| UNITED STATES                                                                       |
|-------------------------------------------------------------------------------------|
| SECURITIES AND EXCHANGE COMMISSION                                                  |
| WASHINGTON, D. C.    20549                                                |
|                                                                                |
| FORM 10-Q                                                                           |
|                                                                                |
| [x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE                  |
| SECURITIES EXCHANGE ACT OF 1934                                                     |
| For the quarterly period ended  March 31, 2004                                 |
| OR                                                                                  |
| [ ]  TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                 |
| SECURITIES EXCHANGE ACT OF 1934                                                     |
|                                                                                |
| Commission file number  1-4996                                                 |
|                                                                                |
| **ALLTEL  CORPORATION**                                                             |
| (Exact name of registrant as specified in its  charter)                             |
|                                                                                |
| Delaware                                                                            |  34-0868285 |
| (State  or other jurisdiction of                                                    | (I.R.S. Employer |
|  incorporation  or organization)                                               | Identification No.) |
|                                                                                |   |
| One Allied Drive,  Little Rock, Arkansas                                            | 72202 |
| (Address of  principal executive offices)                                           | (Zip Code) |
|                                                                                |   |
| Registrant’s telephone  number, including area code                            | (501) 905-8000 |
|                                                                                |   |
|                                                                                |
| (Former name,  former address and former fiscal year, if changed since last report) |
|                                                                                     |  |  |

 

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  X       NO      

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2of the Act).

YES  X       NO      

 

 

Number of common shares outstanding as of March 31, 2004:  308,171,432

 

 

 

The Exhibit Index is located on page 38.

 

 

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**ALLTELCORPORATION**

**FORM10-Q**

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

 

**PARTII - OTHER INFORMATION**

 
| Item 1. | Legal  Proceedings *                                                              |   |
|---------|-----------------------------------------------------------------------------------|--------|
| Item 2. | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity 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                                                 |   |

 

*   No reportable information under this item.

 

Forward-LookingStatements

ThisReport on Form 10-Q includes, and future filings by the Company on Form 10-K,Form 10-Q and Form 8-K and future oral and written statements by ALLTEL and itsmanagement may include, certain “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject touncertainties that could cause actual future events and results to differmaterially from those expressed in the forward-looking statements.  These forward-looking statements are 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.

 

Actualfuture events and results may differ materially from those expressed in theseforward-looking statements as a result of a number of important factors.  Representative examples of these factorsinclude (without limitation) adverse changes in economic conditions in themarkets served by ALLTEL; the extent, timing, and overall effects ofcompetition in the communications business; material changes in thecommunications industry generally that could adversely affect vendorrelationships with equipment and network suppliers and customer relationshipswith wholesale customers; material changes in communications technology; therisks associated with the integration of acquired businesses; adverse changesin the terms and conditions of the Company’s wireless roaming agreements; thepotential for adverse changes in the ratings given to our debt securities bynationally accredited ratings organizations; the availability and cost offinancing in the corporate debt markets; the uncertainties related to ALLTEL’sstrategic investments; the effects of work stoppages; the effects oflitigation; ongoing deregulation (and the resulting likelihood of significantlyincreased price and product/service competition) in the communications businessas a result of federal and state legislation, rules, and regulations; the finaloutcome of federal, state and local regulatory initiatives and proceedingsrelated to the terms and conditions of interconnection, access charges,universal service, and unbundled network elements and resale rates; and theeffects of the Federal Communications Commission’s number portability rules.

 

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

 

1

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**ALLTELCORPORATION**

**FORM10-Q**

**PART I -FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**
| (Dollars in millions,  except per share amounts)                                                                                               |   | March 31, |       | December 31, |       |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|--------------|------------|
| **Assets**                                                                                                                                     |   | 2004      |       | 2003         |       |
| **Current Assets:**                                                                                                                            |   |      |       |         |       |
| Cash and  short-term investments                                                                                                               |   | $         | 637.4      |         | $          | 657.8 |   |
| Accounts  receivable (less allowance for doubtful  accounts of $41.9 and $46.3, respectively)                                                  |   | 841.5     |       | 890.0        |       |
| Inventories                                                                                                                                    |   | 116.7     |       | 122.1        |       |
| Prepaid expenses  and other                                                                                                                    |   | 70.4      |       | 59.2         |       |
| Total current  assets                                                                                                                          |   | 1,666.0   |       | 1,729.1      |       |
| Investments                                                                                                                                    |   | 765.8     |       | 722.7        |       |
| Goodwill                                                                                                                                       |   | 4,854.2   |       | 4,854.2      |       |
| Other  intangibles                                                                                                                             |   | 1,321.9   |       | 1,337.0      |       |
| **Property, Plant and Equipment:**                                                                                                             |   |      | ** ** |         | ** ** |
| Land                                                                                                                                           |   | 261.6     |       | 259.2        |       |
| Buildings and  improvements                                                                                                                    |   | 1,066.0   |       | 1,053.0      |       |
| Wireline                                                                                                                                       |   | 6,578.5   |       | 6,514.7      |       |
| Wireless                                                                                                                                       |   | 5,366.8   |       | 5,255.8      |       |
| Information  processing                                                                                                                        |   | 980.6     |       | 946.7        |       |
| Other                                                                                                                                          |   | 494.6     |       | 482.3        |       |
| Under  construction                                                                                                                            |   | 334.6     |       | 398.2        |       |
| Total property,  plant and equipment                                                                                                           |   | 15,082.7  |       | 14,909.9     |       |
| Less accumulated  depreciation                                                                                                                 |   | 7,572.0   |       | 7,289.1      |       |
| Net property,  plant and equipment                                                                                                             |   | 7,510.7   |       | 7,620.8      |       |
| Other assets                                                                                                                                   |   | 421.0     |       | 397.3        |       |
| **Total Assets**                                                                                                                               |   | $         | 16,539.6   |         | $          | 16,661.1 |   |
|                                                                                                                                           |   |      |       |         |       |
| **Liabilities and Shareholders’  Equity**                                                                                                 |   |      |       |         |       |
| **Current Liabilities:**                                                                                                                       |   |      | ** ** |         | ** ** |
| Current  maturities of long-term debt                                                                                                          |   | $         | 277.3      |         | $          | 277.2 |   |
| Accounts payable                                                                                                                               |   | 404.8     |       | 479.8        |       |
| Advance payments  and customer deposits                                                                                                        |   | 208.6     |       | 205.3        |       |
| Accrued taxes                                                                                                                                  |   | 129.1     |       | 114.6        |       |
| Accrued  dividends                                                                                                                             |   | 116.0     |       | 116.2        |       |
| Accrued interest                                                                                                                               |   | 85.3      |       | 107.1        |       |
| Other current  liabilities                                                                                                                     |   | 181.4     |       | 192.5        |       |
| Total current  liabilities                                                                                                                     |   | 1,402.5   |       | 1,492.7      |       |
| Long-term debt                                                                                                                                 |   | 5,608.1   |       | 5,581.2      |       |
| Deferred income  taxes                                                                                                                         |   | 1,501.0   |       | 1,417.7      |       |
| Other liabilities                                                                                                                              |   | 1,129.5   |       | 1,147.3      |       |
| **Shareholders’ Equity:**                                                                                                                 |   |      | ** ** |         | ** ** |
| Preferred stock,  Series C, $2.06, no par value, 13,528 and 13,928 shares issued and  outstanding, respectively                                |   | 0.3       |       | 0.4          |       |
| Common stock,  par value $1 per share, 1.0 billion shares authorized, 308,171,432 and  312,643,922 shares issued and outstanding, respectively |   | 308.2     |       | 312.6        |       |
| Additional  paid-in capital                                                                                                                    |   | 519.5     |       | 750.1        |       |
| Unrealized  holding gain on investments                                                                                                        |   | 110.3     |       | 73.6         |       |
| Foreign currency  translation adjustment                                                                                                       |   | 0.8       |       | 0.6          |       |
| Retained earnings                                                                                                                              |   | 5,959.4   |       | 5,884.9      |       |
| Total  shareholders’ equity                                                                                                               |   | 6,898.5   |       | 7,022.2      |       |
| **Total Liabilities and Shareholders’  Equity**                                                                                           |   | $         | 16,539.6   |         | $          | 16,661.1 |   |

 

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)                                                 |   | 2004                          |    | 2003 |   |
| **Revenues and sales:**                                                               |   |                          |    |   |   |
| Service revenues                                                                      |   | $                             | 1,765.6 |   | $ | 1,716.5 |   |
| Product sales                                                                         |   | 195.6                         |    | 189.3 |   |
| Total revenues  and sales                                                             |   | 1,961.2                       |    | 1,905.8 |   |
| **Costs and expenses:**                                                               |   |                          |    |   |   |
| Cost of services  (excluding depreciation of $231.9 and $220.2 included below)        |   | 560.8                         |    | 537.4 |   |
| Cost of products  sold                                                                |   | 257.3                         |    | 237.7 |   |
| Selling,  general, administrative and other                                           |   | 375.2                         |    | 361.1 |   |
| Depreciation and  amortization                                                        |   | 321.3                         |    | 303.5 |   |
| Restructuring  and other charges                                                      |   | 51.8                          |    | — |   |
| Total costs and  expenses                                                             |   | 1,566.4                       |    | 1,439.7 |   |
| **Operating income**                                                                  |   | 394.8                         |    | 466.1 |   |
|                                                                                  |   |                          |    |   |   |
| Equity earnings  in unconsolidated partnerships                                       |   | 13.3                          |    | 17.5 |   |
| Minority  interest in consolidated partnerships                                       |   | (15.6                         | )       | (17.8 | ) |
| Other income,  net                                                                    |   | 4.6                           |    | 0.4 |   |
| Interest expense                                                                      |   | (91.7                         | )       | (103.4 | ) |
|                                                                                  |   |                          |    |   |   |
| Income from  continuing operations before income taxes                                |   | 305.4                         |    | 362.8 |   |
| Income taxes                                                                          |   | 115.6                         |    | 135.2 |   |
|                                                                                  |   |                          |    |   |   |
| Income from  continuing operations                                                    |   | 189.8                         |    | 227.6 |   |
| Discontinued operations (net of income taxes of  $25.0)                               |   | —                        |    | 37.1 |   |
|                                                                                  |   |                          |    |   |   |
| Income before  cumulative effect of accounting change                                 |   | 189.8                         |    | 264.7 |   |
| Cumulative effect of accounting change (net of  income taxes of $10.3)                |   | —                        |    | 15.6 |   |
|                                                                                  |   |                          |    |   |   |
| Net income                                                                            |   | 189.8                         |    | 280.3 |   |
| Preferred  dividends                                                                  |   | —                        |    | — |   |
| Net income  applicable to common shares                                               |   | $                             | 189.8   |   | $ | 280.3 |   |
| **Earnings per share:**                                                               |   |                          |    |   |   |
| Basic:                                                                                |   |                          |    |   |   |
| Income from  continuing operations                                                    |   | $                             | .61     |   | $ | .73 |   |
| Income from  discontinued operations                                                  |   | —                        |    | .12 |   |
| Cumulative  effect of accounting change                                               |   | —                        |    | .05 |   |
| Net income                                                                            |   | $                             | .61     |   | $ | .90 |   |
| Diluted:                                                                              |   |                          |    |   |   |
| Income from  continuing operations                                                    |   | $                             | .61     |   | $ | .73 |   |
| Income from  discontinued operations                                                  |   | —                        |    | .12 |   |
| Cumulative  effect of accounting change                                               |   | —                        |    | .05 |   |
| Net income                                                                            |   | $                             | .61     |   | $ | .90 |   |
| Pro forma  amounts assuming change in accounting principle was applied retroactively: |   |                          |    |   |   |
| Net income                                                                            |   | $                             | 189.8   |   | $ | 264.7 |   |
| Basic earnings  per share                                                             |   | $                             | .61     |   | $ | .85 |   |
| Diluted earnings  per share                                                           |   | $                             | .61     |   | $ | .85 |   |

 

See the accompanying notes to the unaudited interimconsolidated financial statements.

 

3

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**
|                                                                                            |   | Three Months  Ended March 31, |   |
|-------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
| (Millions)                                                                                      |   | 2004                          |   | 2003 |   |
| **Cash Provided from Operations:**                                                              |   |                          |   |   |   |
| Net income                                                                                      |   | $                             | 189.8  |   | $ | 280.3 |   |
| Adjustments to  reconcile net income to net cash provided from operations:                      |   |                          |   |   |   |
| Income from  discontinued operations                                                            |   | —                        |   | (37.1 | ) |
| Cumulative  effect of accounting change                                                         |   | —                        |   | (15.6 | ) |
| Depreciation and  amortization                                                                  |   | 321.3                         |   | 303.5 |   |
| Provision for  doubtful accounts                                                                |   | 42.6                          |   | 52.8 |   |
| Non-cash portion  of restructuring and other charges                                            |   | 25.6                          |   | — |   |
| Increase in  deferred income taxes                                                              |   | 72.1                          |   | 78.0 |   |
| Other, net                                                                                      |   | (2.9                          | )      | (1.8 | ) |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  dispositions: |   |                          |   |   |   |
| Accounts  receivable                                                                            |   | 4.5                           |   | 21.7 |   |
| Inventories                                                                                     |   | 5.4                           |   | (15.5 | ) |
| Accounts payable                                                                                |   | (75.0                         | )      | (73.1 | ) |
| Other current  liabilities                                                                      |   | (15.0                         | )      | (37.1 | ) |
| Other, net                                                                                      |   | (16.9                         | )      | (9.2 | ) |
| Net cash  provided from operations                                                              |   | 551.5                         |   | 546.9 |   |
| **Cash Flows from Investing  Activities:**                                                      |   |                          |   |   |   |
| Additions to  property, plant and equipment                                                     |   | (207.2                        | )      | (227.7 | ) |
| Additions to  capitalized software development costs                                            |   | (8.0                          | )      | (13.5 | ) |
| Additions to  investments                                                                       |   | (1.1                          | )      | (3.8 | ) |
| Purchase of  property, net of cash acquired                                                     |   | —                        |   | (124.6 | ) |
| Proceeds from  the return on investments                                                        |   | 20.3                          |   | 13.8 |   |
| Other, net                                                                                      |   | (5.8                          | )      | 7.2 |   |
| Net cash used in  investing activities                                                          |   | (201.8                        | )      | (348.6 | ) |
| **Cash Flows from Financing  Activities:**                                                      |   |                          |   |   |   |
| Dividends on  preferred and common stock                                                        |   | (115.5                        | )      | (109.1 | ) |
| Reductions in  long-term debt                                                                   |   | (1.5                          | )      | (456.2 | ) |
| Repurchases of  common stock                                                                    |   | (243.0                        | )      | — |   |
| Distributions to  minority investors                                                            |   | (16.2                         | )      | (10.0 | ) |
| Long-term debt  issued                                                                          |   | —                        |   | 285.0 |   |
| Common stock  issued                                                                            |   | 5.9                           |   | 2.9 |   |
| Net cash used in  financing activities                                                          |   | (370.3                        | )      | (287.4 | ) |
|                                                                                            |   |                          |   |   |   |
| Net cash  provided from discontinued operations                                                 |   | —                        |   | 7.5 |   |
|                                                                                            |   |                          |   |   |   |
| Effect of  exchange rate changes on cash and short-term investments                             |   | 0.2                           |   | (0.1 | ) |
|                                                                                            |   |                          |   |   |   |
| Decrease in cash  and short-term investments                                                    |   | (20.4                         | )      | (81.7 | ) |
|                                                                                            |   |                          |   |   |   |
| **Cash and Short-term Investments:**                                                            |   |                          |   |   |   |
| Beginning of the  period                                                                        |   | 657.8                         |   | 134.6 |   |
| End of period                                                                                   |   | $                             | 637.4  |   | $ | 52.9 |   |
|                                                                                            |   |                          |   |   |   |
| **Non-Cash Investing and Financing  Activities:**                                               |   |                          |   |   |   |
| Change in fair  value of investments in equity securities                                       |   | $                             | 49.1   |   | $ | — |   |
| Change in fair  value of interest rate swap agreements                                          |   | $                             | 28.5   |   | $ | 0.6 |   |

 

See the accompanyingnotes to the unaudited interim consolidated financial statements.

 

4

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**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)**
| (Millions)                                                                    |   | Preferred  Stock |   | Common  Stock |   | Additional  Paid-In  Capital |   | Unrealized  Holding  Gain On  Investments |   | Foreign  Currency  Translation  Adjustment |   | Retained  Earnings |   | Total  |   |
|-------------------------------------------------------------------------------|--------|------------------|--------|---------------|--------|------------------------------|--------|-------------------------------------------|--------|--------------------------------------------|--------|--------------------|--------|--------|--------|
| Balance at  December 31, 2003                                                 |   | $                | 0.4    |          | $      | 312.6                        |   | $                                         | 750.1  |                                       | $      | 73.6               |   | $      | 0.6    |   | $ | 5,884.9 |   | $ | 7,022.2 |   |
| Net income                                                                    |   | —           |   | —        |   | —                       |   | —                                    |   | —                                     |   | 189.8              |   | 189.8  |   |
| Other  comprehensive income, net of tax: (See Note 5)                         |   |             |   |          |   |                         |   |                                      |   |                                       |   |               |   |   |   |
| Unrealized  holding gains on investments, net of reclassification adjustments |   | —           |   | —        |   | —                       |   | 36.7                                      |   | —                                     |   | —             |   | 36.7   |   |
| Foreign currency  translation adjustment                                      |   | —           |   | —        |   | —                       |   | —                                    |   | 0.2                                        |   | —             |   | 0.2    |   |
| Comprehensive  income                                                         |   | —           |   | —        |   | —                       |   | 36.7                                      |   | 0.2                                        |   | 189.8              |   | 226.7  |   |
| Employee plans,  net                                                          |   | —           |   | 0.1           |   | 5.6                          |   | —                                    |   | —                                     |   | —             |   | 5.7    |   |
| Restricted  stock, net of unearned compensation                               |   | —           |   | 0.2           |   | 0.7                          |   | —                                    |   | —                                     |   | —             |   | 0.9    |   |
| Tax benefit for  non-qualified stock options                                  |   | —           |   | —        |   | 1.3                          |   | —                                    |   | —                                     |   | —             |   | 1.3    |   |
| Conversion of  preferred stock                                                |   | (0.1             | )      | 0.1           |   | —                       |   | —                                    |   | —                                     |   | —             |   | — |   |
| Repurchases of  stock                                                         |   | —           |   | (4.8          | )      | (238.2                       | )      | —                                    |   | —                                     |   | —             |   | (243.0 | )      |
| Dividends:                                                                    |   |             |   |          |   |                         |   |                                      |   |                                       |   |               |   |   |   |
| Common                                                                        |   | —           |   | —        |   | —                       |   | —                                    |   | —                                     |   | (115.3             | )      | (115.3 | )      |
| Preferred                                                                     |   | —           |   | —        |   | —                       |   | —                                    |   | —                                     |   | —             |   | — |   |
| Balance at March  31, 2004                                                    |   | $                | 0.3    |          | $      | 308.2                        |   | $                                         | 519.5  |                                       | $      | 110.3              |   | $      | 0.8    |   | $ | 5,959.4 |   | $ | 6,898.5 |   |
|                                                                          |   |             |   |          |   |                         |   |                                      |   |                                       |   |               |   |   |   |

 

The accompanying notesare an integral part of this consolidated financial statement.

