnetwork-related costs of $35.8 million and $95.2 million, respectively,compared to the same 2003 periods, primarily due to increased network trafficresulting from customer growth, increased minutes of use and expansion ofnetwork facilities.  Compared to the sameperiods in 2003, cost of services for the three and nine month periods of 2004also reflected increases in wireless customer service expenses of $10.9 millionand $28.4 million, respectively, primarily reflecting additional costsassociated with ALLTEL’s initiatives designed to improve customer satisfactionand reduce postpay churn.  Cost ofservices for the nine month period ended September 30, 2004 also includedincreased wireless regulatory fees of $11.2 million compared to the same perioda year ago principally related to fees associated with USF, reflecting changesin FCC regulations effective April 1, 2003.  The increases in cost of services in the ninemonth period of 2004 attributable to higher wireless network-related costs,increased wireless regulatory fees and customer service expenses were partiallyoffset by a decrease in wireless bad debt expense.  Compared to the same period in 2003, wirelessbad debt expense declined $10.6 million in the first nine months of 2004primarily due to ALLTEL’s continuing efforts to reduce losses sustained frombad debts by managing its customer credit policies, improving collectionpractices, utilizing new technologies and proactively managing the efforts ofthe Company’s collection agencies.  Costof services for the three and nine months ended September 30, 2004 alsoreflected decreases in network-related costs for the wireline operations of$15.8 million and $28.9 million, respectively, primarily due to the loss ofwireline access lines and the effects of the incremental strike-relatedexpenses and maintenance costs incurred in 2003.  Cost of services for the three and nine monthperiods of 2004 were also favorably affected by reduced operating costs of$12.4 million and $33.2 million, respectively, resulting from the sale ofcertain telecommunications information services operations to Convergys, aspreviously discussed.

 

Cost of products solddecreased $9.8 million, or 4 percent, and $5.5 million, or 1 percent, in thethree and nine month periods ended September 30, 2004, respectively,compared to the same 2003 periods.  Thedecreases in both 2004 periods reflected decreased sales of telecommunicationsand data products to regulated wireline affiliates, as well as theeffects of vendor rebates earned by ALLTEL for attaining specified purchasevolumes with the Company’s wireless handset vendors.

 

Selling, general,administrative and other expenses decreased $2.7 million, or 1 percent, andincreased $11.8 million, or 1 percent, in the three and nine months ended September 30,2004, respectively, compared to the same prior year periods.  The increase in the nine month period of 2004primarily reflected increased wireless commissions expense of $31.0 million,driven by increased sales of ALLTEL’s more profitable rate plans and a highermix of postpay gross customer additions, as compared to the correspondingperiods of 2003.  The increase in thenine month period of 2004 due to wireless commissions expense was partiallyoffset by cost savings realized in the wireline operations, reflecting theCompany’s continued control of operating expenses.  These cost savings were also primarilyresponsible for the decrease in selling, general, administrative and otherexpenses in the three month period of 2004.

 

Depreciation andamortization expense increased 4 percent in both the three and nine monthperiods ended September 30, 2004 compared to the same prior year periods,or $12.5 million and $40.8 million, respectively, due primarily to growth inwireless plant in service.

 

18

----

 

Operating incomeincreased $31.1 million, or 6 percent, in the three month period ended September 30,2004, compared to the same period in 2003, primarily due to growth in both wirelessand wireline segment income. Conversely, operating income in the nine month period of 2004 decreasedslightly compared to the same period of 2003 primarily due to the net increasein restructuring and other charges incurred in 2004 compared to 2003, asfurther discussed below, and a reduction in wireless segment income.  These decreases in the nine month period of2004 were partially offset by growth in wireline segment income.  The growth in wireless segment income in thethree month period of 2004 primarily reflected an increase in wireless servicerevenues, higher retail prices realized on the sale of wireless handsets andthe effects of rebates earned by ALLTEL for attaining specified purchasevolumes with its handset vendors.  Thedecrease in wireless segment income in the nine month period of 2004 resultedfrom decreased wireless wholesale revenues and increased customer acquisitionand retention costs.  Wireline segmentincome increased in both 2004 periods primarily due to selling additionalservices and features to existing wireline customers, growth in the Company’sInternet operations and the effects of the incremental strike-related costsincurred in 2003.  The changes inwireless and wireline segment income in 2004 are further discussed below under “Resultsof Operations by Business Segment”.

 

Restructuring andOther Charges

Set forth below is asummary of the restructuring and other charges recorded for the three and ninemonth periods ended September 30:

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                                          | ** ** | ** **             | **2004**   | ** **            | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Severance and employee benefit costs                    |       | $                      | —     |                  | $          | — |   | $ | 22.6 |   | $ | 6.3 |   |
| Relocation costs                                        |       | —                 |       | —                |       | 4.8 |   | — |   |
| Lease and contract termination costs                    |       | —                 |       | —                |       | (1.5 | ) | (0.5 | ) |
| Write-down of software development costs                |       | —                 |       | —                |       | — |   | 13.2 |   |
| Write-down in the carrying value of certain  facilities |       | —                 |       | —                |       | 24.8 |   | — |   |
| Other exit costs                                        |       | —                 |       | —                |       | 1.1 |   | — |   |
| Total restructuring and other charges                   |       | $                      | —     |                  | $          | — |   | $ | 51.8 |   | $ | 19.0 |   |
|                                                         |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

In January 2004,ALLTEL announced its plans to reorganize its operations and support teams.  Also, during February 2004, the Companyannounced its plans to exit its Competitive Local Exchange Carrier (“CLEC”)operations in the Jacksonville, Florida market due to the continuedunprofitability of these operations.  Inconnection with these activities, ALLTEL recorded a restructuring charge of$29.3 million consisting of $22.9 million in severance and employee benefitcosts related to a planned workforce reduction, $4.8 million of employeerelocation expenses, $0.5 million in lease termination costs and $1.1 millionof other exit costs.  The severance andemployee benefit costs included a $1.2 million payment to a former employee ofthe Company’s sold financial services division that became payable in the firstquarter of 2004 pursuant to the terms of a change in control agreement betweenthe employee and ALLTEL.  As of September 30,2004, the Company had paid $22.2 million in severance and employee-relatedexpenses, and all of the employee reductions had been completed.  ALLTEL also recorded a $2.3 million reductionin the liabilities associated with various restructuring activities initiatedprior to 2003, consisting of $2.0 million in lease and contract terminationcosts and $0.3 million in severance and employee benefit costs.  The reductions primarily reflecteddifferences between estimated and actual costs paid in completing the previousplanned workforce reductions and lease and contract terminations.  During the first quarter of 2004, the Companyalso recorded a write-down in the carrying value of certain corporate andregional facilities to fair value in conjunction with the proposed leasing orsale of those facilities.  The asset write-downsresulted from lower occupancy in the facilities due to the 2004reorganizational changes and the 2003 sale of the Company’s financial servicesdivision to Fidelity National Financial Inc. (“Fidelity National”), as furtherdiscussed below under “Discontinued Operations”.

 

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 September 30,2004, the Company had paid $8.5 million in severance and employee-relatedexpenses, and all of the employee reductions had been completed.  The Company also recorded a $2.7 millionreduction in the liabilities associated with various restructuring activitiesinitiated prior to 2003, consisting of $2.2 million in severance and employeebenefit costs and $0.5 million in lease termination costs.  The reduction primarily reflected differencesbetween estimated and actual costs paid in completing the previous plannedworkforce reductions and lease terminations. During the second quarter of 2003, ALLTEL also wrote off certaincapitalized software development costs totaling $13.2 million that had noalternative future use or functionality.

 

At September 30,2004, the remaining unpaid liability related to the Company’s integration andrestructuring activities consisted of severance and employee-related expensesof $0.9 million, relocation expenses of $0.8 million and lease and contracttermination costs of $0.4 million.  Cashoutlays for the remaining unpaid liability are to be paid over the next 12 to24 months out of operating cash flows. (See Note 4 to the unaudited interim consolidated financial statementsfor additional information regarding the restructuring and other charges.)

 

19

----

 

Non-Operating Income (Expense), Net
| ** **                                     | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Millions)**                                 | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Equity earnings in unconsolidated partnerships |       | $                                          | 24.3       |                                      | $          | 13.8 |   | $ | 53.5 |   | $ | 48.0 |   |
| Minority interest in consolidated partnerships |       | (23.7                                      | )          | (22.3                                     | )          | (60.9 | ) | (61.5 | ) |
| Other income, net                              |       | 15.7                                       |       | 3.4                                       |       | 23.2 |   | 7.5 |   |
| Non-operating income (expense), net            |       | $                                          | 16.3       |                                      | $          | (5.1 | ) | $ | 15.8 |   | $ | (6.0 | ) |

 

As indicated in thetable above, non-operating income (expense), net increased $21.4 million, or420 percent, and $21.8 million, or 363 percent, in the three and nine monthsended September 30, 2004, respectively, compared to the same periods of2003.  The increases in equity earningsof $10.5 million and $5.5 million in the three and nine month periods of 2004,respectively, reflected improved operating results in the Company’sminority-owned wireless partnerships and favorable adjustmentsresulting from recently completed audits of certain of these non-ALLTEL managedpartnerships.  The effects of theimproved operating results and favorable audit adjustments on equity earningswere partially offset in the nine month period of 2004 by ALLTEL’s April 1,2003 acquisition of a majority ownership interest in a Wisconsin RSA in whichthe Company previously owned a minority interest.  Other income, net for both the three and ninemonth periods of 2004 included a $6.0 million increase in the amount of annualdividends paid on the Company’s investment in Rural Telephone Bank Class Cstock.  In the second quarter of 2003,ALLTEL received additional shares of this stock investment as a result of theCompany’s repayment of all outstanding debt under the Rural Utilities Services,Rural Telephone Bank and Federal Financing Bank programs, as further discussedbelow.  Other income, net for the threeand nine month periods of 2004 also included additional interest income earnedon the Company’s cash and short-term investments of $0.7 million and $1.9million, respectively.  The additionalinterest income reflected growth in the Company’s available cash on handfollowing the sale of the financial services division to Fidelity National, asfurther discussed below under “Discontinued Operations”.  Other income, net for the nine month periodof 2004 included additional dividend income of $1.8 million earned on theCompany’s investment in Fidelity National common stock.  Conversely, other income, net for the threeand nine month periods of 2003 included net losses of $4.9 million related tothe disposal of certain assets.

 

Interest Expense

Interest expensedecreased $4.4 million, or 5 percent, and $22.7 million, or 8 percent, in thethree and nine month periods ended September 30, 2004, respectively,compared to the same periods of 2003. The decreases in both 2004 periods reflected the repayment of a $250.0million, 7.25 percent senior unsecured note that the Company repaid on April 1,2004, using available cash on hand. Interest expense for the nine month period of 2004 also reflected theCompany’s repayment of more than $750.0 million of long-term debt during2003.  During the first quarter of 2003,the Company repaid a $450.0 million, 7.125 percent unsecured note due March 1,2003, using commercial paper borrowings. In the second quarter of 2003, ALLTEL repaid all outstanding commercialpaper borrowings and prepaid $249.1 million of long-term debt outstanding underthe Rural Utilities Services, Rural Telephone Bank and Federal Financing Bankprograms.  The debt repayments in thesecond quarter of 2003 were funded primarily from the cash proceeds receivedfrom the sale of the financial services division.

 

Write-down ofInvestments and 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.  Asnoted above, during the second quarter of 2003, the Company retired, prior tostated maturity dates, $249.1 million of long-term debt.  In connection with the early retirement ofthis debt, the Company incurred pretax termination fees of $7.1 million.

 

Income Taxes

Income tax expensedecreased $4.0 million, or 3 percent, and $7.4 million, or 2 percent, for thethree and nine month periods ended September 30, 2004, respectively,compared to the same periods of 2003. The decreases in income tax expense in both 2004 periods primarily reflectedtax benefits of $19.7 million associated with the reversal of certain incometax contingency reserves, partially offset by taxes attributable to theoverall growth in the Company’s earnings from continuing operations.  As more fully discussed in Note 2 to theinterim consolidated financial statements, during the third quarter of 2004,the Internal Revenue Service (“IRS”) completed its fieldwork related to theaudits of ALLTEL’s consolidated federal income tax returns for the fiscal years1997 through 2001.  As a result of theIRS issuing its proposed audit adjustments related to the periods underexamination, ALLTEL reassessed its income tax contingency reserves to reflectthe IRS findings and recorded a $129.3 million reduction in these reserves duringthe third quarter of 2004.  Thecorresponding effects of the adjustments to the tax contingency reservesresulted in a reduction in goodwill of $94.5 million and a reduction in incometax expense associated with continuing operations of $19.7 million.  The remaining $15.1 million of the adjustmentsto the tax contingency reserves related to the sold financial services divisionand has been reported as “discontinued operations” in the Company’s interimconsolidated financial statements for the three and nine months ended September 30,2004.

