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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C.20549**

 

**FORM 10-Q**

 

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

** **

**For the quarterly period ended  March 31, 2003**

 

**OR**

** **

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

**SECURITIESEXCHANGE ACT OF 1934**

 

**Commission file number  1-4996**

 

# **ALLTEL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                                                                                             |   | **34-0868285**                        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of   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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES  ý      NO  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined by Rule 12b-2 of the Act).

YES  ý       NO  o

 

Number of common sharesoutstanding as of March 31, 2003:  **311,272,082**

 

The Exhibit Index islocated on page 37.

 

 

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**ALLTELCORPORATION**

**FORM10-Q**

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

 

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*            Noreportable information under this item.

 

Forward-LookingStatements

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

 

Actual future events andresults may differ materially from those expressed in these forward-lookingstatements 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 the communicationsindustry generally that could adversely affect vendor relationships withequipment and network suppliers and customer relationships with wholesalecustomers; material changes in communications technology; the risks associatedwith the integration of acquired businesses; adverse changes in the terms andconditions of the Company’s wireless roaming agreements; the potential foradverse changes in the ratings given to our debt securities by nationallyaccredited ratings organizations; the availability and cost of financing in thecorporate debt markets; the uncertainties related to ALLTEL’s strategicinvestments; the effects of work stoppages; the effects of litigation; ongoingderegulation (and the resulting likelihood of significantly increased price andproduct/service competition) in the communications business as a result offederal and state legislation, rules, and regulations; the final outcome offederal, state and local regulatory initiatives and proceedings related to theterms and conditions of interconnection, access charges, universal service andunbundled network elements and resale rates; and the final outcome of pendinglitigation challenging the Federal Communications Commission’s wireless numberportability rules.

 

In addition to thesefactors, actual future performance, outcomes and results may differ materiallybecause of other, more general, factors including (without limitation) generalindustry and market conditions and growth rates, economic conditions,governmental and public policy changes.

 

1

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**ALLTELCORPORATION**

**FORM10-Q**

**PART I - FINANCIAL INFORMATION**

**Item1.  FinancialStatements**

** **

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

** **
| **(Millions, except per share amounts)**                                                                                                       |   | **March 31,  2003** |       | **December  31,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                     |   |                |       |                    |       |
| **CURRENT  ASSETS:**                                                                                                                           |   |                |       |                    |       |
| Cash  and short-term investments                                                                                                               |   | $                   | 52.9       |                    | $          | 134.6 |   |
| Accounts  receivable (less allowance for doubtful accounts of $53.2 and $68.4,  respectively)                                                  |   | 1,089.1             |       | 1,162.8                 |       |
| Inventories                                                                                                                                    |   | 154.4               |       | 138.5                   |       |
| Prepaid  expenses and other                                                                                                                    |   | 54.3                |       | 38.8                    |       |
| Assets  held for sale                                                                                                                          |   | 559.0               |       | 538.3                   |       |
| Total  current assets                                                                                                                          |   | 1,909.7             |       | 2,013.0                 |       |
| Investments                                                                                                                                    |   | 321.5               |       | 327.4                   |       |
| Goodwill                                                                                                                                       |   | 4,861.4             |       | 4,769.7                 |       |
| Other  intangibles                                                                                                                             |   | 1,345.2             |       | 1,346.5                 |       |
| **PROPERTY,  PLANT AND EQUIPMENT:**                                                                                                            |   |                | ** ** |                    | ** ** |
| Land                                                                                                                                           |   | 287.1               |       | 275.3                   |       |
| Buildings  and improvements                                                                                                                    |   | 1,098.7             |       | 1,074.3                 |       |
| Wireline                                                                                                                                       |   | 6,260.8             |       | 6,188.5                 |       |
| Wireless                                                                                                                                       |   | 4,930.5             |       | 4,798.3                 |       |
| Information  processing                                                                                                                        |   | 1,048.2             |       | 1,047.7                 |       |
| Other                                                                                                                                          |   | 557.5               |       | 571.0                   |       |
| Under  construction                                                                                                                            |   | 357.2               |       | 365.0                   |       |
| Total  property, plant and equipment                                                                                                           |   | 14,540.0            |       | 14,320.1                |       |
| Less  accumulated depreciation                                                                                                                 |   | 6,971.0             |       | 6,756.4                 |       |
| Net  property, plant and equipment                                                                                                             |   | 7,569.0             |       | 7,563.7                 |       |
| Other  assets                                                                                                                                  |   | 352.8               |       | 368.8                   |       |
| **TOTAL  ASSETS**                                                                                                                              |   | $                   | 16,359.6   |                    | $          | 16,389.1 |   |
|                                                                                                                                           |   |                |       |                    |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                 |   |                | ** ** |                    | ** ** |
| **CURRENT  LIABILITIES:**                                                                                                                      |   |                | ** ** |                    | ** ** |
| Current  maturities of long-term debt                                                                                                          |   | $                   | 47.9       |                    | $          | 494.7 |   |
| Accounts  payable                                                                                                                              |   | 484.9               |       | 558.3                   |       |
| Advance  payments and customer deposits                                                                                                        |   | 214.0               |       | 214.3                   |       |
| Accrued  taxes                                                                                                                                 |   | 112.3               |       | 72.2                    |       |
| Accrued  dividends                                                                                                                             |   | 109.4               |       | 109.6                   |       |
| Accrued  interest                                                                                                                              |   | 86.9                |       | 123.8                   |       |
| Other  current liabilities                                                                                                                     |   | 116.0               |       | 136.5                   |       |
| Liabilities  related to assets held for sale                                                                                                   |   | 177.3               |       | 190.5                   |       |
| Total  current liabilities                                                                                                                     |   | 1,348.7             |       | 1,899.9                 |       |
| Long-term  debt                                                                                                                                |   | 6,421.5             |       | 6,145.4                 |       |
| Deferred  income taxes                                                                                                                         |   | 1,181.8             |       | 1,115.4                 |       |
| Other  liabilities                                                                                                                             |   | 1,235.0             |       | 1,230.3                 |       |
| **SHAREHOLDERS’  EQUITY:**                                                                                                                |   |                | ** ** |                    | ** ** |
| Preferred  stock, Series C, $2.06, no par value, 14,928 and 15,635 shares issued and  outstanding, respectively                                |   | 0.4                 |       | 0.4                     |       |
| Common  stock, par value $1 per share, 1.0 billion shares authorized, 311,272,082 and  311,182,950 shares issued and outstanding, respectively |   | 311.3               |       | 311.2                   |       |
| Additional  paid-in capital                                                                                                                    |   | 698.8               |       | 695.7                   |       |
| Foreign  currency translation adjustment                                                                                                       |   | (7.0                | )          | (6.9                    | )          |
| Retained  earnings                                                                                                                             |   | 5,169.1             |       | 4,997.7                 |       |
| Total  shareholders’ equity                                                                                                               |   | 6,172.6             |       | 5,998.1                 |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                           |   | $                   | 16,359.6   |                    | $          | 16,389.1 |   |

 

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

2

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**CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)**

** **
|                                                                                   |   | **Three  Months  Ended March 31,** |    |
|----------------------------------------------------------------------------------------|--------|------------------------------------|---------|
| **(Millions, except per share amounts)**                                               |   | **2003**                           |    | **2002** |   |
| **REVENUES  AND SALES:**                                                               |   |                               |    |   |   |
| Service  revenues                                                                      |   | $                                  | 1,716.5 |   | $ | 1,478.9 |   |
| Product  sales                                                                         |   | 189.3                              |    | 144.0 |   |
| Total  revenues and sales                                                              |   | 1,905.8                            |    | 1,622.9 |   |
| **COSTS  AND EXPENSES:**                                                               |   |                               |    |   |   |
| Cost  of services (excluding depreciation of $220.2 and $179.7 included below)         |   | 527.4                              |    | 450.3 |   |
| Cost  of products sold                                                                 |   | 237.7                              |    | 208.7 |   |
| Selling,  general, administrative and other                                            |   | 371.1                              |    | 295.6 |   |
| Depreciation  and amortization                                                         |   | 303.5                              |    | 247.5 |   |
| Integration  expenses and other charges                                                |   | —                             |    | 42.9 |   |
| Total  costs and expenses                                                              |   | 1,439.7                            |    | 1,245.0 |   |
| **OPERATING  INCOME**                                                                  |   | 466.1                              |    | 377.9 |   |
|                                                                                   |   |                               |    |   |   |
| Equity  earnings in unconsolidated partnerships                                        |   | 17.5                               |    | 8.6 |   |
| Minority  interest in consolidated partnerships                                        |   | (17.8                              | )       | (15.0 | ) |
| Other  income, net                                                                     |   | 0.4                                |    | 1.2 |   |
| Interest  expense                                                                      |   | (103.4                             | )       | (60.9 | ) |
|                                                                                   |   |                               |    |   |   |
| Income  from continuing operations before income taxes                                 |   | 362.8                              |    | 311.8 |   |
| Income  taxes                                                                          |   | 135.2                              |    | 116.9 |   |
|                                                                                   |   |                               |    |   |   |
| Income  from continuing operations                                                     |   | 227.6                              |    | 194.9 |   |
| Discontinued  operations                                                               |   |                               |    |   |   |
| (net  of income taxes of $25.0 and $12.7)                                              |   | 37.1                               |    | 18.9 |   |
|                                                                                   |   |                               |    |   |   |
| Income  before cumulative effect of accounting change                                  |   | 264.7                              |    | 213.8 |   |
| Cumulative  effect of accounting change                                                |   |                               |    |   |   |
| (net  of income taxes of $10.3)                                                        |   | 15.6                               |    | — |   |
|                                                                                   |   |                               |    |   |   |
| Net  income                                                                            |   | 280.3                              |    | 213.8 |   |
| Preferred  dividends                                                                   |   | —                             |    | — |   |
| Net  income applicable to common shares                                                |   | $                                  | 280.3   |   | $ | 213.8 |   |
| **EARNINGS  PER SHARE:**                                                               |   |                               |    |   |   |
| Basic:                                                                                 |   |                               |    |   |   |
| Income  from continuing operations                                                     |   | $                                  | .73     |   | $ | .63 |   |
| Income  from discontinued operations                                                   |   | .12                                |    | .06 |   |
| Cumulative  effect of accounting change                                                |   | .05                                |    | — |   |
| Net  income                                                                            |   | $                                  | .90     |   | $ | .69 |   |
| Diluted:                                                                               |   |                               |    |   |   |
| Income  from continuing operations                                                     |   | $                                  | .73     |   | $ | .62 |   |
| Income  from discontinued operations                                                   |   | .12                                |    | .06 |   |
| Cumulative  effect of accounting change                                                |   | .05                                |    | — |   |
| Net  income                                                                            |   | $                                  | .90     |   | $ | .68 |   |
| Pro  forma amounts assuming change in accounting principle was applied  retroactively: |   |                               |    |   |   |
| Net  income                                                                            |   | $                                  | 264.7   |   | $ | 214.0 |   |
| Basic  earnings per share                                                              |   | $                                  | .85     |   | $ | .69 |   |
| Diluted  earnings per share                                                            |   | $                                  | .85     |   | $ | .68 |   |

 

See theaccompanying notes to the unaudited interim consolidated financial statements.

 

3

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**CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

** **
|                                                                                            |   | **Three  Months  Ended March 31,** |   |
|-------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
| **(Millions)**                                                                                  |   | **2003**                           |   | **2002** |   |
|                                                                                            |   |                               |   |   |   |
| **CASH  PROVIDED FROM OPERATIONS:**                                                             |   |                               |   |   |   |
| Net  income                                                                                     |   | $                                  | 280.3  |   | $ | 213.8 |   |
| Adjustments  to reconcile net income to net cash provided from operations:                      |   |                               |   |   |   |
| Income  from discontinued operations                                                            |   | (37.1                              | )      | (18.9 | ) |
| Cumulative  effect of accounting change                                                         |   | (15.6                              | )      | — |   |
| Depreciation  and amortization                                                                  |   | 303.5                              |   | 247.5 |   |
| Provision  for doubtful accounts                                                                |   | 52.8                               |   | 54.2 |   |
| Non-cash  portion of integration expenses and other charges                                     |   | —                             |   | 11.4 |   |
| Increase  in deferred income taxes                                                              |   | 78.0                               |   | 33.9 |   |
| Other,  net                                                                                     |   | (1.8                               | )      | 5.0 |   |
| Changes  in operating assets and liabilities, net of effects of acquisitions and  dispositions: |   |                               |   |   |   |
| Accounts  receivable                                                                            |   | 21.7                               |   | (36.4 | ) |
| Inventories                                                                                     |   | (15.5                              | )      | 44.2 |   |
| Accounts  payable                                                                               |   | (73.1                              | )      | (17.7 | ) |
| Other  current liabilities                                                                      |   | (37.1                              | )      | 64.4 |   |
| Other,  net                                                                                     |   | (9.2                               | )      | (33.7 | ) |
| Net  cash provided from operations                                                              |   | 546.9                              |   | 567.7 |   |
|                                                                                            |   |                               |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                      |   |                               |   |   |   |
| Additions  to property, plant and equipment                                                     |   | (227.7                             | )      | (190.9 | ) |
| Additions  to capitalized software development costs                                            |   | (13.5                              | )      | (18.7 | ) |
| Additions  to investments                                                                       |   | (3.8                               | )      | (1.1 | ) |
| Purchase  of property, net of cash acquired                                                     |   | (124.6                             | )      | (19.5 | ) |
| Proceeds  from the lease of cell site towers                                                    |   | —                             |   | 7.5 |   |
| Proceeds  from the return on investments                                                        |   | 13.8                               |   | 11.3 |   |
| Other,  net                                                                                     |   | 7.2                                |   | (9.1 | ) |
| Net  cash used in investing activities                                                          |   | (348.6                             | )      | (220.5 | ) |
|                                                                                            |   |                               |   |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                      |   |                               |   |   |   |
| Dividends  on preferred and common stock                                                        |   | (109.1                             | )      | (105.7 | ) |
| Reductions  in long-term debt                                                                   |   | (456.2                             | )      | (227.4 | ) |
| Distributions  to minority investors                                                            |   | (10.0                              | )      | (12.6 | ) |
| Long-term  debt issued                                                                          |   | 285.0                              |   | — |   |
| Common  stock issued                                                                            |   | 2.9                                |   | 9.8 |   |
| Net  cash used in financing activities                                                          |   | (287.4                             | )      | (335.9 | ) |
|                                                                                            |   |                               |   |   |   |
| Net  cash provided from (used in) discontinued operations                                       |   | 7.5                                |   | (1.8 | ) |
|                                                                                            |   |                               |   |   |   |
| Effect  of exchange rate changes on cash and short-term investments                             |   | (0.1                               | )      | (0.4 | ) |
|                                                                                            |   |                               |   |   |   |
| Increase  (decrease) in cash and short-term investments                                         |   | (81.7                              | )      | 9.1 |   |
|                                                                                            |   |                               |   |   |   |
| **CASH  AND SHORT-TERM INVESTMENTS:**                                                           |   |                               |   |   |   |
| Beginning  of the period                                                                        |   | 134.6                              |   | 63.2 |   |
| End  of period                                                                                  |   | $                                  | 52.9   |   | $ | 72.3 |   |
|                                                                                            |   |                               |   |   |   |
| **NON-CASH  INVESTING AND FINANCING ACTIVITY:**                                                 |   |                               |   |   |   |
| Change  in fair value of interest rate swap agreements                                          |   | $                                  | 0.6    |   | $ | (6.0 | ) |

 

See theaccompanying notes to the unaudited interim consolidated financial statements.

 

4

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS**

 

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

Basisof Presentation – The consolidatedfinancial statements at March 31, 2003 and 2002 and for the three month periodsthen ended of ALLTEL Corporation (“ALLTEL” or the “Company”) areunaudited.  The consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial reporting and Securities and ExchangeCommission rules and regulations. Certain information and footnote disclosures have been condensed oromitted in accordance with those rules and regulations.  Certain prior year amounts, as furtherdiscussed below, have been reclassified to conform to the 2003 financialstatement presentation.  Theconsolidated financial statements reflect all adjustments (consisting only ofnormal recurring adjustments) which are, in the opinion of management, necessaryfor a fair presentation of the financial position and operating results for theinterim periods presented.