 

5

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS**

       

 

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

Basis of Presentation– The consolidated financial statements as of March 31, 2004 and 2003 and forthe three month periods then ended of ALLTEL Corporation (“ALLTEL” or the“Company”) are unaudited.  Theconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial reporting andSecurities and Exchange Commission rules and regulations.  Certain information and footnote disclosureshave been condensed or omitted in accordance with those rules andregulations.   The consolidatedfinancial statements reflect all adjustments (consisting only of normal recurringadjustments) which are, in the opinion of management, necessary for a fairpresentation of the financial position and operating results for the interimperiods presented.

 

**2.****                      CumulativeEffect of Accounting Change:**

Except for certain wireline subsidiariesas further discussed below, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 143, “Accounting for Asset RetirementObligations”, effective January 1, 2003. SFAS No. 143 addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This standardapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development, or normaluse of the assets.  SFAS No. 143requires that a liability for an asset retirement obligation be recognized whenincurred and reasonably estimable, recorded at fair value, and classified as aliability in the balance sheet.  Whenthe liability is initially recorded, the entity capitalizes the cost andincreases the carrying value of the related long-lived asset.  The liability is then accreted to itspresent value each period, and the capitalized cost is depreciated over theestimated useful life of the related asset. At the settlement date, the entity will settle the obligation for itsrecorded amount and recognize a gain or loss upon settlement.  The Company has evaluated the effects ofSFAS No. 143 on its operations and has determined that, for telecommunicationsand other operating facilities in which the Company owns the underlying land,ALLTEL has no contractual or legal obligation to remediate the property if theCompany were to abandon, sell or otherwise dispose of the property.  Certain of the Company’s cell site and switchsite operating lease agreements contain clauses requiring restoration of theleased site at the end of the lease term. Similarly, certain of the Company’s lease agreements for office andretail locations require restoration of the leased site upon expiration of thelease term.  Accordingly, ALLTEL issubject to asset retirement obligations associated with these leased facilitiesunder the provisions of SFAS No. 143. The application of SFAS No. 143 to the Company’s cell site and switchsite leases and leased office and retail locations did not have a materialimpact on ALLTEL’s consolidated results of operations, financial position, orcash flows as of and for the three months ended March 31, 2004 or 2003.

 

In accordance with federal and stateregulations, depreciation expense for ALLTEL’s wireline operations hashistorically included an additional provision for cost of removal.  The additional cost of removal provisiondoes not meet the recognition and measurement principles of an asset retirementobligation under SFAS No. 143.  InDecember 2002, the Federal Communications Commission (“FCC”) notified wirelinecarriers that they should not adopt the provisions of SFAS No. 143 unlessspecifically required by the FCC in the future.  As a result of the FCC ruling, ALLTEL continues to record aregulatory liability for cost of removal for its wireline subsidiaries thatfollow the accounting prescribed by SFAS No. 71 “Accounting for the Effects ofCertain Types of Regulation”.  Theregulatory liability for cost of removal included in accumulated depreciationamounted to $161.0 million and $148.5 million at March 31, 2004 and 2003,respectively.  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 indepreciation expense and eliminated the cumulative cost of removal included inaccumulated depreciation.  Thecumulative effect of retroactively applying these changes to periods prior toJanuary 1, 2003, resulted in a non-cash credit of $15.6 million, net of incometax benefit of $10.3 million, and was included in net income for the threemonths ended March 31, 2003.

 

**3.****                      Goodwill andOther Intangible Assets:**

Goodwill represents the excess of costover the fair value of net identifiable tangible and intangible assets acquiredthrough various business combinations. The Company has acquired identifiable intangible assets through itsacquisitions of interests in various wireless and wireline 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.  As of January 1, 2004, ALLTELcompleted the annual impairment reviews of its goodwill and otherindefinite-lived intangible assets and determined that no write-down in thecarrying value of these assets was required. During the three months ended March 31, 2004, there were no changes in thecarrying amounts of goodwill or other indefinite-lived intangible assets.

 

6

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

      

 

**3.****                      Goodwill andOther Intangible Assets, Continued:**

Goodwillby business segment was as follows:

 
| (Millions)                       |   | March 31,  2004 |    | December 31,  2003 |   |
|----------------------------------|--------|-----------------|---------|--------------------|--------|
| Wireless                         |   | $               | 3,604.3 |               | $      | 3,604.3 |   |
| Wireline                         |   | 1,247.6         |    | 1,247.6            |   |
| Communications  Support Services |   | 2.3             |    | 2.3                |   |
|                             |   | $               | 4,854.2 |               | $      | 4,854.2 |   |
|                                  |        |                 |         |                    |        |  |  |  |  |

 

Thecarrying value of indefinite-lived intangible assets other than goodwill wereas follows:

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

 

Intangibleassets subject to amortization were as follows:

 
|                    |   | March 31, 2004 |   |
|-------------------------|--------|----------------|--------|
| (Millions)              |   | Gross  Cost    |   | Accumulated  Amortization |   | Net Carrying  Value |   |
| Customer lists          |   | $              | 382.4  |   | $ | (174.3 | ) | $ | 208.1 |   |
| Franchise rights        |   | 22.5           |   | (13.8 | ) | 8.7 |   |
| Non-compete  agreements |   | 2.9            |   | (2.9 | ) | — |   |
|                    |   | $              | 407.8  |   | $ | (191.0 | ) | $ | 216.8 |   |
|                         |        |                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

 

Amortization expense for intangibleassets subject to amortization was $15.1 million and $14.9 million for thethree month periods ended March 31, 2004 and 2003, respectively.  Amortization expense for intangible assetssubject to amortization is estimated to be $60.3 million in 2004, $59.6 millionin 2005, $41.0 million in 2006, $24.3 million in 2007 and $18.1 million in2008.

 

**4.       Restructuringand Other Charges:**

Asummary of the restructuring and other charges recorded during the three monthsended March 31, 2004 was as follows:

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

 

7

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

        

 

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

In January 2004, the Company announcedits plans to reorganize its operations and support teams.  Also, during February 2004, the Companyannounced its plans to exit its Competitive Local Exchange Carrier (“CLEC”)operations in the Jacksonville, Florida market due to the continuedunprofitability of these operations.  Inconnection with these activities, the Company recorded a restructuring chargeof $29.3 million consisting of $22.9 million in severance and employee benefitcosts related to a planned workforce reduction, $4.8 million of employeerelocation expenses, $0.5 million in lease termination costs and $1.1 millionof other exit costs.  The severance and employeebenefit costs included a $1.2 million payment to a former employee of theCompany's sold financial services division that becamepayable in the first quarter of 2004 pursuant to the terms of a change incontrol agreement between the employee and ALLTEL.  As of March 31, 2004, the Company had paid$18.4 million in severance and employee-related expenses, and all of theemployee reductions associated with the reorganization had been completed.  Certain of the planned employee relocationsand employee reductions associated with the closure of the CLEC operations willbe completed by the end of the third quarter of 2004.  ALLTEL also recorded a $2.3 million reduction in the liabilitiesassociated with various restructuring activities initiated prior to 2003,consisting of $2.0 million in lease and contract termination costs and $0.3million in severance and employee benefit costs.  The reductions primarily reflected differences between estimatedand actual costs paid in completing the previous planned workforce reductionsand lease and contract terminations. During the first quarter of 2004, the Company also recorded a write-downin the carrying value of certain corporate and regional facilities to fairvalue in conjunction with the proposed leasing or sale of thosefacilities.  The asset write-downsresulted from lower occupancy in the facilities due to the 2004 organizationalchanges and the 2003 sale of the Company’s financial services division toFidelity National Financial Inc. ("Fidelity National"), asfurther discussed in Note 10 to the unaudited interim consolidated financialstatements.

 

During the second quarter of 2003, theCompany recorded a restructuring charge of $8.5 million consisting of severanceand employee benefit costs related to a planned workforce reduction, primarilyresulting from the closing of certain call center locations.  As of March 31, 2004, the Company had paid$8.5 million in severance and employee-related expenses, and all of theemployee reductions had been completed. The Company also recorded a $2.7 million reduction in the liabilitiesassociated with various restructuring activities initiated prior to 2003, consistingof $2.2 million in severance and employee benefit costs and $0.5 million inlease termination costs.  The reductionprimarily reflected differences between estimated and actual costs paid incompleting the previous planned workforce reductions and leaseterminations.  During the second quarterof 2003, ALLTEL also wrote off certain capitalized software development coststotaling $13.2 million that had no alternative future use or functionality.

 

The following is a summary of activityrelated to the liabilities associated with the Company’s restructuring andother charges for the three months ended March 31, 2004:

 
| (Millions)                       |   |   |   |
|----------------------------------|--------|--------|--------|
| Balance,  beginning of period    |   | $      | 3.8    |   |
| Restructuring  and other charges |   | 54.1   |   |
| Reversal of  accrued liabilities |   | (2.3   | )      |
| Non-cash  write-down of assets   |   | (25.6  | )      |
| Cash outlays                     |   | (21.1  | )      |
| Balance, end of  period          |   | $      | 8.9    |   |

 

At March 31, 2004, the remaining unpaidliability related to the Company’s integration and restructuring activitiesconsisted of severance and employee-related expenses of $4.6 million,relocation expenses of $3.4 million, lease and contract termination costs of$0.6 million, and other exit costs of $0.3 million and is included in othercurrent liabilities in the accompanying consolidated balance sheets.

 

8

----

 

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

        

 

**5.****                      OtherComprehensive Income (Loss):**

Comprehensiveincome was as follows for the three month periods ended March 31:

 
| (Millions)                                                     |   | 2004   |       | 2003   |   |
|----------------------------------------------------------------|--------|--------|------------|--------|--------|
| Net income                                                     |   | $      | 189.8      |   | $      | 280.3 |   |
| Other  comprehensive income (loss):                            |   |   |       |   |   |
| Unrealized  holding gains on investments arising in the period |   | 49.1   |       | — |   |
| Income tax  expense                                            |   | 12.4   |       | — |   |
|                                                           |   | 36.7   |       | — |   |
|                                                           |   |   |       |   |   |
| Foreign currency  translation adjustment                       |   | 0.2    |       | (0.1   | )      |
|                                                           |   |   |       |   |   |
| Other  comprehensive income (loss) before tax                  |   | 49.3   |       | (0.1   | )      |
| Income tax  expense                                            |   | 12.4   |       | — |   |
| Other  comprehensive income (loss)                             |   | $      |  36.9 |   | $      |  (0.1 | ) |
| Comprehensive  income                                          |   | $      | 226.7      |   | $      | 280.2 |   |

** **

**6.****                      Earnings perShare:**

Basic earnings pershare of common stock was computed by dividing net income applicable to commonshares by the weighted average number of common shares outstanding during theperiod.  Diluted earnings per sharereflects the potential dilution that could occur assuming conversion orexercise of all unexercised stock options and outstanding preferred stock.  A reconciliation of the net income andnumber of shares used in computing basic and diluted earnings per share was asfollows for the three month periods ended March 31:

 
| (Millions,  except per share amounts)                      |   | 2004   |   | 2003   |   |
|------------------------------------------------------------|--------|--------|--------|--------|--------|
| **Basic earnings per share:**                              |   |   |   |   |   |
| Income from  continuing operations                         |   | $      | 189.8  |   | $      | 227.6 |   |
| Income from  discontinued operations                       |   | — |   | 37.1   |   |
| Cumulative  effect of accounting change                    |   | — |   | 15.6   |   |
| Less preferred  dividends                                  |   | — |   | — |   |
| Net income  applicable to common shares                    |   | $      | 189.8  |   | $      | 280.3 |   |
| Weighted average  common shares outstanding for the period |   | 311.5  |   | 311.2  |   |
|                                                       |   |   |   |   |   |
| Basic earnings  per share:                                 |   |   |   |   |   |
| From continuing  operations                                |   | $      | .61    |   | $      | .73 |   |
| From  discontinued operations                              |   | — |   | .12    |   |
| Cumulative  effect of accounting change                    |   | — |   | .05    |   |
| Net income                                                 |   | $      | .61    |   | $      | .90 |   |
|                                                       |   |   |   |   |   |
| **Diluted earnings per share:**                            |   |   |   |   |   |
| Net income  applicable to common shares                    |   | $      | 189.8  |   | $      | 280.3 |   |
| Adjustment for  convertible preferred stock dividends      |   | — |   | — |   |
| Net income  applicable to common shares                    |   |   |   |   |   |
| Assuming  conversion of preferred stock                    |   | $      | 189.8  |   | $      | 280.3 |   |
| Weighted average  common shares outstanding for the period |   | 311.5  |   | 311.2  |   |
| Increase in  shares resulting from the assumed:            |   |   |   |   |   |
| Exercise of  stock options                                 |   | 0.7    |   | 0.8    |   |
| Conversion of  preferred stock                             |   | 0.3    |   | 0.3    |   |
| Weighted average  common shares assuming conversion        |   | 312.5  |   | 312.3  |   |
|                                                       |   |   |   |   |   |
| Diluted earnings  per share:                               |   |   |   |   |   |
| From continuing  operations                                |   | $      | .61    |   | $      | .73 |   |
| From  discontinued operations                              |   | — |   | .12    |   |
| Cumulative  effect of accounting change                    |   | — |   | .05    |   |
| Net income                                                 |   | $      | .61    |   | $      | .90 |   |

 

9

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

        

 

**7.****                      BusinessSegment Information:**

ALLTEL manages its business operationsbased on differences 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 andrestructuring and other charges discussed in Notes 2 and 4, respectively.  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)                                             |   |    | 2004    |    | 2003   |    |
|--------------------------------------------------------|--------|---------|---------|---------|--------|---------|
| **Revenues and Sales from External  Customers:**       |   |    |    |    |   |
| Wireless                                               |   | $       | 1,184.5 |    | $      | 1,107.8 |   |
| Wireline                                               |   | 561.4   |    | 572.3   |   |
| Communications  support services                       |   | 146.6   |    | 145.1   |   |
| Total business  segments                               |   | $       | 1,892.5 |    | $      | 1,825.2 |   |
|                                                   |   |    |    |    |   |
| **Intersegment Revenues and Sales:**                   |   |    |    |    |   |
| Wireless                                               |   | $       | —  |    | $      | —  |   |
| Wireline                                               |   | 38.1    |    | 36.6    |   |
| Communications  support services                       |   | 72.4    |    | 80.0    |   |
| Total business  segments                               |   | $       | 110.5   |    | $      | 116.6   |   |
|                                                   |   |    |    |    |   |
| **Total Revenues and Sales:**                          |   |    |    |    |   |
| Wireless                                               |   | $       | 1,184.5 |    | $      | 1,107.8 |   |
| Wireline                                               |   | 599.5   |    | 608.9   |   |
| Communications  support services                       |   | 219.0   |    | 225.1   |   |
| Total business  segments                               |   | 2,003.0 |    | 1,941.8 |   |
| Less  intercompany eliminations                        |   | (41.8   | )       | (36.0   | )      |
| Total revenues  and sales                              |   | $       | 1,961.2 |    | $      | 1,905.8 |   |
|                                                   |   |    |    |    |   |
| **Segment Income:**                                    |   |    |    |    |   |
| Wireless                                               |   | $       | 210.9   |    | $      | 236.0   |   |
| Wireline                                               |   | 228.2   |    | 222.8   |   |
| Communications  support services                       |   | 16.5    |    | 17.7    |   |
| Total segment  income                                  |   | 455.6   |    | 476.5   |   |
| Corporate  expenses                                    |   | (9.0    | )       | (10.4   | )      |
| Restructuring  and other charges                       |   | (51.8   | )       | —  |   |
| Equity earnings  in unconsolidated partnerships        |   | 13.3    |    | 17.5    |   |
| Minority  interest in consolidated partnerships        |   | (15.6   | )       | (17.8   | )      |
| Other income,  net                                     |   | 4.6     |    | 0.4     |   |
| Interest expense                                       |   | (91.7   | )       | (103.4  | )      |
| Income from  continuing operations before income taxes |   | $       | 305.4   |    | $      | 362.8   |   |

 