 

20

----

 

Primarily due to the taxbenefits associated with the reversal of income tax contingency reservesdiscussed above, the Company’s effective income tax rates from continuingoperations decreased to 32.1 percent and 35.4 percent for the three and ninemonths ended September 30, 2004, respectively, compared to 37.8 percentfor both corresponding periods of 2003. In determining its quarterly provision for income taxes, ALLTEL uses anestimated annual effective tax rate, which is based on the Company’s expectedannual income, statutory rates and tax planning opportunities and reflectsALLTEL’s best estimate of the ultimate outcome of tax examinations andassessments.  Significant or unusualitems, such as the taxes related to the sale of a business, are separatelyrecognized in the quarter in which they occur.

 

Net Income andEarnings per Share from Continuing Operations

Net income fromcontinuing operations increased $60.9 million, or 25 percent, and $61.5million, or 9 percent, for the three and nine month periods ended September 30,2004, respectively, compared to the same periods of 2003.  Basic and diluted earnings per share fromcontinuing operations both increased 27 percent in the three month period of2004 and increased 10 percent and 9 percent, respectively in the nine monthperiod of 2004, compared to the same periods of 2003.  The increases in net income and earnings pershare in the three month period of 2004 primarily reflected growth in wirelessand wireline segment income, increased annual dividends received on the Company’sinvestment in Rural Telephone Bank stock, additional income earned from ALLTEL’sminority-owned wireless partnerships and the tax benefits associated with thereversal of income tax contingency reserves previously discussed.  Net income and earnings per share fromcontinuing operations for the nine month period of 2004 reflected growth inwireline segment income and the tax benefits from the reversal of income taxcontingency reserves, partially offset by the net increase in restructuring andother charges incurred in 2004 compared to 2003, and a reduction in wirelesssegment income due to lower wholesale revenues and increased customer acquisitionand retention costs.  For a furtherdiscussion of the wireless and wireline segment operating results, see “Resultsof Operations by Business Segment” below.

 

DiscontinuedOperations

On April 1, 2003,ALLTEL completed the sale of the financial services division of its informationservices subsidiary, ALLTEL Information Services, Inc., to Fidelity National,for $1.05 billion, received as $775.0 million in cash and $275.0 million inFidelity National common stock.  As partof this transaction, Fidelity National acquired ALLTEL’s mortgage servicing,retail and wholesale banking and commercial lending operations, as well as thecommunity/regional bank division. Approximately 5,500 employees of the Company transitioned to FidelityNational as part of the transaction.  Asa result of this transaction, the financial services division has beenreflected as discontinued operations in the Company’s consolidated financialstatements for the three and nine months ended September 30, 2003.  The telecom division of ALLTEL InformationServices, Inc. was retained by the Company and was not part of the saletransaction with Fidelity National.  Theoperations of the retained telecom division are included in the communicationssupport services segment.

 

In January 2003, ALLTELcompleted the termination of its business venture with Bradford & BingleyGroup.  The business venture, ALLTELMortgage Solutions, Ltd., a majority-owned consolidated subsidiary of ALLTEL,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 in the Company’s consolidated financial statements for the three andnine months ended September 30, 2003.

 

The following tableincludes certain summary income statement information related to the financialservices operations reflected as discontinued operations for the three and ninemonths ended September 30:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                             | ** ** | ** **             | **2004**   | ** **            | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues and sales                         |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | 210.3 |   |
| Operating expenses                         |       | —                 |       | —                |       | — |   | 148.1 |   |
| Operating income                           |       | —                 |       | —                |       | — |   | 62.2 |   |
| Other expense, net                         |       | —                 |       | —                |       | — |   | (0.1 | ) |
| Gain on sale of discontinued operations    |       | —                 |       | —                |       | — |   | 555.1 |   |
| Pretax income from discontinued operations |       | —                 |       | —                |       | — |   | 617.2 |   |
| Income tax expense (benefit)               |       | (19.5                  | )          | —                |       | (19.5 | ) | 256.2 |   |
| Income from discontinued operations        |       | $                      | 19.5       |                  | $          | — |   | $ | 19.5 |   | $ | 361.0 |   |
|                                            |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

The income tax benefitrecorded in the third quarter of 2004 included the reversal of $15.1 million offederal income tax contingency reserves attributable to the sold financialservices division, as previously discussed. In connection with the IRS audits of the Company’s consolidated federalincome tax returns for the fiscal years 1997 through 2001, the Company alsorecorded a foreign tax credit carryback benefit of $4.4 million.

 

21

----

 

The depreciation oflong-lived assets related to the financial services division ceased as of January 28,2003, the date of the agreement to sell such operations.  The cessation of depreciation had the effectof reducing operating expenses by approximately $13.0 million in 2003.  (See Note 11 to the unaudited interimconsolidated financial statements for additional information regarding thediscontinued operations.)

 

Cumulative Effect ofAccounting Change

Except for certainwireline subsidiaries as further discussed below, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 143, “Accounting for AssetRetirement 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 for anasset 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 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.  Certain of theCompany’s cell site and switch site operating lease agreements contain clausesrequiring restoration of the leased site at the end of the lease term.  Similarly, certain of the Company’s leaseagreements for office and retail locations require restoration of the leasedsite upon expiration of the lease term. Accordingly, ALLTEL is subject to asset retirement obligationsassociated with these leased facilities under the provisions of SFAS No.143.  The application of SFAS No. 143 tothe Company’s cell site and switch site leases and leased office and retaillocations did not have a material impact on ALLTEL’s consolidated results ofoperations, financial position or cash flows as of or for the nine months endedSeptember 30, 2004 or 2003.

 

In accordance withfederal and state regulations, depreciation expense for the Company’s wirelineoperations has historically included an additional provision for cost ofremoval.  The additional cost of removalprovision does not meet the recognition and measurement principles of an assetretirement obligation under SFAS No. 143. On December 20, 2002, the FCC notified wireline carriers that theyshould not adopt the provisions of SFAS No. 143 unless specifically required bythe FCC in the future.  As a result ofthe FCC ruling, ALLTEL continues 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 $168.8 million and $156.0million at September 30, 2004 and 2003, respectively. For the acquiredKentucky and Nebraska wireline operations not subject to SFAS No. 71, effectiveJanuary 1, 2003, the Company ceased recognition of the cost of removalprovision in depreciation expense and eliminated the cumulative cost of removalincluded in accumulated depreciation. The cumulative effect of retroactively applying these changes to periodsprior 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 forthe nine months ended September 30, 2003. The cessation of the cost of removal provision in depreciation expensefor the acquired Kentucky and Nebraska wireline operations did not have amaterial impact on the Company’s consolidated results of operations for thethree and nine months ended September 30, 2004 and 2003.

 

Average CommonShares Outstanding

The average number ofcommon shares outstanding decreased 2 percent and 1 percent, respectively, inthe three and nine month periods ended September 30, 2004, compared to thesame periods of 2003.  The decreases inboth 2004 periods primarily reflected the effects of the Company’s repurchaseof approximately 9.7 million of its common shares during the first nine monthsof 2004, as further discussed below under “Cash Flows-Financing Activities”.  The decreases in outstanding common shares inboth 2004 periods attributable to the share repurchase were partially offset byadditional shares issued upon the exercise of options granted under ALLTEL’semployee stock-based compensation plans.

 

22

----

 

**RESULTSOF OPERATIONS BY BUSINESS SEGMENT**

Communications-Wireless Operations
| ** **                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Millions, customers in  thousands)**          | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues and sales:                              |       |                                       |       |                                      |       |   |   |   |   |
| Service revenues                                 |       | $                                          | 1,239.4    |                                      | $          | 1,163.8 |   | $ | 3,538.5 |   | $ | 3,338.4 |   |
| Product sales                                    |       | 74.3                                       |       | 69.4                                      |       | 212.8 |   | 198.0 |   |
| Total revenues and sales                         |       | 1,313.7                                    |       | 1,233.2                                   |       | 3,751.3 |   | 3,536.4 |   |
| Costs and expenses:                              |       |                                       |       |                                      |       |   |   |   |   |
| Cost of services                                 |       | 406.6                                      |       | 361.1                                     |       | 1,144.4 |   | 1,017.2 |   |
| Cost of products sold                            |       | 139.3                                      |       | 141.7                                     |       | 418.9 |   | 405.4 |   |
| Selling, general, administrative and other       |       | 294.0                                      |       | 293.0                                     |       | 882.8 |   | 851.9 |   |
| Depreciation and amortization                    |       | 186.2                                      |       | 169.0                                     |       | 545.1 |   | 495.5 |   |
| Total costs and expenses                         |       | 1,026.1                                    |       | 964.8                                     |       | 2,991.2 |   | 2,770.0 |   |
| Segment income                                   |       | $                                          | 287.6      |                                      | $          | 268.4 |   | $ | 760.1 |   | $ | 766.4 |   |
| Customers                                        |       | 8,394.7                                    |       | 7,928.1                                   |       | — |   | — |   |
| Average customers                                |       | 8,369.8                                    |       | 7,900.6                                   |       | 8,234.5 |   | 7,793.9 |   |
| Gross customer additions (a)                     |       | 642.0                                      |       | 705.8                                     |       | 2,029.5 |   | 2,159.9 |   |
| Net customer additions (a)                       |       | 58.3                                       |       | 55.8                                      |       | 371.3 |   | 326.4 |   |
| Market penetration                               |       | 13.7                                       | %          | 13.1                                      | %          | — |   | — |   |
| Postpay customer churn                           |       | 1.80                                       | %          | 2.20                                      | %          | 1.77 | % | 2.13 | % |
| Total churn                                      |       | 2.33                                       | %          | 2.75                                      | %          | 2.24 | % | 2.62 | % |
| Retail minutes of use per customer per month (b) |       | 516                                        |       | 389                                       |       | 480 |   | 364 |   |
| Retail revenue per customer per month (c)        |       | $                                          | 45.24      |                                      | $          | 44.55 |   | $ | 44.00 |   | $ | 43.37 |   |
| Average revenue per customer per month (d)       |       | $                                          | 49.36      |                                      | $          | 49.10 |   | $ | 47.75 |   | $ | 47.59 |   |
| Cost to acquire a new customer (e)               |       | $                                          | 318        |                                      | $          | 305 |   | $ | 310 |   | $ | 304 |   |

 

Notes:

(a)          Includes the effects ofacquisitions.  Excludes resellercustomers for all periods presented.

 

(b)         Represents the averagemonthly minutes that ALLTEL’s customers use on both the Company’s network andwhile roaming on other carriers’ networks.

 

(c)          Retail revenue percustomer is calculated by dividing wireless retail revenues by averagecustomers for the period.  Areconciliation of the revenues used in computing retail revenue per customerper month was as follows for the three and nine month periods ended September 30:

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**          | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service revenues        |       | $                      | 1,239.4    |                  | $          | 1,163.8 |   | $ | 3,538.5 |   | $ | 3,338.4 |   |
| Less wholesale revenues |       | (103.4                 | )          | (107.9                | )          | (277.8 | ) | (295.9 | ) |
| Total retail revenues   |       | $                      | 1,136.0    |                  | $          | 1,055.9 |   | $ | 3,260.7 |   | $ | 3,042.5 |   |

 

(d)         Average revenue percustomer per month is calculated by dividing wireless service revenues byaverage customers for the period.

 

(e)          Cost to acquire a newcustomer is calculated by dividing the sum of product sales, cost of productssold and sales and marketing expenses (included within “Selling, general,administrative and other”), as reported above, by the number of internal grosscustomer additions in the period. Customer acquisition costs exclude amounts related to the Company’scustomer retention efforts.  Areconciliation of the revenues, expenses and customer additions used incomputing cost to acquire a new customer was as follows for the three and ninemonth periods ended September 30:

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions, customers in  thousands)**          | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Product sales                                    |       | $                      | (55.2      | )                     | $          | (48.1 | ) | $ | (159.3 | ) | $ | (130.9 | ) |
| Cost of products sold                            |       | 78.0                   |       | 79.9                  |       | 242.2 |   | 219.7 |   |
| Sales and marketing expense                      |       | 181.5                  |       | 181.8                 |       | 545.3 |   | 523.2 |   |
| Total costs incurred to acquire new customers    |       | $                      | 204.3      |                  | $          | 213.6 |   | $ | 628.2 |   | $ | 612.0 |   |
| Gross customer additions, excluding acquisitions |       | 642.0                  |       | 699.7                 |       | 2,029.5 |   | 2,012.5 |   |
| Cost to acquire a new customer                   |       | $                      | 318        |                  | $          | 305 |   | $ | 310 |   | $ | 304 |   |

 

23

----

 

Thetotal number of wireless customers served by ALLTEL increased by almost 467,000customers, or 6 percent, during the twelve month period ended September 30,2004.  Wireless gross customer additionswere 642,000 and 2,029,000 during the three and nine month periods of 2004,respectively.  Excluding the effects ofacquisitions, wireless gross customer additions were 700,000 and 2,013,000during the three and nine month periods of 2003, respectively.  The 8 percent decrease in gross customeradditions in the third quarter of 2004 compared to the same period a year agoresulted from lower prepay customer additions. Gross postpay customer additions increased in both the three and nine monthperiods of 2004 compared to the same periods a year ago, reflecting the Company’sfocus on growing its postpay customer base by emphasizing to customers throughpricing, advertising and retail store operations, the value of ALLTEL’s postpayservice plans.  Sales of ALLTEL’shigher-yield Total and National Freedom rate plans accounted for approximately37 percent and 41 percent of the gross additions during the three and ninemonth periods of 2004, respectively.  At September 30,2004, customers on the Company’s Total and National Freedom rate plansrepresented approximately 37 percent of ALLTEL’s wireless customer base.  During the three and nine month periods endedSeptember 30, 2004, net wireless customer additions were 58,000 and371,000, respectively, substantially all of which were on postpay plans.  Overall, the Company’s wireless marketpenetration rate (number of customers as a percent of the total population inALLTEL’s service areas) increased to 13.7 percent as of September 30,2004.