 

Changein Business Segment Reporting– Effective January 1, 2003, ALLTEL changed its business segment presentationto reclassify the operations of the telecom division of its information servicessubsidiary, ALLTEL Information Services, Inc., to be included within theCompany’s communications support services segment.  This segment also includes ALLTEL’s long-distance and networkmanagement services, communications products, and directory publishingoperations.  Previously, the telecomdivision had been combined with the financial services division and reportedwithin the Company’s information services segment.  As further discussed in Note 10 to the unaudited consolidatedfinancial statements, on January 28, 2003, ALLTEL signed a definitive agreementto sell the financial services division of ALLTEL Information Services, Inc. toFidelity National Financial Inc. (“Fidelity National”).  ALLTEL completed the sale transaction onApril 1, 2003. (See Note 11 to the unaudited consolidated financialstatements.)  Accordingly, the financialservices division has been reported in the accompanying unaudited consolidatedfinancial statements as discontinued operations.  In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 131 “Disclosures about Segments of an Enterprise and RelatedInformation”, all prior period segment information has been reclassified toconform to this new financial reporting presentation.

 

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

Except for certainwireline subsidiaries as further discussed below, the Company adopted SFAS No.143, “Accounting for Asset Retirement Obligations”, effective January 1,2003.  SFAS No. 143 addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This standard applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the assets.  SFAS No. 143 requires that a liability foran asset retirement obligation be recognized when incurred and reasonablyestimable, recorded at fair value, and classified as a liability in the balancesheet.  When the liability is initiallyrecorded, the entity capitalizes the cost and increases the carrying value ofthe related long-lived asset.  Theliability is then accreted to its present value 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.  ALLTEL issubject to asset retirement obligations associated with its cell site andswitch site operating leases, which are subject to the provisions of SFAS No.143.  Cell site and switch site leaseagreements frequently contain clauses requiring restoration of the leased siteat the end of the lease term, creating an asset retirement obligation.  The Company has concluded that the fairvalue of these obligations cannot be reasonably estimated at this time becauseneither the range of settlement dates of the asset retirement obligations northe probability of enforcement of the remediation clauses are currentlydeterminable.  The Company hasinsufficient historical data to reasonably determine the probability of whetherthe remediation terms of the lease will be enforced and to what extent.  In addition, ALLTEL is unable to estimate apotential range of settlement dates as a result of its intent and ability torenew site leases after the initial lease expiration.  A liability for the asset retirement obligation associated withthe Company’s cell site and switch site leases will be recorded if and when areasonable estimate of fair value can be determined.  In addition to cell site and switch site operating leases, ALLTELalso has leases for office and retail locations that are subject to theprovisions of SFAS No. 143.  Theadoption of SFAS No. 143 related to the leased office and retail locations didnot have a material impact on ALLTEL’s consolidated results of operations, financialposition, or cash flows as of and for the three months ended March 31, 2003.

 

In accordance withfederal and state regulations, depreciation expense for ALLTEL’s wirelineoperations has historically included an additional provision for cost ofremoval.  Effective with the adoption ofSFAS No. 143, the additional cost of removal provision will no longer beincluded in depreciation expense because it does not meet the recognition andmeasurement principles of an asset retirement obligation under SFAS No. 143.  In December 2002, the Federal CommunicationsCommission (“FCC”) notified wireline carriers that they should not adoptthe provisions of SFAS No. 143

 

5

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unless specificallyrequired by the FCC in the future.  As aresult of the FCC ruling, ALLTEL will continue to record a regulatory liabilityfor cost of removal for its wireline subsidiaries that follow the accountingprescribed by SFAS No. 71 “Accounting for the Effects of Certain Types ofRegulation”.  The regulatory liabilityfor cost of removal included in accumulated depreciation amounted to $148.5million and $153.3 million at March 31, 2003 and 2002, 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, netof income tax benefit of $10.3 million, and was included in net income for thethree months ended March 31, 2003.

 

Effective January 1,2003, the Company adopted Emerging Issues Task Force Issue 00-21 “Accountingfor Revenue Arrangements with Multiple Deliverables” for all new arrangementsentered into on or after that date. Issue 00-21 addresses the accounting by a vendor for arrangements underwhich it will perform multiple revenue-generating activities.  Specifically, Issue 00-21 addresses how todetermine whether an arrangement involving multiple deliverables contains oneor more units of accounting and how arrangement consideration should be measuredand allocated to the separate units of accounting.  Upon adoption, the Company ceased deferral of fees assessed towireless communications customers to activate service and direct incrementalcustomer acquisition costs incurred in the activation of service.  The adoption of Issue 00-21 did not have amaterial impact on the Company’s consolidated results of operations for thethree months ended March 31, 2003.

 

**3.****                                      Goodwilland Other Intangible Assets:**

Goodwill represents theexcess of cost over the fair value of net identifiable tangible and intangibleassets acquired through various business combinations.  The Company has acquired identifiableintangible assets through its acquisitions of interests in various wireless andwireline properties.  The cost of acquired entities at the date ofthe acquisition is allocated to identifiable assets and the excess of the totalpurchase price over the amounts assigned to identifiable assets is recorded asgoodwill.  The changes in the carryingamount of goodwill by business segment for the three months ended March 31,2003 were as follows:

 
| **(Millions)**                |   | **Wireless** |          | **Wireline** |   | **Communications  Support  Services** |   | **Total** |      |
|-------------------------------|--------|--------------|---------------|--------------|--------|---------------------------------------|--------|-----------|-----------|
| Balance  at December 31, 2002 |   | $            |  3,519.7 |         | $      |  1,247.7                         |   | $         |  2.3 |   | $ |  4,769.7 |   |
| Acquired  during the period   |   | 100.2        |          | —       |   | —                                |   | 100.2     |      |
| Other  adjustments            |   | (8.2         | )             | (0.3         | )      | —                                |   | (8.5      | )         |
| Balance  at March 31, 2003    |   | $            |  3,611.7 |         | $      |  1,247.4                         |   | $         |  2.3 |   | $ |  4,861.4 |   |
|                               |        |              |               |              |        |                                       |        |           |           |  |  |  |  |  |  |  |  |  |  |

 

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

 
| **(Millions)**                             |   | **March 31,  2003** |          | **December  31,  2002** |   |
|--------------------------------------------|--------|---------------------|---------------|-------------------------|--------|
| Cellular  licenses                         |   | $                   |  729.8   |                    | $      |  720.2 |   |
| Personal  Communications Services licenses |   | 76.9                |          | 76.9                    |   |
| Franchise  rights – wireline          |   | 265.0               |          | 265.0                   |   |
|                                       |   | $                   |  1,071.7 |                    | $      |  1,062.1 |   |
|                                            |        |                     |               |                         |        |  |  |  |  |  |  |

 

Intangible assetssubject to amortization were as follows:

 
|                    |   | **March 31,  2003** |        |
|-------------------------|--------|---------------------|-------------|
| **(Millions)**          |   | **Gross  Cost**     |        | **Accumulated  Amortization** |   | **Net  Carrying  Value** |   |
| Customer  lists         |   | $                   |  378.6 |   | $ |  (115.4 | ) | $ |  263.2 |   |   |
| Franchise  rights       |   | 22.5                |        | (12.3 | ) | 10.2 |   |
| Non-compete  agreements |   | 2.9                 |        | (2.8 | ) | 0.1 |   |   |
|                    |   | $                   |  404.0 |   | $ |  (130.5 | ) | $ | 273.5 |   |   |
|                         |        |                     |             |  |  |  |  |  |  |  |  |  |  |  |

 

6

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|                    |   | **December  31, 2002** |        |
|-------------------------|--------|------------------------|-------------|
| **(Millions)**          |   | **Gross  Cost**        |        | **Accumulated  Amortization** |   | **Net  Carrying  Value** |   |
| Customer  lists         |   | $                      |  374.6 |   | $ |  (101.0 | ) | $ |  273.6 |   |
| Franchise  rights       |   | 22.5                   |        | (11.9 | ) | 10.6 |   |
| Non-compete  agreements |   | 2.9                    |        | (2.7 | ) | 0.2 |   |   |
|                    |   | $                      |  400.0 |   | $ |  (115.6 | ) | $ |  284.4 |   |   |
|                         |        |                        |             |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense forintangible assets subject to amortization was $14.9 million and $9.2 millionfor the three month periods ended March 31, 2003 and 2002, respectively.  Amortization expense for intangible assetssubject to amortization is estimated to be $59.8 million in 2003, $59.7 millionin 2004, $59.0 million in 2005, $40.3 million in 2006 and $23.7 million in2007.  (See Note 4 for a discussion ofthe significant acquisitions completed during 2003 that resulted in therecognition of goodwill and other intangible assets.)

 

**4.****                                      Acquisitions:**

On February 28, 2003,the Company completed its purchase of wireless properties, representingapproximately 370,000 potential customers (“POPs”) in southern Mississippi,from Cellular XL Associates (“Cellular XL”), a privately held company, for$72.0 million in cash.  Of the totalpurchase price, $64.6 million was paid to Cellular XL at the date of purchasewith the remaining cash payment, subject to adjustments as specified in thepurchase agreement, payable with interest, 12 months from the date ofclosing.  The accompanying consolidatedfinancial statements include the accounts and results of operations of the acquiredwireless properties from the date of acquisition.  During the first quarter of 2003, the Company completed thepurchase price allocation of this acquisition based upon a fair value analysisof the tangible and identifiable intangible assets acquired.  The excess of the aggregate purchase priceover the fair market value of the tangible net assets acquired of $67.0 millionwas assigned to customer list ($4.0 million), cellular licenses ($9.6 million)and goodwill ($53.4 million).  Thecustomer list recorded in connection with this transaction is being amortizedon a straight-line basis over its estimated useful life of six years.  The cellular licenses are classified asindefinite-lived intangible assets and are not subject to amortization.

 

On February 28, 2003,the Company also acquired from the other five minority owners the remainingownership interest in wireless properties, representing approximately 355,000POPs in two Michigan Rural Service Areas (“RSAs”) for $60.0 million incash.  Prior to this acquisition, ALLTELowned approximately 49 percent of the Michigan properties.  The excess of the aggregate purchase priceover the fair market value of the tangible net assets acquired of $46.8 millionhas been initially allocated to goodwill. The fair values and useful lives of the assets acquired have beenestimated based on a preliminary valuation pending completion of fair valueanalyses of the assets acquired and liabilities assumed.

 

The purchase price paid for the wireless propertiesdiscussed above was based on estimates of future cash flows of the propertiesacquired.  ALLTEL paid a premium (i.e.,goodwill) over the fair value of the net tangible and identified intangibleassets acquired because the purchase of wireless properties expanded the Company’swireless footprint into new markets across Michigan and Mississippi and added acombined 111,000 new wireless customers to ALLTEL’s communications customerbase.  Additionally, in the wirelessproperties acquired, ALLTEL should realize, over time, accelerated customergrowth and higher average revenue per customer as a result of the Company’shigher revenue national rate plans.

 

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

A summary of the integration expenses and othercharges recorded for the three months ended March 31, 2002 was as follows:

 
| **(Dollars in millions)**                               |   |   |   |
|---------------------------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs                   |   | $      | 13.4   |   |
| Lease  and contract termination costs                   |   | 12.4   |   |
| Computer  system conversion and other integration costs |   | 3.4    |   |
| Write-down  of cell site equipment                      |   | 7.1    |   |
| Write-down  of software development costs               |   | 4.4    |   |
| Equipment  removal and other disposal costs             |   | 2.2    |   |
| Total  integration expenses and other charges           |   | $      | 42.9   |   |

 

In January 2002, theCompany announced its plans to exit its Competitive Local Exchange Carrier(“CLEC”) operations in seven states. The Company also consolidated its call center and retail storeoperations during the first quarter of 2002.

 

7

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In connection with these activities, the Companyrecorded a restructuring charge consisting of severance and employee benefitcosts related to a planned workforce reduction, costs associated withterminating certain CLEC transport agreements and lease termination feesrelated to the closing of certain retail and call center locations.  In exiting the CLEC operations, the Companyalso incurred costs to disconnect and remove switching and other transmissionequipment from central office facilities and expenses to notify and migratecustomers to other service providers. ALLTEL also wrote off certain capitalized software development coststhat had no alternative future use or functionality.  The restructuring plans, completed in March 2002, provided forthe elimination of 910 employees primarily in the Company’s sales, customerservice and network operations support functions.  In the fourth quarter of 2002, ALLTEL reduced the liabilitiesassociated with these restructuring plans by $2.5 million.  As of March 31, 2003, the Company had paid$11.2 million in severance and employee-related expenses, and all of theemployee reductions had been completed.

 

During the first quarter of 2002, the Company alsorecorded the final write-down in the carrying value of certain cell siteequipment to fair value.  In conjunctionwith a product replacement program initiated by a vendor in 2001, the Companyexchanged certain used cell site equipment for new equipment.  The exchange of cell site equipment beganduring the third quarter of 2001 and continued through the first quarter of2002.  As the equipment exchanges werecompleted, the Company recorded write-downs in the carrying value of the usedcell site equipment to fair value.  Inthe first quarter of 2002, the Company also incurred expenses related to itspending acquisition of wireline properties in Kentucky from VerizonCommunications, Inc. (“Verizon”).  Theseexpenses primarily consisted of computer programming costs associated withconverting Verizon’s customer billing records to ALLTEL’s internal billingsystem.

 

The $12.4 million of lease and contract terminationcosts recorded in the first quarter of 2002 consisted of $5.0 millionrepresenting the estimated minimum contractual commitments over the next one tofive years for 31 operating locations that the Company has abandoned, net ofanticipated sublease income.  The leaseand contract termination costs also included $3.6 million of costs to terminatetransport agreements with six interexchange carriers.  The Company also recorded an additional $2.8 million to reflectthe revised estimated costs, net of anticipated sublease income, to terminateleases associated with four operating locations.  ALLTEL had previously recorded $6.3 million in lease terminationcosts related to these four locations in 1999. The additional charge reflected a reduction in expected sublease incomeattributable primarily to softening in the commercial real estate market andbankruptcy filings by two sublessees. Finally, the lease termination costs also included $1.0 million ofunamortized leasehold improvement costs related to the abandoned locations.

 

During the third quarter of 2002, the Company recordeda restructuring charge of $4.1 million consisting of severance and employeebenefit costs of $1.9 million related to a planned workforce reduction and $2.2million of lease termination costs primarily related to the closing of sevenproduct distribution centers.  The leasetermination costs consisted of $1.2 million, primarily representing theestimated minimum contractual commitments over the ensuing one to four yearsfor operating locations that the Company abandoned, net of anticipated subleaseincome.  The lease termination costsalso included an additional $1.0 million to reflect the revised estimatedcosts, net of anticipated sublease income, to terminate leases associated withfour operating locations.  ALLTEL hadpreviously recorded $9.1 million in lease termination costs related to thesefour locations ($2.8 million during the first quarter of 2002 and $6.3 millionin 1999).  The additional chargereflected a further reduction in expected sublease income attributableprimarily to softening in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 130 employees primarily in theCompany’s product distribution operations. As of March 31, 2003, the Company had paid $1.7 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.

 

The following is a summary of activity related to theliabilities associated with the Company’s integration expenses and othercharges for the three months ended March 31, 2003:

 
| **(Millions)**                          |   |   |   |
|-----------------------------------------|--------|--------|--------|
| Balance,  beginning of period           |   | $      | 13.1   |   |
| Integration  expenses and other charges |   | — |   |
| Cash  outlays                           |   | (2.1   | )      |
| Balance,  end of period                 |   | $      | 11.0   |   |

 

At March 31, 2003, the remaining unpaid liabilityrelated to the Company’s integration and restructuring activities consisted ofseverance and employee-related expenses of $2.8 million and lease cancellationand contract termination costs of $8.2 million and is included in other currentliabilities in the accompanying consolidated balance sheets.