Segment assets were as follows as of:

 
| (Millions)                                               |   |     | March 31,

2004 |     | December 31, 2003 |     |
|----------------------------------------------------------|--------|----------|-----------------|----------|-------------------|----------|
| Wireless                                                 |   | $        | 9,623.5         |     | $                 | 9,673.9  |   |
| Wireline                                                 |   | 5,139.7  |            | 5,212.9  |              |
| Communications  support services                         |   | 469.8    |            | 518.6    |              |
| Total business  segments                                 |   | 15,233.0 |            | 15,405.4 |              |
| Corporate  headquarters assets not allocated to segments |   | 1,340.6  |            | 1,319.3  |              |
| Less elimination  of intersegment receivables            |   | (34.0    | )               | (63.6    | )                 |
| Total  consolidated assets                               |   | $        | 16,539.6        |     | $                 | 16,661.1 |   |

 

10

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

        

** **

**7.****                      BusinessSegment Information, Continued:**

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

 
| (Millions)                                       |   | 2004   |   | 2003   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|
| **Revenues and Sales from External  Customers:** |   |   |   |   |   |
| Product  distribution                            |   | $      | 69.4   |   | $      | 60.4 |   |
| Long-distance  and network management services   |   | 48.5   |   | 48.9   |   |
| Directory publishing                             |   | 14.0   |   | 9.2    |   |
| Telecommunications  information services         |   | 14.7   |   | 26.6   |   |
| Total                                            |   | $      | 146.6  |   | $      | 145.1 |   |
|                                             |   |   |   |   |   |
| **Intersegment Revenues and Sales:**             |   |   |   |   |   |
| Product  distribution                            |   | $      | 29.7   |   | $      | 32.7 |   |
| Long-distance  and network management services   |   | 30.5   |   | 32.1   |   |
| Directory  publishing                            |   | 12.2   |   | 15.2   |   |
| Telecommunications  information services         |   | — |   | — |   |
| Total                                            |   | $      | 72.4   |   | $      | 80.0 |   |
|                                             |   |   |   |   |   |
| **Total Revenues and Sales:**                    |   |   |   |   |   |
| Product  distribution                            |   | $      | 99.1   |   | $      | 93.1 |   |
| Long-distance  and network management services   |   | 79.0   |   | 81.0   |   |
| Directory  publishing                            |   | 26.2   |   | 24.4   |   |
| Telecommunications  information services         |   | 14.7   |   | 26.6   |   |
| Total revenues  and sales                        |   | $      | 219.0  |   | $      | 225.1 |   |

 

**8.****                      Stock-BasedCompensation:**

Under the Company’s stock-basedcompensation plans, ALLTEL may grant fixed and performance-based incentive andnon-qualified stock options and other equity securities to officers and othermanagement employees.  The Companyaccounts for these plans under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” and related Interpretations. For fixed stock options granted under these plans, the exercise price ofthe option equals the market value of ALLTEL’s common stock on the date ofgrant.  Accordingly, ALLTEL does notrecord compensation expense for any of the fixed stock options granted, and nocompensation expense related to stock options was recognized in the three monthperiods ended March 31, 2004 or 2003. In January 2004, the Company granted 173,000 shares of restricted stockto certain senior management employees. The restricted shares will vest in equal increments over a three-yearperiod from the date of grant.  Compensationexpense related to these restricted shares amounted to $0.7 million for thethree months ended March 31, 2004. Unrecognized compensation expense for the restricted shares amounted to$7.8 million and was included in additional paid-in capital in the accompanyingconsolidated balance sheet as of March 31, 2004. The following tableillustrates the effects on net income and earnings per share had the Companyapplied the fair value recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation”, to its stock-based employee compensation plans forthe three month periods ended March 31:

 
| (Millions,  except per share amounts)                                                                                            |        | 2004   |   | 2003   |   |
|----------------------------------------------------------------------------------------------------------------------------------|-------------|--------|--------|--------|--------|
| Net income as  reported                                                                                                          |        | $      | 189.8  |   | $      | 280.3 |   |
| Deduct  stock-based employee compensation expense determined under fair value method  for all awards, net of related tax effects |        | (6.2   | )      | (4.4   | )      |
| Pro forma net  income                                                                                                            |        | $      | 183.6  |   | $      | 275.9 |   |
| Basic earnings  per share:                                                                                                       | As reported |   | $      | .61    |   | $ | .90 |   |
|                                                                                                                             | Pro forma   |   | $      | .59    |   | $ | .89 |   |
| Diluted earnings  per share:                                                                                                     | As reported |   | $      | .61    |   | $ | .90 |   |
|                                                                                                                             | Pro forma   |   | $      | .59    |   | $ | .88 |   |

 

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

 

11

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

        

 

**9.****                      EmployeeBenefit Plans and Postretirement Benefits Other Than Pensions:**

The Company maintains a qualified definedbenefit pension plan, which covers substantially all employees other thanemployees of ALLTEL’s directory publishing subsidiary.  The Company also maintains a supplementalexecutive retirement plan that provides unfunded, non-qualified supplementalretirement benefits to a select group of management employees.  In addition, the Company has entered intoindividual retirement agreements with certain retired executives providing forunfunded supplemental pension benefits. The Company provides postretirement healthcare and life insurancebenefits for eligible employees. Employees share in the cost of these benefits.  The Company funds the accrued costs of these plans as benefitsare paid.  The components of pensionexpense, including provision for executive retirement agreements, andpostretirement expense were as follows for the three month periods ended March31:

 
|                                           |   | Pension Benefits |   | Postretirement Benefits |   |
|------------------------------------------------|--------|------------------|--------|-------------------------|--------|
| (Millions)                                     |   | 2004             |   | 2003                    |   | 2004 |   | 2003 |   |
| Benefits earned  during the year               |   | $                | 7.7    |                    | $      | 6.6 |   | $ | 0.2 |   | $ | 0.2 |   |
| Interest cost on  benefit obligation           |   | 13.0             |   | 13.1                    |   | 3.9 |   | 3.7 |   |
| Amortization of  transition (asset) obligation |   | —           |   | (0.3                    | )      | 0.2 |   | 0.2 |   |
| Amortization of  prior service cost            |   | 0.1              |   | —                  |   | 0.4 |   | 0.4 |   |
| Recognized net  actuarial loss                 |   | 4.9              |   | 5.2                     |   | 2.2 |   | 1.8 |   |
| Expected return  on plan assets                |   | (17.6            | )      | (14.3                   | )      | — |   | — |   |
| Net periodic  benefit expense                  |   | $                | 8.1    |                    | $      | 10.3 |   | $ | 6.9 |   | $ | 6.3 |   |
|                                                |        |                  |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

ALLTEL disclosedin its financial statements for the year ended December 31, 2003 that itexpected to contribute $5.0 million for retirement benefits in 2004 consistingsolely of amounts necessary to fund the expected benefit payments related tothe unfunded supplemental retirement plans. Primarily due to the timing of the required contributions to fund thesupplemental retirement plans, actual contributions were $2.4 million for thethree months ended March 31, 2004. ALLTEL does not expect that any contribution to the qualified definedpension plan calculated in accordance with the minimum funding requirements ofthe Employee Retirement Income Security Act of 1974 will be required in2004.  Future discretionarycontributions to the plan will depend on various factors, including futureinvestment performance, changes in future discount rates and changes in thedemographics of the population participating in ALLTEL’s qualified pensionplan.

 

On December 8,2003, the Medicare Prescription Drug, Improvement and Modernization Act of2003, (the “Act”) became law. Beginning in 2006, the Act will provide for a prescription drug benefitunder Medicare Part D, as well as a federal subsidy to plan sponsors of retireehealthcare plans that provide a prescription drug benefit to participants thatis at least actuarially equivalent to the benefit that will be available underMedicare.  The amount of the federalsubsidy will be based on 28 percent of an individual beneficiary’s annualeligible prescription drug costs ranging between $250 and $5,000. ALLTEL hasnot fully quantified the effects, if any, that the Act will have on its futurebenefit costs or accumulated postretirement benefit obligation, andaccordingly, the effects of the Act have not been reflected in the accompanying unaudited consolidated financial statements. The authoritative guidance addressing the accounting for the federalsubsidy is under consideration by the Financial Accounting Standards Board, andonce issued, could require the Company to restate previously reported amountsrelated to its postretirement healthcare plan.

** **

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

Pursuant to an agreement dated January28, 2003, on April 1, 2003, ALLTEL sold the financial services division of itsinformation services subsidiary, ALLTEL Information Services, Inc., to FidelityNational for $1.05 billion received as$775.0 million in cash and $275.0 million in Fidelity National commonstock.  Approximately 5,500 employees ofthe Company transitioned to Fidelity National as part of this transaction.  As a result of this transaction, ALLTELrecorded an after-tax gain of $323.9 million. The after-tax proceeds from the sale were used primarily to reduceborrowings outstanding under the Company’s commercial paper program and toretire all long-term debt outstanding under the Rural Utilities Services, RuralTelephone Bank and Federal Financing Bank programs.  The Fidelity National common stock acquired in this transactioncurrently represents an approximate seven percent interest in Fidelity Nationaland may not be disposed of by ALLTEL, subject to certain conditions specifiedin the sale agreement, prior to April 1, 2004.

 

As a result of this transaction, thefinancial services division has been reflected as discontinued operations inthe Company’s interim consolidated statements of income and cash flows for theperiod ended March 31, 2003.  Thedepreciation of long-lived assets related to the financial services divisionceased as of January 28, 2003, the date of the agreement to sell suchoperations.

 

12

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

        

 

**10.****               DiscontinuedOperations, Continued:**

In January 2003, ALLTEL also completedthe termination of its business venture with Bradford & Bingley Group.  The business venture, ALLTEL MortgageSolutions, Ltd., a majority-owned consolidated subsidiary of ALLTEL, wascreated in 2000 to provide mortgage administration and information technologyproducts in the United Kingdom. Unfortunately, the business climate in the United Kingdom limited theventure’s ability to leverage the business across a broad base ofcustomers.  As a result, the operationsof ALLTEL Mortgage Solutions, Ltd. have also been reflected as discontinuedoperations in the Company’s interim consolidated statements of income and cashflows for the period ended March 31, 2003.

 

The following table includes certainsummary income statement information related to the financial servicesoperations reflected as discontinued operations for the three months endedMarch 31, 2003:

 
| (Millions)                                  |   |   |   |
|---------------------------------------------|--------|--------|--------|
| Revenues and  sales                         |   | $      | 210.3  |   |
| Operating  expenses                         |   | 148.1  |   |
| Operating income                            |   | 62.2   |   |
| Other expense,  net                         |   | (0.1   | )      |
| Pretax income  from discontinued operations |   | 62.1   |   |
| Income tax  expense                         |   | 25.0   |   |
| Income from  discontinued operations        |   | $      | 37.1   |   |

 

The following table includes certainsummary cash flow statement information related to the financial servicesoperations reflected as discontinued operations for the three months endedMarch 31, 2003:

 
| (Millions)                                    |   |   |   |
|-----------------------------------------------|--------|--------|--------|
| Net cash  provided by operating activities    |   | $      | 42.6   |   |
| Net cash used in  investing activities        |   | (35.0  | )      |
| Net cash used in  financing activities        |   | (0.1   | )      |
| Net cash  provided by discontinued operations |   | $      | 7.5    |   |

 

**11.****              ****Commitmentsand Contingencies:**

The Company currently has outstandingvarious indemnifications related either to the sale of the financial servicesdivision to Fidelity National (see Note 10) or the sale of certain assets andrelated liabilities, including selected customer contracts and capitalizedsoftware development costs, associated with the telecommunications informationservices operations to Convergys Information Management Group, Inc.(“Convergys”) during the fourth quarter of 2003.

 

In conjunction with the sale of thefinancial services division, ALLTEL agreed to indemnify Fidelity National forany damages resulting from ALLTEL’s breach of warranty or non-fulfillment ofcertain covenants under the sales agreement, that exceed 1.5 percent of thepurchase price, or $15.75 million, up to a maximum of 15 percent of thepurchase price, or $157.5 million.  TheCompany believes, because of the low probability of being required to pay anyamount under this indemnification, the fair value of this obligation isimmaterial to the consolidated results of operations, cash flows and financialcondition of the Company.  Accordingly,the Company has not recorded a liability related to it.  ALLTEL also agreed to indemnify FidelityNational from any future tax liability imposed on the financial servicesdivision related to periods prior to the date of sale.  ALLTEL’s obligation to Fidelity Nationalunder this indemnification is not subject to a maximum amount.  The Company has recorded a liability for taxcontingencies of approximately $34.0 million related to the operations of thefinancial services division for periods prior to the date of sale thatmanagement has assessed as probable and estimable, which should adequatelycover any obligation under this indemnification.

 

In connection withthe sale of assets to Convergys, ALLTEL agreed to indemnify Convergys for anydamages resulting from ALLTEL’s breach of warranty under the sales agreementthat exceed $500,000, up to a maximum of $10.0 million.  In addition, the Company agreed to indemnifyConvergys from any damages resulting from non-fulfillment of certain covenantsor liabilities arising from the ownership, operation or use of the assetsincluded in the sale.  Thisindemnification is not subject to a maximum obligation.  The Company believes, because of the lowprobability of being required to pay any amount under these indemnifications,the fair value of these obligations is immaterial to the consolidated resultsof operations, cash flows and financial condition of the Company.  Accordingly, the Company has not recorded aliability related to these indemnifications.

 

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**ALLTELCORPORATIONFORM 10-QPART I - FINANCIAL INFORMATION**

 

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

 

**GENERAL**

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

 

**EXECUTIVE SUMMARY**

ALLTEL is a customer-focused communications company providing wireless,local telephone, long-distance, Internet and high-speed data services to nearly13 million residential and business customers in 26 states.  Among the highlights in the first quarter of2004, ALLTEL:

 

•                  Achievedsolid financial results while improving the Company’s growth of wirelesspost-pay customers.  Wireless customergross additions were 737,000, an increase of 12 percent compared to the firstquarter of 2003 and marked the best gross gain quarter in ALLTEL’s history.  Combined with continued improvements inpost-pay churn, net wireless customer additions were 158,000 during thequarter, representing the highest non-acquisition-related growth for theCompany in nearly five years.

 

•                  Launched“Touch2Talk” ALLTEL’s “walkie-talkie” wireless offering that provides customerswith service coverage over ALLTEL’s entire digital wireless network.  To date, more than 50,000 customers, most ofthem existing customers, have signed up for this service.

 

•                  Addedmore than 21,000 DSL customers increasing ALLTEL’s high-speed data customerbase to more than 174,000.  Wirelineaccess line losses slowed to 6,000 during the quarter, the loss of which wasmore than offset by the growth in DSL customers.  Generated solid operating margins in the Company’s wirelinebusiness by controlling operating expenses.

 

•                  ChangedALLTEL’s organizational structure to support continued improvements in servicedelivery and customer satisfaction, while reducing headcount by almost 700employees.  These organizational changesshould result in expense savings of approximately $25 million in 2004 andongoing annualized expense savings of more than $30 million.  In connection with these efforts, theCompany recorded a pretax restructuring charge of $29.3 million in the quarter.  In addition, ALLTEL also recorded write-downsof $24.8 million in the carrying value of certain corporate and regionalfacilities due to the proposed sale or leasing of those facilities.

 

In addition to the effects of the restructuringcharges and asset write-downs, ALLTEL’s first quarter 2004 operating resultswere also adversely affected by the additional customer acquisition costsattributable to the accelerated wireless customer growth and additional costsassociated with the Company’s customer retention efforts.  Although dilutive to its first quarter 2004operating results, ALLTEL believes that this investment in wireless post-paycustomer growth will provide opportunities to enhance future revenue andearnings growth in the Company’s wireless business.

 

Throughout the remainder of 2004, the Company will continue to facesignificant challenges resulting from continued competition in thetelecommunications industry and changes in the regulatory environment,including the effects of the Federal Communications Commission’s (“FCC”) numberportability rules scheduled to take effect in the majority of the Company’swireless and wireline markets at the end of May 2004, as well as potentialchanges to the rules governing Universal Service and inter-carriercompensation.  In addressing thesechallenges, ALLTEL will continue to focus its efforts on improving customerservice, enhancing the quality of its networks and expanding its product andservice offerings.