 

Thelevel of customer growth throughout the remainder of 2004 will be dependentupon the Company’s ability to attract new customers in an increasinglycompetitive marketplace, which is currently supporting up to seven competitorsin each market.  The Company willcontinue to focus its efforts on sustaining value-added customer growth byimproving service quality and customer satisfaction, managing its distributionchannels and customer segments, offering attractively priced rate plans and newor enhanced services and other features, selling additional phone lines andservices to existing customers and pursuing strategic acquisitions.  Consistent with this focus, during the firstquarter of 2004, the Company completed the launch of “Touch2Talk”, ALLTEL’s “walkie-talkie”wireless offering that provides customers with service coverage over ALLTEL’sentire digital wireless network.

 

TheCompany continues to focus its efforts on lowering postpay customer churn(average monthly rate of customer disconnects). To improve customer retention, during the second quarter of 2003, theCompany launched several operational initiatives designed to improve overallservice quality to its customers both at its retail stores and in its callcenters.  ALLTEL also continues toupgrade its telecommunications network in order to offer expanded networkcoverage and quality and to provide enhanced service offerings to itscustomers.  In addition, the Company hasincreased the number of its customers under contract through the offering ofcompetitively priced rate plans, proactively analyzing customer usage patternsand migrating customers to newer digital handsets.  The Company believes that its improvements incustomer service levels, digital network expansion and proactive retentionefforts contributed to the decrease in postpay customer churn in the both thethree and nine month periods of 2004 compared to the same periods of 2003.  Primarily due to the declines in postpaychurn, total churn also decreased in both the three and nine month periods of2004 compared to the same periods of 2003.

 

Wirelessrevenues and sales increased $80.5 million, or 7 percent, and $214.9 million,or 6 percent, for the three and nine month periods ended September 30,2004, respectively, compared to the same periods in 2003.  Service revenues increased 6 percent in boththe three and nine month periods of 2004 compared to the same periods in 2003,or $75.6 million and $200.1 million, respectively.   The increases in service revenues primarilyreflected growth in ALLTEL’s wireless customer base and the correspondingincreases in wireless access revenues, which increased $85.2 million and $244.7million in the three and nine month periods in 2004, respectively, as comparedto the same 2003 periods.  Servicerevenues for both 2004 periods also reflected growth in revenues derived fromwireless data services and from the sale of enhanced communication services,including caller identification, call waiting, call forwarding, voice mail, andwireless equipment protection plans. Revenues from data and enhanced services increased $12.7 million and$38.8 million in the three and nine month periods of 2004, respectively, ascompared to the same periods in 2003. Wireless service revenues also included increases in regulatory andother fees of $19.8 million and $41.4 million in the three and nine monthperiods of 2004, respectively. Regulatory fees in 2004 included USF support received by ALLTEL pursuantto its certification in five states as an ETC, and accounted for $9.7 millionand $24.9 million of the overall increases in regulatory fees in the three andnine month periods of 2004, respectively. During the third quarter of 2004, ALLTEL received FCC approval for fivenon-rural ETC applications and was recently approved by the state commissionsin Kansas and Louisiana as an ETC.  As aresult, ALLTEL expects to receive an additional $5.0 million of USF subsidiesin its wireless business in the fourth quarter of 2004 and approximately $40.0million for all of 2004.  After deductingthe portion of USF subsidies distributed to its partners in wireless marketsoperated in partnership with other companies, ALLTELexpects to receive net USF subsidies in its wireless business of approximately$37.0 million for all of 2004.  Beginningin 2005, the Company expects to receive on a quarterly basis net USF subsidiesin its wireless business of $20.0 million to $25.0 million.  The increase in regulatory fees in the ninemonth period of 2004 also reflected additional amounts billed to customers tooffset costs related to certain regulatory mandates, including universalservice funding, primarily resulting from changes in FCC regulations applicableto universal service fees that were effective on April 1, 2003.

 

24

----

 

Servicerevenue growth in the three and nine month periods of 2004 attributable tocustomer growth, increased access revenues, additional revenues earned fromdata and enhanced services and increased regulatory and other fees werepartially offset by lower airtime and retail roaming revenues and a decrease inwholesale revenues.  Compared to the sameperiods of 2003, airtime and retail roaming revenues decreased $34.4 millionand $96.2 million in the three and nine months ended September 30, 2004,respectively.   The decreases in airtimeand retail roaming revenues primarily reflected the effects of customersmigrating to rate plans with a larger number of packaged minutes.  For a flat monthly service fee, such rateplans provide customers with a specified number of airtime minutes and includeunlimited weekend, nighttime and mobile-to-mobile minutes at no extracharge.  Wholesale wireless revenuesdeclined $4.5 million and $18.1 million in the three and nine month periodsended September 30, 2004, respectively, as compared to the same periods in2003.  The decline in wholesale wirelessrevenues was principally due to lower analog and TDMA minutes of use by othercarriers’ customers roaming on ALLTEL’s wireless network, partially offset bygrowth in CDMA minutes of use as other CDMA carriers direct wholesale trafficto ALLTEL’s network.  The decline in TDMAminutes is likely to continue; however, this impact may be somewhat offset byCDMA minute growth as other CDMA carriers direct wholesale traffic to ALLTEL’snetwork.

 

Primarilydriven by growth in average monthly retail minutes of use, increased sales ofhigher-priced postpay rate plans, additional revenues from data and otherenhanced services and the effects of the USF subsidies which were partiallyoffset by lower airtime revenues, retail revenue per customer per monthincreased 2 percent and 1 percent in the three and nine months periods of 2004,respectively, as compared to the same periods in 2003.  Average revenue per customer per month alsoincreased slightly in both the three and nine month periods of 2004 as comparedto the same periods in 2003, which reflected the increases in retail revenueper customer per month, offset by the decline in wholesale revenues discussedabove.  Growth in service revenues andaverage revenue per customer per month for the remainder of 2004 will dependupon ALLTEL’s ability to maintain market share in an increasingly competitivemarketplace by adding new customers, retaining existing customers, increasingcustomer usage, and continuing to sell data and additional enhanced services.

 

Productsales increased 7 percent in both the three and nine months ended September 30,2004 as compared to the same periods in 2003, or $4.9 million and $14.8million, respectively.  The increases inproduct sales in both 2004 periods were primarily driven by higher retailprices for wireless handsets that include advanced features, such as picturemessaging, and that are capable of downloading games, entertainment content,weather and office applications.  Theincreases in product sales in both 2004 periods also reflected the continuedretention efforts by the Company focused on migrating existing wirelesscustomers to new wireless technologies.

 

Costof services increased 13 percent in both the three and nine month periods endedSeptember 30, 2004 as compared to the same periods in the prior year, or$45.5 million and $127.2 million, respectively. The increases in both of the 2004 periods reflected increases innetwork-related costs of $35.8 million and $95.2 million, respectively,compared to the same 2003 periods, primarily due to increased network trafficresulting from customer growth, increased minutes of use and expansion ofnetwork facilities.  Cost of services inboth 2004 periods also reflected increases in customer service expenses of$10.9 million and $28.4 million, respectively, as compared to the same periodsin 2003, which principally reflected additional costs associated with ALLTEL’sinitiatives designed to improve customer satisfaction and reduce postpay churn.Cost of services for the nine month period ended September 30, 2004 alsoincluded increased regulatory fees of $11.2 million compared to the same perioda year ago primarily related to fees associated with USF, reflecting changes inFCC regulations effective April 1, 2003. The increases in cost of services in the nine month period of 2004attributable to higher network-related costs, increased regulatory fees andcustomer service expenses were partially offset by a decrease in bad debtexpense.  Compared to the same period in2003, bad debt expense declined $10.6 million in the nine months ended September 30,2004 primarily due to ALLTEL’s continuing efforts to reduce losses sustainedfrom bad debts by managing its customer credit policies, improving collectionpractices, utilizing new technologies and proactively managing the efforts ofthe Company’s collection agencies.

 

Costof products sold decreased $2.4 million, or 2 percent, in the three monthsended September 30, 2004, and increased $13.5 million, or 3 percent, inthe nine months ended September 30, 2004, as compared to the same periodsin 2003.  The decrease in the three monthperiod of 2004 as compared to the same prior year period primarily resultedfrom the effects of vendor rebates earned by ALLTEL for attaining specifiedpurchase volumes with the Company’s handset vendors.  The increase in cost of products sold in thenine month period of 2004 was consistent with the corresponding increase inproduct sales discussed above and primarily reflected the effects of sellinghigher-priced handsets and the Company’s continuing efforts to migratecustomers to newer wireless technologies as part of ALLTEL’s customer retentionefforts, partially offset by the effects of vendor rebates previouslydiscussed.

 

Selling,general, administrative and other expenses increased slightly in the threemonth period ended September 30, 2004, and increased $30.9 million, or 4percent, in the nine month period of 2004, as compared to the same periods in2003.  The increases in selling, general,administrative and other expenses in both 2004 periods primarily reflected

 

25

----

 

increasedcommission costs of $3.6 million and $31.0 million, respectively, compared tothe same periods in 2003.  Commissionsexpense increased in both 2004 periods due to increased sales of ALLTEL’s Totaland National Freedom rate plans and a higher mix of postpay gross customeradditions, as compared to the corresponding periods of 2003.  Commission rates paid to the Company’sinternal sales force and outside agents are higher on the sales of ALLTEL’smore profitable postpay rate plans than comparable rates paid on otherlower-margin rate plans offered by the Company.

 

Depreciationand amortization expense increased 10 percent, or $17.2 million and $49.6million, in the three and nine months ended September 30, 2004,respectively, as compared to the same periods in 2003.  The increase in depreciation and amortizationexpense in both 2004 periods was primarily due to growth in wireless plant inservice.

 

Comparedto the same period of 2003, wireless segment income increased $19.2 million, or7 percent, in the three month period of 2004, reflecting growth in retailrevenues, higher retail prices realized on the sale of wireless handsets andthe effects of rebates earned by ALLTEL for attaining specified purchasevolumes with its handset vendors. Although wireless revenues and sales also increased in the nine monthperiod of 2004, wireless segment income decreased $6.3 million, or 1percent.  This decrease primarilyreflected increased network costs attributable to the significant growth incustomer usage and additional costs associated with the initiatives designed toimprove customer satisfaction and reduce postpay churn noted above, as well asthe Company’s retention efforts.  Inaddition to these factors, the decrease in wireless segment income in the ninemonth period also reflected increased customer acquisition costs of $16.2million consistent with the growth in gross postpay customer additions,excluding acquisitions.

 

Costto acquire a new customer is used to measure the average cost of adding a newcustomer and represents sales, marketing and advertising costs and the netequipment cost, if any, for each new customer added.  The increases in cost to acquire a newcustomer for both the three and nine month period of 2004 primarily reflectedthe increases in commissions expense and a higher mix of postpay gross customeradditions, partially offset by improved margins on the sales of wirelesshandsets.  In addition, the increase incost to acquire a new customer in the three month period ended September 30,2004 also reflected the unfavorable effects of spreading the total customeracquisition costs over a lower number of gross customer additions as comparedto the same period of 2003.  For both thenine months ended September 30, 2004 and 2003, approximately 66 percent ofthe wireless gross customer additions came through ALLTEL’s internaldistribution channels.  ALLTEL’s internalsales distribution channels include Company retail stores and kiosks located inshopping malls, other retail outlets and mass merchandisers.  Incremental sales costs at a Company retailstore or kiosk are significantly lower than commissions paid to dealers.  Although ALLTEL intends to manage the costsof acquiring new customers throughout the remainder of 2004 by continuing toenhance its internal distribution channels, the Company will also continue toutilize its large dealer network.