 

8

----

 

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

Comprehensive income was as follows for the threemonth periods ended March 31:

 
| **(Millions)**                                                  |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net  income                                                     |   | $        | 280.3  |     | $      | 213.8 |   |
| Other  comprehensive income (loss):                             |   |     |   |     |   |
| Unrealized  holding losses on investments arising in the period |   | (0.1     | )      | (3.0     | )      |
| Income  tax expense (benefit)                                   |   | —   |   | (1.2     | )      |
|                                                            |   | (0.1     | )      | (1.8     | )      |
|                                                            |   |     |   |     |   |
| Foreign  currency translation adjustment                        |   | (0.1     | )      | (0.4     | )      |
|                                                            |   |     |   |     |   |
| Other  comprehensive income (loss) before tax                   |   | (0.2     | )      | (3.4     | )      |
| Income  tax expense (benefit)                                   |   | —   |   | (1.2     | )      |
| Other  comprehensive income (loss)                              |   | (0.2     | )      | (2.2     | )      |
| Comprehensive  income                                           |   | $        | 280.1  |     | $      | 211.6 |   |

 

**7.****                                      Earningsper Share:**

Basic earnings per share of common stock was computedby dividing net income applicable to common shares by the weighted averagenumber of common shares outstanding during the period.  Diluted earnings per share reflects thepotential dilution that could occur assuming conversion or exercise of allunexercised stock options and outstanding preferred stock.  A reconciliation of the net income andnumber of shares used in computing basic and diluted earnings per share was asfollows for the three month periods ended March 31:

 
| **(Millions, except per share amounts)**                                       |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| **Basic  earnings per share:**                                                 |   |     |   |     |   |
| Income  from continuing operations                                             |   | $        | 227.6  |     | $      | 194.9 |   |
| Income  from discontinued operations                                           |   | 37.1     |   | 18.9     |   |
| Cumulative  effect of accounting change                                        |   | 15.6     |   | —   |   |
| Less:  preferred dividends                                                     |   | —   |   | —   |   |
| Net  income applicable to common shares                                        |   | $        | 280.3  |     | $      | 213.8 |   |
| Weighted  average common shares outstanding for the period                     |   | 311.2    |   | 310.8    |   |
|                                                                           |   |     |   |     |   |
| Basic  earnings per share:                                                     |   |     |   |     |   |
| From  continuing operations                                                    |   | $        | .73    |     | $      | .63 |   |
| From  discontinued operations                                                  |   | .12      |   | .06      |   |
| Cumulative  effect of accounting change                                        |   | .05      |   | —   |   |
| Net  income                                                                    |   | $        | .90    |     | $      | .69 |   |
|                                                                           |   |     |   |     |   |
| **Diluted  earnings per share:**                                               |   |     |   |     |   |
| Net  income applicable to common shares                                        |   | $        | 280.3  |     | $      | 213.8 |   |
| Adjustment  for convertible preferred stock dividends                          |   | —   |   | —   |   |
| Net  income applicable to common shares assuming conversion of preferred stock |   | $        | 280.3  |     | $      | 213.8 |   |
| Weighted  average common shares outstanding for the period                     |   | 311.2    |   | 310.8    |   |
| Increase  in shares resulting from the assumed:                                |   |     |   |     |   |
| Exercise  of stock options                                                     |   | 0.8      |   | 1.5      |   |
| Conversion  of preferred stock                                                 |   | 0.3      |   | 0.3      |   |
| Weighted  average common shares assuming conversion                            |   | 312.3    |   | 312.6    |   |
|                                                                           |   |     |   |     |   |
| Diluted  earnings per share:                                                   |   |     |   |     |   |
| From  continuing operations                                                    |   | $        | .73    |     | $      | .62 |   |
| From  discontinued operations                                                  |   | .12      |   | .06      |   |
| Cumulative  effect of accounting change                                        |   | .05      |   | —   |   |
| Net  income                                                                    |   | $        | .90    |     | $      | .68 |   |
|                                                                                |        |          |        |          |        |  |  |  |  |  |  |

 

9

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

ALLTEL manages its business operations based ondifferences in products and services. The Company evaluates performance of the segments based on segmentincome, which is computed as revenues and sales less operating expenses,excluding the effects of the cumulative effect of accounting change andintegration expenses and other charges discussed in Notes 2 and 5.  These items are not allocated to thesegments and are included in corporate operations.  Segment operating results were as follows for the three monthperiods ended March 31:

 
| **(Millions)**                                   |   | **2003** |    | **2002** |   |
|--------------------------------------------------|--------|----------|---------|----------|--------|
| **Revenues and  Sales from External Customers:** |   |     |    |     |   |
| Wireless                                         |   | $        | 1,107.8 |     | $      | 944.1 |   |
| Wireline                                         |   | 572.3    |    | 460.6    |   |
| Communications  support services                 |   | 145.1    |    | 132.4    |   |
| Total business  segments                         |   | $        | 1,825.2 |     | $      | 1,537.1 |   |
|                                             |   |     |    |     |   |
| **Intersegment  Revenues and Sales:**            |   |     |    |     |   |
| Wireless                                         |   | $        | —  |     | $      | — |   |
| Wireline                                         |   | 36.6     |    | 38.5     |   |
| Communications  support services                 |   | 80.0     |    | 79.4     |   |
| Total business  segments                         |   | $        | 116.6   |     | $      | 117.9 |   |
|                                             |   |     |    |     |   |
| **Total Revenues  and Sales:**                   |   |     |    |     |   |
| Wireless                                         |   | $        | 1,107.8 |     | $      | 944.1 |   |
| Wireline                                         |   | 608.9    |    | 499.1    |   |
| Communications  support services                 |   | 225.1    |    | 211.8    |   |
| Total business  segments                         |   | 1,941.8  |    | 1,655.0  |   |
| Less:  intercompany eliminations                 |   | 36.0     |    | 32.1     |   |
| Total revenues  and sales                        |   | $        | 1,905.8 |     | $      | 1,622.9 |   |
|                                             |   |     |    |     |   |
| **Segment Income:**                              |   |     |    |     |   |
| Wireless                                         |   | $        | 236.0   |     | $      | 220.2 |   |
| Wireline                                         |   | 222.8    |    | 190.1    |   |
| Communications  support services                 |   | 17.7     |    | 18.8     |   |
| Total segment  income                            |   | 476.5    |    | 429.1    |   |
| Corporate  expenses                              |   | (10.4    | )       | (8.3     | )      |
| Integration  expenses and other charges          |   | —   |    | (42.9    | )      |
| Total corporate  operations                      |   | (10.4    | )       | (51.2    | )      |
| Total operating  income                          |   | $        | 466.1   |     | $      | 377.9 |   |

 

Segment assets were as follows as of:

 
| **(Millions)**                                           |   | **March 31,  2003** |     | **December  31,  2002** |   |
|----------------------------------------------------------|--------|---------------------|----------|-------------------------|--------|
| Wireless                                                 |   | $                   | 9,501.2  |                    | $      | 9,418.7 |   |
| Wireline                                                 |   | 5,362.7             |     | 5,394.1                 |   |
| Communications  support services                         |   | 535.5               |     | 535.6                   |   |
| Total business  segments                                 |   | 15,399.4            |     | 15,348.4                |   |
| Corporate  headquarters assets not allocated to segments |   | 457.1               |     | 545.3                   |   |
| Assets held for  sale                                    |   | 559.0               |     | 538.3                   |   |
| Less:  elimination of intersegment receivables      |   | (55.9               | )        | (42.9                   | )      |
| Consolidated  total assets                               |   | $                   | 16,359.6 |                    | $      | 16,389.1 |   |

 

10

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Supplemental information pertaining to thecommunications support services segment was as follows for the three monthperiods ended March 31:

 
| **(Millions)**                                   |   | **2003** |   | **2002** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
| **Revenues  and Sales from External Customers:** |   |     |   |     |   |
| Product  distribution                            |   | $        | 60.4   |     | $      | 44.5 |   |
| Long-distance  and network management services   |   | 48.9     |   | 47.1     |   |
| Telecommunications  information services         |   | 26.6     |   | 29.2     |   |
| Directory  publishing                            |   | 9.2      |   | 11.6     |   |
| Total                                            |   | $        | 145.1  |     | $      | 132.4 |   |
|                                             |   |     |   |     |   |
| **Intersegment  Revenues and Sales:**            |   |     |   |     |   |
| Product  distribution                            |   | $        | 32.7   |     | $      | 36.4 |   |
| Long-distance  and network management services   |   | 32.1     |   | 27.6     |   |
| Telecommunications  information services         |   | —   |   | —   |   |
| Directory  publishing                            |   | 15.2     |   | 15.4     |   |
| Total                                            |   | $        | 80.0   |     | $      | 79.4 |   |
|                                             |   |     |   |     |   |
| **Total  Revenues and Sales:**                   |   |     |   |     |   |
| Product  distribution                            |   | $        | 93.1   |     | $      | 80.9 |   |
| Long-distance  and network management services   |   | 81.0     |   | 74.7     |   |
| Telecommunications  information services         |   | 26.6     |   | 29.2     |   |
| Directory  publishing                            |   | 24.4     |   | 27.0     |   |
| Total  revenues and sales                        |   | $        | 225.1  |     | $      | 211.8 |   |

 

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

ALLTEL may grant fixed and performance-based incentiveand non-qualified stock options to officers and other key employees undervarious stock-based compensation plans. The Company accounts for these plans under the recognition andmeasurement principles of Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” and related Interpretations.  No compensation expense was recognizedrelated to stock-based compensation plans in the three month periods endedMarch 31, 2003 or 2002.  The followingtable illustrates the effects on net income and earnings per share had theCompany applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation”, to its stock-based employeecompensation plans for the three months ended March 31: 

 
| **(Millions,  except per share amounts)**                                                                                       |        | **2003** |   | **2002** |    |
|---------------------------------------------------------------------------------------------------------------------------------|-------------|----------|--------|----------|---------|
| Net income as reported                                                                                                          |        | $        | 280.3  |     | $       | 213.8 |   |
| Deduct stock-based employee compensation expense  determined under fair value method for all awards, net of related tax effects |        | (4.4     | )      | (7.2     | )  |
| Pro forma net income                                                                                                            |        | $        | 275.9  |     | $       | 206.6 |   |
| Basic earnings  per share:                                                                                                      | As reported |     | $      | .90      |    | $ | .69 |   |
|                                                                                                                            | Pro forma   |     | $      | .89      |    | $ | .66 |   |
| Diluted earnings  per share:                                                                                                    | As reported |     | $      | .90      |    | $ | .68 |   |
|                                                                                                                            | Pro forma   |     | $      | .88      |    | $ | .66 |   |
|                                                                                                                                 |             |          |        |          |         |  |  |  |  |  |

 

The pro forma amounts presented above may not berepresentative of the future effects on reported net income and earnings pershare, since the pro forma compensation expense is allocated over the periodsin which options become exercisable, and new option awards may be granted eachyear.

 

11

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**10.****                               DiscontinuedOperations:**

On January 28, 2003, ALLTEL signed a definitiveagreement to sell the financial services division of its information servicessubsidiary, ALLTEL Information Services, Inc., to Fidelity National for $1.05billion, payable as $775.0 million in cash and $275.0 million in FidelityNational common stock.  As part of thistransaction, which was completed on April 1, 2003, Fidelity National acquiredALLTEL’s mortgage servicing, retail and wholesale banking and commerciallending operations, as well as the community/regional bank division.  As a result of this transaction, thefinancial services division has been reflected as discontinued operations andas assets held for sale in the Company’s consolidated financial statements asof and for the three months ended March 31, 2003.  Corresponding amounts reported for the financial servicesdivision for 2002 have been reclassified to conform to the 2003 financialstatement presentation.  Thedepreciation of long-lived assets related to the financial services divisionceased as of the date of the agreement to sell such operations.

 

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

 

The following table includes certain summary income statementinformation related to the financial services operations reflected asdiscontinued operations for the three months ended March 31:

 
| **(Millions)**                                  |   | **2003** |   | **2002** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|
| Revenues  and sales                             |   | $        | 210.3  |     | $      | 210.0 |   |
| Operating  expenses                             |   | 148.1    |   | 179.9    |   |
| Operating  income                               |   | 62.2     |   | 30.1     |   |
| Minority  interest in consolidated partnerships |   | —   |   | 0.8      |   |
| Other  income (expense), net                    |   | (0.1     | )      | 0.7      |   |
| Pretax  income from discontinued operations     |   | 62.1     |   | 31.6     |   |
| Income  tax expense                             |   | 25.0     |   | 12.7     |   |
| Income  from discontinued operations            |   | $        | 37.1   |     | $      | 18.9 |   |
|                                                 |        |          |        |          |        |  |  |  |

 

The following table includes certain summary cash flowstatement information related to the financial services operations reflected asdiscontinued operations for the three months ended March 31:

 
| **(Millions)**                                          |   | **2003** |   | **2002** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|
| Net  cash provided by operating activities              |   | $        | 42.6   |     | $      | 36.6 |   |
| Net  cash used in investing activities                  |   | (35.0    | )      | (38.2    | )      |
| Net  cash used in financing activities                  |   | (0.1     | )      | (0.2     | )      |
| Net  cash provided by (used in) discontinued operations |   | $        | 7.5    |     | $      | (1.8 | ) |
|                                                         |        |          |        |          |        |  |  |  |

 

The following table includes the net assets of thediscontinued financial services operations that are classified as held for salein the accompanying unaudited consolidated balance sheets as of: 

 
| **(Millions)**                               |   | **March 31,  2003** |   | **December  31,  2002** |   |
|----------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Current  assets                              |   | $                   | 169.2  |                    | $      | 171.2 |   |
| Property,  plant and equipment               |   | 158.3               |   | 145.0                   |   |
| Goodwill                                     |   | 25.8                |   | 25.8                    |   |
| Other  assets                                |   | 205.7               |   | 196.3                   |   |
| Assets  held for sale                        |   | $                   | 559.0  |                    | $      | 538.3 |   |
|                                         |   |                |   |                    |   |
| Current  liabilities                         |   | $                   | 105.3  |                    | $      | 109.9 |   |
| Other  liabilities                           |   | 72.0                |   | 80.6                    |   |
| Liabilities  related to assets held for sale |   | $                   | 177.3  |                    | $      | 190.5 |   |

 

12

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**11.****                               SubsequentEvent – Completion of Sale of Financial Services Division:**

On April 1, 2003, ALLTEL completed the sale of thefinancial 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 have transitioned to Fidelity National as part of thetransaction.  As a result of thistransaction, ALLTEL will record an after tax gain of approximately $324.5million, which will first be reported in the Company’s interim unauditedconsolidated financial statements for the periods ended June 30, 2003.  The after-tax proceeds from the sale wereused primarily to reduce borrowings outstanding under the Company’s commercialpaper program and to retire all long-term debt outstanding under the RuralUtilities Services, Rural Telephone Bank and Federal Financing Bankprograms.  The Fidelity National commonstock acquired in this transaction represented an approximate 8 percentinterest in Fidelity National and may not be disposed of by ALLTEL, subject tocertain conditions specified in the sale agreement, for a period of one yearfrom the closing date of the transaction.

 

13

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**ALLTELCORPORATION**

**FORM10-Q**

**PART I -FINANCIAL INFORMATION**

 

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**GENERAL**

The following is a discussion and analysis of the historical results ofoperations and financial condition of ALLTEL Corporation (“ALLTEL” or the“Company”).  This discussion should beread in conjunction with the unaudited consolidated financial statements,including the notes thereto, for the interim periods ended March 31, 2003 and2002, and the Company’s Annual Report on Form 10-K for the year ended December31, 2002.

 

**DISPOSAL OF FINANCIAL SERVICES BUSINESS**

On April 1, 2003, ALLTEL completed the sale of the financial servicesdivision of its information services subsidiary, ALLTEL Information Services,Inc., to Fidelity National Financial Inc. (“Fidelity National”), for $1.05billion, payable in the form of $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 have transitioned toFidelity National as part of the transaction. As a result of this transaction, the financial services division hasbeen reflected as discontinued operations and as assets held for sale in theCompany’s consolidated financial statements as of and for the three monthsended March 31, 2003.  The telecomdivision of ALLTEL Information Services, Inc. was retained by the Company andwas not part of the sale transaction with Fidelity National.  The operations of the retained telecomdivision are included in the communications support services segment.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 131, “Disclosures about Segments of anEnterprise and Related Information”, all prior period segment information hasbeen reclassified to conform to this new financial reporting presentation.

 

In January 2003, ALLTEL 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 existing business climatein the United Kingdom limited the venture’s ability to leverage the businessacross a broad base of customers.  As aresult, the operations of ALLTEL Mortgage Solutions, Ltd. were also reflected asdiscontinued operations and as assets held for sale in the Company’sconsolidated financial statements for all periods presented.  (See Notes 10 and 11 to the unauditedinterim consolidated financial statements for additional information regardingthe disposal of the financial services operations.)

 

**ACQUISITIONS**

On February 28, 2003, theCompany completed its purchase of wireless properties, representingapproximately 370,000 potential customers (“POPs”) in southern Mississippi,from Cellular XL Associates (“Cellular XL”), a privately held company, for$72.0 million in cash.  Of the totalpurchase price, $64.6 million was paid to Cellular XL at the date of purchasewith the remaining cash payment, subject to adjustments as specified in thepurchase agreement, payable with interest, 12 months from the date of closing.On February 28, 2003, the Company also acquired the remaining ownershipinterest in wireless properties, representing approximately 355,000 POPs in twoMichigan Rural Service Areas (“RSAs”) for $60.0 million in cash.  Prior to this acquisition, ALLTEL ownedapproximately 49 percent of the Michigan properties. Through the completion ofthese transactions, ALLTEL added approximately 111,000 customers.  (See Note 4 to the unaudited interim consolidatedfinancial statements for additional information regarding these acquisitions.)