 

14

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**CONSOLIDATEDRESULTS OF OPERATIONS**
|                                                         |   | Three Months Ended  March 31, |    |
|--------------------------------------------------------------|--------|-------------------------------|---------|
| (Millions,  except per share amounts)                        |   | 2004                          |    | 2003 |   |
| Revenues and  sales:                                         |   |                          |    |   |   |
| Service revenues                                             |   | $                             | 1,765.6 |   | $ | 1,716.5 |   |
| Product sales                                                |   | 195.6                         |    | 189.3 |   |
| Total revenues  and sales                                    |   | 1,961.2                       |    | 1,905.8 |   |
| Costs and expenses:                                          |   |                          |    |   |   |
| Cost of services                                             |   | 560.8                         |    | 537.4 |   |
| Cost of products  sold                                       |   | 257.3                         |    | 237.7 |   |
| Selling,  general, administrative and other                  |   | 375.2                         |    | 361.1 |   |
| Depreciation and  amortization                               |   | 321.3                         |    | 303.5 |   |
| Restructuring  and other charges                             |   | 51.8                          |    | — |   |
| Total costs and  expenses                                    |   | 1,566.4                       |    | 1,439.7 |   |
| Operating income                                             |   | 394.8                         |    | 466.1 |   |
| Non-operating  income, net                                   |   | 2.3                           |    | 0.1 |   |
| Interest expense                                             |   | (91.7                         | )       | (103.4 | ) |
| Income from  continuing operations before income taxes       |   | 305.4                         |    | 362.8 |   |
| Income taxes                                                 |   | 115.6                         |    | 135.2 |   |
| Income from  continuing operations                           |   | 189.8                         |    | 227.6 |   |
| Income from  discontinued operations, net of income taxes    |   | —                        |    | 37.1 |   |
| Cumulative  effect of accounting change, net of income taxes |   | —                        |    | 15.6 |   |
| Net income                                                   |   | $                             | 189.8   |   | $ | 280.3 |   |
| Basic earnings  per share:                                   |   |                          |    |   |   |
| Income from continuing  operations                           |   | $                             | .61     |   | $ | .73 |   |
| Income from  discontinued operations                         |   | —                        |    | .12 |   |
| Cumulative  effect of accounting change                      |   | —                        |    | .05 |   |
| Net income                                                   |   | $                             | .61     |   | $ | .90 |   |
| Diluted earnings  per share:                                 |   |                          |    |   |   |
| Income from  continuing operations                           |   | $                             | .61     |   | $ | .73 |   |
| Income from  discontinued operations                         |   | —                        |    | .12 |   |
| Cumulative  effect of accounting change                      |   | —                        |    | .05 |   |
| Net income                                                   |   | $                             | .61     |   | $ | .90 |   |
|                                                              |        |                               |         |  |  |  |  |  |  |  |  |  |

 

Service revenues andtotal revenues and sales both increased 3 percent, or $49.1 million and $55.4million, respectively, in the three month period ended March 31, 2004 comparedto the same period of 2003.  Theincrease in service revenues in 2004 primarily reflected 5 percent growth inALLTEL’s wireless customer base from March 31, 2003 and the correspondingincrease of $75.1 million in wireless access revenues.  Service revenues for 2004 also reflectedgrowth of $19.3 million in revenues derived from wireless and wireline dataservices and from the sale of enhanced communication services, including calleridentification, call waiting, call forwarding, voice mail, and wirelessequipment protection plans. Growth in the Company’s Internet operationsprimarily driven by growth in DSL customers also contributed to the increase inservice revenues in the first quarter of 2004. These increases were partially offset by lower wireless airtime andretail roaming revenues of $19.1 million, the loss of wireline access linesdue, in part, to broadband and wireless substitution, and a $11.9 millionreduction in revenues from telecommunications information services.  The decrease in airtime and retail roamingrevenues primarily reflected the effects of customers migrating torate plans with a larger number of packaged minutes, such as the Company’s Total and National Freedom plans, which, fora flat monthly service fee, provide a specified number of airtime minutes andinclude roaming and long-distance at no extra charge.  The decrease in telecommunications information services revenuesreflected the December 2003 sale of certain assets and related liabilities,including selected customer contracts and capitalized software developmentcosts, to Convergys Information Management Group, Inc. (“Convergys”).

 

Product sales increased$6.3 million, or 3 percent, in the three month period ended March 31, 2004compared to the same period of 2003. The increase in product sales in the 2004 period was primarily driven bystrong growth in gross wireless customer additions, higher retail pricesrealized on the sale of wireless handsets and accessories and increased salesof wireless handsets to retailers and other distributors.  Offsetting this growth in product sales inthe 2004 period was a reduction in sales of landline-based communicationsequipment, reflecting lower customer demand and the loss of wireline accesslines.

 

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Cost of servicesincreased $23.4 million, or 4 percent, in the three month period ended March31, 2004 compared to the same period of 2003. The increase in the 2004 period reflected an increase in wirelessnetwork-related costs of $26.2 million primarily due to increased networktraffic resulting from customer growth, increased minutes of use and expansionof network facilities.  Cost of services forthe first quarter of 2004 also reflected increases in wireless regulatory feesof $13.1 million and customer service expenses of $9.1 million.  The increase in regulatory fees in 2004principally related to fees associated with the Universal Service Fund (“USF”),reflecting changes in FCC regulations effective April 1, 2003.  Customer serviceexpenses increased in 2004 primarily due to the additional costs associatedwith the Company’s initiatives designed to improve customer satisfaction andreduce post-pay churn.  Partiallyoffsetting the increases in cost of services in 2004 attributable to higherwireless network costs, regulatory fees and customer services expenses was adecrease in bad debt expense, which declined $10.2 million in the first quarterof 2004 compared to the same period of 2003. Bad debt expense decreased primarily due to ALLTEL’s continuing effortsto reduce losses sustained from bad debts by managing its customer creditpolicies, improving collection practices, utilizing new technologies andproactively managing the efforts of the Company’s collection agencies.  Cost of services for 2004 also reflected adecrease in network-related costs for the wireline operations, primarily due tothe loss of wireline access lines and a reduction in maintenance costs.  Cost of services in the first quarter of2003 included $6.0 million of additional maintenance expense incurred to repairdamage caused by severe winter storms in Kentucky.  Cost of services in the 2004 period was also favorably affectedby reduced operating costs resulting from the sale of certaintelecommunications information services operations to Convergys, as previouslydiscussed.

 

Cost of products soldincreased $19.6 million, or 8 percent, in the three month period ended March31, 2004 compared to the same period of 2003. The increase in cost of products sold in 2004 was consistent with thegrowth in product sales and reflected the strong growth in wireless customeractivations, sales of higher-priced digital phones and increased sales ofwireless handsets to resellers and other distributors.   Selling, general, administrative and otherexpenses increased $14.1 million, or 4 percent, in the three month period endedMarch 31, 2004 compared to the same period of 2003.  The increase in the 2004 period primarily resulted from anincrease in wireless commissions expense of $22.5 million, consistent with thegrowth in gross customer additions, partially offset by cost savings realizedin the wireline operations, reflecting the Company’s continued efforts tocontrol operating expenses. Depreciation and amortization expense increased $17.8 million, or 6percent, in the three month period ended March 31, 2004 compared to the sameperiod in 2003, primarily due to growth in communications plant in service.

 

Operating incomedecreased $71.3 million, or 15 percent, in the three month period ended March31, 2004 compared to the same period of 2003. The decrease primarily reflected the effects of the restructuring andother charges incurred during the first quarter of 2004, as further discussedbelow, and a reduction in wireless segment income due to increased customeracquisition and retention costs, as further discussed below under “Results ofOperations by Business Segment”.

 

Restructuring andOther Charges

A summary of therestructuring and other charges recorded during the three months ended March31, 2004 was as follows:

 
| (Millions)                                             |   |   |   |
|--------------------------------------------------------|--------|--------|--------|
| Severance and  employee benefit costs                  |   | $      | 22.6   |   |
| Relocation costs                                       |   | 4.8    |   |
| Lease and  contract termination costs                  |   | (1.5   | )      |
| Writedown in the  carrying value of certain facilities |   | 24.8   |   |
| Other exit costs                                       |   | 1.1    |   |
| Total  restructuring and other charges                 |   | $      | 51.8   |   |

 

In January 2004, theCompany announced its plans to reorganize its operations and supportteams.  Also, during February 2004, theCompany announced its plans to exit its Competitive Local Exchange Carrier(“CLEC”) operations in the Jacksonville, Florida market due to the continuedunprofitability of these operations.  In connection with these activities,ALLTEL recorded a restructuring charge of $29.3 million consisting of $22.9million in severance and employee benefit costs related to a planned workforcereduction, $4.8 million of employee relocation expenses, $0.5 million in leasetermination costs and $1.1 million of other exit costs.  The severance and employee benefit costsincluded a $1.2 million payment to a former employee of the Company's soldfinancial services division that became payable in thefirst quarter of 2004 pursuant to the terms of a change in control agreementbetween the employee and ALLTEL. As of March 31, 2004, the Company had paid $18.4 million in severanceand employee-related expenses, and all of the employee reductions associatedwith the reorganization had been completed. Certain of the planned employee relocations and employee reductionsassociated with the closure of the CLEC operations will be completed by the endof third quarter of 2004.  ALLTEL alsorecorded a $2.3 million reduction in the liabilities associated with variousrestructuring activities initiated prior to 2003, consisting of $2.0 million inlease and contract termination costs and $0.3 million in severance and employeebenefit costs.

 

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The reductions primarily reflected differences between estimated and actualcosts paid in completing the previous planned workforce reductions and lease andcontract terminations.  During the first quarter of 2004, the Company alsorecorded a write-down in the carrying value of certain corporate and regionalfacilities to fair value in conjunction with the proposed leasing or sale ofthose facilities.  The asset write-downs resulted from lower occupancy inthe facilities due to the 2004 organizational changes and the 2003 sale of theCompany's financial services division to Fidelity National Financial Inc.("Fidelity National"), as further discussed below under "Discontinued Operations".

 

During the secondquarter of 2003, the Company recorded a restructuring charge of $8.5 millionconsisting of severance and employee benefit costs related to a plannedworkforce reduction, primarily resulting from the closing of certain callcenter locations.  As of March 31, 2004,the Company had paid $8.5 million in severance and employee-related expenses,and all of the employee reductions had been completed.  The Company also recorded a $2.7 millionreduction in the liabilities associated with various restructuring activitiesinitiated prior to 2003, consisting of $2.2 million in severance and employeebenefit costs and $0.5 million in lease termination costs.  The reduction primarily reflecteddifferences between estimated and actual costs paid in completing the previousplanned workforce reductions and lease terminations. During the second quarterof 2003, ALLTEL also wrote off certain capitalized software development coststotaling $13.2 million that had no alternative future use or functionality.

 

At March 31, 2004, theremaining unpaid liability related to ALLTEL’s integration and restructuringactivities consisted of severance and employee-related expenses of $4.6million, relocation expenses of $3.4 million, lease termination costs of $0.6million, and other exit costs of $0.3 million. Cash outlays for the remaining unpaid liability will be disbursed overthe next 12 to 24 months and will be funded from operating cash flows. (SeeNote 4 to the unaudited interim consolidated financial statements foradditional information regarding the restructuring and other charges.)

 

Non-Operating Income,Net
|                                            |   | Three Months Ended  March 31, |   |
|-------------------------------------------------|--------|-------------------------------|--------|
| (Millions)                                      |   | 2004                          |   | 2003 |   |
| Equity earnings  in unconsolidated partnerships |   | $                             | 13.3   |   | $ | 17.5 |   |
| Minority  interest in consolidated partnerships |   | (15.6                         | )      | (17.8 | ) |
| Other income,  net                              |   | 4.6                           |   | 0.4 |   |
| Non-operating  income, net                      |   | $                             | 2.3    |   | $ | 0.1 |   |

 

Asindicated in the table above, non-operating income, net increased $2.2 millionin the three months ended March 31, 2004 compared to the same period of2003.  The decrease in equity earningsof $4.2 million primarily reflected the effects of ALLTEL’s April 1, 2003acquisition of a majority ownership interest in a Wisconsin RSA in which theCompany previously owned a minority interest. Conversely, the decrease in minority interest expense of $2.2 million primarilyreflected the effects of ALLTEL’s third quarter 2003 acquisitions of additionalownership interests in wireless properties in Mississippi, New Mexico andVirginia in which the Company owned a majority interest.  Other income, net for 2004 includedadditional dividend income of $2.0 million earned on the Company’s equityinvestments, primarily Fidelity National common stock.  Other income, net for 2004 also included$1.7 million of additional interest income earned on the Company’s cash andshort-term investments due to significant growth in the Company’s availablecash on hand following the sale of the financial services division toFidelity National, as further discussedbelow under “Discontinued Operations”.

 

Interest Expense

Interestexpense decreased $11.7 million, or 11 percent, in the three months ended March31, 2004, as compared to the same period of 2003.  The decrease in 2004 primarily reflected the Company’s repaymentof more than $750.0 million of long-term debt during 2003.  During the first quarter of 2003, theCompany repaid a $450.0 million, 7.125 percent unsecured note due March 1,2003, using commercial paper borrowings. In the second quarter of 2003, ALLTEL repaid all outstanding commercialpaper borrowings and prepaid $249.1 million of long-term debt outstanding underthe Rural Utilities Services, Rural Telephone Bank and Federal Financing Bankprograms.  The debt repayments in thesecond quarter were funded primarily from the cash proceeds received from thesale of the financial services division.

 

Income Taxes

Incometax expense decreased $19.6 million, or 14 percent, for the three month periodended March 31, 2004, as compared to the same period of 2003.  The decrease in income tax expense in 2004was consistent with the overall decrease in the Company’s earnings fromcontinuing operations that resulted primarily from the effects of therestructuring and other charges and increased wireless customer acquisition andretention costs previously discussed. The Company’s estimated annual effective income tax rate also increasedslightly to 38.0 percent for the three months

 

17

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endedMarch 31, 2004.  In determining itsquarterly provision for income taxes, ALLTEL uses an estimated annual effectivetax rate, which is based on the Company’s expected annual income, statutoryrates and tax planning opportunities and reflects ALLTEL’s best estimate of theultimate outcome of tax examinations and assessments.  Significant or unusual items, such as the taxes related to thesale of a business, would be separately recognized in the quarter in which theyoccur.

 

Net Income and Earningsper Share from Continuing Operations

Netincome from continuing operations decreased 17 percent and basic and dilutedearnings per share from continuing operations both decreased 16 percent in thefirst quarter of 2004 compared to the same period of 2003.  The decreases in net income and earnings pershare from continuing operations primarily reflected the effects of therestructuring and other charges previously discussed, and the reduction inwireless segment income due to increased customer acquisition and retentioncosts, as further discussed below under “Results of Operations by BusinessSegment”.

 

DiscontinuedOperations

OnApril 1, 2003, ALLTEL completed the sale of the financial services division ofits information services subsidiary, ALLTEL Information Services, Inc., toFidelity National, for $1.05 billion received as $775.0 million in cash and$275.0 million in Fidelity National common stock.  As part of this transaction, Fidelity National acquired ALLTEL’smortgage servicing, retail and wholesale banking and commercial lending operations,as well as the community/regional bank division.  Approximately 5,500 employees of the Company transitioned toFidelity National as part of the transaction. As a result of this transaction, the financial services division hasbeen reflected as discontinued operations in the Company’s consolidatedfinancial statements for the three months ended 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 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 business climate in theUnited Kingdom limited the venture’s ability to leverage the business across abroad base of customers.  As a result,the operations of ALLTEL Mortgage Solutions, Ltd. were also reflected asdiscontinued operations in the Company’s consolidated financial statements forthe three months ended March 31, 2003. The following table includes certain summary income statementinformation related to the financial services operations reflected asdiscontinued operations for the three months ended March 31, 2003:

 
| (Millions)                                  |   |   |   |
|---------------------------------------------|--------|--------|--------|
| Revenues and  sales                         |   | $      | 210.3  |   |
| Operating expenses                          |   | 148.1  |   |
| Operating income                            |   | 62.2   |   |
| Other expense,  net                         |   | (0.1   | )      |
| Pretax income  from discontinued operations |   | 62.1   |   |
| Income tax  expense                         |   | 25.0   |   |
| Income from  discontinued operations        |   | $      | 37.1   |   |

 

The depreciation oflong-lived assets related to the financial services division ceased as ofJanuary 28, 2003, the date of the agreement to sell such operations.  The cessation of depreciation had the effectof reducing operating expenses by approximately $13.0 million in 2003.  (See Note 10 to the unaudited interimconsolidated financial statements for additional information regarding thedisposal of the financial services operations.)

 

CumulativeEffect of Accounting Change

Exceptfor certain wireline subsidiaries as further discussed below, the Companyadopted Statement of Financial Accounting Standards (“SFAS”) No. 143,“Accounting for Asset Retirement Obligations”, effective January 1, 2003.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangible long-livedassets and the 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 each period, and the capitalized cost isdepreciated over the estimated useful life of the related asset.  At the settlement date, the entity willsettle the obligation for its recorded amount and recognize a gain or loss uponsettlement.  The Company has evaluatedthe effects of SFAS No. 143 on its operations and has determined that, fortelecommunications and other operating facilities in which the Company owns theunderlying land, ALLTEL

 

18

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has no contractualor legal obligation to remediate the property if the Company were to abandon,sell or otherwise dispose of the property. Certain of the Company’s cell site and switch site operating leaseagreements contain clauses requiring restoration of the leased site at the endof the lease term.  Similarly, certainof the Company’s lease agreements for office and retail locations requirerestoration of the leased site upon expiration of the lease term.  Accordingly, ALLTEL is subject to assetretirement obligations associated with these leased facilities under theprovisions of SFAS No. 143.  Theapplication of SFAS No. 143 to the Company’s cell site and switch site leasesand leased office and retail locations did not have a material impact onALLTEL’s consolidated results of operations, financial position or cash flowsas of or for the three months ended March 31, 2004 or 2003.

 

In accordance withfederal and state regulations, depreciation expense for the Company’s wirelineoperations has historically included an additional provision for cost ofremoval.  The additional cost of removalprovision does not meet the recognition and measurement principles of an assetretirement obligation under SFAS No. 143. On December 20, 2002, the FCC notified wireline carriers that theyshould not adopt the provisions of SFAS No. 143 unless specifically required bythe FCC in the future.  As a result ofthe FCC ruling, ALLTEL continues to record a regulatory liability for cost ofremoval for its wireline subsidiaries that follow the accounting prescribed bySFAS No. 71 “Accounting for the Effects of Certain Types of Regulation”.  The regulatory liability for cost of removalincluded in accumulated depreciation amounted to $161.0 million and $148.5million at March 31, 2004 and 2003, respectively.  For the acquired Kentucky and Nebraska wireline operations not subjectto SFAS No. 71, effective January 1, 2003, the Company ceased recognition ofthe cost of removal provision in depreciation expense and eliminated thecumulative cost of removal included in accumulated depreciation.  The cumulative effect of retroactivelyapplying these changes to periods prior to January 1, 2003, resulted in anon-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 March 31, 2003.  The cessation of the cost of removalprovision in depreciation expense for the acquired Kentucky and Nebraskawireline operations did not have a material impact on the Company’sconsolidated results of operations for the three months ended March 31, 2003.

 

Average CommonShares Outstanding

Theaverage number of common shares outstanding increased slightly in the threemonth period ended March 31, 2004 compared to the same period of 2003.  The increase primarily reflected additionalshares issued upon the exercise of options granted under ALLTEL’s employeestock-based compensation plans, partially offset by the effects of theCompany’s repurchase of approximately 4.8 million of its common shares duringthe first quarter of 2004, as further discussed below under “CashFlows-Financing Activities”.