 

Setforth below is a summary of the restructuring and other charges related to thewireless operations that were not included in the determination of segmentincome for the three and nine months ended September 30:

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Millions)**                                          | ** ** | ** **             | **2004**   | ** **            | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Severance and employee benefit costs                    |       | $                      | —     |                  | $          | — |   | $ | 8.8 |   | $ | 1.3 |   |
| Relocation costs                                        |       | —                 |       | —                |       | 3.2 |   | — |   |
| Lease and contract termination costs                    |       | —                 |       | —                |       | 0.5 |   | — |   |
| Write-down of software development costs                |       | —                 |       | —                |       | — |   | 7.6 |   |
| Write-down in the carrying value of certain  facilities |       | —                 |       | —                |       | 0.7 |   | — |   |
| Other exit costs                                        |       | —                 |       | —                |       | 0.4 |   | — |   |
| Total restructuring and other charges                   | .          | $                      | —     |                  | $          | — |   | $ | 13.6 |   | $ | 8.9 |   |
|                                                         |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

RegulatoryMatters-Wireless Operations

ALLTELis subject to regulation by the FCC as a provider of wireless communicationsservices.  The Telecommunications Act of1996 (the “96 Act”) provides wireless carriers numerous opportunities toprovide an alternative to the long-distance and local exchange servicesprovided by local exchange telephone companies and interexchange carriers.  Wireless carriers are also entitled tocompensation from other telecommunications carriers for calls transmitted fromthe other carriers’ networks and terminated on the wireless carriers’ networks.  Presently, the Company’s wireless operationsdo not bill access charges to interexchange carriers, although an FCC decisionissued on referral from the U.S. District Court for the Western District ofMissouri noted that wireless operators are not precluded from billing andcollecting access charges that the interexchange carrier has a contractual orother legal obligation to pay.  In April 2001,the FCC released a notice of proposed rulemaking addressing inter-carriercompensation issues.  Under this rulemaking,the FCC has proposed a “bill and keep” compensation method that would overhaulthe existing rules governing reciprocal compensation and access chargeregulation.  The FCC is expected to issuea further notice of proposed rulemaking on this matter in response tointer-carrier compensation proposals from various carrier groups in the firstquarter of 2005.  In addition, individualwireless

 

26

----

 

carriershave filed a number of petitions with the FCC seeking determinations as to thetype and amount of compensation due to and from local exchange carriers and/orinterexchange 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’ networks.  The outcome of the FCC and state proceedingscould change the way ALLTEL receives compensation from, and remits compensationto, other carriers as well as its wireless customers.  At this time, ALLTEL cannot estimate whetherany such changes will occur or, if they do, what the effect of the changes onits wireless revenues and expenses would be.

 

Underrules established by the FCC, Cellular Radiotelephone Service (“CRS”) andPersonal Communications Services (“PCS”) (collectively Commercial Mobile RadioServices or “CMRS”) providers were required, as of November 24, 2002, toparticipate in a nationwide number conservation program known as thousand blocknumber pooling in accordance with roll-out schedules established by theFCC.  These providers were required tomodify their networks to comply with FCC and industry performance criteria fornumber pooling, including support for roaming customers.  Number pooling is a FCC-mandated programintended to alleviate the shortage of available telephone numbers by requiringcarriers to return unused numbers in their inventory to a centrallyadministered pool and to take assignment of new numbers in blocks of 1,000 insteadof the 10,000 number blocks previously assigned.  In a decision released June 18, 2003,the FCC affirmed that all carriers must participate in the nationwide poolingroll-out.  The FCC exempted small andrural CMRS and local exchange carriers from the pooling requirement until suchtime as they implement local number portability in response to a specificrequest from another carrier.

 

FCCrules also required CMRS providers in the top 100 markets to implement by November 24,2003 (and by May 24, 2004 for all other markets) wireless local numberportability (“WLNP”), which permits customers to retain their existingtelephone number when moving from one telecommunications carrier toanother.  The FCC, on June 18, 2003,released the rules governing the number of Metropolitan Statistical Areas (“MSAs”)in which WLNP must be deployed, as well as the process for triggering a carrier’sobligation to provide WLNP in markets both within those MSAs andotherwise.  The FCC retained therequirement that carriers implement WLNP based upon the specific request ofanother carrier and gave the state public service commissions authority torequire CMRS carriers to implement WLNP in any market within the top 100 MSAsin which they provide service and for which a request was not received from acompeting carrier.

 

OnOctober 7, 2003, the FCC released a decision providing guidance tocarriers on certain WLNP implementation issues that had been raised in twopetitions for declaratory rulings filed by the Cellular TelecommunicationsIndustry Association (“CTIA”) and to resolve related issues raised through theappeal of a July 3, 2003 letter from the Chief of the WirelessTelecommunications Bureau of the FCC.  Ingeneral, the FCC decision noted that porting numbers between carriers should beperformed without obstruction, including any delay related to efforts tocollect outstanding balances; porting intervals should be governed by a “reasonablenessstandard” using the industry’s suggested 2.5 hour porting interval as thereference point; written interconnection agreements between carriers involvedin porting are not required; and carriers must continue to support nationwideroaming.

 

OnNovember 10, 2003, the FCC released a decision addressing the CTIApetitions and providing guidance on wireline to wireless porting, which isreferred to as “intermodal porting”.  TheFCC stated that number porting from a wireline carrier to a wireless carrier isrequired where the coverage area of the wireless carrier (i.e. the area inwhich the wireless carrier provides service) overlaps the geographic locationin which the wireline number was provisioned. Further, while the FCC required the wireless carrier to maintain therate center designation of the number, it also noted that wireless carrierswere not required to have either direct connections or interconnectionagreements with wireline carriers nor were wireless carriers required to havenumbering resources in the rate center in which the wireline number is locatedin order to subject the wireline number to intermodal porting.  The FCC’s guidance requires that wirelinenumbers be ported to wireless carriers across traditional wireline ratecenters; however, the FCC left issues governing the payment of call routingcosts to another pending proceeding.  On September 16,2004, the FCC initiated a rulemaking proceeding in which it proposed reducingthe intermodal porting interval from 96 hours to 53 hours and to addressimplementation and cost recovery issues associated with such a reduction in theintermodal porting interval.

 

TheUnited States Telecommunications Association (“USTA”), along with certain ruraltelephone companies, appealed the FCC’s November 10, 2003 decision to theU.S. Court of Appeals for the District of Columbia Circuit (the “D.C. CircuitCourt”).  The appeal remains pending withoral arguments scheduled for November 2004.  The intermodal porting requirement tookeffect on November 24, 2003 for wireline carriers in the top 100 MSAs, andon May 24, 2004 for wireline carriers operating in markets below the top 100MSAs.  To date, the volume of intermodalporting requests processed by the Company for wireless customers has not beensignificant.  In addition, various statepublic service commissions have granted the requests of rural local exchangecarriers to suspend their obligations to port numbers to CMRS carriers.

 

27

----

 

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 of receivingand utilizing the number and cell site 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 instancesand in accordance with the rules, been extended by mutual agreement betweenALLTEL and the particular PSAPs involved.

 

Inphase two, CMRS carriers opting for a handset-based solution, as the Companyhas, must determine, for originated calls, the location of the caller withinfifty meters for 67 percent of the originated calls and 150 meters for 95percent of the originated calls.  Thephase two requirements were set to begin by October 1, 2001, but, due totechnology unavailability and other factors, the Company requested a limitedwaiver of these requirements, as did virtually every other carrier.  On July 26, 2002, the FCC released anorder granting a temporary stay of the E-911 emergency implementation rules asthey applied to the Company.  The FCCorder provides for a phased-in deployment of Automatic Location Identification(“ALI”) capable network or handset-based technology that began on March 1,2003.  ALI capability permits moreaccurate identification of the caller’s location by PSAPs.  Under the FCC order, the Company, (1) began selling and activating ALI-capable handsetsprior to March 1,2003; (2) ensured that as of May 31, 2003 at least 25 percent of all newhandsets activated were ALI-capable; (3) ensured that as of November 30,2003 at least 50 percent of all new handsets activated were ALI-capable; (4)ensured that 100 percent of its digital handsets activated were ALI-capable asof May 31, 2004; and (5) will ensure that penetration of ALI-capable handsets amongits customers reaches 95 percent no later than December 31, 2005.  ALLTEL began selling ALI-capable handsets in June 2002and to date has complied with the handset deployment thresholdsunder the FCC’s order.   Based on the current pace of migration to ALI-capable handsets, ALLTEL may havedifficulty complying with the December 31, 2005 requirement to be 95 percentpenetrated without incurring a significant increase in its operating costs.

 

TheCompany filed petitions with the FCC and various state commissions during 2003seeking certification as an Eligible Telecommunications Carrier ("ETC"). Certification as an ETC qualifies the Company to receive support fromthe federal USF.  In September 2004,the Company received approval from the FCC on non-rural applications for itsproperties in Alabama, Virginia, Georgia, North Carolina and Florida.  ALLTEL has obtained approval of its petitionsfrom state commissions for its properties in Michigan, Mississippi, Arkansas,Wisconsin, West Virginia, Louisiana and Kansas and is presently certified as anETC in each of those states.  Aspreviously discussed, the Company began receiving USF support associated withthese approved petitions, except Louisiana and Kansas, in the first quarter of2004, and expects to begin receiving support for Louisiana in the fourthquarter of 2004 and for Kansas in the first quarter of 2005.  The Company has also filed a petitionrequesting ETC certification by the state commission in Arizona.  A recommended decision granting ETCdesignation to ALLTEL subject to various conditions was provided to thecommission by the administrative law judge on August 16, 2004.  ALLTEL filed exceptions to the recommendeddecision seeking to limit the conditions associated with ETC designation.  A final commission decision is pending.  The Company has withdrawn the application forETC certification that it previously filed with the state commission in NewMexico.  ALLTEL received approximately$25.0 million of USF subsidies in the first nine months of 2004 and expects toreceive approximately $40.0 million of subsidies for all of 2004 related to theapproved ETC petitions.  After deductingthe portion of USF subsidies distributed to its partners in wireless marketsoperated in partnership with other companies, ALLTELexpects to receive net USF subsidies in its wireless business of approximately$37.0 million for all of 2004, and beginning in 2005, ALLTEL expects to receiveon a quarterly basis between $20.0 million to $25.0 million of net USFsubsidies.   

 

The FCC, in conjunction withthe Federal/State Joint Board on Universal Service, is considering changes tothe USF program, including the services qualified for USF support and thequalifications of ETCs.   Inaddition, the FCC mandated that, effective October 1,2004, the Universal Service Administrative Company ("USAC") must beginaccounting for the USF program in accordance with generally accepted accountingprinciples for federal agencies, rather than the accounting rules that USACformerly used. This accounting method change subjected USAC to theAnti-Deficiency Act (the "ADA"), the effect of which could, starting in 2005,cause delays in USF payments to USF program recipients and significantlyincrease the amount of USF regulatory fees charged to wireline and wirelessconsumers. At this time, ALLTEL cannot estimate the specific effect that thesechanges may have on ALLTEL's wireless business.
 

InJuly 2003, the FCC unanimously adopted an order modifying the wirelessphone exemption to the Hearing Aid Compatibility Act (the “HAC Act”) andadopted requirements governing the compatibility of hearing aids and wirelessphones.  The decision requires thatinterference to hearing aids from digital wireless phones be reduced, and thatcarriers make available wireless phone models engineered to reduce radiofrequency interference to hearing aids. ALLTEL’s obligations under the new HAC rules are set to begin in September 2005,although the FCC’s decision modifying the HAC 

 

28

 

Act wireless exemption iscurrently under reconsideration.  In October 2003,the FCC issued its long awaited order in the proceeding governing the sale orleasing of spectrum in the secondary market, and subsequently modified theserules inSeptember 2004.  The decision revises standards for transferof control and provides new options for the lease of spectrum to providers ofnew and existing wireless technologies. The FCC also deleted the rule prohibiting ownership of both A and B blockcellular systems in the same rural service area.  At this time, ALLTEL has not fully evaluatedthe effects, if any, that these orders may have on ALLTEL’s existing wirelessoperations.

 

The CommunicationsAssistance for Law Enforcement Act (“CALEA”) requires wireless and wirelinecarriers to ensure that their networks have the capability and capacity toaccommodate law enforcement agencies’ lawful intercept requests.  The FCC has imposed various obligations andcompliance deadlines, with which ALLTEL has either complied or, in accordancewith CALEA, filed a request for an extension of time.  On August 18, 2004, the U.S. Departmentof Justice (“DOJ”) objected to ALLTEL’s pending extension request relating tothe Company’s packet-mode services insofar as that extension request relates toALLTEL’s “Touch2Talk” walkie-talkie service. ALLTEL is initiating discussions with DOJ personnel in an effort toaddress the DOJ’s concerns.  Separately,on March 10, 2004, the DOJ, jointly with other federal agencies,petitioned the FCC to adopt new rules under CALEA pertaining to wireless andwireline carriers’ packet mode communications services, including Internetprotocol (“IP”) based services.  The FCChas requested public comment on the petition, and subsequently initiated arulemaking proceeding to consider the issues raised therein.  The FCC concurrently issued a declaratoryruling concerning the appropriate treatment of push-to-talk services underCALEA.  Rules or precedents adopted as aresult of these proceedings could impose new costs and obligations on ALLTELand other carriers, including seeking Federal Bureau of Investigation and FCCconcurrence before deploying new technology or features in its network.