 

On August 1, 2002, ALLTELcompleted its purchase of local telephone properties serving approximately589,000 wireline customers in Kentucky from Verizon Communications, Inc.(“Verizon”) for $1.93 billion in cash. The acquired wireline properties overlapped ALLTEL’s existing wirelessservice in northeastern Kentucky and increased the Company’s total access linesby approximately 23 percent to nearly 3.2 million wireline customers.  On August 1, 2002, ALLTEL also completed itspurchase of substantially all of the wireless properties owned by CenturyTel,Inc. (“CenturyTel”) for approximately $1.59 billion in cash.  Through the completion of this transaction,ALLTEL added properties representing approximately 8.3 million POPs, acquiredapproximately 762,000 customers, increasing its wireless customer base to morethan 7.5 million customers, and expanded its wireless footprint into newmarkets across Arkansas, Louisiana, Michigan, Mississippi, Texas and Wisconsin.  Also included in the transaction wereminority partnership interests in cellular operations representingapproximately 1.8 million proportionate POPs, and Personal CommunicationsServices (“PCS”) licenses covering 1.3 million POPs in Wisconsin and Iowa.

 

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The accounts and resultsof operations of the acquired wireless and wireline properties are included inthe accompanying consolidated financial statements from the date ofacquisition.

 

**ACCOUNTING CHANGES**

Except for certain wireline subsidiaries as further discussed below,the Company adopted SFAS No. 143, “Accounting for Asset RetirementObligations”, effective January 1, 2003. SFAS No. 143 addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. This standard applies to legal obligations associated with theretirement of long-lived assets that result from the acquisition, construction,development, or normal use of the assets. SFAS No. 143 requires that a liability for an asset retirementobligation be recognized when incurred and reasonably estimable, recorded atfair value and classified as a liability in the balance sheet.  When the liability is initially recorded,the entity capitalizes the cost and increases the carrying value of the relatedlong-lived asset.  The liability is thenaccreted to its present value, and the capitalized cost is depreciated over theestimated useful life of the related asset. At the settlement date, the entity will recognize a gain or loss aftersettlement of the obligation.

 

The Company has evaluated the effects of SFAS No. 143 on its operationsand has determined that, for telecommunications and other operating facilitiesin which the Company owns the underlying land, ALLTEL has no contractual orlegal obligation to remediate the property if the Company were to abandon, sellor otherwise dispose of the property. ALLTEL is subject to asset retirement obligations associated with itscell site and switch site operating leases, which are subject to the provisionsof SFAS No. 143.  Cell site and switchsite lease agreements frequently contain clauses requiring restoration of theleased site at the end of the lease term, creating an asset retirementobligation.  The Company has concludedthat the fair value of these obligations cannot be reasonably estimated at thistime, because neither the settlement date of the asset retirement obligationnor the probability of enforcement of the remediation clauses are currentlydeterminable.  The Company hasinsufficient historical data to reasonably determine the probability of whetherthe remediation terms of the lease will be enforced and to what extent.  In addition, ALLTEL is unable to estimate apotential range of settlement dates due to its intent and ability to renew siteleases after the initial lease expiration. A liability for the asset retirement obligation associated with theCompany’s cell site and switch site leases will be made if and when areasonable estimate of fair value can be determined.  In addition to cell site and switch site operating leases, theCompany also has leases for office and retail locations that are subject to theprovisions of SFAS No. 143.  The adoptionof SFAS No. 143 related to the leased office and retail locations did not havea material impact on ALLTEL’s consolidated results of operations, financialposition or cash flows as of or for the three months ended March 31, 2003.

 

In accordance with federal and state regulations, depreciation expensefor the Company’s wireline operations has historically included an additionalprovision for cost of removal. Effective with the adoption of SFAS No. 143, the additional cost ofremoval provision will no longer be included in depreciation expense, becauseit 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 will continue to record a regulatory liability for costof removal for its wireline subsidiaries that follow the accounting prescribedby SFAS No. 71 “Accounting for the Effects of Certain Types ofRegulation”.  For the acquired Kentuckyand Nebraska wireline operations not subject to SFAS No. 71, effective January1, 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, 2003,resulted in a non-cash credit of $15.6 million, net of income tax benefit of$10.3 million, and was included in net income for the three months ended March31, 2003.  The cessation of the cost ofremoval provision in depreciation expense for the acquired Kentucky andNebraska wireline operations did not have a material impact on the Company’sconsolidated results of operations for the three months ended March 31, 2003.

 

Effective January 1, 2003, the Company adopted Emerging Issues TaskForce (“EITF”) Issue 00-21 “Accounting for Revenue Arrangements with MultipleDeliverables” for all new arrangements entered into on or after that date.  Issue 00-21 addresses the accounting by avendor for arrangements under which it will perform multiple revenue-generatingactivities.  Specifically, Issue 00-21addresses how to determine whether an arrangement involving multipledeliverables contains one or more units of accounting and how arrangementconsideration should be measured and allocated to the separate units ofaccounting.  Upon adoption, the Companyceased deferral of fees assessed to wireless communications customers toactivate service and direct incremental customer acquisition costs incurred inthe activation of service.  The adoptionof Issue 00-21 did not have a material impact on the Company’s consolidated resultsof operations for the three months ended March 31, 2003.

 

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**CONSOLIDATED RESULTS OF OPERATIONS**

** **
|                                                         |   | **Three  Months Ended  March 31,** |    |
|--------------------------------------------------------------|--------|------------------------------------|---------|
| **(Millions,  except per share amounts)**                    |   | **2003**                           |    | **2002** |   |
| Revenues and  sales:                                         |   |                               |    |   |   |
| Service revenues                                             |   | $                                  | 1,716.5 |   | $ | 1,478.9 |   |
| Product sales                                                |   | 189.3                              |    | 144.0 |   |
| Total revenues  and sales                                    |   | 1,905.8                            |    | 1,622.9 |   |
| Costs and  expenses:                                         |   |                               |    |   |   |
| Cost of services                                             |   | 527.4                              |    | 450.3 |   |
| Cost of products  sold                                       |   | 237.7                              |    | 208.7 |   |
| Selling,  general, administrative and other                  |   | 371.1                              |    | 295.6 |   |
| Depreciation and  amortization                               |   | 303.5                              |    | 247.5 |   |
| Integration  expenses and other charges                      |   | —                             |    | 42.9 |   |
| Total costs and  expenses                                    |   | 1,439.7                            |    | 1,245.0 |   |
| Operating income                                             |   | 466.1                              |    | 377.9 |   |
| Non-operating  income (expense), net                         |   | 0.1                                |    | (5.2 | ) |
| Interest expense                                             |   | (103.4                             | )       | (60.9 | ) |
| Income from  continuing operations before income taxes       |   | 362.8                              |    | 311.8 |   |
| Income taxes                                                 |   | 135.2                              |    | 116.9 |   |
| Income from  continuing operations                           |   | 227.6                              |    | 194.9 |   |
| Income from  discontinued operations, net of income taxes    |   | 37.1                               |    | 18.9 |   |
| Cumulative  effect of accounting change, net of income taxes |   | 15.6                               |    | — |   |
| Net income                                                   |   | $                                  | 280.3   |   | $ | 213.8 |   |
| Basic earnings  per share:                                   |   |                               |    |   |   |
| Income from  continuing operations                           |   | $                                  | .73     |   | $ | .63 |   |
| Income from  discontinued operations                         |   | .12                                |    | .06 |   |
| Cumulative  effect of accounting change                      |   | .05                                |    | — |   |
| Net income                                                   |   | $                                  | .90     |   | $ | .69 |   |
| Diluted earnings  per share:                                 |   |                               |    |   |   |
| Income from  continuing operations                           |   | $                                  | .73     |   | $ | .62 |   |
| Income from  discontinued operations                         |   | .12                                |    | .06 |   |
| Cumulative  effect of accounting change                      |   | .05                                |    | — |   |
| Net income                                                   |   | $                                  | .90     |   | $ | .68 |   |

 

Revenues and sales increased $282.9 million, or 17 percent, and servicerevenues increased $237.6 million, or 16 percent, in the three month periodended March 31, 2003.  The increase inservice revenues reflected growth in ALLTEL’s communications customer baseresulting primarily from acquisitions and the corresponding increase in accessrevenues.  The acquisitions of wirelessproperties from CenturyTel, Cellular XL and in Michigan, along with the wirelineproperties acquired from Verizon, accounted for $203.9 million of the overallincrease in service revenues and $211.1 million of the overall increase intotal revenues and sales in 2003.  Inaddition to the effects of the acquisitions, service revenues for 2003 alsoreflected growth in revenues derived from wireless data services and from thesale of enhanced communication services, including caller identification,call-waiting, call forwarding, voice mail and communications equipmentprotection plans.  Growth in theCompany’s Internet and long-distance operations also contributed to theincrease in services revenues in 2003. These increases were partially offset by lower wireless airtime andretail roaming revenues compared to 2002 and the loss of wireline access linesdue, in part, to broadband and wireless substitution.

 

Product sales increased $45.3 million, or 31 percent, in the threemonth period ended March 31, 2003.  Theincrease in product sales in 2003 was primarily driven by higher retail pricesrealized on the sale of wireless handsets and accessories, reflecting growth ingross customer additions, lower equipment subsidies and increased retentionefforts by the Company. The wireless and wireline acquisitions discussed aboveaccounted for approximately $7.2 million of the overall increase in productsales in 2003.  Product sales in 2003also reflected increased sales of telecommunications and data products tonon-affiliates of $15.9 million, reflecting increased sales of wireless handsetsto retailers and other distributors, partially offset by a $2.6 million decrease in directorypublishing revenues. 

 

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Cost of services increased $77.1 million, or 17 percent, in the threemonth period ended March 31, 2003.  Thewireless and wireline property acquisitions accounted for approximately $73.4million of the overall increase in cost of services in 2003.  In addition to the effects of theacquisitions, cost of services for 2003 also reflected increases innetwork-related costs for the wireless operations due to increased customerusage.  The increase in cost of servicesattributable to acquisitions and increased wireless network-related costs werepartially offset by a decrease in wireless bad debt expense.  The reduction in losses sustained from baddebts reflected the Company’s continuing efforts to refine its customer creditpolicies, evaluate minimum deposit requirements for high-credit risk customers,and improve collection practices by adding new technologies and proactivelymanaging the efforts of the Company’s collection agencies.

 

Cost of products sold increased $29.0 million, or 14 percent, in thethree month period ended March 31, 2003. The increase in cost of products sold in 2003 was consistent with the growth in wireless customeractivations and theCompany’s continued retention efforts.  In addition, the wirelessand wireline property acquisitions accounted for approximately $14.0 million ofthe overall increase in cost of products sold in 2003.

 

Selling, general, administrative and other expenses increased $75.5million, or 26 percent, in the three month period ended March 31, 2003.  The wireless and wireline propertyacquisitions accounted for approximately $40.9 million of the overall increasein selling, general, administrative and other expenses in 2003.  In addition to the effects of theacquisitions, selling, general, administrative and other expenses for 2003 alsoreflected increases in advertising, commissions and wireless general andadministrative expenses.  The increasein wireless general and administrative expenses primarily reflected additionalcosts incurred to complete, for various pre-2002 acquisitions, the conversionof these operations to the Company’s billing and operational support systems.

 

Depreciation and amortization expense increased $56.0 million, or 23percent, in the three month period ended March 31, 2003.  The wireless and wireline propertyacquisitions accounted for approximately $35.6 million of the overall increasein depreciation and amortization in 2003. In addition to the effects of the acquisitions, depreciation andamortization expense increased $20.4 million primarily due to growth incommunications plant in service.

 

Operating income increased $88.2 million, or 23 percent, in the threemonth period ended March 31, 2003.  Thewireless and wireline property acquisitions accounted for approximately $47.3million of the overall increase in operating income in 2003.  In addition to the effects of theacquisitions, operating income growth in 2003 reflected the impact of integrationexpenses and other charges incurred during the first quarter of 2002, asfurther discussed below.

 

Integration Expenses and Other Charges

A summary of the integration expenses and other charges recorded was asfollows for the three month period ended March 31, 2002:

 
| **(Dollars in millions)**                               |   |   |   |
|---------------------------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs                   |   | $      | 13.4   |   |
| Lease  and contract termination costs                   |   | 12.4   |   |
| Computer  system conversion and other integration costs |   | 3.4    |   |
| Write-down  of cell site equipment                      |   | 7.1    |   |
| Write-down  of software development costs               |   | 4.4    |   |
| Equipment  removal and other disposal costs             |   | 2.2    |   |
| Total  integration expenses and other charges           |   | $      | 42.9   |   |
|                                                         |        |        |        |  |  |

 

During the evaluation of its existing Competitive Local ExchangeCarrier (“CLEC”) operations in 2001, ALLTEL determined that a business modelthat relied heavily on interconnection with other carriers had limitedpotential for profitably acquiring market share.  Accordingly, in January 2002, the Company announced its plans toexit its CLEC operations in seven states representing less than 20 percent ofALLTEL’s CLEC access lines.  In thecourse of exiting these markets, ALLTEL honored all existing customercontracts, licenses and other obligations and worked to minimize theinconvenience to affected customers by migrating these customers to otherservice providers.  In the first quarterof 2002, the Company also consolidated its call center and retail storeoperations.  In connection with theseactivities, the Company recorded a restructuring charge consisting of severanceand employee benefit costs related to a planned workforce reduction, costsassociated with terminating certain CLEC transport agreements and leasetermination fees incurred with the closing of certain retail and call centerlocations. In exiting the CLEC operations, the Company also incurred costs todisconnect and remove switching and other transmission equipment from centraloffice facilities and expenses to notify and migrate customers to other serviceproviders.  ALLTEL also wrote offcertain capitalized software

 

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development costs that had no alternative future use orfunctionality.  The restructuring plans,completed in March 2002, provided for the elimination of 910 employeesprimarily in the Company’s sales, customer service and network operationssupport functions.  During the fourthquarter of 2002, ALLTEL reduced the liabilities associated with theserestructuring plans by $2.5 million.  Asof March 31, 2003, the Company had paid $11.2 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.

 

During the first quarter of 2002, the Company also recorded the finalwrite-down in the carrying value of certain cell site equipment to fair value.  In conjunction with a product replacementprogram initiated by a vendor in 2001, the Company exchanged certain used cellsite equipment for new equipment.  Theexchange of cell site equipment began during the third quarter of 2001 andcontinued through the first quarter of 2002. As the equipment exchanges were completed, the Company recordedwrite-downs in the carrying value of the used cell site equipment to fairvalue.  In the first quarter of 2002,the Company also incurred expenses related to its pending acquisition ofwireline properties in Kentucky from Verizon. These expenses primarily consisted of computer programming costsassociated with converting Verizon’s customer billing records to ALLTEL’sinternal billing system.

 

The $12.4 million of lease and contract termination costs recorded inthe first quarter of 2002 consisted of $5.0 million representing the estimatedminimum contractual commitments over the next one to five years for 31operating locations that the Company has abandoned, net of anticipated subleaseincome.  The lease and contracttermination costs also included $3.6 million of costs to terminate transportagreements with six interexchange carriers. The Company also recorded an additional $2.8 million to reflect therevised estimated costs, net of anticipated sublease income, to terminateleases associated with four operating locations.  ALLTEL had previously recorded $6.3 million in lease terminationcosts related to these four locations in 1999. The additional charge reflected a reduction in expected sublease incomeprimarily due to softening in the commercial real estate market and thebankruptcy filings by two sublessees. Finally, the lease termination costs also included $1.0 million ofunamortized leasehold improvement costs related to the abandoned locations.

 

During the third quarter of 2002, the Company recorded a restructuringcharge of $4.1 million consisting of severance and employee benefit costs of$1.9 million related to a planned workforce reduction and $2.2 million of leasetermination costs primarily related to the closing of seven productdistribution centers.  The leasetermination costs consisted of $1.2 million, primarily representing theestimated minimum contractual commitments over the ensuing one to four yearsfor operating locations that the Company abandoned, net of anticipated subleaseincome.  The lease termination costsalso included an additional $1.0 million to reflect the revised estimatedcosts, net of anticipated sublease income, to terminate leases associated withfour operating locations.  ALLTEL hadpreviously recorded $9.1 million in lease termination costs related to thesefour locations ($2.8 million during the first quarter of 2002 and $6.3 millionin 1999).  The additional chargereflected a further reduction in expected sublease income attributableprimarily to softening in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 130 employees primarily in theCompany’s product distribution operations. As of March 31, 2003, the Company had paid $1.7 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.

 

At March 31, 2003, the unpaid liability related to ALLTEL’s variousintegration and restructuring activities was $11.0 million, consisting ofseverance and employee-related expenses of $2.8 million and lease cancellationand contract termination costs of $8.2 million.  Cash outlays for the remaining unpaid liability will be disbursedover the next 12 to 48 months and will be funded from operating cashflows.  (See Note 5 to the unauditedinterim consolidated financial statements for additional information regardingthe integration expenses and other charges.)