 

 

**RESULTS OF OPERATIONS BY BUSINESSSEGMENT**

Communications-Wireless Operations
|                                        |   | Three Months Ended  March 31, |    |
|---------------------------------------------|--------|-------------------------------|---------|
| (Millions)                                  |   | 2004                          |    | 2003 |   |
| Revenues and  sales:                        |   |                          |    |   |   |
| Service revenues                            |   | $                             | 1,115.5 |   | $ | 1,047.0 |   |
| Product sales                               |   | 69.0                          |    | 60.8 |   |
| Total revenues  and sales                   |   | 1,184.5                       |    | 1,107.8 |   |
| Costs and  expenses:                        |   |                          |    |   |   |
| Cost of services                            |   | 355.7                         |    | 316.4 |   |
| Cost of products  sold                      |   | 144.6                         |    | 122.5 |   |
| Selling,  general, administrative and other |   | 295.8                         |    | 271.8 |   |
| Depreciation and  amortization              |   | 177.5                         |    | 161.1 |   |
| Total costs and  expenses                   |   | 973.6                         |    | 871.8 |   |
| Segment income                              |   | $                             | 210.9   |   | $ | 236.0 |   |

 

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|                                              |   | Three Months  Ended  March 31, |   |
|---------------------------------------------------|--------|-------------------------------------|--------|
| (Customers  in thousands)                         |   | 2004                                |   | 2003 |   |
| Customers                                         |   | 8,181.2                             |   | 7,760.8 |   |
| Average  customers                                |   | 8,089.9                             |   | 7,654.7 |   |
| Gross  customer additions (a)                     |   | 737.4                               |   | 768.0 |   |
| Net  customer additions (a)                       |   | 157.7                               |   | 159.2 |   |
| Market  penetration                               |   | 13.3                                | %      | 12.9 | % |
| Post-pay  customer churn                          |   | 1.93                                | %      | 2.16 | % |
| Total  churn                                      |   | 2.40                                | %      | 2.66 | % |
| Retail  minutes of use per customer per month (b) |   | 432                                 |   | 334 |   |
| Retail  revenue per customer per month (c)        |   | $                                   | 42.56  |   | $ | 41.79 |   |
| Average  revenue per customer per month (d)       |   | $                                   | 45.96  |   | $ | 45.59 |   |
| Cost  to acquire a new customer (e)               |   | $                                   | 299    |   | $ | 285 |   |

 

Notes:

(a)          Includesthe effects of acquisitions and dispositions. Excludes reseller customers for all periods presented.

 

(b)         Representsthe average monthly minutes that ALLTEL’s customers use on both the Company’snetwork and while roaming on other carriers’ networks.

 

(c)          Retailrevenue per customer is calculated by dividing wireless retail revenues byaverage customers for the period.  Areconciliation of the revenues used in computing retail revenue per customerper month was as follows for the three month periods ended March 31:

 
| (Millions)               |   | 2004  |    | 2003   |   |
|--------------------------|--------|-------|---------|--------|--------|
| Services  revenues       |   | $     | 1,115.5 |   | $      | 1,047.0 |   |
| Less  wholesale revenues |   | (82.7 | )       | (87.4  | )      |
| Total  retail revenues   |   | $     | 1,032.8 |   | $      | 959.6 |   |

 

(d)         Averagerevenue per customer per month is calculated by dividing wireless servicesrevenues by average customers for the period.

 

(e)          Costto acquire a new customer is calculated by dividing the sum of product sales,cost of products sold and sales and marketing expenses (included within“Selling, general, administrative and other”), as reported above, by the numberof internal gross customer additions in the period.  Customer acquisition costs exclude amountsrelated to the Company’s customer retention efforts.  A reconciliation of the revenues, expenses and customer additionsused in computing cost to acquire a new customer was as follows for the threemonth periods ended March 31:

 
| (Millions,  except customers in thousands)        |   | 2004  |   | 2003   |   |
|---------------------------------------------------|--------|-------|--------|--------|--------|
| Product  sales                                    |   | $     | (52.3  | )      | $      | (39.9 | ) |
| Cost  of products sold                            |   | 86.8  |   | 65.7   |   |
| Selling  and marketing expense                    |   | 185.9 |   | 161.2  |   |
| Total  costs incurred to acquire new customers    |   | $     | 220.4  |   | $      | 187.0 |   |
| Gross  customer additions, excluding acquisitions |   | 737.4 |   | 657.1  |   |
| Cost  to acquire a new customer                   |   | $     | 299    |   | $      | 285 |   |

 

Thetotal number of wireless customers served by ALLTEL increased by more than400,000 customers, or 5 percent, during the twelve month period endedMarch 31, 2004.  Wireless customergross additions were 737,000 during the first quarter of 2004, an increase of12 percent compared to the same period of 2003, and marked the best gross gainquarter in ALLTEL’s history.  Sales ofthe Company’s higher-yield Total and National Freedom rate plans accounted forapproximately 43 percent of the gross additions during the first quarter of2004, and now represent approximately 34 percent of ALLTEL’s wireless customerbase.  The combination of increasedgross additions and the reduction in post-pay churn resulted in net wirelesscustomer additions of 158,000 during the first quarter of 2004, representingthe highest non-acquisition-related growth for the Company in nearly fiveyears.  Overall, the Company’s wirelessmarket penetration rate (number of customers as a percent of the totalpopulation in ALLTEL’s service areas) increased to 13.3 percent as ofMarch 31, 2004.

 

Thelevel of customer growth in 2004 will be dependent upon the Company’s abilityto attract new customers in an increasingly competitive marketplace, which iscurrently supporting up to seven competitors in each market.  The Company will continue to focus itsefforts on sustaining value-added customer growth by improving service qualityand

 

20

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customersatisfaction, managing its distribution channels and customer segments,offering attractively priced rate plans and new or enhanced services and otherfeatures, selling additional phone lines and services to existing customers andpursuing strategic acquisitions. Consistent with this focus, during the first quarter of 2004, theCompany completed the launch of “Touch2Talk”, ALLTEL’s “walkie-talkie” wirelessoffering that provides customers with service coverage over ALLTEL’s entiredigital wireless network.  During thefirst quarter of 2004, more than 50,000 customers, most of them existingcustomers, signed up for this new service.

 

TheCompany continues to focus its efforts on lowering post-pay customer churn(average monthly rate of customer disconnects).  To improve customer retention, during the second quarter of 2003,the Company launched several operational initiatives designed to improveoverall service quality to its customers both at its retail stores and in itscall centers.  ALLTEL also continues toupgrade its telecommunications network in order to offer expanded networkcoverage and quality and to provide enhanced service offerings to its customers.  In addition, the Company has increased thenumber of its customers under contract through the offering of competitivelypriced rate plans, proactively analyzing customer usage patterns and migratingcustomers to newer digital handsets. The Company believes that its improvements in customer service levels,digital network expansion and proactive retention efforts contributed to thedecrease in post-pay customer churn in the first quarter of 2004.  Primarily due to the decline in post-paychurn, total churn also decreased in the first quarter of 2004 compared to thesame period of 2003.

 

Wirelessrevenues and sales increased $76.7 million, or 7 percent, for the three monthperiod ended March 31, 2004 compared to the same period of 2003.  Service revenues increased $68.5 million, or7 percent, and product sales increased $8.2 million, or 13 percent, for thethree month period ended March 31, 2004, respectively, compared to thesame period of 2003.   Access revenuesincreased $75.1 million in the first quarter of 2004 compared to the sameperiod of 2003 primarily driven by customer growth and increased sales of theCompany’s higher-yield Total and National Freedom rate plans.  Service revenues in 2004 also reflected increasesin revenues earned from data messaging services and from the sale of enhancedservices, including call waiting, call forwarding, voicemail and equipmentprotection plans.  Revenues from dataand enhanced services increased $13.0 million in the first quarter of 2004compared to the same period of 2003, reflecting increased demand for theseservice offerings.  Service revenues inthe first quarter of 2004 also included an increase in regulatory and otherfees of $5.8 million compared to the same period of 2003.  The increase in regulatory and other fees in2004 reflected additional amounts billed to customers to offset costs relatedto certain regulatory mandates, including universal service funding, primarilyresulting from changes in FCC regulations applicable to universal service feesthat were effective on April 1, 2003.

 

Servicerevenue growth in the first quarter of 2004 attributable to customer growth,increased access revenues, additional revenues earned from data and enhancedservices and increased regulatory and other fees were partially offset by lowerairtime and retail roaming revenues of $19.1 million and a decrease inwholesale revenues of $4.7 million compared to the same period of 2003.  The decrease in airtime and retail roamingrevenues primarily reflected the effects of customers migrating torate plans with a larger number of packaged minutes, such as the Company’s Total and National Freedom plans, which, fora flat monthly service fee, provide a specified number of airtime minutes andinclude roaming and long-distance at no extra charge.  The decline in wholesale revenues was primarily driven by loweranalog and TDMA minutes of use by other carriers’ customers roaming on ALLTEL’swireless network.  It is likely that thedecline in TDMA minutes will continue; however, this impact may be somewhat offset by CDMA minute growth as other CDMAcarriers direct wholesale traffic to ALLTEL’s network.  Primarily driven by the increase in averagemonthly retail minutes of use and the effects of increased sales of thehigher-yield Total and National Freedom rate plans, both retail revenue percustomer per month and average revenue per customer per month increasedslightly in the first quarter of 2004 compared to the same period of 2003.  The increase in average revenue per customerper month attributable to the increases in minutes of use and sales of Totaland National Freedom rate plans was partially offset by the decrease inwholesale revenues.  Growth in servicerevenues and average revenue per customer per month during 2004 will dependupon ALLTEL’s ability to maintain market share in an increasingly competitivemarketplace by adding new customers, retaining existing customers, increasingcustomer usage, and selling data and additional enhanced services.

 

Theincrease in product sales in 2004 was primarily driven by growth in grosscustomer additions, higher retail prices for wireless handsets that includeadvanced digital features, such as picture messaging, and increased retentionefforts by the Company focused on migrating existing wireless customers to newdigital technologies.

 

Costof services increased $39.3 million, or 12 percent, for the three month periodended March 31, 2004 compared to the same period of 2003.  Cost of services for the first quarter of2004 reflected an increase in network-related costs of $26.2 million comparedto the same period of 2003, primarily due to increased network trafficresulting from customer growth, increased minutes of use and expansionof network facilities.  Cost of services forthe first quarter of 2004 also reflected increases in regulatory fees of $13.1million and customer service expenses of $9.1 million when compared to the sameperiod of 2003.  The increase inregulatory fees in the 2004 period principally related to fees associated withthe USF,

 

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reflectingchanges in FCC regulations effective April 1, 2003.  Customer service expenses increased in the2004 period primarily due to the additional costs associated with ALLTEL’sinitiatives designed to improve customer satisfaction and reduce post-paychurn.  Partially offsetting theincreases in cost of services attributable to higher network-related costs,increased regulatory fees and customer services expenses was a decrease in baddebt expense.  Compared to the sameperiod of 2003, bad debt expense decreased $10.3 million in the first quarterof 2004 primarily due to ALLTEL’s continuing efforts to reduce losses sustainedfrom bad debts by managing its customer credit policies, improving collectionpractices, utilizing new technologies and proactively managing the efforts ofthe Company’s collection agencies.

 

Costof products sold increased $22.1 million, or 18 percent, for the three monthperiod ended March 31, 2004 compared to the same period of 2003.  The increase in cost of products sold in the2004 period was consistent with the corresponding increase in product salesdiscussed above and primarily reflected the effects of significant growth ingross customer activations, the selling of higher-priced digital phones and theCompany’s continuing efforts to migrate customers to newer digital technologiesas part of ALLTEL’s customer retention efforts.

 

Selling,general, administrative and other expenses increased $24.0 million, or 9percent, for the three month period ended March 31, 2004 compared to thesame period of 2003.  The increase inselling, general, administrative and other expenses in the first quarter of2004 primarily reflected increased commission costs of $22.5 million comparedto the same period of 2003.  Commissionsexpense increased in the 2004 period due to the significant growth in grosscustomer additions and increased sales of ALLTEL’s Total and National Freedomrate plans.  Commission rates paid tothe Company’s internal sales force and outside agents are higher on the salesof ALLTEL’s more profitable Total and National Freedom rate plans thancomparable rates paid on other lower-margin rate plans offered by the Company.

 

Depreciationand amortization expense increased $16.4 million, or 10 percent, for the threemonth period ended March 31, 2004 compared to the same period of2003.  Depreciation and amortizationexpense increased primarily due to growth in wireless plant in service.

 

Primarily due to theeffects of increased customer acquisition costs attributable to the acceleratedgrowth in gross customer additions and additional costs associated with theCompany’s customer retention efforts, wireless segment income decreased $25.1million, or 11 percent, for the three month period ended March 31, 2004compared to the same period of 2003. Although the additional expenses associated with the additional customergrowth adversely affected segment income for the first quarter of 2004, theCompany believes the increased market share will provide ALLTEL with theopportunity to enhance future revenue and earnings growth in its wirelessbusiness.

 

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 increase in per unit customer acquisition costs in the firstquarter of 2004 compared to the same period of 2003 primarily reflected theincrease in commissions expense discussed above and the increase in netequipment cost resulting from selling higher-priced digital phones.  For the three months ended March 31,2004 and 2003, approximately 67 percent and 66 percent, respectively, of thegross customer additions came through ALLTEL’s internal distribution channels.  ALLTEL’s internal sales distributionchannels include Company retail stores and kiosks located in shopping malls,other retail outlets and mass merchandisers. Incremental sales costs at aCompany retail store or kiosk are significantly lower than commissions paid todealers.  Although ALLTEL intends tomanage the costs of acquiring new customers throughout the remainder of 2004 bycontinuing to enhance its internal distribution channels, the Company will alsocontinue to utilize its large dealer network.

 

A summary of therestructuring and other charges related to the wireless operations that werenot included in the determination of segment income were as follows for thethree months ended March 31, 2004:

 
| (Millions)                                              |   |   |   |
|---------------------------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs                   |   | $      | 8.8    |   |
| Relocation  costs                                       |   | 3.2    |   |
| Lease  and contract termination costs                   |   | 0.5    |   |
| Write-down  in the carrying value of certain facilities |   | 0.7    |   |
| Other  exit costs                                       |   | 0.4    |   |
| Total  restructuring and other charges                  |   | $      | 13.6   |   |

 

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RegulatoryMatters-Wireless Operations

ALLTEL is subject toregulation by the FCC as a provider of wireless communications services.  The Telecommunications Act of 1996 (the “96Act”) provides wireless carriers numerous opportunities to provide an alternativeto the long-distance and local exchange services provided by interexchangecarriers and local exchange telephone companies.  Wireless carriers are also entitled to compensation from otherlocal telecommunications carriers for calls transmitted from the othercarriers’ networks and terminated on the wireless carriers’ networks.  Presently, the Company’s wireless operationsdo not bill access charges to interexchange carriers, although an FCC decisionissued on referral from the U.S. District Court for the Western District ofMissouri noted that wireless operators are not precluded from billing andcollecting these access charges that the interexchange carrier has acontractual or other legal obligation to pay. In April 2001, the FCC released a notice of proposed rulemakingaddressing inter-carrier compensation issues. Under this rulemaking, the FCC has proposed a “bill and keep”compensation method that would overhaul the existing rules governing reciprocalcompensation and access charge regulation. The FCC is expected to issue a further notice of proposed rulemaking onthis matter in the second quarter of 2004. In addition, individual wireless carriers have filed a number ofpetitions with the FCC seeking determinations as to the type and amount ofcompensation due to and from local exchange carriers and/or interexchangecarriers for the termination of traffic. Furthermore, various wireline companies have initiated a number of stateproceedings to address inter-carrier compensation for traffic that originatesor terminates on wireless carriers’ networks. The outcome of the FCC and state proceedings could change the way ALLTELreceives compensation from, and remits compensation to, other carriers as wellas its wireless customers.  At thistime, the Company cannot estimate whether any such changes will occur or, ifthey do, what the effect of the changes would be on its wireless revenues andexpenses.

 

Under rules establishedby the FCC, Cellular Radiotelephone Service (“CRS”) and Personal CommunicationsServices (“PCS”) providers were required, as of November 24, 2002, toparticipate in a nationwide number conservation program known as thousand blocknumber pooling in accordance with roll-out schedules established by theFCC.  These providers were required tomodify their networks to comply with FCC and industry performance criteria fornumber pooling, including support for roaming customers.  Number pooling is an FCC-mandated programintended to alleviate the shortage of available telephone numbers by requiringcarriers to return unused numbers in their inventory to a centrallyadministered pool and take assignment of new numbers in blocks of 1,000 insteadof the 10,000 number blocks previously assigned.  In a decision released June 18, 2003, the FCC affirmed thatall carriers must participate in the nationwide pooling roll-out.  The FCC exempted small and rural CommercialMobile Radio Services (“CMRS”) and local exchange carriers from the poolingrequirement until such time as they implement local number portability inresponse to a specific request from another carrier.

 

FCC rules also requiredthat CMRS providers implement on November 24, 2003 wireless local numberportability (“WLNP”) to permit customers to retain their existing telephonenumber when moving from one telecommunications carrier to another.  The FCC, on June 18, 2003, released therules governing the number of Metropolitan Statistical Areas (“MSAs”) in whichWLNP must be deployed, as well as the process for triggering a carrier’s obligationto provide WLNP in markets both within those MSAs and otherwise.  The FCC retained the requirement thatcarriers implement WLNP based upon the specific request of another carrier andgave the state public service commissions authority to require CMRS carriers toimplement WLNP in any market within the top 100 MSAs in which they provideservice and for which a request was not received from a competing carrier.