 

Communications-Wireline Operations

** **

** **

**Three Months Ended  September 30,**

 

**Nine Months Ended  September 30,**

** **

**(Millions, access lines in  thousands)**

** **

**2004**

** **

**2003**

** **

**2004**

** **

**2003**

** **

Revenues and sales:

 

 

 

 

 

 

 

 

 

Local service

 

$

278.6

 

$

283.9

 

$

839.3

 

$

854.1

 

Network access and long-distance

 

263.5

 

260.3

 

787.0

 

784.0

 

Miscellaneous

 

60.8

 

61.0

 

185.7

 

182.2

 

Total revenues and sales

 

602.9

 

605.2

 

1,812.0

 

1,820.3

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

179.7

 

195.8

 

531.2

 

563.4

 

Cost of products sold

 

7.8

 

7.4

 

20.1

 

21.6

 

Selling, general, administrative and other

 

60.1

 

63.4

 

181.9

 

193.8

 

Depreciation and amortization

 

127.6

 

131.2

 

388.5

 

394.5

 

Total costs and expenses

 

375.2

 

397.8

 

1,121.7

 

1,173.3

 

Segment income

 

$

227.7

 

$

207.4

 

$

690.3

 

$

647.0

 

Access lines in services (excludes DSL lines)

 

3,040.5

 

3,121.7

 

—

 

—

 

Average access lines in service

 

3,052.5

 

3,128.1

 

3,074.2

 

3,146.5

 

Average revenue per customer per month (a)

 

$

65.84

 

$

64.49

 

$

65.49

 

$

64.28

 

 

Notes:

(a)          Average revenue percustomer per month is calculated by dividing total wireline revenues by averageaccess lines in service for the period.

 

Wireline operations consist of the Company’sIncumbent Local Exchange Carrier (“ILEC”), CLEC and Internet operations.  Wireline revenues and sales decreased by lessthan 1 percent in both the three and nine months periods ended September 30,2004, as compared to the same periods of 2003, or $2.3 million and $8.3million, respectively.  Customer accesslines decreased 3 percent during the twelve months ended September 30,2004, reflecting declines in both primary and secondary access lines.  The Company lost approximately 26,000 and55,000 access lines during the three and nine month periods ended September 30,2004, respectively, as compared to 12,000 and 45,000 access lines lost duringthe same periods in the prior year.  Thedeclines in access lines primarily resulted from the effects of wireless andbroadband substitution for the Company’s wireline services.  The Company expects access line growth forthe remainder of 2004 to continue to be impacted by the effects of wireless andbroadband substitution.

 

 

 

29

 

To slow the decline of revenue during theremainder of 2004, the Company will continue to emphasize sales of enhancedservices and bundling of its various product offerings including Internet,long-distance and high-speed data transport services (digital subscriber lineor “DSL”).  Deployment of DSL service isan important strategic initiative for ALLTEL. During the twelve month period ended September 30, 2004, the numberof DSL subscribers grew 67 percent to approximately 217,000 customers, or 11percent of the Company’s addressable access lines.  The growth in the Company’s DSL customersmore than offset the decline in customer access lines that occurred during thetwelve months ended September 30, 2004 noted above.  As further discussed below, revenuesgenerated from the sales of data and enhanced services increased in both thethree and nine month periods of 2004, which helped to offset the adverseeffects on wireline revenues resulting from the loss of access lines.

 

Local service revenues decreased by 2 percent inthe three and nine month periods ended September 30, 2004 as compared tothe same periods in the prior year, or $5.3 million and $14.8 million,respectively.  Local service revenuesreflected reductions in basic service access line revenues of $6.2 million and$19.0 million in the three and nine month periods of 2004, respectively, ascompared to the same periods in 2003, consistent with the overall decline inprimary and secondary access lines discussed above.  The declines in local service revenuesattributable to access line loss were partially offset by growth in revenuesderived from the sales of enhanced products and services and equipmentprotection plans.  Revenues from theseservices increased $1.3 million and $5.5 million in the three and nine monthsended September 30, 2004, respectively, compared to the same periods in2003, reflecting continued demand for these products and services.

 

Network access and long-distance revenuesincreased $3.2 million, or 1 percent, and $3.0 million, or less than 1 percent,in the three and nine month periods ended September 30, 2004 as comparedto the same 2003 periods.  Primarily dueto the overall decline in access lines discussed above, intrastate networkaccess usage and toll revenues decreased $2.4 million and $12.7 million in thethree and nine month periods of 2004, respectively, compared to the same periodsof 2003.  The declines in network accessand long-distance revenues attributable to access line loss were primarilyoffset by growth in revenues from data services, which increased $3.4 millionand $10.9 million in the three and  nine month periods of 2004, respectively,reflecting increased demand for high-speed data transport services.

 

Miscellaneous revenues primarily consist ofcharges for billing and collections services provided to long-distancecompanies, customer premise equipment sales, directory advertising and revenuesderived from Internet services. Miscellaneous revenues decreased slightly andincreased $3.5 million, or 2 percent, in the three and nine month periods endedSeptember 30, 2004, respectively, compared to the same periods in 2003.  Primarily driven by growth in DSL customers,revenues from the Company’s Internet operations increased $2.6 million and $9.4million in the three and nine month periods of 2004, respectively.  The increases in miscellaneous revenuesattributable to the Internet operations were partially offset in both 2004periods by lower directory advertising revenues.  Although directory advertising revenues forthe nine month period of 2004 included additional revenues of approximately$7.0 million associated with the initial publication of directories in theacquired Kentucky markets, directory advertising revenues in ALLTEL’s otherwireline markets decreased $2.8 million and $8.4 million in the three and ninemonths ended September 30, 2004, respectively, as compared to the sameperiods in 2003.  The declines indirectory advertising revenues in ALLTEL’s other wireline markets were dueprimarily to a change in the number and mix of directories published.  Miscellaneous revenues for the nine monthperiod of 2004 also reflected a $3.4 million decline in customer premiseequipment sales and rentals due to lower customer demand for purchasing orleasing landline-based communications equipment.

 

Primarily due to the DSL customer growth andincreased sales of enhanced products and services, average revenue per customerper month increased 2 percent in both the three and nine month periods of 2004compared to the same periods in 2003. Future growth in average revenue per customer per month will depend onthe Company’s success in sustaining growth in sales of DSL and enhancedservices to new and existing customers.

 

Costof services decreased $16.1 million, or 8 percent, and $32.2 million, or 6percent, in the three and nine months ended September 30, 2004,respectively, compared to the same periods of 2003.  Interconnection expenses decreased $2.6million and $9.2 million in the three and nine month periods of 2004,respectively, consistent with the declines in toll revenues and access linesdiscussed above.  Compared to the sameperiods of 2003, customer service expenses decreased $0.3 million and $3.3million in the three and nine month periods of 2004, respectively, primarilyreflecting cost savings from the Company’s continued efforts to controloperating expenses.  In addition,salaries and employee benefit costs for the three and nine months ended September 30,2003 included incremental expenses of $10.6 million and $13.0 million,respectively, associated with a strike that began in early June and endedon October 1, 2003, when the Company signed a new collective bargainingagreement impacting approximately 400 ALLTEL employees in Kentucky representedby the Communications Workers of America. Cost of services for the nine month period of 2003 also included $6.0million of additional maintenance costs incurred to repair damage caused bysevere winter storms in Kentucky.

 

 

 

30

 

Costof products sold increased slightly in the three months ended September 30,2004 and decreased $1.5 million, or 7 percent, in the nine months ended September 30,2004, respectively, compared to the same periods in 2003.  The decrease in the nine month period of 2004was consistent with the decline in sales and leasing of customer premiseequipment discussed above.

 

Selling,general, administrative and other expenses decreased $3.3 million, or 5percent, and $11.9 million, or 6 percent, for the three and nine months ended September 30,2004, respectively, as compared to the same periods in 2003.  The decreases in selling, general,administrative and other expenses in both 2004 periods resulted from reductionsin data processing charges and salaries and employee benefit costs, primarilyreflecting cost savings from the Company’s continued efforts to controloperating expenses.  Compared to the sameperiods in 2003, data processing charges declined by $0.4 million and $4.0million, while employee benefit costs and salaries decreased $2.5 million and$9.3 million for the three and nine months ended September 30, 2004,respectively.

 

Depreciationand amortization expense decreased $3.6 million, or 3 percent, and $6.0million, or 2 percent, in the three and nine months ended September 30,2004, respectively, compared to the same periods of 2003.  The decreases in depreciation andamortization expense in both 2004 periods primarily resulted from a reductionin depreciation rates for the Company’s Nebraska operations, reflecting theresults of a triennial study of depreciable lives completed by ALLTEL in thesecond quarter of 2004 as required by the Nebraska Public Service Commission.

 

Wirelinesegment income increased $20.3 million, or 10 percent, and $43.3 million, or 7percent, in the three and nine months ended September 30, 2004,respectively, compared to the same periods of 2003.  The increases in both 2004 periods primarilyreflected the selling of additional services and features to existing wirelinecustomers, growth in the Company’s Internet operations, the effects of theincremental strike-related and maintenance costs incurred in 2003 and theCompany’s cost savings and expense control efforts discussed above.

 

Setforth below is a summary of the restructuring and other charges related to thewireline operations that were not included in the determination of segmentincome for the three and nine months ended September 30:

 

** **

** **

**Three Months Ended**

** **

**Nine Months Ended**

** **

**(Millions)**

** **

** **

**2004**

** **

**2003**

** **

**2004**

** **

**2003**

** **

Severance and employee benefit costs

 

$

—

 

$

—

 

$

11.2

 

$

7.0

 

Relocation costs

 

—

 

—

 

1.4

 

—

 

Lease and contract termination costs

 

—

 

—

 

(1.9

)

—

 

Write-down of software development costs

 

—

 

—

 

—

 

1.8

 

Other exit costs

 

—

 

—

 

0.7

 

—

 

Total restructuring and other charges

 

$

—

 

$

—

 

$

11.4

 

$

8.8

 

 

Regulatory Matters- Wireline Operations

Exceptfor the Kentucky properties acquired in 2002 and the Nebraska operationsacquired in 1999, ALLTEL’s ILEC operations follow the accounting for regulatedenterprises prescribed by SFAS No. 71, “Accounting for the Effects of CertainTypes of Regulation”.  Criteria thatwould give rise to the discontinuance of SFAS No. 71 include (1) increasingcompetition restricting the ILEC subsidiaries’ ability to establish prices torecover specific costs and (2) significant changes in the manner in which ratesare set by regulators from cost-based regulation to another form ofregulation.  On a quarterly basis, theCompany reviews the criteria to determine whether the continuing application ofSFAS No. 71 is appropriate.  Some of theCompany’s ILEC operations have begun to experience competition in their localservice areas.  Sources of competition toALLTEL’s local exchange business include, but are not limited to, resellers oflocal exchange services, interexchange carriers, satellite transmission services,wireless communications providers, cable television companies, and competitiveaccess service providers including those utilizing Unbundled NetworkElements-Platform (“UNE-P”).  Through September 30,2004, this competition has not had a material adverse effect on the results ofoperations of ALLTEL’s ILEC operations.

 

Althoughthe Company believes that the application of SFAS No. 71 continues to beappropriate, it is possible that changes in regulation, legislation orcompetition could result in the Company’s ILEC operations no longer qualifyingfor the application of SFAS No. 71 in the near future.  If ALLTEL’s ILEC operations no longerqualified for the application of SFAS No. 71, the accounting impact to theCompany 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 $168.8 million as of September 30,2004.  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. 

 

31

 

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.

 

Moststates in which ALLTEL’s ILEC subsidiaries operate have adopted alternatives torate-of-return regulation, either through legislative or state public servicecommission actions.  The Company haselected alternative regulation for certain of its ILEC subsidiaries in Alabama,Arkansas, Florida, Georgia, Kentucky, Nebraska, North Carolina, Ohio,Pennsylvania, South Carolina and Texas. The Company also elected alternative regulation in Missouri, althoughthe Missouri Public Service Commission has ruled that the Company was not eligible to elect alternative regulationin Missouri.  The commission's action will not affect the Company's localservice and intrastate access rates.  ALLTEL continuesto evaluate alternative regulation options in other states where its ILECsubsidiaries are presently not subject to alternative regulation.  The FCC originally adopted the"all-or-nothing"rule to ensure that all study areas of a carrier and its affiliates are subjectto a single form of pricing regulation. The acquired Nebraska and Kentucky properties operate under interstateprice-cap regulation pursuant to waivers granted by the FCC.  On April 17, 2002, the FCC extended ALLTEL’s waiver of the"all-or-nothing" rule with respect to its Nebraskaproperties and granted the Company a waiver of the "all-or-nothing" rule withrespect to the acquired Kentucky properties. The waivers permit price-cap regulation for these two properties whileretaining rate-of-return regulation for ALLTEL's other ILEC properties.  On February 26, 2004, the FCC releasedan order modifying the "all-or-nothing" rule to allow a rate-of-return carrieracquiring lines from a price-cap carrier to choose between price-cap orrate-of-return regulation for the acquired lines.  The FCC adopted a notice of proposedrulemaking in conjunction with the order proposing to establish optionalalternative regulation mechanisms for rate-of-return carriers.  In the order, the FCC stated that all outstandingwaivers of the "all-or-nothing" rule would continue in effect until the FCCissued a final order on the issue.