 

Non-Operating Income(Expense), Net

 
|                                            |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------|--------|------------------------------------|--------|
| **(Millions)**                                  |   | **2003**                           |   | **2002** |   |
| Equity  earnings in unconsolidated partnerships |   | $                                  | 17.5   |   | $ | 8.6 |   |
| Minority  interest in consolidated partnerships |   | (17.8                              | )      | (15.0 | ) |
| Other  income, net                              |   | 0.4                                |   | 1.2 |   |
| Non-operating  income (expense), net            |   | $                                  | 0.1    |   | $ | (5.2 | ) |

 

As indicated in the table above, non-operating income, net increased$5.3 million, or 102 percent, in the three months ended March 31, 2003.  Equity earnings in unconsolidatedpartnerships in 2003 included $4.7 million of additional income resulting fromthe acquisition of certain minority partnership interests from CenturyTel, aspreviously discussed.  Equity earningsalso increased $4.2 million due to improved earnings of certain wirelesspartnerships in which the Company owns a minority interest.  These increases were partially offset by thefirst quarter 2003 acquisition of the remaining ownership interest in twoMichigan wireless properties, in which the Company previously held a minorityownership interest. 

 

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Minority interest expense for 2003 included $1.1 million of additionalexpense resulting from the acquisition of certain non-wholly owned partnershipinterests from CenturyTel.  In additionto the effects of the CenturyTel acquisition, minority interest expense for2003 also reflected improved earnings in ALLTEL’s majority-owned wirelessoperations.

 

Interest Expense

Interest expense increased $42.5 million, or 70 percent, in the threemonths ended March 31, 2003.  Theincrease primarily reflected the additional interest expense resulting fromALLTEL’s equity unit and long-term debt offerings to finance the cost of itsacquisition of wireline properties in Kentucky and wireless properties fromCenturyTel completed in the third quarter of 2002.  To fund the cost of these acquisitions, during the second quarterof 2002, ALLTEL sold 27.7 million equity units and received net proceeds of$1.34 billion.  The equity units had astated amount of $50 per unit and included a purchase contract pursuant towhich the holder agreed to purchase shares of ALLTEL common stock on May 17,2005.  ALLTEL will make quarterlycontract adjustment payments to the holder at the rate of 1.50 percent of thestated amount per year.  The number ofshares to be purchased will be determined at the time the purchase contractsare settled based on the then current price of ALLTEL’s common stock and willrange between 0.8280 and 1.0101 shares of ALLTEL common stock per equity unit.  The equity units also included $50 principalamount of senior notes, which bear interest at 6.25 percent and mature on May17, 2007.  In June 2002, the Companyalso issued $1.5 billion of unsecured long-term debt consisting of $800.0million of 7.0 percent senior notes due July 1, 2012 and $700.0 million of7.875 percent senior notes due July 1, 2032.

 

Income Taxes

Income tax expense increased $18.3 million, or 16 percent, for thethree month period ended March 31, 2003, consistent with the overall growth inthe Company’s earnings from continuing operations.

 

Average CommonShares Outstanding

The average number of common shares outstanding increased slightly inthe three month period ended March 31, 2003. The increase primarily reflected additional shares issued upon theexercise of options granted under ALLTEL’s employee stock-based compensationplans.

 

DiscontinuedOperations

As previously discussed,as a result of the January 28, 2003 agreement to sell the financial servicesdivision to Fidelity National and the January 2003 termination of its businessventure with Bradford & Bingley Group, the Company’s financial servicesoperations have been reflected as discontinued operations in ALLTEL’s interimconsolidated financial statements.  Thefollowing table includes certain summary income statement information relatedto the financial services operations reflected as discontinued operations forthe three months ended March 31:

 
| **(Millions)**                                  |   | **2003** |   | **2002** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|
| Revenues  and sales                             |   | $        | 210.3  |     | $      | 210.0 |   |
| Operating  expenses                             |   | 148.1    |   | 179.9    |   |
| Operating  income                               |   | 62.2     |   | 30.1     |   |
| Minority  interest in consolidated partnerships |   | —   |   | 0.8      |   |
| Other  income (expense), net                    |   | (0.1     | )      | 0.7      |   |
| Pretax  income from discontinued operations     |   | 62.1     |   | 31.6     |   |
| Income  tax expense                             |   | 25.0     |   | 12.7     |   |
| Income  from discontinued operations            |   | $        | 37.1   |     | $      | 18.9 |   |

 

Operating expenses decreased $31.8 million, consisting of a decrease indepreciation and amortization expense of $13.0 million, a decrease in selling,general, administrative and other expenses of $11.3 million, and a reduction incost of services of $7.5 million.  Thedecrease in depreciation and amortization expense primarily resulted from thecessation of depreciation on property, plant and equipment in conjunction withthe announced sale of the financial services division.  The reductions in cost of services andselling, general, administrative and other expenses primarily reflected reducedoperating and overhead costs resulting from various restructuring activitiescompleted in 2002.  (See Note 10 to theunaudited interim consolidated financial statements for additional informationregarding the discontinued operations.)

 

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**RESULTS OF OPERATIONS BY BUSINESSSEGMENT**

Communications-WirelessOperations

 
|                                              |   | **Three  Months Ended  March 31,** |    |
|---------------------------------------------------|--------|------------------------------------|---------|
| **(Dollars in millions, customers in thousands)** |   | **2003**                           |    | **2002** |   |
| Revenues  and sales:                              |   |                               |    |   |   |
| Service  revenues                                 |   | $                                  | 1,047.0 |   | $ | 914.7 |   |
| Product  sales                                    |   | 60.8                               |    | 29.4 |   |
| Total  revenues and sales                         |   | 1,107.8                            |    | 944.1 |   |
| Costs  and expenses:                              |   |                               |    |   |   |
| Cost  of services                                 |   | 307.5                              |    | 268.3 |   |
| Cost  of products sold                            |   | 122.5                              |    | 109.8 |   |
| Selling,  general, administrative and other       |   | 280.7                              |    | 214.6 |   |
| Depreciation  and amortization                    |   | 161.1                              |    | 131.2 |   |
| Total  costs and expenses                         |   | 871.8                              |    | 723.9 |   |
| Segment  income                                   |   | $                                  | 236.0   |   | $ | 220.2 |   |
| Customers                                         |   | 7,760.8                            |    | 6,763.2 |   |
| Gross  customer additions                         |   | 768.0                              |    | 568.8 |   |
| Net  customer additions                           |   | 159.2                              |    | 80.3 |   |
| Market  penetration                               |   | 12.9                               | %       | 13.2 | % |
| Postpaid  customer churn                          |   | 2.16                               | %       | 2.31 | % |
| Total  churn                                      |   | 2.66                               | %       | 2.44 | % |
| Average  revenue per customer per month           |   | $                                  | 45.59   |   | $ | 45.54 |   |
| Cost  to acquire a new customer                   |   | $                                  | 285     |   | $ | 316 |   |

 

The total number of wireless customers served by ALLTEL increased bynearly 1.0 million customers, or 15 percent, during the twelve month periodended March 31, 2003, primarily due to the effects of acquisitions.  As previously discussed, on August 1, 2002,the Company completed the purchase of substantially all of the wireless assetsof CenturyTel.  In addition, on February28, 2003, the Company completed two additional acquisitions, purchasingwireless properties in Michigan and Mississippi.  These acquisitions accounted for approximately 873,000 of theoverall increase in wireless customers that occurred during the past twelvemonth period ended March 31, 2003. Overall, the Company’s wireless market penetration rate (number ofcustomers as a percent of the total population in ALLTEL’s service areas)decreased to 12.9 percent as of March 31, 2003, primarily due to lowerpenetration levels in the markets acquired from CenturyTel.

 

Excluding the effects of the acquisitions, net customer additions wereapproximately 48,300 for the three months ended March 31, 2003, compared toapproximately 80,300 for the corresponding period of 2002.  A sluggish economy and the effects ofheightened competition and increased penetration levels in the wirelessindustry continue to affect customer growth rates in the wirelessindustry.  The level of customer growthduring 2003 will be dependent upon the Company’s ability to attract newcustomers in an increasingly competitive marketplace currently supporting up toseven competitors in ALLTEL’s markets. The Company will continue to focus its efforts on sustaining value-addedcustomer growth by managing its distribution channels and customer segments,offering attractively priced rate plans and enhanced services and otherfeatures, selling additional phone lines and services to existing customers andpursuing strategic acquisitions.

 

The Company continues to focus its efforts on lowering postpaidcustomer churn (average monthly rate of customer disconnects).  To improve customer retention, the Companyoffers competitively priced rate plans, proactively analyzes customer usagepatterns and migrates customers to digital handsets due to technologyadvancements.  In addition, the Companycontinues to upgrade its telecommunications network in order to provideenhanced service offerings to customers. These efforts helped to reduce postpaid customer churn in 2003, despiteheightened competition and declining economic conditions.  Total churn increased in 2003 primarily dueto an increase in the actual number of prepaid customer disconnects during thefirst quarter of 2003.

 

Wireless revenues and sales increased $163.7 million, or 17 percent,for the three month period ended March 31, 2003.  Service revenues increased $132.3 million, or 14 percent, andrevenues from product sales increased $31.4 million, or 107 percent, for thethree month period ended March 31, 2003, respectively.  The increase in service revenues in 2003primarily reflected growth in ALLTEL’s customer base mainly attributable toacquisitions and the resulting increase in access revenues.  The acquisitions of wireless properties inMichigan, Mississippi and from CenturyTel accounted for approximately $96.5million of the overall increase in service revenues and $100.9 million of theoverall increase in total revenues and sales in 2003.  In addition to the effects of the acquisitions, access revenuesincreased $53.7 million in 2003 primarily driven by nonacquisition-relatedcustomer growth and increased sales of the Company’s higher-yield Total and

 

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National Freedom rate plans. Service revenues in 2003 also reflected increases in revenues earnedfrom data messaging services and from the sale of enhanced services, includingcall waiting, call forwarding, voicemail and equipment protection plans.  Revenues from data and enhanced servicesincreased $10.5 million in 2003, reflecting increased demand for these serviceofferings.  Service revenue growth in2003 attributable to customer growth, acquisitions, increased access revenuesand additional revenues earned from data and enhanced services were partiallyoffset by lower airtime and retail roaming revenues of $32.9 million.  The decrease in airtime and retail roamingrevenues primarily reflected the expansion of local, regional and nationalcalling areas and a decrease in wholesale roaming rates.  Average revenue per customer per month in2003 increased slightly primarily due to the increased sales of the Company’shigher-yield Total and National Freedom rate plans, partially offset bydecreased wholesale roaming rates and slightly dilutive effects of migratingthe acquired CenturyTel markets to ALLTEL’s roaming rate structure.

 

Service revenue growth during 2003 will depend upon ALLTEL’s ability tomaintain market share in an increasingly competitive marketplace by adding newcustomers, retaining existing customers, increasing customer usage and sellingdata and additional enhanced services.

 

The increase in product sales in 2003 was primarily driven by higherretail prices, growth in gross customer additions and increased retentionefforts by the Company focused on migrating existing wireless customers to newdigital technologies.  The acquisitionsof wireless properties in Michigan, Mississippi and from CenturyTel accountedfor approximately $4.4 million of the overall increase in product sales in2003.

 

Cost of services increased $39.2 million, or 15 percent, for the threemonth period ended March 31, 2003.  Thewireless property acquisitions previously discussed accounted for approximately$33.7 million of the overall increase in cost of services in 2003.  In addition to the effects of theacquisitions, cost of services for 2003 reflected increases in network-relatedcosts of $14.1 million, primarily due to increased network traffic resultingfrom customer growth and expansion of calling areas.  The increase in cost of services attributable to acquisitions andincreased network-related costs were partially offset by a decrease in bad debtexpense.  Bad debt expense decreased$9.8 million in 2003 primarily due to the Company’s efforts to reduce lossessustained from bad debts by refining its customer credit policies,re-evaluating minimum deposit requirements for high-credit risk customers, andimproving collection practices by adding new technologies and proactivelymanaging the efforts of the Company’s collection agencies.

 

Cost of products sold increased $12.7 million, or 12 percent, for thethree month period ended March 31, 2003. The acquisitions of wireless properties accounted for approximately$11.7 million of the overall increase in cost of products sold in 2003.  In addition to the effects of the acquisitions,cost of products sold increased primarily due to growth in gross customeractivations, the selling of higher-priced digital phones and the Company’scontinuing efforts to migrate customers from analog to digital equipment aspart of ALLTEL’s customer retention efforts.

 

Selling, general, administrative and other expenses increased $66.1million, or 31 percent, for the three month period ended March 31, 2003.  The acquisitions of wireless propertiesaccounted for approximately $29.4 million of the overall increase in selling,general, administrative and other expenses in 2003.  In addition to the effects of the acquisitions, selling, general,administrative and other expenses for 2003 reflected increased general andadministrative expenses of $23.5 million and increased commission costs of $4.3million.  The increase in general andadministrative expenses primarily reflected additional costs incurred tocomplete, for various pre-2002 acquisitions, the conversion of these operationsto ALLTEL’s billing and operational support systems.  Commissions expense reflected growth in gross customer additions,increased sales of ALLTEL’s Total and National Freedom rate plans and increasedcommissions paid to outside agents reflecting a shift in ALLTEL’s distributionand product mix, as further discussed below. Commission rates paid to the Company’s internal sales force and outsideagents are higher on the sales of ALLTEL’s more profitable Total and NationalFreedom rate plans than comparable rates paid on other lower-margin rate plansoffered by the Company.  Advertisingcosts also increased $4.1 million in 2003 primarily attributable to increasedpromotional activities.

 

Depreciation and amortization expense increased $29.9 million, or 23percent, for the three month period ended March 31, 2003.  The acquisitions of wireless propertiesaccounted for approximately $11.7 million of the overall increase indepreciation and amortization expense in 2003. In addition to the effects of the acquisitions, depreciation andamortization expense increased primarily due to growth in wireless plant inservice.

 

Wireless segment incomeincreased $15.8 million, or 7 percent, for the three month period ended March31, 2003, primarily reflecting the growth in wireless revenues and salesdiscussed above.  The acquisitions ofwireless properties accounted for approximately $14.4 million of the overallincrease in wireless segment income in 2003.

 

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The cost to acquire a newwireless customer represents sales, marketing and advertising costs and the netequipment cost, if any, for each new customer added.  The decrease in per unit customer acquisition costs in 2003primarily reflected reduced subsidies on the sale of wireless handsets to newcustomers, partially offset by the increases in commissions and advertisingcosts previously discussed.  Theimproved margins on the sale of wireless handsets primarily reflected increasedretail prices associated with the selling of higher-priced digital phones.  As previously discussed, commissions paid tooutside agents increased during the first quarter of 2003 reflecting a shift inthe Company’s distribution and product mix, as proportionately higher salesvolumes were generated from ALLTEL’s external sales distribution channels.  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 during 2003 by continuing to enhance its internaldistribution channels, the Company will also continue to utilize its largedealer network.

 

A summary of theintegration expenses and other charges related to the wireless operations thatwere not included in the determination of segment income were as follows forthe three months ended March 31, 2002:

 
| **(Millions)**                                |   |   |   |
|-----------------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs         |   | $      | 6.2    |   |
| Lease  and contract termination costs         |   | 5.5    |   |
| Write-down  of cell site equipment            |   | 7.1    |   |
| Write-down  of software development costs     |   | 0.3    |   |
| Total  integration expenses and other charges |   | $      | 19.1   |   |
|                                               |        |        |        |  |  |

 

RegulatoryMatters-Wireless Operations

The Company is subject toregulation by the Federal Communications Commission (“FCC”) as a provider ofwireless communications services.  TheTelecommunications Act of 1996 (the “96 Act”) provides wireless carriersnumerous opportunities to provide an alternative to the long-distance and localexchange services provided by local exchange telephone companies andinterexchange carriers.  Wirelesscarriers are also entitled to compensation from other telecommunicationscarriers for calls transmitted from the other carriers’ networks and terminatedon the wireless carriers’ networks. Presently, the Company’s wireless operations do not bill access chargesto interexchange carriers, although a recent FCC decision noted that wirelessoperators are not precluded from billing these access charges.  In April 2001, the FCC released a notice ofproposed rulemaking addressing inter-carrier compensation issues.  Under this rulemaking, the FCC has proposeda “bill and keep” compensation method that would overhaul the existing rulesgoverning reciprocal compensation and access charge regulation.  Individual wireless carriers have also fileda number of petitions with the FCC seeking determinations as to the type andamount of compensation due to and from local exchange carriers and/orinterexchange carriers for the termination of traffic.  Further, a number of state proceedings havebeen initiated by various wireline companies to address compensation withrespect to traffic that originates or terminates on wireless carriers.  The outcome of the FCC and state proceedingscould change the way ALLTEL receives compensation from and pays compensation toother carriers as well as its wireless customers.  At this time, ALLTEL cannot estimate whether any such changeswill occur or, if they do, what the effect of the changes on its wirelessrevenues and expenses would be.