 

On October 7, 2003,the FCC released a decision providing guidance to carriers on certain WLNPimplementation issues that had been raised in two petitions for declaratoryrulings filed by the Cellular Telecommunications Industry Association (“CTIA”)and to resolve related issues raised through the appeal of a July 3, 2003letter from the Chief of the Wireless Telecommunications Bureau of theFCC.  In general, the FCC decision notedthat porting numbers between carriers should be performed without obstruction,including any delay related to efforts to collect outstanding balances; portingintervals should be governed by a “reasonableness standard” using theindustry’s suggested 2.5 hour porting interval as the reference point; writteninterconnection agreements between carriers involved in porting are notrequired; and carriers must continue to support nationwide roaming.

 

On November 10, 2003,the FCC released a decision addressing theCTIA petitions and providing guidance on wireline to wireless porting, which isreferred to as “intermodal porting”. The FCC stated that number porting from a wireline carrier to a wirelesscarrier is required where the coverage area of the wireless carrier (i.e. thearea in which the wireless carrier provides service) overlaps the geographiclocation in which the wireline number was provisioned.  Further, while the FCC required the wirelesscarrier to maintain the rate center designation of the number, it also notedthat wireless carriers were not required to have either direct connections orinterconnection agreements with wireline carriers nor were wireless carriersrequired to have numbering resources in the rate center in which the wirelinenumber is located in order to subject the wireline number to intermodalporting.  The FCC’s guidance requiresthat wireline numbers be ported to wireless carriers across traditionalwireline rate centers; however, the FCC left issues governing the payment ofcall routing costs to another pending proceeding.  The United States Telecommunications Association (“USTA”), alongwith certain rural

 

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telephone companies,appealed the FCC’s November 10, 2003 decision to the U.S. Court of Appealsfor the District of Columbia Circuit (the “U.S. District Court”).  The appeal remains pending, but has beenaccorded expedited treatment by the Court. The intermodal porting requirement took effect on November 24, 2003for wireline carriers in the top 100 MSAs, and will take effect on May 24, 2004for wireline carriers operating in markets below the top 100 MSAs.  On January 16, 2004, the FCC granted alimited waiver to wireline companies with fewer than two percent of thenation’s access lines operating in the top 100 MSAs, which extended thedeadline by which these companies must implement intermodal porting to May 24,2004.  At this time, ALLTEL cannot fully quantify the effects on its communicationsoperations of implementing WLNP or the potential outcome of any courtappeal.  Although implementation of WLNPhas not had a significant impact on the Company’s operating results to date,the balance of the Company’s wireless and wireline customers will haveintermodal porting available to them on May 24, 2004.  Accordingly, ALLTEL believes that the effects of theserequirements, once fully implemented, could result in an increase in both itsoperating costs and customer churn rates in 2004.

 

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 one enabledPublic Safety Answering Point (“PSAP”), deliver both the caller’s number andthe location of the cell site to the PSAP serving the geographic territory fromwhich the E-911 call originated.  Aphase one enabled PSAP is generally one that is capable of receiving andutilizing the number and location data transmitted by the carrier.  ALLTEL has generally complied with the phaseone requirements and provides service to phase one capable PSAPs.  Due to the status of the PSAPs, as well asother technology and deployment issues, the six month window in which serviceis to be provided under the FCC rules has, in certain instances, been extendedby mutual agreement between ALLTEL and the particular PSAPs involved.  In phase two, CMRS carriers opting for ahandset-based solution, as the Company has, must determine, for originatedcalls, the location of the caller within fifty meters for 67 percent of theoriginated 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 otherfactors, the Company requested a limited waiver of these requirements, as didvirtually every other carrier.  OnJuly 26, 2002, the FCC released an order granting a temporary stay of theE-911 emergency implementation rules as they applied to the Company.  The FCC order provides for a phased-indeployment of Automatic Location Identification (“ALI”) capable network orhandset-based technology to begin on March 1, 2003.  ALI capability will permit immediateidentification of the caller’s location by PSAPs.  Under the FCC order, the Company, which has chosen to employhandset-based ALI technology, (1) began selling and activating ALI-capablehandsets prior to March 1, 2003; (2) ensured that as of May 31, 2003 atleast 25 percent of all new handsets activated were ALI-capable; (3) ensuredthat as of November 30, 2003 at least 50 percent of all new handsetsactivated were ALI-capable; (4) will ensure that 100 percent of its digitalhandsets activated are ALI-capable by May 31, 2004; and (5) will ensure thatpenetration of ALI-capable handsets among its customers reaches 95 percent nolater than December 31, 2005. ALLTEL began selling ALI-capable handsets in June 2002 and has compliedwith the handset deployment thresholds under the FCC’s order.  ALLTEL fully expects to comply with theremaining requirements.  Although atthis time, the Company cannot fully quantify the effects on its communicationsoperations of implementing ALI technology, ALLTEL believes these requirements,when fully implemented, could result in a significant increase in its operatingcosts.

 

The Company filedpetitions with the FCC and various state commissions during 2003 seekingcertification as an Eligible Telecommunications Carrier (“ETC”).  Certification as an ETC will qualify theCompany to receive support from the federal USF.  The Company has applications pending at the FCC for itsproperties in Alabama, Virginia, Georgia, North Carolina and Florida.  ALLTEL has obtained approval of itspetitions from state commissions for its properties in Michigan, Mississippi,Arkansas, Wisconsin and West Virginia and is now certified as an ETC in each ofthose states.  The Company qualified tobegin receiving USF support associated with these approved petitions in thefirst quarter of 2004.  The Company hasalso filed petitions requesting ETC certification at the state commissions inArizona,  Kansas and Louisiana and isawaiting commission action on those petitions. The Company has withdrawn the application for ETC certification that itpreviously filed with the state commission in New Mexico.  ALLTEL expects to receive approximately$10.0 million of ETC subsidies in the first half of 2004 and approximately$25.0 to $30.0 million of subsidies for the full year of 2004 related to theapproved ETC petitions.

 

On January 22, 2004,the FCC approved the petition of Virginia Cellular, LLC (“Virginia Cellular”)for certification as an ETC in Virginia and on April 12, 2004, the FCCgranted the petition of Highland Cellular, Inc. (“Highland Cellular”), forcertification as an ETC in Virginia.  Inits orders granting these approvals, the FCC required that Virginia Cellularand Highland Cellular meet certain additional conditions in exchange for itsdesignation as an ETC.  The FCC statedthat it intended to impose similar requirements in future proceedings to grantETC designations.  ALLTEL supplementedits ETC applications pending before the FCC on March 1, 2004 to meet thenew conditions set forth in the Virginia Cellular decision.  On April 12, 2004, the FCC released apublic notice inviting parties with pending ETC petitions to supplement thosepetitions in light of the Virginia Cellular and Highland Cellular decisions andestablished deadlines for public comments on the pending petitions.  On April 12, 2004, the FCC alsoreleased a public notice seeking comment on ETC

 

24

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petitions that alreadyhad been supplemented in light of the Virginia Cellular and Highland Cellulardecisions.  As a result of these FCCactions, ALLTEL’s petitions before the FCC will be subject to additional publiccomment.  Further, the FCC, inconjunction with the Federal/State Joint Board on Universal Service, isconsidering changes to the USF program, including the services qualified forUSF support and the qualifications of ETCs. At this time, ALLTEL cannot estimate what effect the Virginia Cellularand Highland Cellular orders and potential FCC changes to the USF program mayhave on ALLTEL’s ability to receive support from the USF related to itswireless business.

 

In July 2003, theFCC unanimously adopted an order modifying the wireless phone exemption to theHearing Aid Compatibility Act (the “HAC Act”) and adopted requirementsgoverning the compatibility of hearing aids and wireless phones.  The decision requires that interference tohearing aids from digital wireless phones be reduced, and that carriers makeavailable wireless phone models engineered to reduce radio frequencyinterference to hearing aids.  The FCC’sdecision on the HAC Act is currently under reconsideration.  In October 2003, the FCC issued itslong awaited order in the proceeding governing the sale or leasing of spectrumin the secondary market.  The decisionrevises standards for transfer of control and provides new options for thelease of spectrum to providers of new wireless technologies.  At this time, ALLTEL has not fully evaluatedthe effects, if any, that these orders may have on ALLTEL’s existing wirelessoperations.

 

The CommunicationsAssistance for Law Enforcement Act (“CALEA”) requires wireless and wirelinecarriers to ensure that their networks have the capability and capacity toaccommodate law enforcement agencies’ lawful intercept requests. The FCC hasimposed various obligations and compliance deadlines, with which ALLTEL haseither complied or, in accordance with CALEA, filed a request for an extensionof time.  On March 10, 2004, theU.S. Department of Justice, jointly with other federal agencies, petitioned theFCC to adopt new rules under CALEA pertaining to wireless and wirelinecarriers’ packet mode communications services, including Internet protocol(“IP”) based services.  The FCC hasrequested public comment on the petition, and has indicated that it will subsequentlyinitiate a rulemaking proceeding to consider the issues raised therein.  Rules adopted as a result of this proceedingcould impose new costs and obligations on ALLTEL and other carriers, includingseeking Federal Bureau of Investigation and FCC concurrence before deployingnew technology or features in its network.

 

Communications-WirelineOperations
|                                                                           |   | Three Months  Ended  March 31, |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------|--------|
| (Dollars  in millions, except per customer amounts, access lines in thousands) |   | 2004                                |   | 2003 |   |
| Revenues  and sales:                                                           |   |                                |   |   |   |
| Local  service                                                                 |   | $                                   | 280.0  |   | $ | 285.9 |   |
| Network  access and long-distance                                              |   | 260.7                               |   | 262.2 |   |
| Miscellaneous                                                                  |   | 58.8                                |   | 60.8 |   |
| Total  revenues and sales                                                      |   | 599.5                               |   | 608.9 |   |
| Costs  and expenses:                                                           |   |                                |   |   |   |
| Cost  of services                                                              |   | 172.9                               |   | 182.1 |   |
| Cost  of products sold                                                         |   | 5.2                                 |   | 7.9 |   |
| Selling,  general, administrative and other                                    |   | 60.9                                |   | 66.2 |   |
| Depreciation  and amortization                                                 |   | 132.3                               |   | 129.9 |   |
| Total  costs and expenses                                                      |   | 371.3                               |   | 386.1 |   |
| Segment  income                                                                |   | $                                   | 228.2  |   | $ | 222.8 |   |
| Access  lines in service (excludes DSL lines)                                  |   | 3,089.7                             |   | 3,159.9 |   |
| Average  access lines in service                                               |   | 3,092.3                             |   | 3,162.3 |   |
| Average  revenue per customer per month (a)                                    |   | $                                   | 64.62  |   | $ | 64.18 |   |

 

Notes:

(a)          Averagerevenue per customer per month is calculated by dividing total wirelinerevenues by average access lines in service for the period.

 

Wireline operations consistof the Company’s Incumbent Local Exchange Carrier (“ILEC”), CLEC and Internetoperations.  Wireline revenues and salesdecreased $9.4 million, or 2 percent, for the three months ended March 31,2004 compared to the same period of 2003. Customer access lines decreased approximately 2 percent during thetwelve months ended March 31, 2004, reflecting declines in both primaryand secondary access lines.  During thefirst quarter of 2004, the Company lost approximately 6,000 access lines, asignificantly slower rate of decline than the Company experienced in the fourthquarter of 2003.  The decline in accesslines primarily resulted from the effects of wireless and broadbandsubstitution for the Company’s wireline services.  The Company expects access line growth in 2004 to continue to beimpacted by the effects of wireless and broadband substitution.

 

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To slow the decline ofrevenue in 2004, the Company will continue to emphasize sales of enhancedservices and bundling of its various product offerings including Internet,long-distance and high-speed data transport services.  Deployment of DSL service is an important strategic initiativefor ALLTEL.  During the twelve monthperiod ended March 31, 2004, the number of DSL subscribers nearly doubledto approximately 174,000 customers, or 9 percent of the Company’s addressableaccess lines.  The growth in theCompany’s DSL customers significantly outpaced the rate of decline in customeraccess lines discussed above.

 

Local service revenuesdecreased $5.9 million, or 2 percent, for the three months ended March 31,2004 compared to the same period of 2003. Local service revenues in the first quarter of 2004 reflected reductionsin basic service access line revenues of $7.6 million compared to the sameperiod of 2003, consistent with the overall decline in primary and secondaryaccess lines discussed above.  Thedecline in local service revenues attributable to access line loss waspartially offset by growth in revenues derived from the sales of enhancedproducts and services and equipment protection plans, which increased $2.4million in the first quarter of 2004 compared to the same period of 2003,reflecting continued demand for these products and services.

 

Network access andlong-distance revenues decreased $1.5 million, or 1 percent, in the threemonths ended March 31, 2004 compared to the same period of 2003.  Network access and long-distance revenues inthe 2004 period reflected reductions in intrastate network access usage andtoll revenues of $4.5 million compared to the same period of 2003, consistentwith the overall decline in access lines discussed above.  The decline in network access andlong-distance revenues attributable to access line loss was partially offset bygrowth in revenues from data services of $3.9 million, reflecting increaseddemand for high-speed data transport services.

 

Miscellaneous revenuesprimarily consist of charges for billing and collections services provided tolong-distance companies, customer premise equipment sales, directoryadvertising and Internet services. Miscellaneous revenues decreased $2.0 million, or 3 percent, in thethree months ended March 31, 2004 compared to the same period of2003.  Miscellaneous revenues in thefirst quarter of 2004 period reflected declines in directory advertisingrevenues of $1.7 million and customer premise equipment sales and rentals of$3.4 million compared to the same period of 2003.  The decrease in directory advertising revenues primarily resultedfrom a change in the number and mix of directories published, while thedecrease in customer premise equipment sales and rentals reflected lowercustomer demand for purchasing or leasing landline-based communicationsequipment.  The decreases inmiscellaneous revenues attributable to directory advertising services andcustomer premise equipment sales and rentals were partially offset by growth inInternet services, which increased $3.4 million in 2004 compared to the sameperiod of 2003, primarily due to the strong growth in DSL customers discussedabove.

 

Primarily due to the DSLcustomer growth and increased sales of enhanced products and services, averagerevenue per customer per month increased one percent in the first quarter of2004 compared to the same period in 2003. Future growth in average revenue per customer per month will depend onthe Company’s success in sustaining growth in sales of DSL and enhancedservices to new and existing customers.

 

Cost of servicesdecreased $9.2 million, or 5 percent, in the three months ended March 31,2004 compared to the same period of 2003, primarily due to reductions inmaintenance and interconnection expenses. Cost of services for the first quarter of 2003 included $6.0 million ofadditional maintenance costs incurred to repair damage caused by severe winterstorms in Kentucky.  Compared to thesame period of 2003, interconnection expenses declined by $3.6 million in thefirst quarter of 2004, consistent with the decrease in toll revenues and theoverall decline in access lines discussed above.

 

Cost of products solddecreased $2.7 million, or 34 percent, in the three months ended March 31,2004 compared to the same period of 2003, consistent with the decline in salesand leasing of customer premise equipment discussed above.  Selling, general, administrative and otherexpenses decreased $5.3 million, or 8 percent, in the first quarter of 2004compared to the same period of 2003. The decrease in selling, general, administrative and other expenses inthe 2004 period primarily resulted from reductions in data processing chargesand salaries and employee benefit costs. Compared to the same period of 2003, data processing charges andsalaries and employee benefit costs decreased $2.7 million and $3.0 million,respectively, in the first quarter of 2004, primarily due to cost savingsresulting from the Company’s continued efforts to control operatingexpenses.  Depreciation and amortizationexpense increased $2.4 million, or 2 percent, in the three months endedMarch 31, 2004 compared to the same period of 2003, primarily due togrowth in wireline plant in service.

 

Although revenues andsales decreased in the three months ended March 31, 2004 compared to thesame period of 2003, segment income increased $5.4 million, or 2 percent, inthe first quarter of 2004 primarily due to the Company’s cost savings andexpense control efforts discussed above.

 

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A summary of therestructuring and other charges related to the wireline operations that werenot included in the determination of segment income were as follows for thethree months ended March 31, 2004:

 
| (Millions)                             |   |   |   |
|----------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs  |   | $      | 11.2   |   |
| Relocation  costs                      |   | 1.4    |   |
| Lease  and contract termination costs  |   | (1.9   | )      |
| Other  exit costs                      |   | 0.7    |   |
| Total  restructuring and other charges |   | $      | 11.4   |   |

 

Regulatory Matters– Wireline Operations

Except for the Kentuckyproperties acquired in 2002 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 give riseto 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.  On a quarterly basis, the Company reviewsthe criteria to determine whether the continuing application of SFAS No. 71 isappropriate.  Some of the Company’s ILECoperations have begun to experience competition in their local service areas.Sources of competition to ALLTEL’s local exchange business include, but are notlimited to, resellers of local exchange services, interexchange carriers,satellite transmission services, wireless communications providers, cabletelevision companies, and competitive access service providers including thoseutilizing Unbundled Network Elements-Platform (“UNE-P”).  Through March 31, 2004, thiscompetition has not had a material adverse effect on the results of operationsof ALLTEL’s ILEC operations.

 

Although the Companybelieves that the application of SFAS No. 71 continues to be appropriate, it ispossible that changes in regulation, legislation or competition could result inthe Company’s ILEC operations no longer qualifying for the application of SFASNo. 71 in the near future.  If ALLTEL’sILEC operations no longer qualified for the application of SFAS No. 71, theaccounting impact to the Company would be an extraordinary non-cash credit tooperations.  The non-cash credit wouldconsist primarily of the reversal of the regulatory liability for cost ofremoval included in accumulated depreciation, which amounted to $161.0 millionat March 31, 2004.  ALLTEL does notexpect to record any impairment charge related to the carrying value of itsILEC plant.  Under SFAS No. 71, ALLTELcurrently depreciates its ILEC plant based upon asset lives approved byregulatory agencies or as otherwise allowed by law.  Upon discontinuance of SFAS No. 71, ALLTEL would be required torevise the lives of its property, plant and equipment to reflect the estimateduseful lives of the assets.  ALLTEL doesnot expect any revisions in asset lives to have a material adverse effect onits ILEC operations.