 

A number of carriers have begun offering voice telecommunications servicesutilizing the Internet as the means of transmitting those calls.  Thisservice, commonly known as voice-over-Internet-protocol ("VoIP") telephony, is challenging existingregulatory definitions and raises questions whether such services should beregulated.  Several state public utilitycommissions have attempted to assert jurisdiction over VoIP services. Federal courts in New York and Minnesota have indicated that the FCCpreempts the states with respect to jurisdiction.  On March 10, 2004, the FCC released anotice of proposed rulemaking seeking comment on the appropriate regulatorytreatment of IP-enable communications services. The proposed rulemaking sought comment on the differences betweenIP-enabled services and traditional telephony services, and the distinctions betweendifferent types of IP-enabled services. The FCC indicated that the cost of the public switched telephone networkshould be borne equitably among those that use it in similar ways and askswhich regulatory requirements should be extended to IP-enabled service,including requirements relating to E-911, disability accessibility, accesscharges, and universal service.

 

Althoughthe FCC’s rulemaking regarding IP-enabled services remains pending, the FCC hasadopted two orders establishing broad parameters for the regulation of suchservices.  Specifically, on February 12,2004, the FCC released an order declaring Pulver.com’s IP-based, peer-to-peerservice that requires specialized telephone equipment or software for computersis not a telecommunications service, but rather was an unregulated informationservice subject to federal jurisdiction. On April 21, 2004, the FCC denied a waiver petition filed byAT&T requesting that its IP telephony service be exempt from accesscharges.  The FCC ruled that AT&T’sIP telephony service, which converts voice calls to IP format for routing overthe public switched telephone network is a regulated telecommunications servicesubject to interstate access charges.  Two additional IP proceedings are pendingat the FCC.  Vonage Holdings Corporationhas petitioned the FCC to declare its service an Internet-based service andaccordingly, classified as an interstate information service.  Level 3 Communications Inc. has petitionedthe FCC to forbear from imposing interstate or intrastate access charges onInternet-based calls that originate or terminate on the public switchedtelephone network.  While theseproceedings and the broader FCC rulemaking regarding the classification ofIP-enabled services are pending, ALLTEL continues to evaluate the possiblelong-term implications of these determinations on its operations.

 

In April 2001,the FCC released a notice of proposed rulemaking addressing inter-carriercompensation.  Under this rulemaking, theFCC asked for comment on a “bill and keep” compensation method that wouldsignificantly modify the existing rules governing reciprocal compensation andaccess charge regulation.  A number ofstate proceedings have also been initiated by various wireline companies toaddress compensation with respect to traffic that originates or terminates withwireless carriers or CLECs.  The outcomeof the FCC and state proceedings could change the way ALLTEL receivescompensation from, and remits compensation to, other carriers and its endusers.  Several industry associationshave presented plans to the FCC to reform inter-carrier compensation andrelated universal service collection and distribution mechanisms.  The FCC is expected to issue a further noticeof proposed rulemaking seeking comment on these proposals.  Until this proceeding concludes, ALLTELcannot estimate the potential impact of any changes to the inter-carriercompensation structure on its ILEC revenues and expenses.

 

32

 

InMay 2001, the FCC adopted the Rural Task Force Order that established aninterim universal service mechanism that will govern compensation for ruraltelephone companies for the ensuing five years. The interim mechanism has allowed rural carriers to continue receiving high-costfunding based on embedded costs.  On June 2,2004, the FCC asked the Federal/State Joint Board on Universal Service (the “JointBoard”) to review the FCC’s rules as they pertain to rural telephone companiesand to determine what high-cost support mechanism should be adopted when thecurrent funding program expires in June 2006.  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 universal service compensation plan for ruralcarriers.

 

On December 13,2002, the FCC released an order and further notice of proposed rulemakingadopting an interim USF contribution methodology.  The FCC changed the method for providingfederal USF contributions from the historical interstate revenue-basedarrangement to contributions based on projected revenues.  In addition, the FCC ruled the USF line itemon a customer’s bill could not exceed the relevant USF contribution obligationof the carrier.  The FCC also proposedthree “connections-based” models to replace the current revenue-basedassessment methodology.  The proposedconnection-based methods would establish a universal service charge basedeither on the number of customer connections, the capacity and nature of theconnection, or on the number of working telephone numbers.  As noted above, several industry associationshave also proposed reform of the universal service system in connection withtheir inter-carrier compensation reform proposals.  The interim universal service changes havenot had a material adverse effect on the Company’s wireline operations.  ALLTEL cannot predict at this time the impactto its wireline operations of any permanent USF contribution plan that the FCCmight adopt.

 

On November 8,2002, the FCC requested that the Joint Board review certain of the FCC’s rulesrelating to the high-cost universal support levels and the process by whichcarriers are designated ETCs.  On February 27,2004, the Joint Board issued its recommended decision regarding a number ofissues related to portable USF support for ETCs.  Among its recommendations, the Joint Boardsuggested that the FCC should adopt optional federal guidelines to assist withstate ETC designations and that support should be provided only for a singleprimary connection per customer.  On June 8,2004, the FCC asked for comments on the Joint Board’s recommended decision, butdid not elaborate or reach tentative conclusions on any of the Joint Board’srecommendations.  At this time, ALLTELcannot estimate what impact, if any, this proceeding may have on its universalservice funding.

 

On July 10,2002, the Joint Board recommended that the FCC not modify the existing list ofservices supported by universal service. On July 10, 2003, the FCC adopted the Joint Board’s recommendationto retain the existing list of services supported by universal service that didnot include equal access offerings.  Inits February 27, 2004 decision, the Joint Board again declined to includeequal access in the definition of universal service.

As previously discussed under "Regulatory Matters - Wireless Operations", theFCC mandated that, effective October 1, 2004, USAC must begin accounting for theUSF program in accordance with generally accepted accounting principles forfederal agencies, rather than the accounting rules that USAC formerly used. Thisaccounting method change subjected USAC to the ADA, the effect of which could,starting in 2005, cause delays in USF payments to USF program recipients andsignificantly increase the amount of USF regulatory fees charged to wireline andwireless consumers. At this time, ALLTEL cannot estimate the specific effectthat these changes may have on ALLTEL's wireline business.

On December 20,2001, the FCC released a notice of proposed rulemaking initiating the firsttriennial review of the FCC’s policies on unbundled network elements (“UNEs”)including UNE-P.  UNE-P is created when acompeting carrier obtains all the network elements needed to provide servicefrom the ILEC at a discounted rate.  On August 21,2003, the FCC released the text of its Triennial Review Order.  The FCC adopted new rules governing theobligations of ILECs to unbundle the elements of their local networks for useby competitors.  The FCC made nationalfindings of impairment or non-impairment for loops, transport and, mostsignificantly, switching.  The FCCcreated “mass market” and “enterprise market” customer classifications thatgenerally correspond to the residential and business markets,respectively.  The FCC found that CLECswere not impaired without access to local circuit switching when serving “enterprisemarket” customers on a national level. The FCC, however, found CLECs to be impaired on a national level withoutaccess to local switching when serving “mass market” customers.  The FCC’s decision gave the ILECs significantrelief from broadband UNE obligations by imposing no requirement to unbundlepacket switching over copper/fiber loops or fiber-to-the-home loops.  In addition, line sharing was eliminated as aUNE.

 

Aspart of the Triennial Review Order the FCC also opened a further notice ofproposed rulemaking to consider the  "pickand choose" rule under which a competing carrier could select from among thevarious terms of interconnection offered by an ILEC in its variousinterconnection agreements.  On July 13, 2004, the FCC released an ordereliminating the "pick and choose" rule, replacing it with an "all-or-nothing"rule.  Under the new rules, a requesting carrier may only adopt aneffective interconnection agreement in its entirety, taking all rates, terms andconditions of the adopted agreement.  

 

33

 

The FCC explained that it eliminated the "pick and choose" rule to promotecommercial negotiations and produce agreements better tailored to meet carriers'individuals needs.

 

On March 2,2004, the D.C. Circuit Court overturned key portions of the FCC’sTriennial Review Order.  The D.C. CircuitCourt’s decision vacated the nationwide impairment standard, as well as the FCC’sdelegation of authority to the states, while generally upholding ILEC broadbandrelief.  The D.C. Circuit Court’sdecision was to become effective on May 3, 2004.  On March 31, 2004, the FCC commissionerssent a letter to carriers urging them to begin a period of commercialnegotiation regardingunbundling network elements.  To provideadditional time for these negotiations, the FCC requested and was granted a45-day extension to June 15, 2004 of the May 3, 2004 effective date of theD.C. Circuit Court’s decision to vacate the UNE rules.  The SupremeCourt recently denied all petitions for review.  On September 13, 2004, theFCC released its Interim UNE Order requiring incumbent ILECs to maintain thestatus quo through March 13, 2005.  ILECs are required to provide mass-marketswitching, enterprise market loops and dedicated transport under the samerates, terms and conditions as in effect on June 15, 2004.  The FCC hasindicated that it will release permanent rulesprior to March 13, 2005 and possibly by year-end 2004.  Ifpermanent rules are not adopted by March 13, 2005, UNE rates generallywould increase by 15 percent for existing CLEC customers for a six-month periodending September 13, 2005.  In both cases, the interim rates would bediscarded if the FCC approves permanent UNE rules.  On September 23, 2004, a Petition forReview of the Interim UNE Order was filed asking the D.C. Circuit Court to holdunlawful, vacate, and set aside the FCC’s interim rules.  On September 24, 2004, parties filed awrit of mandamus asking the D.C. Circuit Court to strike down the FCC’s interimrules and complete impairment findings by the end of the year.  On October 7, 2004, the D.C.Circuit Court deferred any decision on thewrit of mandamus until January 4, 2005 permitting the FCC time to completepermanent rules.  Until thesescenarios unfold and the proceeding has worked its way through the courts, theultimate impact of the Triennial Review Order and interim UNE rules on ALLTEL’sILEC operations cannot be determined.

 

On September 15,2003, the FCC launched its first comprehensive review of the rules thatestablish wholesale pricing of UNEs.  Thenotice of proposed rulemaking sought comment on a variety of UNE and resalepricing-related issues and on a proposal to make total element long-runincremental cost methodology (“TELRIC”) rules more closely account for the “real-world”attributes of the incumbent carrier’s network. If this proposal were adopted, the result would likely be higher UNEprices.

 

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, the FCCtentatively 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. In a related proceeding released March 15, 2002, the FCC issued adeclaratory ruling concluding that cable modem service was an interstate “informationservice” and not a cable service or a telecommunications service.  The FCC sought comment on whether there arelegal or policy reasons why it should reach different conclusions with respectto wireline broadband Internet access and cable modem service, but has notreached a final order.  On October 6,2003, the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit Court”)rejected the FCC’s classification of cable modem service as solely anunregulated “information service”, finding a portion of the service to be atelecommunications service.  The FCCrequested a rehearing before the full Ninth Circuit Court, but the request wasdenied on March 31, 2004.  The NinthCircuit Court ruling was scheduled to become effective April 8, 2004, butthe Ninth Circuit Court stayed the ruling pending appeal to the U. S. SupremeCourt.  On September 27, 2004, the DOJ joined the FCC in asking the SupremeCourt to overturn the Ninth Circuit Court’s decision.  The stay of the Ninth Circuit Court’sdecision will remain in effect until the Supreme Court decides whether to hearthe case.  It remains uncertain whethercable modem service will ultimately fall under common carrier regulation of the96 Act and whether cable companies will be required to providenondiscriminatory access to their networks. At this time, ALLTEL cannot estimate what impact, if any, thesebroadband proceedings may have on its ILEC operations.

 

Section 251(b) ofthe Communications Act of 1934 (the “34 Act”), as amended, requires, in part,that local exchange carriers provide local number portability to any requestingtelecommunications carrier.  Wirelesscarriers are generally defined as “telecommunications carriers” under the 34Act, and are therefore eligible to port numbers with wireline carriers, whichis referred to as “intermodal porting”. As previously discussed under “Regulatory Matters – Wireless Operations”,on November 10, 2003, the FCC released a decision providing guidance onintermodal porting issues.  Theintermodal porting requirement took effect on November 24, 2003 forwireline carriers in the top 100 MSAs and on May 24, 2004 for wireline carriersoperating in markets below the top 100 MSAs. The majority of the Company’s wireline operations are conducted inmarkets below the top 100 MSAs and were subject to the later May 24, 2004implementation date for intermodal porting. To date, implementation of intermodal porting has not had a significantimpact on the Company’s wireline operating results.

 

 

 

34
 
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.