 

Under rules establishedby the FCC, Cellular Radiotelephone Service (“CRS”) and PCS providers wererequired, as of November 24, 2002, to participate in a nationwide numberconservation program known as thousand block number pooling in accordance withroll out schedules established by the FCC. These providers must modify their networks to comply with FCC andindustry performance criteria for number pooling, including support for roamingcustomers. Number pooling is an FCC mandated program intended to alleviate theshortage of available telephone numbers by requiring carriers to return unusednumbers in their inventory to a centrally administered pool and takingassignment of new numbers in blocks of 1,000 instead of the 10,000 numberblocks previously assigned.

 

FCC rules also requirethat Commercial Mobile Radio Services (“CMRS”) providers implement wirelesslocal number portability, an intercarrier network function that permitscustomers to retain their existing telephone number when moving from onetelecommunications carrier to another. On July 26, 2002, compliance with the FCC requirements for wirelesslocal number portability was extended by one year to November 24, 2003.  Rules governing the number of MetropolitanStatistical Areas (“MSAs”) in which wireless local number portability must bedeployed, as well as the process for triggering a carrier’s obligation toprovide wireless local number portability in markets both within the top MSAsand below, remain subject to reconsideration by the FCC.  Recently, the FCC denied a request ofVerizon Wireless seeking forbearance of the CMRS provider’s obligation toprovide wireless local number portability. The FCC decision has been appealed to the U.S. Court of Appeals for theDistrict of Columbia Circuit.  Oralarguments in the appeal were heard April 15, 2003 and a decision is expectedduring the summer of 2003.  Although atthis time, the Company cannot fully quantify the effects on its communicationsoperations of implementing wireless local number portability, ALLTEL believes theserequirements, when implemented, would result in a significant increase in bothits operating costs and

 

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customer churnrates.  The effect of wireless localnumber portability on the Company’s wireless operations is expected to besimilar to the effects on the wireless industry as a whole.

 

In addition, wirelessservice carriers must also provide enhanced 911 emergency service (“E-911”) ina two-phased approach.  In phase one,carriers must, within six months of receiving a request from a phase oneenabled Public Safety Answering Point (“PSAP”), deliver both the caller’snumber and the location of the cell site to the PSAP serving the geographicterritory from which the E-911 call originated.  A phase one enabled PSAP is generally one that is capable ofreceiving and utilizing the number and location data transmitted by thecarrier.  ALLTEL has generally compliedwith the phase one requirements and provides service to phase one capablePSAPs.  Due to the status of the PSAPs,as well as other technology and deployment issues, the six month window inwhich service is to be provided under the FCC rules has, in certain instances,been extended by mutual agreement between ALLTEL and the particular PSAPsinvolved.  In phase two, CMRS carriersopting for a handset-based solution, as the Company has, must determine fororiginated calls the location of the caller within fifty meters for 67 percentof the originated calls and 150 meters for 95 percent of the originated calls.  The phase two requirements were set to beginby October 1, 2001, but, due to technology unavailability and other factors,the Company requested a limited waiver of these requirements, as did virtuallyevery other carrier.  On July 26, 2002,the FCC released an order granting a temporary stay of the E-911 emergencyimplementation rules as they applied to the Company.  The FCC order provides for a phased-in deployment of AutomaticLocation Identification (“ALI”) capable network or handset-based technology tobegin on March 1, 2003.  ALI capabilitywill permit immediate identification of the caller’s location by PSAPs.  Under the FCC order, the Company, which haschosen to employ handset-based ALI technology, will be required to (1) beginselling and activating ALI-capable handsets no later than March 1, 2003; (2)ensure that at least 25 percent of all new handsets activated are ALI capableno later than May 31, 2003; (3) ensure that at least 50 percent of all newhandsets activated are ALI capable no later than November 30, 2003; (4) ensurethat 100 percent of its digital handsets activated are ALI capable by May 31,2004; and (5) ensure that penetration of ALI capable handsets among itscustomers reaches 95 percent no later than December 31, 2005.  ALLTEL began selling ALI capable handsets inJune 2002 and expects to comply with the remaining requirements.  Although at this time, the Company cannotfully quantify the effects on its communications operations of implementing ALItechnology, ALLTEL believes these requirements, when fully implemented, couldresult in a significant increase in its operating costs.

 

On April 14, 2003, theCompany filed petitions with the FCC seeking status as an EligibleTelecommunications Carrier (“ETC”) in the states of Alabama and Virginia inorder to obtain high cost loop support for both rural and non-rural areas fromthe federal Universal Service Fund (“USF”). A similar filing was made with the Michigan Public ServiceCommission.  On April 29, 2003, ALLTELalso filed an application for ETC status with the Louisiana and South Carolinacommissions and filed petitions in North Carolina and Florida asking thosecommissions to confirm that they do not have jurisdiction to grant ETC statusto a wireless carrier.  If the Floridaand North Carolina commissions agree with the declaratory petitions, thenapplications with respect to those states will be filed with the FCC.  Additional filings in other states where theCompany or its affiliates do business are anticipated in the near future.  While status as an ETC will qualify theCompany for USF funds, the FCC, in conjunction with the Federal/State JointBoard on Universal Service are considering changes to the USF program,including the services qualified for USF support and the qualifications ofETCs.  At this time, ALLTEL cannotestimate whether any such changes will occur or, if they do, what the effect ofthe changes on its wireless revenues and expenses would be.

 

Communications-WirelineOperations

 
|                                                 |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------|--------|------------------------------------|--------|
| **(Dollars in millions, access lines in thousands)** |   | **2003**                           |   | **2002** |   |
| Revenues  and sales:                                 |   |                               |   |   |   |
| Local  service                                       |   | $                                  | 285.9  |   | $ | 231.1 |   |
| Network  access and long-distance                    |   | 262.2                              |   | 217.4 |   |
| Miscellaneous                                        |   | 60.8                               |   | 50.6 |   |
| Total  revenues and sales                            |   | 608.9                              |   | 499.1 |   |
| Costs  and expenses:                                 |   |                               |   |   |   |
| Cost  of services                                    |   | 182.1                              |   | 141.3 |   |
| Cost  of products sold                               |   | 7.9                                |   | 5.3 |   |
| Selling,  general, administrative and other          |   | 66.2                               |   | 59.1 |   |
| Depreciation  and amortization                       |   | 129.9                              |   | 103.3 |   |
| Total  costs and expenses                            |   | 386.1                              |   | 309.0 |   |
| Segment  income                                      |   | $                                  | 222.8  |   | $ | 190.1 |   |
| Access  lines in service                             |   | 3,159.9                            |   | 2,623.2 |   |

 

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Wireline operations consist of the Company’s Incumbent Local ExchangeCarrier (“ILEC”), CLEC and Internet operations.  Wireline revenues and sales increased $109.8 million, or 22percent, for the three months ended March 31, 2003.  As previously discussed, on August 1, 2002, the Company completedthe purchase from Verizon of wireline properties in Kentucky.  This acquisition accounted for approximately589,000 of the overall increase in wireline customers that occurred during thetwelve months ended March 31, 2003. Excluding the effects of the acquisition, customer access linesdecreased approximately two percent during the twelve months ended March 31,2003, reflecting declines in both primary and second access lines and ALLTEL’sdecision to exit CLEC markets in seven states, as previously discussed.  During the first quarter of 2003, theCompany lost approximately 7,000 access lines, a significantly slower rate ofdecline than the Company experienced in the fourth quarter of 2002.  The decline in access lines primarilyresulted from the effects of wireless andbroadband substitution for the Company’s wireline services.  The Company expectsaccess line growth in 2003 to continue to be impacted by the effects of wirelessand broadband substitution.

 

To maintain revenue growth in 2003, the Company will continue toemphasize sales of enhanced services and bundling of its various productofferings including Internet, long-distance and high-speed data transportservices (“DSL”).  Deployment of DSLservice is an important strategic initiative for ALLTEL.  Currently, DSL service is available toapproximately 1.7 million of the Company’s wireline customers.  During the twelve month period ended March31, 2003, the number of DSL customers nearly tripled to approximately 88,000customers.  The growth in the Company’sDSL customers significantly outpaced the rate of decline in customer accesslines discussed above.

 

Local service revenuesincreased $54.8 million, or 24 percent, for the three months ended March 31,2003.  The acquisition of wirelineproperties in Kentucky accounted for $53.7 million of the overall increase inlocal service revenues in 2003.  Inaddition to the effects of the acquisition, local service revenues in 2003 alsoreflected growth in revenues derived from the sales of enhanced products andservices, reflecting increased demand for these services.  Revenues from these enhanced services increased$2.6 million in the first quarter of 2003.

 

Network access andlong-distance revenues increased $44.8 million, or 21 percent, in the threemonths ended March 31, 2003.  Theacquisition of wireline properties in Kentucky accounted for $47.6 million ofthe overall increase in network access and long-distance revenues in 2003.  In addition to the effects of theacquisition, network access and long-distance revenues in 2003 also reflectedgrowth in revenues from data services of $2.3 million, partially offset byreductions in intrastate network access usage and toll revenues of $6.0million, consistent with the overall decline in primary and second access linesdiscussed above.

 

Miscellaneous revenues primarily consist of charges for billing andcollections services provided to long-distance companies, customer premiseequipment sales, directory advertising and Internet services.  Miscellaneous revenues increased $10.2million, or 20 percent, in the three months ended March 31, 2003.  The acquisition of wireline properties inKentucky accounted for approximately $8.9 million of the overall increase inmiscellaneous revenues in the first quarter of 2003.  In addition to the effects of the acquisition, miscellaneousrevenues in 2003 also reflected growth in Internet service, which increased$2.4 million in the first quarter of 2003 primarily due to customer growth.

 

Cost of servicesincreased $40.8 million, or 29 percent, in the three months ended March 31,2003.  The acquisition of wirelineproperties in Kentucky accounted for $39.6 million of the overall increase incost of services in 2003.  Included incost of services for the acquired wireline properties in Kentucky were $6.0million of additional maintenance costs incurred during the first quarter of2003 to repair damage caused by severe winter storms.

 

Cost of products soldincreased $2.6 million, or 49 percent, in the three months ended March 31,2003.  The acquisition of wirelineproperties in Kentucky accounted for $2.3 million of the overall increase incost of products sold in the first quarter of 2003.  Selling, general, administrative and other expenses increased$7.1 million, or 12 percent, in the three months ended March 31, 2003.  The acquisition of wireline properties inKentucky accounted for $11.5 million of the overall increase in selling,general, administrative and other expenses in 2003.  The increase attributable to the acquisition was partially offsetby a $4.3 million decrease in data processing charges.  Depreciation and amortization expenseincreased $26.6 million, or 26 percent, in the three months ended March 31,2003.  Depreciation expense increased in2003 due to growth in wireline plant in service and $23.9 million of additionaldepreciation attributable to the acquisition of wireline properties inKentucky.

 

Wireline segment incomeincreased $32.7 million, or 17 percent, in the three months ended March 31,2003 due to growth in wireline revenues and sales primarily attributable to theacquisition of wireline properties in Kentucky.  This acquisition accounted for $32.9 million of the overallincrease in segment income in 2003.

 

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A summary of theintegration expenses and other charges related to the wireline operations thatwere not included in the determination of segment income were as follows forthe three months ended March 31, 2002:

 
| **(Millions)**                                          |   |   |   |
|---------------------------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs                   |   | $      | 7.0    |   |
| Lease  and contract termination costs                   |   | 4.1    |   |
| Computer  system conversion and other integration costs |   | 3.4    |   |
| Write-down  of software development costs               |   | 4.1    |   |
| Equipment  removal and other disposal costs             |   | 2.2    |   |
| Total  integration expenses and other charges           |   | $      | 20.8   |   |

 

Regulatory Matters– Wireline Operations

Except for the Kentuckyproperties acquired from Verizon and the Nebraska operations acquired in 1999,ALLTEL’s ILEC operations follow the accounting for regulated enterprisesprescribed by SFAS No. 71, “Accounting for the Effects of Certain Types ofRegulation”.  Criteria that would giverise to the discontinuance of SFAS No. 71 include (1) increasing competitionrestricting the ILEC subsidiaries’ ability to establish prices to recoverspecific costs and (2) significant changes in the manner in which rates are setby regulators from cost-based regulation to another form of regulation.  The Company periodically reviews thecriteria to determine whether the continuing application of SFAS No. 71 isappropriate.  ALLTEL’s ILEC operationshave begun to experience some competition in their local service areas.  Sources of competition to ALLTEL’s localexchange business include, but are not limited to, resellers of local exchangeservices, interexchange carriers, satellite transmission services, wirelesscommunications providers, cable television companies, radio-based personalcommunications companies, and competitive service providers including thoseutilizing Unbundled Network Elements-Platform (“UNE-P”).  Through March 31, 2003, this competition hasnot had a material adverse effect on the results of operations of ALLTEL’s ILECoperations.

 

Although the Company believes that the application of SFAS No. 71continues to be appropriate, it is possible that changes in regulation,legislation or competition could result in the Company’s ILEC operations nolonger qualifying for 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 $148.5 million at March 31,2003.  ALLTEL does not expect to recordany impairment charge related to the carrying value of its ILEC plant.  Under SFAS No. 71, ALLTEL currentlydepreciates its ILEC plant based upon asset lives approved by regulatoryagencies or as otherwise allowed by law. Upon discontinuance of SFAS No. 71, ALLTEL would be required to revisethe lives of its property, plant and equipment to reflect the estimated usefullives of the assets.  ALLTEL does notexpect any revisions in asset lives to have a material adverse effect on itsILEC operations.

 

Most states in which theCompany’s ILEC subsidiaries operate have adopted alternatives to rate-of-returnregulation, either through legislative or regulatory commission actions.  The Company has elected alternativeregulation for certain of its ILEC subsidiaries in Alabama, Arkansas, Florida,Georgia, Kentucky, Missouri, Nebraska, North Carolina, Pennsylvania, SouthCarolina and Texas.  The Companycontinues to evaluate alternative regulation options in other states where itsILEC subsidiaries operate.  The NebraskaILEC properties and the recently acquired Kentucky properties operate underinterstate price cap regulation pursuant to waivers granted by the FCC.  On April 17, 2002, the FCC extended ALLTEL’swaiver of price cap regulation associated with its Nebraska ILEC properties and,in the same order, the FCC granted ALLTEL a waiver with respect to the Kentuckyproperties.  Both waivers will remain ineffect until the FCC completes its pending review to either modify or eliminatethe “all-or-nothing” rule.  The“all-or-nothing” rule was originally intended to ensure that all study areas ofa carrier and its affiliates are subject to a single form of pricingregulation.

 

In April 2001, the FCCreleased a notice of proposed rulemaking addressing inter-carriercompensation.  Under this rulemaking,the FCC asked for comment on a “bill and keep” compensation method that wouldoverhaul the existing rules governing reciprocal compensation and access chargeregulation.  A number of stateproceedings have been initiated by various wireline companies to addresscompensation with respect to traffic that originates or terminates on wirelesscarriers.  The outcome of the FCC andstate proceedings could change the way ALLTEL receives compensation from, andremits compensation to, other carriers and its end users.  At this time, ALLTEL cannot estimate whetheror when any such changes will occur or, if they occur, what would be the impactof the changes on its ILEC revenues and expenses.

 

In May 2001, the FCCadopted the Rural Task Force Order that established an interim universalservice mechanism that will govern compensation for rural telephone companiesfor the ensuing five years.  At thistime, ALLTEL cannot estimate the effect of the changes to its universal servicesupport, if any, that may occur once the FCC adopts a permanent plan for

 

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rural carriers.  On December 13, 2002, the FCC released itsinterim USF contribution report and order and further notice of proposedrulemaking.  Under this ruling, themethod for providing federal universal service fund contributions will changefrom the current historical interstate revenue-based arrangement tocontributions based on projected revenues. Effective April 1, 2003, carriers must also limit the USF line item onthe customer bill to the USF contribution obligation of the carrier.  In the further notice of proposedrulemaking, the FCC has indicated it continues to consider adopting a permanentplan for USF contributions and assessment methodology.  These interim universal service changes arenot expected to have a material adverse effect on the Company’s wirelineoperations.