 

Most states in which theCompany’s ILEC subsidiaries operate have adopted alternatives to rate-of-returnregulation, either through legislative or state public service commissionactions.  ALLTEL 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 acquiredNebraska and Kentucky properties operate under interstate price cap regulationpursuant to waivers granted by the FCC. On April 17, 2002, the FCC extended ALLTEL’s waiver of the“all-or-nothing” rule with respect to the Nebraska properties and granted awaiver of the “all-or-nothing” rule with respect to the acquired Kentucky properties.  The waivers permit price cap regulation forthese two properties while retaining rate-of-return regulation for ALLTEL’sother ILEC properties.  OnFebruary 28, 2004, the FCC released an order modifying the“all-or-nothing” rule allowing a rate-of-return carrier acquiring lines from aprice-cap carrier to choose between price-cap or rate-of-return regulation forthe acquired lines.  In the order, theFCC stated that all outstanding waivers of the “all-or-nothing” rule wouldcontinue in effect until the FCC issued a final order on the issue.  The “all-or-nothing” rule was originallyintended to ensure that all study areas of a carrier and its affiliates aresubject to a single form of pricing regulation.

 

A number of carriers havebegun offering voice telecommunications services utilizing the Internet as themeans of transmitting those calls.  Thisservice, commonly know as voice-over-Internet-protocol (“VoIP”) telephony, ischallenging existing regulatory definitions. Several state public utility commissions have initiated proceedings toanalyze VoIP and its regulatory classification.  On March 10, 2004, the FCC released a Notice of ProposedRulemaking seeking comment on the appropriate regulatory treatment ofIP-enabled communications services.  Theproposed rulemaking asks commentors to address the differences betweenIP-enabled services and traditional telephony services, and distinguish betweenthe different types of IP-enabled services provided.  The FCC indicated that the cost of the public switched telephonenetwork should be borne equitably among those that use it in similar ways andasks which regulatory

 

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requirements, forexample, those relating to E-911, disability accessibility, access charges, anduniversal service, should be extended to IP-enabled services.

 

On February 12,2004, the FCC granted a Petition for Declaratory Ruling by Pulver.com in whichit determined that Pulver.com’s IP-based, peer-to-peer service that requiresspecialized telephone equipment or software for computers was not atelecommunications service, but rather was an information service subject tofederal jurisdiction.  On April 21,2004, the FCC denied a waiver petition filed by AT&T requesting that its IPtelephony service be exempt from access charges.  The FCC ruled that AT&T’s IP telephony service thatoriginates and terminates on the public switched telephone network is atelecommunications service subject to interstate access charges.   While the FCC will address theclassification of IP-enabled services in greater detail in its IP-enableservice notice of proposed rulemaking, ALLTEL continues to evaluate thepossible long-term implications of these determinations on its operations.

 

In April 2001, theFCC released 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 withwireless carriers or CLECs.  The outcomeof the FCC and state proceedings could change the way ALLTEL receivescompensation from, and remits compensation to, other carriers and its endusers.  Several industry associationsare working on proposals for unified intercarrier compensation reform, but thespecific details of these plans have not been publicly released.  The FCCis expected to issue a further notice of proposed rulemaking on the subject.  Until this proceedingconcludes, ALLTEL cannot estimate the potential impact of any 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.  The interimmechanism has allowed rural carriers to continue receiving high-cost fundingbased on embedded costs.  At this time, ALLTELcannot estimate the effect of the changes to its universal service support, ifany, that may occur once the FCC adopts a permanent plan for ruralcarriers.  On December 13, 2002,the FCC released its interim USF contribution report and order and furthernotice of proposed rulemaking.  Underthis ruling, the method for providing federal USF contributions changed fromthe historical interstate revenue-based arrangement to contributions based onprojected revenues.  In addition, onApril 1, 2003, the USF line item on the customer bill was adjusted toreflect only 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.  Three “connections-based” proposals havebeen offered as long-term replacements in addition to the continuation of arevenue-based assessment methodology. The proposed connection-based methods would establish a universalservice charge based either on the number of customer connections, the capacityand nature of the connection, or on working telephone numbers.  The interim universal service changes havenot had a material adverse effect on the Company’s wireline operations.  ALLTEL cannot predict at this time theimpact to its wireline operations of any permanent USF contribution plan thatthe FCC might adopt.

 

On November 8, 2002,the FCC requested that the Federal/State Joint Board on Universal Service (the“Joint Board”) review certain of the FCC’s rules relating to the high-costuniversal support mechanism and the process by which carriers are designatedETCs.  On February 27, 2004, theJoint Board issued its recommended decision regarding a number of issuesrelated to portable USF support for ETCs.  Amongits recommendations, the Joint Board suggested that the FCC should adoptoptional federal guidelines to assist with state ETC designations and thatsupport should be provided only for a single primary connection percustomer.  The FCC is expected to seekcomment on the Joint Board’s recommendations in the second quarter of2004.  At this time, ALLTELcannot estimate what impact, if any, this proceeding may have on its universalservice funding.

 

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

 

On December 20,2001, the FCC released a notice of proposed rulemaking initiating the firsttriennial review of the FCC’s policies on unbundled network elements (“UNEs”)including UNE-P.  UNE-P is created whena competing carrier obtains all the network elements needed to provide servicefrom the ILEC at a discounted rate.  OnAugust 21, 2003, the FCC released the text of its Triennial ReviewOrder.  In response to the remand of theU.S. District Court, the FCC adopted new rules governing the obligations ofILECs to unbundle the elements of their local networks for use bycompetitors.  The FCC made national findings of impairment ornon-impairment for loops, transport and, most significantly, switching. The FCC delegated to the states the authority to engage in additional factfinding and make alternative impairment findings

 

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based on a more granular impairment analysis includingevaluation of applicability of FCC-established “triggers”.  The FCC created “mass market” and “enterprisemarket” customer classifications that generally correspond to the residentialand business markets, respectively.  TheFCC found that CLECs were not impaired without access to local circuitswitching when serving “enterprise market” customers on a national level.  CLECs, however, were found to be impaired ona national level without access to local switching when serving “mass market”customers.  State commissions had 90days to ask the FCC to waive the finding of no switching impairment for“enterprise market” customers.  The FCCpresumption that CLECs are impaired without access to transport, high capacityloops and “mass market” switching is subject to a more granular nine monthreview by state commissions pursuant to FCC-established triggers and othereconomic and operational criteria.

 

The FCC’s decision gavethe ILECs significant relief from broadband UNE obligations by imposing norequirement to unbundle packet switching over copper/fiber loops orfiber-to-the-home loops.  In addition,line sharing was eliminated as a UNE. The FCC also opened a further notice of proposed rulemaking to considerthe “pick and choose” rules under which a competing carrier may select fromamong the various terms of interconnection offered by an ILEC in its variousinterconnection agreements.  Commentshave been filed with the FCC on the “pick and choose” further notice, but theFCC has yet to issue a decision.

 

On March 2, 2004,the U.S. District Court overturned key portions of the FCC’s Triennial ReviewOrder.  The Court’s decision vacatedwithin 60 days the nationwide impairment standard, as well as the FCC’sdelegation of authority to the states, while generally upholding ILEC broadbandrelief.  On March 31, 2004, the FCCcommissioners sent a letter to carriers urging them to begin a period ofcommercial negotiation regarding unbundling network elements.  To provide for additional time for thesenegotiations, the FCC requested and was granted a 45-day extension toJune 15, 2004 of the May 3, 2004 effective date of the Court’s decision tovacate the UNE rules.  In addition, theFCC sought an extension of the deadline for filing a petition for certiorari atthe Supreme Court.  ALLTEL continues tomonitor commission proceedings in states that have not terminated theirimpairment proceedings.  It remains tobe seen whether the FCC’s request for commercial negotiation will succeed wherepast negotiations have failed.  Untilthese scenarios unfold and the proceeding has worked its way through thecourts, the ultimate impact of the Triennial Review Order on ALLTEL’s ILECoperations cannot be determined.

 

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

 

During the first quarterof 2002, the FCC initiated a rulemaking to evaluate the appropriate frameworkfor broadband access to the Internet over wireline facilities.  In the notice of proposed rulemaking, theFCC tentatively concluded that wireline broadband Internet access should beclassified as an “information service” rather than a telecommunications serviceand, therefore, should not be subject to common carrier regulation.  The FCC sought comments on their tentativeconclusion, but has not reached a final order. In a related proceeding released March 15, 2002, the FCC issued adeclaratory ruling concluding that cable modem service was an interstate“information service” and not a cable service or a telecommunicationsservice.  The FCC sought comment onwhether there are legal or policy reasons why it should reach differentconclusions with respect to wireline broadband Internet access and cable modemservice, but has not reached a final order. On October 6, 2003, the U.S. Court of Appeals for the Ninth Circuit(the “Ninth Circuit Court”) rejected the FCC’s classification of cable modemservice as solely an unregulated “information service”, finding a portion ofthe service to be a “telecommunications service”.  The FCC requested a rehearing before the full Ninth CircuitCourt.  On March 31, 2004, theNinth Circuit Court rejected the FCC’s request for rehearing.  The Ninth Circuit Court ruling was scheduledto become effective April 8, 2004, but the Ninth Circuit Court granted theFCC its petition to stay the ruling while the FCC and cable industry prepares aformal appeal to the U.S. Supreme Court. It remains uncertain whether cable modem service will ultimately fallunder common carrier regulation of the 96 Act and whether cable companies willbe required to provide nondiscriminatory access to their networks.  At this time, ALLTEL cannot estimate whatimpact, if any, these broadband proceedings may have on its ILEC operations.

 

Section 251(b) ofthe Communications Act of 1934 (the “34 Act”), as amended, requires, in part,that local exchange carriers provide local number portability to any requestingtelecommunications carrier.  Wirelesscarriers are generally defined as “telecommunications carriers” under the 34Act, and are therefore eligible to port numbers with wireline carriers, whichis referred to as “intermodal porting”. As previously discussed under “Regulatory Matters-Wireless Operations”, onNovember 10, 2003, the FCC released a decision providing guidance onintermodal porting issues.  Theintermodal porting requirement took effect on November 24, 2003 forwireline carriers in the top 100 MSAs, and will

 

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take effect on May 24, 2004 for wireline carriers operating in markets below the top 100 MSAs.  As noted earlier, on January 16, 2004,the FCC granted a limited waiver to wireline companies with fewer than twopercent of the nation’s access lines operating in the top 100 MSAs, whichextended the deadline by which these companies must implement intermodalporting to May 24, 2004.  The USTA,along with certain rural telephone companies, appealed the FCC’sNovember 10, 2003 decision to the U.S. District Court, and the appeal ispending before the Court.  The majorityof the Company’s wireline operations are conducted in markets below the top 100MSAs that will be subject to the later May 24, 2004 implementation date forintermodal porting.  At this time, theCompany cannot fully quantify the effects on its wireline operations ofimplementing intermodal porting or the potential outcome of any court appeal;however, it is likely that these requirements, when implemented, will adverselyaffect the Company’s wireline operating costs and customer growth rates.

 

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

 

CommunicationsSupport Services Operations
|                                           |   | Three Months  Ended  March 31, |   |
|------------------------------------------------|--------|-------------------------------------|--------|
| (Millions,  except customers in thousands)     |   | 2004                                |   | 2003 |   |
| Revenues  and sales:                           |   |                                |   |   |   |
| Product  distribution                          |   | $                                   | 99.1   |   | $ | 93.1 |   |
| Long-distance  and network management services |   | 79.0                                |   | 81.0 |   |
| Directory  publishing                          |   | 26.2                                |   | 24.4 |   |
| Telecommunications  information services       |   | 14.7                                |   | 26.6 |   |
| Total  revenues and sales                      |   | 219.0                               |   | 225.1 |   |
| Costs  and expenses:                           |   |                                |   |   |   |
| Cost  of services                              |   | 66.0                                |   | 73.8 |   |
| Cost  of products sold                         |   | 114.8                               |   | 107.7 |   |
| Selling,  general, administrative and other    |   | 13.2                                |   | 16.6 |   |
| Depreciation  and amortization                 |   | 8.5                                 |   | 9.3 |   |
| Total  costs and expenses                      |   | 202.5                               |   | 207.4 |   |
| Segment  income                                |   | $                                   | 16.5   |   | $ | 17.7 |   |
| Long-distance  customers                       |   | 1,707.7                             |   | 1,605.0 |   |

 

Communications supportservices revenues and sales decreased $6.1 million, or 3 percent, for the threemonths ended March 31, 2004 compared to the same period of 2003.  As noted in the table above, the decrease inrevenues and sales in the first quarter of 2004 reflected declines in revenuesfrom telecommunications information services and long-distance and networkmanagement services, partially offset by growth in sales of telecommunicationsand data products and directory publishing revenues.  Sales of telecommunications and data products increased $6.0million in the three month period of 2004 compared to the same period of 2003driven by increased sales to non-affiliates of $8.9 million, primarilyreflecting increased sales of wireless handsets to retailers and otherdistributors.  Conversely, sales toaffiliates decreased $2.9 million in the first quarter of 2004 compared to thesame period of 2003, primarily due to a reduction in capital expenditures bythe Company’s wireline operations. Although the number of long-distance customers served increased duringthe first quarter of 2004, revenues from these operations decreased $2.0million as a result of a reduction in customer billing rates due tocompetition.  Telecommunicationsinformation services revenues decreased $11.9 million in the 2004 periodprimarily due to the December 2003 sale of certain assets and relatedliabilities, including selected customer contracts and capitalized softwaredevelopment costs, to Convergys.  Thesold customer contracts represented approximately 48 percent of the totalrevenues and sales reported by the telecommunications information servicesoperations in 2003.  The $1.8 millionincrease in directory publishing revenues in the first quarter of 2004primarily resulted from a change in accounting for directory contracts in whichthe Company has a secondary delivery obligation.  Effective January 1, 2003, ALLTEL began deferring a portionof its revenues and related costs to provide for secondary deliveries.  As a result, revenues and related costsassociated with any directories for which secondary deliveries were required,but not yet made, were deferred during the first quarter of 2003, resulting ina reduction in directory publishing revenues in that period of $3.7million.  Partially offsetting thefavorable effect in the 2004 period attributable to the change in accountingwas a decrease in yellow page revenues of $2.2 million.  The reduction in yellow page revenuesresulted from a change in the number and mix of directories published duringthe first quarter of 2004 compared to the same period of 2003.

 

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Segment income decreased$1.2 million, or 7 percent, for the three month period ended March 31,2004 compared to the same period of 2003, primarily due to lower profit marginsrealized by the long-distance and directory publishing operations.  Profit margins for the long-distanceoperations were affected by the reduction in customer billing rates driven bycompetition and increased network-related costs due to growth in its customerbase.  Profit margins for the directorypublishing operations reflected increased selling, marketing and other start-upcosts incurred in order for the Company’s publishing subsidiary to beginproviding all directory publishing services, except printing, for all directorycontracts to be published in 2004. Previously, these directory publishing services were contracted out to athird party.  The decreases in segmentincome attributable to the lower margins realized by the long-distance anddirectory publishing operations were partially offset by increased profits fromthe product distribution operations and reduced operating expenses related tothe telecommunications information services operations. The increase in productdistribution income in the 2004 period reflected the increase in sales tonon-affiliates, while the reduction in operating expenses for thetelecommunications information services operations reflected the effects of thesale of certain operations to Convergys, as previously discussed.

 

A summary of therestructuring and other charges related to the communications support servicesoperations that were not included in the determination of segment income wereas follows for the three months ended March 31, 2004:

 
| (Millions)                             |   |   |   |
|----------------------------------------|--------|--------|--------|
| Severance  and employee benefit costs  |   | $      | 0.5    |   |
| Relocation  costs                      |   | 0.1    |   |
| Total  restructuring and other charges |   | $      | 0.6    |   |

 

**FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL RESOURCES**
|                                       |   | Three Months  Ended March 31, |     |
|--------------------------------------------|--------|------------------------------------|----------|
| (Millions,  except per share amounts)      |   | 2004                               |     | 2003 |   |
| Cash  flows from (used in):                |   |                               |     |   |   |
| Operating  activities                      |   | $                                  | 551.5    |   | $ | 546.9 |   |
| Investing  activities                      |   | (201.8                             | )        | (348.6 | ) |
| Financing  activities                      |   | (370.3                             | )        | (287.4 | ) |
| Discontinued  operations                   |   | —                             |     | 7.5 |   |
| Effect  of exchange rate changes           |   | 0.2                                |     | (0.1 | ) |
| Change  in cash and short-term investments |   | $                                  | (20.4    | ) | $ | (81.7 | ) |
| Total  capital structure (a)               |   | $                                  | 12,785.0 |   | $ | 12,642.9 |   |
| Percent  of equity to total capital (b)    |   | 54.0                               | %        | 48.8 | % |
| Book  value per share (c)                  |   | $                                  | 22.38    |   | $ | 19.83 |   |

 

Notes:

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

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

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

 

CashFlows-Operating Activities

Cash provided fromoperations continued to be ALLTEL’s primary source of liquidity.  Cash provided from operations for the threemonths ended March 31, 2004 increased slightly compared to the same periodof 2003.  The increase in cash providedfrom operations resulted from favorable changes in working capitalrequirements, primarily reflecting timing differences in the purchase ofinventories and the payment of income taxes. The favorable changes in working capital requirements were partiallyoffset by the overall decrease in the Company’s earnings from continuingoperations that resulted primarily from the effects of the restructuring andother charges and increased wireless customer acquisition and retention costs,as previously discussed.