Communications Support Services

** **

** **

**Three Months Ended  September 30,**

** **

**Nine Months Ended  September 30,**

** **

**(Millions, except customers in  thousands)**

** **

**2004**

** **

**2003**

** **

**2004**

** **

**2003**

** **

Revenues and sales:

 

 

 

 

 

 

 

 

 

Product distribution

 

$

109.2

 

$

107.3

 

$

304.2

 

$

301.2

 

Long-distance and network management services

 

77.2

 

80.0

 

229.1

 

242.1

 

Directory publishing

 

31.1

 

27.9

 

106.0

 

87.6

 

Telecommunications information services

 

9.7

 

28.8

 

36.1

 

81.0

 

Total revenues and sales

 

227.2

 

244.0

 

675.4

 

711.9

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

68.9

 

76.8

 

193.5

 

224.0

 

Cost of products sold

 

124.6

 

123.6

 

367.3

 

355.4

 

Selling, general, administrative and other

 

13.6

 

14.4

 

39.9

 

46.7

 

Depreciation and amortization

 

8.6

 

8.9

 

25.9

 

27.0

 

Total costs and expenses

 

215.7

 

223.7

 

626.6

 

653.1

 

Segment income

 

$

11.5

 

$

20.3

 

$

48.8

 

$

58.8

 

Long-distance customers

 

1,740.0

 

1,669.8

 

—

 

—

 

 

Communications supportservices revenues and sales decreased $16.8 million, or 7 percent, and $36.5million, or 5 percent, for the three and nine month periods ended September 30,2004, respectively, compared to the same periods in 2003.  As noted in the table above, the decreases inrevenues and sales in both 2004 periods reflected declines in long-distance andnetwork management services and telecommunications information services, partiallyoffset by an increase in sales of telecommunications equipment and dataproducts and directory publishing revenues.

 

Revenues attributable tolong-distance and network management services declined $2.8 million and $13.0million in the three and nine month periods ended September 30, 2004,respectively, as compared to the same periods in 2003.  Although the number of long-distancecustomers served increased during 2004, revenues derived from externalcustomers decreased $1.3 million and $5.4 million in the three and nine monthperiods of 2004, respectively, primarily due to declining usage by residentialcustomers and a reduction in customer billing rates due to competition.  Revenues earned from affiliates for networkmanagement services also decreased $1.5 million and $7.6 million for the threeand nine months ended September 30, 2004, respectively, compared to thesame periods a year ago, primarily due to a reduction in intercompany billingrates which took effect April 1, 2004. Telecommunications information services revenues decreased $19.1 millionand $44.9 million in the three and nine month periods ended September 30,2004, respectively, primarily due to the December 2003 sale of certainassets and related liabilities, including selected customer contracts andcapitalized software development costs, to Convergys, and deconversion effortsof one of ALLTEL’s remaining unaffiliated wireline services customers.  The customer contracts sold to Convergysrepresented approximately 48 percent of the total revenues and sales reportedby the telecommunications information services operations in 2003.

 

Sales oftelecommunications and data products increased $1.9 million and $3.0 million inthe three and nine month periods ended September 30, 2004, respectively,compared to the same periods in the prior year. Sales to non-affiliates increased $5.5 million and $19.5 million in thethree and nine month periods of 2004, respectively, primarily attributable toincreased sales of higher priced wireless handsets that include advancedfeatures and that are capable of various data applications to retailers andother distributors.  Conversely, comparedto the same periods in 2003, sales to affiliates decreased $3.6 million and$16.5 million in the three and nine months ended September 30, 2004,respectively, primarily due to a reduction in capital expenditures by theCompany’s wireline operations.

 

Directory publishingrevenues increased $3.2 million and $18.4 million in the three and nine monthsended September 30, 2004, respectively, as compared to the same periods in2003, primarily due to an increase in the number of directories contractspublished, including for the nine month period of 2004, the initial publicationof directories for the acquired Kentucky operations previously discussed.  In addition, the increase in the nine monthperiod of 2004 also reflected a change in accounting for directory contracts inwhich the Company has a secondary delivery obligation.  Effective January 1, 2003,ALLTEL began deferring a portion of its revenues and related costs to providefor secondary deliveries.  As a result,revenues and related costs associated with any directories for which secondarydeliveries were required, but not yet made, were deferred, resulting in areduction in directory publishing revenues in the nine month period of 2003 of$4.6 million.

 

 

 

35

 

Primarily due to thedecreases in revenues and sales noted above, communications support servicessegment income decreased $8.8 million, or 43 percent and $10.0 million, or 17percent, in the three and nine months ended September 30, 2004,respectively, compared to the same period in 2003.  The adverse effects on segment incomeattributable to the decreases in revenues andsales in both 2004 periods were partially offset by improved profit margins inthe directory publishing operations. Profit margins for the directory publishing operations in 2003 had beenadversely affected by increased selling, marketing and other start-up costsincurred in order for the Company’s publishing subsidiary to begin providingall directory publishing services, except printing, for all directory contractsto be published in 2004.  Previously,these directory publishing services were contracted out to a third party.

 

Setforth below is a summary of the restructuring and other charges related to thecommunications support services operations that were not included in thedetermination of segment income for the three and nine months ended September 30:

 

** **

** **

**Three Months Ended**

** **

**Nine Months Ended**

** **

**(Millions)**

** **

** **

**2004**

** **

**2003**

** **

**2004**

** **

**2003**

** **

Severance and employee benefit costs

 

$

—

 

$

—

 

$

0.5

 

$

—

 

Relocation costs

 

—

 

—

 

0.1

 

 —

 

Lease and contract termination costs

 

—

 

—

 

—

 

(0.5

)

Write-down of software development costs

 

—

 

—

 

—

 

3.8

 

Total restructuring and other charges

 

$

—

 

$

—

 

$

0.6

 

$

3.3

 

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITALRESOURCES**

** **

** **

**Nine Months Ended  September 30,**

** **

**(Millions, except per share  amounts)**

** **

**2004**

** **

**2003**

** **

Cash flows from (used in):

 

 

 

 

 

Operating activities

 

$

1,844.1

 

$

1,850.6

 

Investing activities

 

(717.2

)

(972.2

)

Financing activities

 

(1,136.2

)

(1,085.0

)

Discontinued operations

 

—

 

638.2

 

Effect of exchange rate changes

 

(0.1

)

0.7

 

Increase (decrease) in cash and short-term  investments

 

$

(9.4

)

$

432.3

 

Total capital structure (a)

 

$

12,604.5

 

$

12,695.4

 

Percent of equity to total capital (b)

 

55.5

%

53.6

%

Book value per share (c)

 

$

23.04

 

$

21.79

 

 

Notes:

(a)            Computed as the sum oflong-term debt including current maturities, redeemable preferred stock andtotal shareholders’ equity.

(b)           Computed by dividingtotal shareholders’ equity by total capital structure as computed in (a) above.

(c)            Computed by dividingtotal shareholders’ equity less preferred stock by the total number of commonshares outstanding at the end of the period.

 

Cash Flows-OperatingActivities

Cash provided from operations continued to beALLTEL’s primary source of liquidity. Cash provided from operations for the nine months ended September 30,2004 decreased slightly compared to the same period of 2003.  The decrease in cash provided from operationsprimarily resulted from adverse timing differences in the collection ofaccounts receivable and the payment of trade payables.  These adverse changes in working capitalrequirements were partially offset by favorable timing differences in thepayment of income taxes and the purchase of inventories.

 

Cash Flows-InvestingActivities

Capital expenditures continued to be ALLTEL’sprimary use of capital resources. Capital expenditures for the nine months ended September 30, 2004were $757.3 million compared to $806.5 million for the same period in2003.  Capital expenditures in both yearswere incurred to construct additional network facilities, to deploy digitalwireless technology in the Company’s existing and acquired wireless markets andto upgrade ALLTEL’s telecommunications network in order to offer othercommunications services, including long-distance, Internet, DSL, and “walkie-talkie”communications services. The Company funded substantially all of its capitalexpenditures through internally generated funds.  Investing activities also included outlaysfor capitalized software development costs. Additions to capitalized software for the nine months ended September 30,2004 were $23.6 million compared to $44.6 million for the same period in2003.  The Company expects capitalexpenditures including capitalized software development costs to beapproximately $1.2 to $1.3 billion for 2004, which will be funded primarilyfrom internally generated funds.

 

36

 

Therewere no cash outlays for the purchase of property in the nine months ended September 30,2004 compared to $160.6 million for the same period of 2003.  During the first nine months of 2003, ALLTELpurchased wireless properties in Arizona and Mississippi for $87.4 million incash, acquired the remaining ownership interest in two wireless properties in Michiganfor $60.0 million in cash, and purchased additional ownership interests inwireless properties in Mississippi, New Mexico, Virginia and Wisconsin for$13.2 million in cash.

 

Investing activities for the nine months ended September 30,2004 and 2003 also included proceeds from the return on investments of $67.1million and $34.3 million, respectively. These amounts primarily consisted of cash distributions received fromALLTEL’s wireless minority investments. The increase in distributions received in 2004 was consistent with theimproved operating results of these investments as previously discussed.

 

Cash Flows-Financing Activities

Dividend payments remain a significant use ofcapital resources for ALLTEL.  Common andpreferred dividend payments were $345.3 million for the nine months ended September 30,2004, compared to $327.2 million for the same period in 2003.  The increase in dividend payments in 2004primarily reflected growth in the annual dividend rate on ALLTEL’s commonstock.  On October 21, 2004, theCompany’s Board of Directors approved an increase in the quarterly common stockdividend rate of 3 percent from $.37 to $.38 per share.  This action raised the annual dividend rateto $1.52 per share and marked the 44th consecutive year in which ALLTEL hasincreased its common stock dividend.  TheCompany expects to continue the payment of cash dividends during the balance of2004.

 

ALLTEL’s maximumborrowing capacity under its commercial paper program is $1.5 billion.  ALLTEL classifies commercial paper borrowingsas long-term debt, because they are intended to be maintained on a long-termbasis and are supported by the Company’s revolving credit agreements.  During 2003, the Company amended its $1.0billion revolving credit agreement so that the expiration date of the entire$1.0 billion line of credit would be October 1, 2005.  On July 30, 2003, the Company enteredinto an additional $500.0 million, 364-day revolving credit agreement thatexpired on July 28, 2004.  On July 28,2004, the Company replaced its existing $1.0 billion revolving credit agreementwith a new five-year revolving credit agreement with a $1.5 billion line ofcredit.  No borrowings were outstandingunder the revolving credit agreements as of September 30, 2004, December 31,2003 or September 30, 2003.

 

Under the commercial paper program, commercialpaper borrowings are fully supported by the available borrowings under therevolving credit agreements. Accordingly, the total amount outstanding under the commercial paper programand the indebtedness incurred under the revolving credit agreement may notexceed $1.5 billion.  No commercial paperborrowings were outstanding at September 30, 2004, December 31, 2003or September 30, 2003.  Commercialpaper borrowings outstanding at December 31, 2002 were $25.0 million.  During the first nine months of 2004, noborrowings were incurred by the Company under either its commercial paperprogram or revolving credit agreements. During 2003, the Company incurred additional commercial paper borrowingsof $574.6 million, consisting of $124.6 million to fund the cost of thewireless property acquisitions in Arizona, Mississippi and Michigan, and $450.0million to retire a 7.125 percent senior unsecured note that was due March 1,2003.  During the second quarter of 2003,the Company repaid all borrowings outstanding under its commercial paperprogram utilizing a portion of the cash proceeds ALLTEL received in connectionwith the April 1, 2003, sale of the financial services division of itsinformation services subsidiary to Fidelity National.  ALLTEL also used a portion of the cashproceeds from 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 $255.0million and $744.3 million for the nine months ended September 30, 2004and 2003, respectively.  Retirements oflong-term debt in 2004 primarily consisted of the repayment of a $250.0 millionunsecured note due April 1, 2004. Retirements of long-term debt in 2003 included the repayment of a $450.0million unsecured note due March 1, 2003 and the retirement of $249.1million of long-term debt outstanding under the Rural Utilities Services, RuralTelephone Bank and Federal Financing Bank programs.  Retirements of long-term debt in 2003 alsoincluded the net reduction from December 31, 2002 in commercial paperborrowings of $25.0 million and scheduled long-term debt retirements of $20.2million.

 

On January 22,2004, ALLTEL’s Board of Directors adopted a stock repurchase plan authorizingthe Company to repurchase up to $750.0 million of its outstanding common stockover a two-year period ended December 31, 2005.  Under the repurchase plan, ALLTEL mayrepurchase shares, from time to time, on the open market or in negotiatedtransactions, as circumstances warrant, depending upon market conditions andother factors.  Sources of funding thestock buyback program include available cash on hand, operating cash flows,borrowings under ALLTEL’s commercial paper program and proceeds from monetizingthe Company’s investment portfolio. Through September 30, 2004, ALLTEL had repurchased, using availablecash on hand, 9.7 million of its common shares at a total cost of $506.9million.

 

37

 

Cash flows fromfinancing activities also included distributions to minority investors, whichamounted to $49.7 million and $44.4 million for the nine months ended September 30,2004 and 2003, respectively.