 

In October 2001, the FCCadopted rate-of-return access charge reform and initiated a further round ofrulemaking to consider other rate-of-return carrier issues.  The order lowered traffic sensitive switchedaccess rates, increased the subscriber line charge (“SLC”) over time to bringit in line with SLCs adopted for price cap carriers and phased out carriercommon line charges in favor of a new portable “Interstate Common Line Support”universal service mechanism, and retained the authorized 11.25 percent rate ofreturn.  The residential and single-linebusiness SLC cap phase-in began on January 1, 2002, increased on July 1, 2002 andmay increase again on July 1, 2003, subject to a FCC review of SLC caps forprice cap carriers.  The Company doesnot expect that this order will have a material adverse effect on itsconsolidated financial results during 2003.

 

On December 20, 2001, theFCC released a notice of proposed rulemaking initiating the first triennialreview of the FCC’s policies on unbundled network elements (“UNEs”).  UNE-P is created when a competing carrierobtains all the network elements needed to provide service from the ILEC at adiscounted rate.  The rulemaking askswhether the FCC should retain, modify, or eliminate its existing definitionsand requirements for unbundled network elements.  On February 20, 2003, and in response to the remand of the UnitedStates Court of Appeals for the District of Columbia circuit, the FCC adoptednew rules governing the obligations of ILECs to unbundle the elements of theirlocal networks for use by competitors. The full text of the FCC’s order has not been publicly released, but is expectedin May 2003.  Consequently, the detailsof the new rules are not yet known. Generally, the FCC indicated it would maintain the obligations of ILECsto unbundle their circuit switched networks for mass market customers, removethe obligation for business customers and deregulate the ILECs provisioning ofbroadband packet switched networks.  TheFCC is expected to establish standards for determining when a requestingcompeting carrier’s provision of service is impaired and provide for asubstantial role for the state public utility commissions (“PUCs”) in applyingthese standards to specific requests for ILEC interconnection and networkelements.  The FCC also opened a furthernotice of proposed rulemaking to consider the “pick and choose” rules underwhich a competing carrier may select from among the various terms ofinterconnection offered by an ILEC in its various interconnectionagreements.  In addition, the FCCindicated it would take the following actions:

 

•                                          Switching forbusiness customers served by high-capacity loops would no longer be unbundledbased on a presumptive finding of no impairment.  Under this framework, states will have 90 days to rebut thenational finding. As to all other uses of unbundled switching, PUCs must,within 9 months, complete a granular analysis of exchanges to determine ifswitching impairment exists.  Upon astate finding of no impairment, a three year period for carriers to transitionoff UNE-P would apply.

 

•                                          ILECs wouldnot be required to unbundle packet switching as a stand-alone network element.

 

•                                          The order isexpected to clarify two key components of the FCC’s total element long-runincremental cost methodology (“TELRIC”) pricing rules.  First, the FCC will clarify that therisk-adjusted cost of capital used in calculating UNE prices should reflect therisks associated with a competitive market. Second, the FCC will decline to mandate the use of any particular set ofasset lives for depreciation, but clarify that the use of an accelerateddepreciation mechanism may present a more accurate method of calculatingeconomic depreciation.

 

•                                          The FCC willcontinue its prior position of not permitting CLECs to avoid any liabilityunder contractual early termination clauses in the event a competitive localexchange carrier converts a special access circuit to an UNE.

 

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

 

During the first quarterof 2002, the FCC initiated a rulemaking to evaluate the appropriate frameworkfor broadband access to the Internet over wireline facilities.  In the notice of proposed rulemaking, theFCC tentatively concluded  that wirelinebroadband Internet access should be classified as an information service ratherthan a telecommunications service and, therefore, should not be subject tocommon carrier regulation.  The FCCsought comments on their tentative

 

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conclusion, but has notreached a final order.  At this time,ALLTEL cannot estimate whether or when any such changes will occur or, if theyoccur, what the impact of the changes on its ILEC revenues and expenses wouldbe.

 

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 SupportServices

 
|                                              |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------|--------|------------------------------------|--------|
| **(Dollars in millions, customers in thousands)** |   | **2003**                           |   | **2002** |   |
| Revenues  and sales:                              |   |                               |   |   |   |
| Product  distribution                             |   | $                                  | 93.1   |   | $ | 80.9 |   |
| Long-distance  and network management services    |   | 81.0                               |   | 74.7 |   |
| Telecommunications  information services          |   | 26.6                               |   | 29.2 |   |
| Directory  publishing                             |   | 24.4                               |   | 27.0 |   |
| Total  revenues and sales                         |   | $                                  | 225.1  |   | $ | 211.8 |   |
| Costs  and expenses:                              |   |                               |   |   |   |
| Cost  of services                                 |   | 72.7                               |   | 71.1 |   |
| Cost  of products sold                            |   | 107.7                              |   | 94.6 |   |
| Selling,  general, administrative and other       |   | 17.7                               |   | 18.2 |   |
| Depreciation  and amortization                    |   | 9.3                                |   | 9.1 |   |
| Total  costs and expenses                         |   | 207.4                              |   | 193.0 |   |
| Segment  income                                   |   | $                                  | 17.7   |   | $ | 18.8 |   |
| Long-distance  customers                          |   | 1,605.0                            |   | 1,318.0 |   |

 

Communications supportservices revenues and sales increased $13.3 million, or 6 percent, for thethree months ended March 31, 2003.  Asnoted in the table above, the increase in revenues and sales in the firstquarter of 2003 reflected growth in sales of telecommunications and dataproducts and increased revenues from long-distance and network managementservices, partially offset by reductions in telecommunications informationservices and directory publishing revenues. Sales of telecommunications and data products increased $12.2 million inthe three month period of 2003 driven by increased sales to non-affiliates of$15.9 million, reflecting increased sales of wireless handsets to retailers andother distributors.  For the first quarter of 2003, sales toaffiliates decreased $3.7 million, primarily due to timing differences in thepurchases of materials and equipment related to long-term construction projects.  Revenues from long-distance and networkmanagement services increased $6.3 million, primarily driven by growth inALLTEL’s customer base for these services, partially offset by a decrease incustomer billing rates due to competition. Telecommunications information services revenues decreased $2.6 million,primarily due to a reduction in programming services provided to onecustomer.  The $2.6 million decrease indirectory publishing revenues primarily resulted from a change in accountingfor directory contracts in which the Company has a secondary deliveryobligation.  ALLTEL began deferring aportion of its revenues and related costs to provide for secondary deliveryeffective January 1, 2003.

 

Although revenues andsales increased in the three month period of 2003, segment income decreasedprimarily due to lower profit margins realized by the product distribution anddirectory publishing operations.  Profitmargins for the product distribution operations decreased due to a shift in themix of products sold to non-affiliates, as a proportionately higher percentageof these sales consisted of lower margin wireless handsets as noted above.  Profit margins for the directory publishing operations reflectedincreased selling, marketing and other start-up costs incurred in order for theCompany’s publishing subsidiary to begin providing all directory publishingservices, except printing, for a limited number of directory contracts to bepublished in 2003.  Currently, thesedirectory publishing services are contracted out to a third party.  Depreciation and amortization expenseincreased slightly in the three month period of 2003, primarily due to thegrowth in long-distance and network management plant in service.

 

A summary of theintegration expenses and other charges related to the communications supportservices operations that were not included in the determination of segmentincome were as follows for the three months ended March 31, 2002:

 
| **(Millions)**                                |   |   |   |
|-----------------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs         |   | $      | 0.2    |   |
| Lease  and contract termination costs         |   | 2.8    |   |
| Total  integration expenses and other charges |   | $      | 3.0    |   |

 

27

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Corporate Operations

 
|                                    |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------|--------|------------------------------------|--------|
| **(Millions)**                          |   | **2003**                           |   | **2002** |   |
| Corporate  expenses                     |   | $                                  | 10.4   |   | $ | 8.3 |   |
| Integration  expenses and other charges |   | —                             |   | 42.9 |   |
| Total  corporate operations             |   | $                                  | 10.4   |   | $ | 51.2 |   |

 

As indicated in thetable, corporate operations included integration expenses and other charges, aspreviously discussed. The increase in corporate expenses in 2003 primarilyreflected an increase in employee-related benefit costs. 

 

### **FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 
|                                       |   | **Three  Months  Ended March 31,** |     |
|--------------------------------------------|--------|------------------------------------|----------|
| **(Millions, except per share amounts)**   |   | **2003**                           |     | **2002** |   |
| Cash  flows from (used in):                |   |                               |     |   |   |
| Operating  activities                      |   | $                                  | 546.9    |   | $ | 567.7 |   |
| Investing  activities                      |   | (348.6                             | )        | (220.5 | ) |
| Financing  activities                      |   | (287.4                             | )        | (335.9 | ) |
| Discontinued  operations                   |   | 7.5                                |     | (1.8 | ) |
| Effect  of exchange rate changes           |   | (0.1                               | )        | (0.4 | ) |
| Change  in cash and short-term investments |   | $                                  | (81.7    | ) | $ | 9.1 |   |
| Total  capital structure (a)               |   | $                                  | 12,642.9 |   | $ | 9,367.0 |   |
| Percent  of equity to total capital (b)    |   | 48.8                               | %        | 60.7 | % |
| Book  value per share (c)                  |   | $                                  | 19.83    |   | $ | 18.27 |   |

 

 

Notes:
| (a) |   | Computed as the sum of  long-term debt including current maturities, redeemable preferred stock and  total shareholders’ equity.                  |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | Computed by dividing  total shareholders’ equity by total capital structure as computed in (a)  above.                                            |
| (c) |   | Computed by dividing  total shareholders’ equity less preferred stock by the total number of common  shares outstanding at the end of the period. |

 

OperatingActivities

Cash provided from operations continued to be ALLTEL’s primary sourceof liquidity.  Cash provided fromoperations for the three months ended March 31, 2003 reflected growth inearnings of the Company before depreciation and amortization, interest expenseand income taxes.  The increase in cashprovided from operations resulting from earnings growth in 2003 was more thanoffset by changes in working capital requirements, including timing differencesin the payment of trade payables and income taxes.

 

InvestingActivities

Capital expenditures continued to be ALLTEL’s primary use of capitalresources.  Capital expenditures for thethree months ended March 31, 2003 were $227.7 million compared to $190.9million for the same period in 2002. The increase in 2003 primarily reflected additional spending by ALLTELto construct additional network facilities, to deploy digital wirelesstechnology in the Company’s existing and newly acquired wireless markets and toupgrade ALLTEL’s telecommunications network in order to offer othercommunications services, including long-distance, Internet, DSL and localcompetitive access services.  TheCompany funded most of its capital expenditures through internally generatedfunds.  Investing activities alsoincluded outlays for capitalized software development costs.  Additions to capitalized software for thethree months ended March 31, 2003 were $13.5 million compared to $18.7 millionfor the same period in 2002.  Capitalizedsoftware development costs for 2002 included additional spending for thedevelopment and enhancement of internal use software to support the Company’sretail operations.  Spending levels in2003 for capitalized software development costs reflected the completion ofthese projects during 2002.  The Companyexpects capital expenditures including capitalized software development coststo be approximately $1.2 to $1.3 billion for 2003, which will be funded primarilyfrom internally generated funds.

 

Cash outlays for the purchase of property were $124.6 million for thethree months ended March 31, 2003, compared to $19.5 million for the sameperiod of 2002.  As previouslydiscussed, during the first quarter of 2003, ALLTEL purchased wirelessproperties in Mississippi for $64.6 million in cash.  In addition, the Company also acquired the remaining ownershipinterest in two wireless properties in Michigan for $60.0 million in cash.  During the first quarter of 2002,

 

28

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ALLTEL purchased a wireline property in Georgia for $17.9 million andacquired an additional ownership interest in a Texas wireless property for $1.6million.

 

Cash flows from investing activities for the three months ended March31, 2002 included $7.5 million of advance lease payments received from AmericanTower Corporation (“American Tower”) for the leasing of cell site towers.  In December 2000, ALLTEL signed an agreementto lease American Tower certain of the Company’s cell site towers in exchangefor cash.  In turn, ALLTEL is obligatedto pay American Tower a monthly fee per tower for management and maintenanceservices for the duration of the fifteen year lease agreement.  During February 2002, the Company closed onthe remaining towers under this agreement.

 

Investing activities for the three month periods ended March 31, 2003and 2002 also included proceeds from the return on investments of $13.8 millionand $11.3 million, respectively.  Theseamounts primarily consisted of cash distributions received from ALLTEL’swireless minority investments.  Theincreases in 2003 primarily reflected the acquisition of certain minoritypartnership interests from CenturyTel, as previously discussed.

 

Financing Activities

Dividend payments remain a significant use of capital resources forALLTEL.  Common and preferred dividendpayments were $109.1 million and $105.7 million for the three months endedMarch 31, 2003 and 2002, respectively. The increase in dividend payments in 2003 primarily reflected growth inthe annual dividend rate on ALLTEL’s common stock.  In October 2002, the Company’s Board of Directors approved anincrease in the quarterly common stock dividend rate from $.34 to $.35 pershare, raising the annual dividend rate to $1.40 per share.  The Company expects to continue the paymentof cash dividends during the balance of 2003.

 

ALLTEL’s maximum borrowing capacity under its commercial paper programis $1.5 billion.  ALLTEL classifiescommercial paper borrowings as long-term debt, because they are intended to bemaintained on a long-term basis and are supported by the Company’s revolvingcredit agreements.  ALLTEL has a $1.0billion line of credit under a revolving credit agreement of which $50.0million will expire in October 2003 and $950.0 million will expire in October2005.  On July 31, 2002, the Companyentered into an additional $500.0 million, 364-day revolving credit agreementthat will expire on July 30, 2003, and allows the Company to convert anyoutstanding borrowings under this agreement into term loans maturing in2004.  No borrowings were outstandingunder the revolving credit agreements as of March 31, 2003, December 31, 2002or March 31, 2002.

 

Under the commercial paper program, commercial paper borrowings arefully supported by the available borrowings under the revolving creditagreements.  Accordingly, the totalamount outstanding under the commercial paper program and the indebtednessincurred under the revolving credit agreements may not exceed $1.5billion.  Commercial paper borrowingsoutstanding at March 31, 2003 were $310.0 million and had a weighted averageinterest rate of 1.3 percent. Commercial paper borrowings outstanding at December 31, 2002, March 31,2002 and December 31, 2001 were $25.0 million, $21.0 million and $230.1million, respectively.  The net increaseof $285.0 million in commercial paper borrowings outstanding from December 31,2002 represented all of the long-term debt issued in the first quarter of 2003.During 2003, the Company incurred additional commercial paper borrowings tofund the wireless property acquisitions in Mississippi and Michigan, aspreviously discussed, and to retire a $450.0 million, 7.125 percent seniorunsecured note that was due March 1, 2003.

 

Retirements of long-term debt were $456.2 million and $227.4 millionfor the three months ended March 31, 2003 and 2002, respectively.  The repayment of the $450.0 millionunsecured note due March 1, 2003 represented substantially all of the long-termdebt retired during the first quarter of 2003. The net reductions from December 31, 2001 in commercial paper borrowingsof $209.1 million represented the majority of the long-term debt retired in thethree month period of 2002.  Scheduledlong-term debt retirements, net of commercial paper activity, for the firstquarter of 2002 amounted to $18.3 million.

 

Cash flows from financing activities also included distributions tominority investors, which amounted to $10.0 million and $12.6 million for thethree months ended March 31, 2003 and 2002, respectively.

 

Liquidity andCapital Resources

The Company believes ithas adequate operating cash flows to finance its ongoing operating requirementsincluding capital expenditures and the payment of dividends.  Additional sources of funding available toALLTEL include (1) additional borrowings available to the Company under itscommercial paper program and revolving credit agreements, (2) additional debtor equity securities under the Company’s March 28, 2002, $5.0 billion shelfregistration statement, of

 

29

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which approximately $730 million remained available for issuance atMarch 31, 2003 and (3) additional debt securities issued in the privateplacement market.

 

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

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

 

Factors that could affectALLTEL’s short and long-term credit ratings would include, but not be limitedto, a material decline in the Company’s operating results and increased debtlevels relative to operating cash flows resulting from future acquisitions orincreased capital expenditure requirements. If ALLTEL’s credit ratings were to be downgraded from current levels,the Company would incur higher interest costs on new borrowings, and theCompany’s access to the public capital markets could be adverselyaffected.  A downgrade in ALLTEL’scurrent short or long-term credit ratings would not accelerate scheduledprincipal payments of ALLTEL’s existing long-term debt.

 

During the third quarterof 2002, the Company amended its $1.0 billion revolving credit agreement toconform certain of its provisions to corresponding provisions of the Company’s364-day revolving credit agreement.  Therevolving credit agreements contain 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 March 31, 2003, the Company’s total debt to capitalizationratio was 50.9 percent.