 

CashFlows-Investing Activities

Capital expenditurescontinued to be ALLTEL’s primary use of capital resources.  Capital expenditures for the three monthsended March 31, 2004 were $207.2 million compared to $227.7 million forthe same period in 2003.  Capitalexpenditures in both years were incurred to construct additional networkfacilities, to deploy digital wireless technology in the Company’s existing andacquired wireless markets and to upgrade ALLTEL’s telecommunications network inorder to offer other communications services, including long-distance,Internet, DSL, and “walkie-talkie” communications services.  The Company funded substantially all of itscapital expenditures through internally generated funds.

 

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Investing activitiesalso included outlays for capitalized software development costs.  Additions to capitalized software for thethree months ended March 31, 2004 were $8.0 million compared to $13.5million for the same period in 2003. The Company expects capital expenditures including capitalized softwaredevelopment costs to be approximately $1.2 to $1.3 billion for 2004, which willbe funded primarily from internally generated funds.

 

There were no cash outlaysfor the purchase of property for the three months ended March 31, 2004compared to $124.6 million for the same period of 2003.  During the first quarter of 2003, ALLTELpurchased wireless properties in Mississippi for $64.6 million in cash.  In addition, the Company also acquired theremaining ownership interest in two wireless properties in Michigan for $60.0million in cash.

 

Investing activities forthe three month periods ended March 31, 2004 and 2003 also includedproceeds from the return on investments of $20.3 million and $13.8 million,respectively.  These amounts primarilyconsisted of cash distributions received from ALLTEL’s wireless minorityinvestments.

 

CashFlows-Financing Activities

Dividend payments remain asignificant use of capital resources for ALLTEL.  Common and preferred dividend payments were $115.5 million and$109.1 million for the three months ended March 31, 2004 and 2003,respectively.  The increase in dividendpayments in 2004 primarily reflected growth in the annual dividend rate onALLTEL’s common stock.  InOctober 2003, the Company’s Board of Directors approved an increase in thequarterly common stock dividend rate from $.35 to $.37 per share, raising theannual dividend rate to $1.48 per share. The Company expects to continue the payment of cash dividends during thebalance of 2004.

 

ALLTEL’s maximum borrowingcapacity under its commercial paper program is $1.5 billion.  ALLTEL classifies commercial paperborrowings as long-term debt, because they are intended to be maintained on along-term basis and are supported by the Company’s revolving creditagreements.  ALLTEL has a $1.0 billionline of credit under a revolving credit agreement.  During 2003, the Company amended this revolving credit agreementsuch that the expiration date of the entire $1.0 billion line of credit is now October 1,2005.  On July 30, 2003, the Companyentered into an additional $500.0 million, 364-day revolving credit agreementthat will expire on July 28, 2004, and allows the Company to convert anyoutstanding borrowings under this agreement into term loans maturing in 2005.  No borrowings were outstanding under therevolving credit agreements as of March 31, 2004, December 31, 2003or March 31, 2003.

 

Under the commercial paperprogram, commercial paper borrowings are fully supported by the availableborrowings under the revolving credit agreements.  Accordingly, the total amount outstanding under the commercialpaper program and the indebtedness incurred under the revolving creditagreements may not exceed $1.5 billion. No commercial paper borrowings were outstanding at March 31, 2004or December 31, 2003, compared to $310.0 million and $25.0 millionoutstanding at March 31, 2003 and December 31, 2002,respectively.  During the first quarterof 2004, no borrowings were incurred by the Company under either its commercialpaper program or revolving credit agreements. The net increase of $285.0 million in commercial paper borrowingsoutstanding from December 31, 2002 represented all of the long-term debtissued in the first quarter of 2003. During the first quarter of 2003, the Company incurred additionalcommercial paper borrowings of $574.6 million, consisting of $124.6 million tofund the cost of the wireless property acquisitions in Mississippi andMichigan, and $450.0 million to retire a 7.125 percent senior unsecured notethat was due March 1, 2003.  During the second quarter of 2003, the Companyrepaid all borrowings outstanding under its commercial paper program utilizinga portion of the cash proceeds ALLTEL received in connection with theApril 1, 2003 sale of the financial services division to FidelityNational.

 

Retirements oflong-term debt were $1.5 million and $456.2 million for the three months endedMarch 31, 2004 and 2003, respectively. The repayment of the $450.0 million unsecured note due March 1,2003 represented substantially all of the long-term debt retired during thefirst quarter of 2003.

 

On January 22,2004, ALLTEL’s Board of Directors adopted a stock repurchase plan authorizingthe Company to repurchase up to $750.0 million of its outstanding common stockover a two year period ended December 31, 2005.  Under the repurchase plan, ALLTEL may repurchase shares, fromtime to time, on the open market or in negotiated transactions, ascircumstances warrant, depending upon market conditions and other factors.  Sources of funding the stock buyback programinclude available cash on hand, operating cash flows, borrowings under ALLTEL’scommercial paper program and proceeds from monetizing the Company’s investmentportfolio.  Through March 31, 2004,ALLTEL had repurchased, using available cash on hand, 4.8 million of its commonshares at a total cost of $243.0 million.

 

Cash flows fromfinancing activities also included distributions to minority investors, whichamounted to $16.2 million and $10.0 million for the three months ended March 31,2004 and 2003, respectively.

 

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Liquidity and CapitalResources

ALLTEL believes it hassufficient cash and short-term investments on hand ($637.4 million atMarch 31, 2004) and has adequate operating cash flows to finance itsongoing operating requirements, including capital expenditures, repayment oflong-term debt, payment of dividends, and financing the stock repurchaseprogram.  Additional sources of fundingavailable to ALLTEL include (1) $1.5 billion of borrowings available to theCompany under its commercial paper program and revolving credit agreements, (2)additional debt or equity securities under the Company’s March 28, 2002,$5.0 billion shelf registration statement, of which approximately $730 millionremained available for issuance at March 31, 2004 and (3) additional debtsecurities issued in the private placement market.

 

ALLTEL’s commercialpaper and long-term credit ratings with Moody’s Investors Service (“Moody’s”),Standard & Poor’s Corporation (“Standard & Poor’s”) and Fitch Ratingswere unchanged from December 31, 2003 and were as follows:

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

 

Factors that could 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.

 

The revolving creditagreements contain various covenants and restrictions including a requirementthat, as of the end of each calendar quarter, ALLTEL maintain a totaldebt-to-capitalization ratio of less than 65 percent.  For purposes of calculating this ratio under the revolving creditagreement, total debt would include amounts classified as long-term debt(excluding mark-to-market adjustments for interest rate swaps), currentmaturities of long-term debt outstanding, short-term debt and any letters ofcredit or other guarantee obligations. As of March 31, 2004, the Company’s total debt to capitalizationratio was 45.7 percent.  In addition,the indentures and borrowing agreements, as amended, provide, among otherthings, for various restrictions on the payment of dividends by theCompany.  Retained earnings unrestrictedas to the payment of dividends by the Company amounted to $5,627.8 million atMarch 31, 2004.  There are norestrictions on the payment of dividends among members of ALLTEL’s consolidatedgroup.

 

At March 31, 2004,current maturities of long-term debt were $277.3 million and included a $250.0million, 7.25 percent senior unsecured note due April 1, 2004.  The Company repaid this note at maturityusing available cash on hand.

 

On April 1, 2003, inconnection with the sale of the Company’s financial services divisionpreviously discussed, ALLTEL received shares of Fidelity National commonstock.  As of March 31, 2004,ALLTEL owned approximately 11.2 million shares of Fidelity National commonstock, representing an approximate seven percent interest in FidelityNational.  Subject to certain conditionsspecified in the sale agreement, the shares could not be disposed of by ALLTEL,for a period of one year from the closing date of the transaction.  The contractual holding period related tothese shares expired on April 1, 2004.

 

Under the Company’slong-term debt borrowing agreements, acceleration of principal payments wouldoccur upon payment default, violation of debt covenants not cured within 30days or breach of certain other conditions set forth in the borrowingagreements.  At March 31, 2004, theCompany was in compliance with all of its debt covenants.  There are no provisions within the Company’sleasing agreements that would trigger acceleration of future lease payments.

 

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 entered intoany material arrangement requiring ALLTEL to guarantee payment of third partydebt or to fund losses of an unconsolidated special purpose entity.

 

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Recently IssuedAccounting Pronouncements

On December 8, 2003,the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the“Act”) became law.  Beginning in 2006,the Act will provide for a prescription drug benefit under Medicare Part D, aswell as a federal subsidy to plan sponsors of retiree healthcare plans thatprovide a prescription drug benefit to participants that is at leastactuarially equivalent to the benefit that will be available underMedicare.  The amount of the federalsubsidy will be based on 28 percent of an individual beneficiary’s annualeligible prescription drug costs ranging between $250 and $5,000.  On January 12, 2004, the FinancialAccounting Standards Board issued Staff Position No. 106-1, “Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003” (“FSP No. 106-1”).  ALLTEL has not fully quantified the effects of the Act, althoughit is likely to result in a reduction in both the Company’s future benefitcosts and accumulated benefit obligation related to its postretirementhealthcare plan.  In accordance with theprovisions of FSP No. 106-1, ALLTEL has not reflected the effects of the Act inthe accompanying unaudited interim 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 31,2003, 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, accounting forpension and other postretirement benefits, calculating depreciation andamortization expense and determining the fair values of goodwill and otherindefinite-lived intangible assets. There have been no material changes to ALLTEL’s critical accountingpolicies during the three month period ended March 31, 2004.

 

Legal Proceedings

ALLTEL is party tovarious legal proceedings arising in the ordinary course of business.  Although the ultimate resolution of thesevarious proceedings cannot be determined at this time, management of the Companydoes not believe that such proceedings, individually or in the aggregate, willhave a material adverse effect on the future results of operations or financialcondition of ALLTEL.  In addition,management of the Company is currently not aware of any environmental mattersthat, individually or in the aggregate, would have a material adverse effect onthe consolidated financial condition or results of operations of the Company.

 

Other Information

On February 23,2004, as authorized by the Audit Committee of the Board of Directors of ALLTEL,the Company (1) engaged Moore Stephens Frost, PLC to serve as independentauditors for ALLTEL’s employee benefit plans, including the ALLTEL Corporation401(k) Plan, for the year ended December 31, 2003, and (2) dismissedALLTEL’s existing independent auditors for its employee benefit plans,PricewaterhouseCoopers LLP.  For theyear ended December 31, 2002 through February 23, 2004, there were nodisagreements with PricewaterhouseCoopers LLP on any matter of accounting principlesor practices, financial statement disclosure or auditing scope related toALLTEL’s employee benefit plans, nor did the Company consult with MooreStephens Frost, PLC on any matters related to its employee benefit plans,including the type of audit opinion that might be rendered.

 

 

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**ALLTELCORPORATION**

**FORM10-Q**

**PART I –FINANCIAL INFORMATION**

 

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

The Company’s marketrisks at March 31, 2004 are similar to the market risks discussed inALLTEL’s Annual Report on Form 10-K for the year ended December 31,2003.  The Company is exposed to marketrisk from changes in marketable equity security prices, interest rates, andforeign exchange rates.  The Company hasestimated its market risk using sensitivity analysis.  For marketable equity securities, market risk is defined as thepotential change in fair value attributable to a hypothetical adverse change inmarket prices.  For all other financialinstruments, market risk is defined as the potential change in earningsresulting from a hypothetical adverse change in market prices or interestrates.  The results of the sensitivityanalysis used to estimate market risk are presented below, although the actualresults may differ from these estimates.

 

Equity Price Risk

Changes in equityprices primarily affect the fair value of ALLTEL’s investments in marketableequity securities.  Fair value forinvestments was determined using quoted market prices, if available, or thecarrying amount of the investment, if no quoted market price wasavailable.  At March 31, 2004,investments of the Company were recorded at fair value of $765.8 million,compared to $722.7 million at December 31, 2003.  The increase in fair value primarily reflected the increasedmarket value of the Fidelity National common stock acquired by ALLTEL inconnection with the April 1, 2003 sale of its financial services division,as previously discussed.  Marketableequity securities amounted to $444.9 million at March 31, 2004 andincluded unrealized holding gains of $110.3 million.  Comparatively, investments in marketable equity securities were$395.8 million at December 31, 2003 and included unrealized holding gainsof $73.6 million.  At March 31,2003, investments in marketable equity securities amounted to only $0.2million.  A hypothetical 10 percentdecrease in quoted market prices would result in a $44.5 million decrease inthe fair value of the Company’s marketable equity securities at March 31,2004.

 

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 31,2004, the Company had entered into six, pay variable receive fixed, interestrate swap agreements on notional amounts totaling $1.0 billion to convert fixedinterest rate payments to variable.  Thematurities of the six interest rate swaps range from March 1, 2006 toNovember 1, 2013.  The weighted averagefixed rate received by ALLTEL on these swaps is 5.5 percent, and the variablerate paid by ALLTEL is the three month LIBOR (London-Interbank OfferedRate).  The weighted average variablerate paid by ALLTEL was 1.1 percent at March 31, 2004.  A hypothetical increase of 100 basis pointsin variable interest rates would reduce annual pre-tax earnings byapproximately $10.0 million. Conversely, a hypothetical decrease of 100 basis points in variableinterest rates would increase annual pre-tax earnings by approximately $10.0million.

 

Foreign Exchange Risk

The Company’sbusiness operations in foreign countries are not material to the Company’sconsolidated operations, financial condition and liquidity.  Foreign currency translation gains andlosses were not material to the Company’s consolidated results of operationsfor the three months ended March 31, 2004 and 2003.  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.

 

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**ALLTELCORPORATION**

**FORM10-Q**

**PART I –FINANCIAL INFORMATION**

 

**Item4****.****           Controls andProcedures**

 

(a)                            Evaluationof disclosure controls and procedures.

 

The term “disclosurecontrols and procedures” (defined in SEC Rule 13a-15(e)) refers to the controlsand other procedures of a company that are designed to ensure that informationrequired to be disclosed by a company in the reports that it files under theSecurities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,summarized and reported within required time periods. ALLTEL’s management, withthe participation of the Chief Executive Officer and Chief Financial Officer,have evaluated the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this quarterly report (the“Evaluation Date”).   Based on thatevaluation, ALLTEL’s Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the Evaluation Date, such controls and procedures wereeffective.

 

(b)                           Changesin internal controls.

 

The term “internal controlover financial reporting” (defined in SEC Rule 13a-15(f)) refers to the processof a company that is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  ALLTEL’s management, with the participationof the Chief Executive Officer and Chief Financial Officer, have evaluated anychanges in the Company’s internal control over financial reporting thatoccurred during the period covered by this quarterly report, and they haveconcluded that there was no change to ALLTEL’s internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, ALLTEL’s internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 2.****           Changes in Securities, Use of Proceeds and IssuerPurchases of Equity Securities**

 

(e)                            OnJanuary 23, 2004, the Company announced a $750.0 million stock repurchaseplan which expires on December 31, 2005. Information pertaining to this plan is included in the table below.

 
| Period                    |   | Total Number of  Shares Purchased |   | Average Price  Paid per Share |   | Total Number of  Shares Purchased as  Part of Publicly  Announced Plans |      | Maximum Number  of  Shares (or Approximate  Dollar Value) that May  Yet Be Purchased Under  the Plans |   |
|---------------------------|--------|-----------------------------------|--------|-------------------------------|--------|-------------------------------------------------------------------------|-----------|-------------------------------------------------------------------------------------------------------|--------|
| January 1-31,  2004  |   | 625,000                           |   | $                             | 49.58  |                                                                    | 625,000   |                                                                                                  | $      | 719.0 million |   |
| February 1-29,  2004 |   | 800,600                           |   | $                             | 49.89  |                                                                    | 800,600   |                                                                                                  | $      | 679.1 million |   |
| March 1-31,  2004    |   | 3,400,000                         |   | $                             | 50.62  |                                                                    | 3,400,000 |                                                                                                  | $      | 507.0 million |   |
| Total                     |   | 4,825,600                         |   | $                             | 50.36  |                                                                    | 4,825,600 |                                                                                                  |   |   |

 

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

 

(a)                            Seethe exhibits specified on the Index of Exhibits located at Page 38.

 

(b)                           Reportson Form 8-K:

 

Current Report on Form 8-K dated January 23, 2004, reporting underItem 12, Results of Operations and Financial Condition, the Company’s PressRelease announcing ALLTEL’s 2003 fourth quarter and annual unauditedconsolidated results of operations.

 

No other reports on Form 8-K have been filed during the quarter forwhich this report is filed.

 

 

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SIGNATURE

 

 

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

 

 
|   |                                                    | ALLTEL  CORPORATION     |   |   |
|--------|---------------------------------------------------------|-------------------------|--------|--------|
|   | (Registrant)                                            |                    |
|   |                                                    |                    |
|   |                                                    | /s/ Jeffery R.  Gardner |   |   |
|   | Jeffery R.  Gardner                                     |                    |
|   | Executive Vice President – Chief Financial Officer |                    |
|   | (Principal Financial Officer)                           |                    |
|   | May 7, 2004                                             |                    |

 

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**ALLTELCORPORATION**

**FORM10-Q**

**INDEX OFEXHIBITS**

 
| Form 10-Q  Exhibit No. |   | Description of  Exhibits                                                                                                                                       |
|------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                                                                           |   |   |
| 31(a)                  |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     | (a) |   |
|                   |   |                                                                                                                                                           |   |   |
| 31(b)                  |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     | (a) |   |
|                   |   |                                                                                                                                                           |   |   |
| 32(a)                  |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | (a) |   |
|                   |   |                                                                                                                                                           |   |   |
| 32(b)                  |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | (a) |   |

 

(a) Filedherewith.

 

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