 

Liquidityand Capital Resources

On August 4, 2004, ALLTEL announced that ithad reached agreements with United States Cellular Corp. and TDS Telecom topurchase certain wireless properties in Georgia, Mississippi, North Carolina,Ohio and Wisconsin for $140 million in cash. The transactions are subject to regulatory approvals and are expected toclose in the fourth quarter of 2004.  TheCompany believes it has sufficient cash and short-term investments on hand($648.4 million at September 30, 2004) and has adequate operating cashflows to finance its ongoing operating requirements, including capitalexpenditures, repayment of long-term debt, payment of dividends, funding thestock repurchase plan, and financing the wireless property acquisitionsdiscussed above.  Additional sources offunding available to ALLTEL include (1) $1.5 billion of borrowings available tothe Company under its commercial paper program and revolving credit agreement,(2) additional debt or equity securities under the Company’s March 28,2002, $5.0 billion shelf registration statement, of which approximately $730million remained available for issuance at September 30, 2004 and (3)additional debt securities issued in the private placement market.

 

ALLTEL’s commercial paper and long-term creditratings with Moody’s Investors Service (“Moody’s”), Standard & Poor’sCorporation (“Standard & Poor”) and Fitch Ratings were unchanged from December 31,2003 and were as follows:

 

**Description**

** **

**Moody’s**

** **

**Standard  & Poor**

** **

**Fitch**

** **

Commercial paper credit rating

 

Prime-1

 

A-1

 

F1

 

Long-term debt credit rating

 

A2

 

A

 

A

 

Outlook

 

Stable

 

Negative

 

Stable

 

 

Factorsthat could affect ALLTEL’s short and long-term credit ratings would include,but not be limited to, a material decline in the Company’s operating resultsand increased debt levels relative to operating cash flows resulting fromfuture acquisitions or increased capital expenditure requirements.  If ALLTEL’s credit ratings were to bedowngraded from current levels, the Company would incur higher interest costson new borrowings, and the Company’s access to the public capital markets couldbe adversely affected.  A downgrade inALLTEL’s current short or long-term credit ratings would not acceleratescheduled principal payments of ALLTEL’s existing long-term debt.

 

Therevolving credit agreement contains various covenants and restrictionsincluding a requirement that, as of the end of each calendar quarter, ALLTELmaintain a total debt-to-capitalization ratio of less than 65 percent.  For purposes of calculating this ratio underthe revolving credit agreement, total debt would include amounts classified aslong-term debt (excluding mark-to-market adjustments for interest rate swaps),current maturities of long-term debt outstanding, short-term debt and anyletters of credit or other guarantee obligations.  As of September 30, 2004, the Company’stotal debt to capitalization ratio was 44.2 percent.  In addition, the indentures and borrowingagreements, as amended, provide, among other things, for various restrictionson the payment of dividends by the Company. Retained earnings unrestricted as to the payment of dividends by theCompany amounted to $5,986.4 million at September 30, 2004.  There are no restrictions on the payment ofdividends among members of ALLTEL’s consolidated group.

 

Underthe Company’s long-term debt borrowing agreements, acceleration of principalpayments would occur upon payment default, violation of debt covenants notcured within 30 days or breach of certain other conditions set forth in theborrowing agreements.  At September 30,2004, the Company was in compliance with all of its debt covenants.  There are no provisions within the Company’sleasing agreements that would trigger acceleration of future lease payments.

 

At September 30,2004, current maturities of long-term debt were $226.1 million and included a$200.0 million, 6.75 percent senior unsecured note due September 15,2005.  The Company expects to fund thepayment of this note at maturity through either available cash on hand oroperating cash flows.

 

Inconnection with the sale of the Company’s financial services divisionpreviously discussed, ALLTEL received shares of Fidelity National commonstock.  As of September 30, 2004,ALLTEL owned approximately 11.2 million shares of Fidelity National commonstock, representing an approximate seven percent interest in Fidelity National.

 

TheCompany does not use securitization of trade receivables, affiliation withspecial purpose entities, variable interest 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.

 

38

 

RecentlyIssued Accounting Pronouncements

Underthe Medicare Prescription Drug, Improvement and Modernization Act of 2003, (the“Act”) beginning in 2006, the Act will provide a prescription drug benefitunder Medicare Part D, as well as a federal subsidy to plan sponsors of retireehealthcare plans that provide a prescription drug benefit to their participantsthat is at least actuarially equivalent to the benefit that will be availableunder Medicare.  The amount of the federalsubsidy will be based on 28 percent of an individual beneficiary’s annualeligible prescription drug costs ranging between $250 and $5,000.  On May 19, 2004, the Financial AccountingStandards Board issued Staff Position No. 106-2, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” (“FSP No. 106-2”). FSP No. 106-2 clarified that the federal subsidy provided under the Actshould be accounted for as an actuarial gain in calculating the accumulatedpostretirement benefit obligation and annual postretirement expense.  The Department of Health and Human Serviceshas yet to issue final regulations on the determination of actuarialequivalence and the federal subsidy. Based on its current understanding of the Act, ALLTEL believes that asubstantial portion of the prescription drug benefits provided under itspostretirement benefit plan would be deemed actuarially equivalent to thebenefits provided under Medicare Part D. Effective July 1, 2004, ALLTEL prospectively adopted FSP No. 106-2and remeasured its accumulated postretirement benefit obligation as of thatdate to account for the federal subsidy, the effects of which resulted in anapproximate $16.5 million reduction in the Company’s accumulated postretirementbenefit obligation.  The adoption of FSPNo. 106-2 and subsequent remeasurement did not have a material impact on theCompany’s 2004 postretirement expense. Once the final federal regulations are issued, ALLTEL will re-evaluatethe effects of the Act on its future benefit costs and accumulatedpostretirement benefit obligation.

 

CriticalAccounting Policies

ALLTELprepares its consolidated financial statements in accordance with accountingprinciples generally accepted in the United States.  In its Annual Report on Form 10-K for theyear ended December 31, 2003, ALLTEL identified the critical accountingpolicies which affect its more significant estimates and assumptions used inpreparing the Company’s consolidated financial statements.  These critical accounting policies includeaccounting for service revenues, evaluating the collectibility of tradereceivables, accounting for pension and other postretirement benefits,calculating depreciation and amortization expense and determining the fairvalues of goodwill and other indefinite-lived intangible assets.  There have been no material changes to ALLTEL’scritical accounting policies during the nine month period ended September 30,2004.

 

LegalProceedings

ALLTELis party to various legal proceedings arising in the ordinary course ofbusiness.  Although the ultimateresolution of these various proceedings cannot be determined at this time,management of the Company does not believe that such proceedings, individuallyor in the aggregate, will have a material adverse effect on the future resultsof operations or financial condition of ALLTEL. In addition, management of the Company is currently not aware of anyenvironmental matters that, individually or in the aggregate, would have amaterial adverse effect on the consolidated financial condition or results ofoperations of the Company.

 

39

 

**ALLTEL CORPORATION**

**FORM 10-Q**

**PART I – FINANCIAL INFORMATION**

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

The Company’s market risks at September 30,2004 are similar to the market risks discussed in ALLTEL’s Annual Report onForm 10-K for the year ended December 31, 2003.  The Company is exposed to market risk fromchanges in marketable equity security prices, interest rates, and foreignexchange rates.  The Company hasestimated its market risk using sensitivity analysis.  For marketable equity securities, market riskis defined as the potential change in fair value attributable to a hypotheticaladverse change in market prices.  For allother financial instruments, market risk is defined as the potential change inearnings resulting from a hypothetical adverse change in market prices or interestrates.  The results of the sensitivityanalysis used to estimate market risk are presented below, although the actualresults may differ from these estimates.

 

EquityPrice Risk

Changes in equity prices primarily affectthe fair value 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 September 30, 2004, investments ofthe Company were recorded at fair value of $744.0 million, compared to $722.7million at December 31, 2003.  Theincrease in fair value primarily reflected the increased market value of theFidelity National common stock acquired by ALLTEL in connection with the April 1,2003 sale of its financial services division, as previously discussed.  Marketable equity securities amounted to$428.0 million and included unrealized holding gains of $99.3 million at September 30,2004.  Comparatively, investments inmarketable equity securities were $395.8 million at December 31, 2003 andincluded unrealized holding gains of $73.6 million.  At September 30, 2003, investments inmarketable equity securities amounted to $306.7 million and included unrealizedholding gains of $19.2 million.  Ahypothetical 10 percent decrease in quoted market prices would result in a$42.8 million decrease in the fair value of the Company’s marketable equitysecurities at September 30, 2004.

 

InterestRate Risk

TheCompany’s earnings are affected by changes in variable interest rates relatedto ALLTEL’s issuance of short-term commercial paper and interest rate swapagreements.  The Company enters intointerest rate swap agreements to obtain a targeted mixture of variable andfixed-interest-rate debt such that the portion of debt subject to variablerates does not exceed 30 percent of ALLTEL’s total debt outstanding.  The Company has established policies andprocedures for risk assessment and the approval, reporting, and monitoring ofinterest rate swap activity.  ALLTEL doesnot enter into interest rate swap agreements, or other derivative financialinstruments, for trading or speculative purposes.  Management periodically reviews ALLTEL’sexposure to interest rate fluctuations and implements strategies to manage theexposure.

 

As of September 30, 2004, theCompany had no borrowings outstanding under its commercial paper program.  The Company has entered into six, payvariable receive fixed, interest rate swap agreements on notional amountstotaling $1.0 billion to convert fixed interest rate payments to variable as ofSeptember 30, 2004.  The maturitiesof the six interest rate swaps range from March 1, 2006 to November 1,2013.  The weighted average fixed ratereceived by ALLTEL on these swaps is 5.5 percent, and the variable rate paid byALLTEL is the three month LIBOR (London-Interbank Offered Rate).  The weighted average variable rate paid byALLTEL was 1.7 percent at September 30, 2004.  A hypothetical increase of 100 basis pointsin variable interest rates would reduce annual pre-tax earnings byapproximately $10.0 million.  Conversely,a hypothetical decrease of 100 basis points in variable interest rates wouldincrease annual pre-tax earnings by approximately $10.0 million.

 

ForeignExchange Risk

The Company’s business operations inforeign countries are not material to the Company’s consolidated operations,financial condition and liquidity. Foreign currency translation gains and losses were not material to theCompany’s consolidated results of operations for the three and nine monthsended September 30, 2004 and 2003. Additionally, the Company is not currently subject to material foreigncurrency exchange rate risk from the effects that exchange rate movements offoreign currency would have on the Company’s future costs or on future cashflows it would receive from its foreign subsidiaries.  The Company has not entered into anysignificant foreign currency forward exchange contracts or other derivativefinancial instruments to hedge the effects of adverse fluctuations in foreigncurrency exchange rates.

 

40

 

**ALLTEL CORPORATION**

**FORM 10-Q**

**PART 1 – FINANCIAL INFORMATION**

 

**Item 4.****           Controlsand 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’s disclosurecontrols and procedures as of the end of the period covered by this quarterlyreport (the “Evaluation Date”).   Basedon that evaluation, ALLTEL’s Chief Executive Officer and Chief FinancialOfficer 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 the Company’sinternal control over financial reporting that occurred during the periodcovered by this quarterly report, and they have concluded that there was nochange 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 2.****           UnregisteredSales of Equity Securities and Use of Proceeds**

 

(c)                      OnJanuary 23, 2004, ALLTEL announced a $750.0 million stock repurchase planthat expires on December 31, 2005. During the first six months of 2004, the Company repurchased 4,825,600shares of its common stock at a total cost of $243.0 million, or an average costof $50.36 per share.  Informationpertaining to this plan for the third quarter of 2004 is presented in the tablebelow.

 

**Period**

** **

**Total Number of  Shares Purchased**

** **

**Average Price  Paid per Share**

** **

**Total Number of  Shares Purchased  as Part of Publicly  Announced Plans**

** **

**Maximum Number  of  Shares (or Approximate  Dollar Value) that May  Yet Be Purchased Under  the Plans**

** **

July 1-31, 2004

 

—

 

$

—

 

—

 

$507.0 million

 

August 1-31, 2004

 

1,800,000

 

$

53.75

 

1,800,000

 

$410.2 million

 

September 1-30, 2004

 

3,050,000

 

$

54.80

 

3,050,000

 

$243.1 million

 

Total

 

4,850,000

 

$

54.41

 

4,850,000

 

 

 

 

**Item 6.****           Exhibits**

 

Seethe exhibits specified on the Index of Exhibits located at Page 43.

 

41

 

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)

 

 

November 5, 2004

 

 

42

 

**ALLTEL CORPORATION**

**FORM 10-Q**

**INDEX OF EXHIBITS**

 

**Form 10-Q  Exhibit No.**

** **

**Description of Exhibits**

** **

** **

31(a)

 

Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.

 

(a)

 

 

 

 

 

31(b)

 

Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.

 

(a)

 

 

 

 

 

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.

 

(a)

 

 

 

 

 

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.

 

(a)

 

(a)Filed herewith.

 

43