 

As previously discussed,on April 1, 2003, the Company completed the sale of the financial servicesdivision of itsinformation services subsidiary to Fidelity National for$1.05 billion, payable in the form of $775.0 million in cash and $275.0 millionin Fidelity National common stock.  Theafter-tax proceeds from the sale were used primarily to reduce borrowingsoutstanding under the Company’s commercial paper program and to retire alllong-term debt outstanding under the Rural Utilities Services, Rural TelephoneBank and Federal Financing Bank programs. The Fidelity National common stock acquired in this transactionrepresented an approximate 8 percent interest in Fidelity National and may notbe disposed of by ALLTEL, subject to certain conditions specified in the saleagreement, for a period of one year from the closing date of the transaction.

 

In connection with theleasing of 1,773 cell site towers to American Tower during 2001 and 2002, theCompany received $531.9 million of cash in advance as prepaid rent and isrecognizing the proceeds as revenue on a straight-line basis over thefifteen-year lease term.  Participantsin the telecommunications and cell tower industry currently are experiencing amore difficult operating and financial environment than when the towertransaction with ALLTEL was completed. Accordingly, although ALLTEL currently considers the likelihood to beremote, in the event ALLTEL’s tower lessee were to file or become subject tobankruptcy proceedings, it is possible that the bankruptcy court could requirethat the tower transaction be rescinded and ALLTEL be required to refund theunutilized portion of the prepaid rent. At March 31, 2003, deferred rental income was $473.3 million and wasincluded in other liabilities in the accompanying unaudited consolidatedbalance sheet.

 

Under the Company’slong-term debt borrowing agreements, acceleration of principal payments would occurupon payment default, violation of debt covenants not cured within 30 days orbreach of certain other conditions set forth in the borrowing agreements.  At March 31, 2003, the Company was incompliance with all of its debt covenants. There are no provisions within theCompany’s leasing agreements that would trigger acceleration of future leasepayments.

 

The Company does not usesecuritization of trade receivables, affiliation with special purpose entities,variable interest entities or synthetic leases to finance its operations.  Additionally, the Company has not enteredinto any arrangement requiring ALLTEL to guarantee payment of third party debtor to fund losses of an unconsolidated special purpose entity.

 

30

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Recently IssuedAccounting Pronouncements

In April, 2003, theFinancial Accounting Standards Board issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities”.  SFAS No. 149 amends and clarifies theaccounting guidance on derivative instruments (including certain derivativesembedded in other contracts) and hedging activities that fall within the scopeof SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities”.  SFAS No. 149 is effectivefor contracts entered into or modified after June 30, 2003 and hedgingrelationships designated after June 30, 2003, with certain exceptions.  The Company does not expect that thisstandard will have a material effect on its consolidated financial statements.

 

Critical AccountingPolicies

ALLTEL prepares itsconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States. In its Annual Report on Form 10-K for the year ended December 31, 2002,ALLTEL identified the critical accounting policies which affect its moresignificant estimates and assumptions used in preparing the Company’sconsolidated financial statements. These critical accounting policies include accounting for servicerevenues, evaluating the collectibility of trade receivables, assessing therecoverability of capitalized software development costs, accounting forpension and other postretirement benefits, and calculating depreciation andamortization expense.  There have beenno material changes to ALLTEL’s critical accounting policies during thethree-month period ended March 31, 2003, except for the January 1, 2003adoption of SFAS No. 143 and EITF Issue 00-21, as previously discussed underthe caption “Accounting Changes”.

 

31

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**ALLTELCORPORATION**

**FORM10-Q**

**PARTI – FINANCIAL INFORMATION**

 

**Item 3.****           Quantitative andQualitative Disclosures About Market Risk**

The Company’s market risks at March 31, 2003 are similar to the marketrisks discussed in ALLTEL’s Annual Report on Form 10-K for the year endedDecember 31, 2002. The Company is exposed to market risk from changes ininterest rates and foreign exchange rates. The Company has estimated its market risk using sensitivityanalysis.  Market risk is defined as thepotential change in earnings due to a hypothetical adverse change in marketprices or interest rates.  The resultsof the sensitivity analysis used to estimate market risk are presented below,although the actual results may differ from these estimates.

 

Interest Rate Risk

The Company’s earningsare affected by changes in variable interest rates related to ALLTEL’s issuanceof short-term commercial paper and interest rate swap agreements.  The Company enters into interest rate swapagreements to obtain a targeted mixture of variable and fixed-interest-ratedebt such that the portion of debt subject to variable rates does not exceed 30percent of ALLTEL’s total debt outstanding. The Company has established policies and procedures for risk assessmentand the approval, reporting, and monitoring of interest rate swapactivity.  ALLTEL does not enter intointerest rate swap agreements, or other derivative financial instruments, fortrading or speculative purposes. Management periodically reviews ALLTEL’s exposure to interest ratefluctuations and implements strategies to manage the exposure.

 

As of March 31, 2003, the Company had $310.0 million of outstandingcommercial paper that was subject to variable interest rates.  The Company also had 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 ofMarch 31, 2003.  The maturities of thesix interest rate swaps range from March 1, 2006 to November 1, 2013.  The weighted average fixed rate received byALLTEL on these swaps is 5.5 percent, and the variable rate paid by ALLTEL isthe three month LIBOR (London-Interbank Offered Rate).  The weighted average variable rate paid byALLTEL was 1.4 percent at March 31, 2003. A hypothetical increase of 100 basis points in variable interest rateswould reduce annual pre-tax earnings by approximately $13.1 million.  Conversely, a hypothetical decrease of 100basis points in variable interest rates would increase annual pre-tax earningsby approximately $13.1 million.

 

Foreign Exchange Risk

The Company’s business operations in foreign countries are not materialto the Company’s consolidated operations, financial condition andliquidity.  Foreign currency translationgains and losses were not material to the Company’s consolidated results ofoperations for the three months ended March 31, 2003 and 2002.  Additionally, the Company is not currentlysubject to material foreign currency exchange rate risk from the effects thatexchange rate movements of foreign currency would have on the Company’s futurecosts or on future cash flows it would receive from its foreignsubsidiaries.  The Company has notentered into any significant foreign currency forward exchange contracts orother derivative financial instruments to hedge the effects of adversefluctuations in foreign currency exchange rates.

 

**Item 4.****           Controls andProcedures**

 

(a)                      Evaluationof disclosure controls and procedures.

 

The term “disclosure controls and procedures” (definedin SEC Rule 13a-14(c)) refers to the controls and other procedures of a companythat are designed to ensure that information required to be disclosed by acompany in the reports that it files under the Securities Exchange Act of 1934(the “Exchange Act”) is recorded, processed, summarized and reported withinrequired time periods.  ALLTEL’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company’s disclosure controls and procedures as of a date within 90 daysbefore the filing of this quarterly report (the “Evaluation Date”), and theyhave concluded that, as of the Evaluation Date, such controls and procedureswere effective.

 

(b)                     Changesin internal controls.

 

ALLTEL maintains a system of internal accountingcontrols that are designed to provide reasonable assurance that its books andrecords accurately reflect the Company’s transactions and that ALLTEL’sestablished policies and procedures are followed.  There were no significant changes to ALLTEL’s internal controlsor in other factors that could significantly affect its internal controlssubsequent to the Company’s evaluation.

 

32

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**ALLTEL CORPORATION**

**FORM 10Q**

**PARTII – OTHER INFORMATION**

 

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

On October 3, 2002, the Environmental Protection Agency (“EPA”) servedthe Company with Notices of Violation of the federal Clean Air Act, the Clean Water Act and the EmergencyPlanning and Community Right to Know Act. These notices resulted from an industry-wide investigation intoenvironmental practices conducted by the EPA during 1998 to 2000 and allegedviolations by the Company, dating from 1997, regarding filing andrecord-keeping requirements for fuel storage tanks, as well as generators andbatteries used to supply emergency power at certain ALLTEL facilities.  On December 5, 2002, the Company met withthe EPA to begin settlement discussions. Management of ALLTEL believes that a settlement by mid-2003 isreasonably likely and may require the Company to pay penalties currentlyestimated at approximately $1.0 million and to implement a centralizedenvironmental management system.

 

The Company is party to various other legal proceedings arising fromthe ordinary course of business. Although the ultimate resolution of these various pr oceedings cannot bedetermined at this time, management of ALLTEL does not believe that suchproceedings, individually or in the aggregate, will have a material adverseeffect on the future consolidated results of operations or financial conditionof the Company.

 

To the knowledge of ALLTEL’s management, no other material legalproceedings, either private or governmental, currently are contemplated orthreatened.

 

**Item 6.****           Exhibits and Reportson Form 8-K**

 

(a)                                  Seethe exhibits specified on the Index of Exhibits located at Page 37.

 

(b)                                 Reportson Form 8-K:

 

Current Report onForm 8-K dated January 28, 2003, reporting under Item 5, Other Events, theCompany’s Press Release jointly announcing ALLTEL’s 2002 fourth quarter andannual unaudited consolidated results of operations and its decision to sellthe financial services division of ALLTEL Information Services, Inc. toFidelity National Financial Inc.

 

Current Report onForm 8-K dated April 1, 2003, reporting under Item 5, Other Events, theCompany’s Press Release announcing that ALLTEL had completed the sale of thefinancial services division of ALLTEL Information Services, Inc. to FidelityNational Financial Inc.

 

Current Report onForm 8-K dated April 24, 2003, reporting under Item 9, Regulation FDDisclosure, that the Company furnished under Item 12 “Disclosure of Results ofOperations and Financial Condition”, the Company’s Press Release announcingALLTEL’s first quarter 2003 unaudited consolidated results of operations.  On April 24, 2003, the Company also releasedquarterly supplemental financial information of ALLTEL for the years endedDecember 31, 2002 and 2001 and for the quarter ended March 31, 2003.  This supplemental financial informationreflected the financial services division of ALLTEL Information Services, Inc.,which was sold on April 1, 2003 to Fidelity National Financial Inc., asdiscontinued operations.

 

No other reportson Form 8-K have been filed during the quarter for which this report is filed.

 

33

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SIGNATURE

 

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

 

 
|   | ALLTEL CORPORATION                                      |                   |
|--------|---------------------------------------------------------|------------------------|
|   | (Registrant)                                            |                   |
|   |                                                    |                   |
|   |                                                    |                   |
|   |                                                    | /s/ Jeffery R. Gardner |   |   |
|   | Jeffery R. Gardner                                      |                   |
|   | Executive Vice President – Chief Financial Officer |                   |
|   | (Principal Financial Officer)                           |                   |
|   | May 14, 2003                                            |                   |
|        |                                                         |                        |  |  |

 

34

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CERTIFICATIONS

 

I,Scott T. Ford, Chief Executive Officer and President of ALLTEL Corporation,certify that:

 
| 1.     | I have reviewed this  quarterly report on Form 10-Q of ALLTEL Corporation;                                                                                                                                                                                                                                                                                                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 2.     | Based on my knowledge,  this quarterly report does not contain any untrue statement of a material  fact or omit to state a material fact necessary to make the statements made,  in light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this quarterly report;                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 3.     | Based on my knowledge,  the financial statements, and other financial information included in this  quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 4.     | The registrant’s other  certifying officers and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14  and 15d-14) for the registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | designed such  disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | evaluated the  effectiveness of the registrant’s disclosure controls and procedures as of a  date within 90 days prior to the filing date of this quarterly report (the  “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                  | presented in this  quarterly report our conclusions about the effectiveness of the disclosure  controls and procedures based on our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 5.     | The registrant’s other  certifying officers and I have disclosed, based on our most recent  evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | all significant  deficiencies in the design or operation of internal controls which could  adversely affect the registrant’s ability to record, process, summarize and  report financial data and have identified for the registrant’s auditors any  material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | any fraud, whether or  not material, that involves management or other employees who have a  significant role in the registrant’s internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 6.     | The registrant’s other  certifying officers and I have indicated in this quarterly report whether or  not there were significant changes in internal controls or in other factors  that could significantly affect internal controls subsequent to the date of  our most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   | Date:  May 14, 2003                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   | /s/ Scott T. Ford                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   | Scott T. Ford                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Chief Executive Officer  and President                                                                                                                                                                                                                                                                                                                                                              |
|        |                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |

 

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I,Jeffery R. Gardner, Executive Vice President - Chief Financial Officer ofALLTEL Corporation, certify that:

 
| 1.     | I have reviewed this  quarterly report on Form 10-Q of ALLTEL Corporation;                                                                                                                                                                                                                                                                                                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 2.     | Based on my knowledge,  this quarterly report does not contain any untrue statement of a material  fact or omit to state a material fact necessary to make the statements made,  in light of the circumstances under which such statements were made, not  misleading with respect to the period covered by this quarterly report;                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 3.     | Based on my knowledge,  the financial statements, and other financial information included in this  quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 4.     | The registrant’s other  certifying officers and I are responsible for establishing and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14  and 15d-14) for the registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | designed such  disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | evaluated the  effectiveness of the registrant’s disclosure controls and procedures as of a  date within 90 days prior to the filing date of this quarterly report (the  “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                  | presented in this  quarterly report our conclusions about the effectiveness of the disclosure  controls and procedures based on our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 5.     | The registrant’s other  certifying officers and I have disclosed, based on our most recent  evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | all significant  deficiencies in the design or operation of internal controls which could  adversely affect the registrant’s ability to record, process, summarize and  report financial data and have identified for the registrant’s auditors any  material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | any fraud, whether or  not material, that involves management or other employees who have a  significant role in the registrant’s internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 6.     | The registrant’s other  certifying officers and I have indicated in this quarterly report whether or  not there were significant changes in internal controls or in other factors  that could significantly affect internal controls subsequent to the date of  our most recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   |
|   | Date:  May 14, 2003                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | /s/ Jeffery R. Gardner                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | Jeffery R. Gardner                                                                                                                                                                                                                                                                                                                                                                                  |
|   | Executive Vice  President - Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                 |
|        |                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |

 

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**ALLTELCORPORATION**

**FORM10-Q**

**INDEXOF EXHIBITS**

 
| **Form 10-Q  Exhibit No.** |   | **Description of Exhibits**                                                                                                                                                                                                                                                                                    |     |
|----------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|
| (4)(c)                     |        | Indenture  dated as of March 7,1996, between 360 Communications Company and Citibank,  N.A., as Trustee (the "1996 360 Indenture") (incorporated herein  by reference to Exhibit 4.2 to 360 Communications Company's Annual Report on  Form 10-K for the fiscal year ended December 31, 1995).  | *   |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (4)(d)                     |        | Form of 7 1/2%  Senior Note Due 2006 issued under the 1996 360 Indenture (incorporated  herein by reference to Exhibit 4.1 to 360 Communications Company's Annual  Report of Form 10-K for the fiscal year ended December 31, 1995).                                                                           | *   |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (4)(e)                     |        | First  Supplemental Indenture dated as of February 1, 1999, among 360  Communications Company, ALLTEL Corporation and Citibank, N.A. as trustee.                                                                                                                                                               | (a) |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (4)(f)                     |        | Indenture  dated as of March 1, 1997, between 360 Communications Company and Citibank,  N.A., as Trustee (the "1997 360 Indenture") (incorporated herein  by reference to Exhibit 4.6 to 360 Communications Company's Current Report  of Form 8-K dated March 17, 1997).                             | *   |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (4)(g)                     |        | Form of 7.60%  Senior Note Due 2009 issued under the 1997 360 Indenture (incorporated  herein by reference to Exhibit 4.7 to 360 Communications Company's Current  Report on Form 8-K dated March 17, 1997).                                                                                                   | *   |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (4)(h)                     |        | Form of 6.65%  Senior Note Due 2008 issued under the 1997 360 Indenture (incorporated  herein by reference to Exhibit 4.8 to 360 Communications Company's Current  Report on Form 8-K dated January 13, 1998).                                                                                                 | *   |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (4)(i)                     |        | First  Supplemental Indenture dated as of February 1, 1999, among 360  Communications Company, ALLTEL Corporation and Citibank, N.A. as trustee.                                                                                                                                                               | (a) |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (10)(c)(9)                 |   | Change in Control  Agreement by and between the Company and C.J. Duvall Jr. effective as of  March 12, 2003.                                                                                                                                                                                                   | (a) |
|                            |        |                                                                                                                                                                                                                                                                                                                |     |
| (10)(c)(10)                |   | Change in Control  Agreement by and between the Company and Sharilyn S. Gasaway effective as of  March 12, 2003.                                                                                                                                                                                               | (a) |
|                       |   |                                                                                                                                                                                                                                                                                                           |     |
| 99(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) |
|                       |   |                                                                                                                                                                                                                                                                                                           |     |
| 99(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) |

 
| *  | Incorporated      herein by reference as indicated. |
|---------|-----------------------------------------------------|
| (a)     | Filed      herewith.                                |

   

  

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