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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 31,2002
OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
Commission file number  1-4996 **                                                                     ALLTELCORPORATION                                                                      
(Exact name of registrant as specified in its charter)  
          DELAWARE                                                                                              34-0868285                                        
(State or other jurisdiction ofincorporation or organization) 
                            (I.R.S. Employer                           Identification No.)  
  One Allied Drive, Little Rock, Arkansas                                                               72202                                                 
(Address of principal executive offices)
                                 (Zip Code)  
  Registrant's telephone number, including area code                 (501) 905-8000                                                                                                                                                                                                                                                              
(Former name, former address and former fiscal year, if changed since last report)  
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

   YES  X    NO      
Number of common shares outstanding as of March 31, 2002:

                                                                            310,938,650

The Exhibit Index is located at page 38.

===================================================================================

 

**ALLTEL CORPORATION
FORM 10-Q

TABLE OF CONTENTS**** 

PART I - FINANCIAL INFORMATION****Page No.Item 1.Financial Statements
2Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 
15Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
35**PART II- OTHER INFORMATION**Item 1.Legal Proceedings
*Item 2.
Changes in Securities
*Item 3. 
Defaults Upon Senior    Securities
*Item 4. 
Submission of Matters to    Vote of Security Holders
*Item 5. 
Other Information
*Item 6. 
Exhibits and Reports on    Form 8-K
36

   * No reportable information under this item.
 

 

Forward-Looking Statements

This Report on Form 10-Q includes, and future filings by the Company on Form10-K, Form 10-Q and Form 8-K and future oral and written statements by ALLTELand its management may include, certain "forward-looking statements"within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are subject to uncertainties that could cause actualfuture events and results to differ materially from those expressed in theforward-looking statements. These forward-looking statements are based onestimates, projections, beliefs and assumptions and are not guarantees of futureevents and results. Words such as "expects", "anticipates","intends", "plans", "believes", "seeks","estimates", and "should", and variations of these words andsimilar expressions, are intended to identify these forward-looking statements.ALLTEL disclaims any obligation to update or revise any forward-lookingstatement based on the occurrence of future events, the receipt of newinformation, or otherwise.

Actual future events and results may differ materially from those expressedin these forward-looking statements as a result of a number of importantfactors. Representative examples of these factors include (without limitation)ongoing deregulation (and the resulting likelihood of significantly increasedprice and product/service competition) in the communications business as aresult 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; adversechanges in economic conditions in the markets served by ALLTEL; the extent,timing, and overall effects of competition in the communications business;material changes in available technology; the risks associated with theintegration of acquired businesses; and adverse changes in the ratings given toour debt securities by nationally accredited ratings organizations.

In addition to these factors, actual future performance, outcomes and resultsmay differ materially because of other, more general, factors including (withoutlimitation) general industry and market conditions and growth rates, economicconditions, governmental and public policy changes, and the continuedavailability of financing in the amounts, at the terms, and on the conditionsnecessary to support ALLTEL's business.

 

 

 

1
**ALLTEL CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except per share    amounts)
March 31,       
December 31,       
March 31,       **ASSETS**
2002       
2001       
2001       **CURRENT ASSETS:**Cash and short-term investments
$     93.4
$    85
.3
$      9
.6Accounts receivable (less allowance for    doubtful         accounts of $56.5, $52.2 and $54.4,    respectively)
1,212.1
1,241
.2
1,174
.3Inventories
119.6
163
.8
168
.5Prepaid expenses and other
   278.2
   277
.5
   168
.1         Total current assets
1,703.3
1,767
.8
1,520
.5Investments
232.5
251
.6
266
.1Goodwill
2,660.8
2,633
.6
2,427
.7Other intangibles
790.2
798
.5
735
.7**PROPERTY, PLANT AND EQUIPMENT:**Land
241.3
239
.8
233
.2Buildings and improvements
1,064.5
1,051
.4
1,009
.3Wireline
5,589.0
5,501
.3
5,246
.4Wireless
4,208.0
4,160
.6
3,878
.8Information services
1,208.3
1,166
.8
1,027
.4Other
585.8
578
.0
472
.5Under construction
        365.3
        384
.1
        399
.8Total property, plant and equipment
13,262.2
13,082
.0
12,267
.4Less accumulated depreciation
   6,536.1
   6,300
.7
   5,753
.3Net property, plant and equipment
6,726.1
6,781
.3
6,514
.1Other assets
413.6
376
.2
283
.8**TOTAL ASSETS**
$12,526.5
$12,609
.0
$11,747
.9       
**LIABILITIES AND SHAREHOLDERS'    EQUITY**
**CURRENT LIABILITIES:**Current maturities of long-term debt
$   500.1
$   51
.6
$   59
.3Accounts payable
428.9
522
.1
454
.5Advance payments and customer deposits
216.9
218
.0
226
.9Accrued taxes
223.0
141
.0
391
.7Accrued dividends
105.9
105
.9
104
.4Other current liabilities
    237.9
    246
.5
    269
.8         Total current liabilities
1,712.7
1,285
.1
1,506
.6Long-term debt
3,185.0
3,861
.5
3,988
.5Deferred income taxes
773.9
738
.0
225
.7Other liabilities
1,173.0
1,158
.6
665
.9**SHAREHOLDERS' EQUITY**Preferred stock, Series C, $2.06, no par    value, issued and         outstanding: 16,510, 16,880 and 18,974 shares,    respectively
0.4
0
.4
0
.5Common stock, par value $1 per share, 1.0    billion shares         authorized, issued and outstanding: 310,938,650, 310,529,902         and 313,227,464 shares, respectively
310.9
310
.5
313
.2Additional paid-in capital
778.9
769
.2
934
.9Unrealized holding gain (loss) on investments
(6.3)
(4
.5)
3
.8Foreign currency translation adjustment
(10.3)
(9
.9)
(10
.7)Retained      earnings
         4,608.3
        4,500.1
        4,119.5         Total shareholders' equity
5,681.9
5,565
.8
5,361
.2**TOTAL LIABILITIES AND    SHAREHOLDERS' EQUITY**
$12,526.5
$12,609
.0
$11,747
.9
2    

 

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**
**  
Three Months
Twelve Months  
               Ended March 31,     
             Ended March 31,     
(Millions, except per share amounts)
2002    
2001    
2002    
2001    **REVENUES AND SALES:         
Service revenues
$1,679
.8
$1,635
.8
$6,780
.8
$6,484
.0 
Product sales
     153
.1
     191
.2
     730
.7
     846
.7 
Total revenues and sales
1,832
.9
1,827
.0
7,511
.5
7,330
.7**COST AND EXPENSES:         
Operations
905
.7
902
.1
3,676
.7
3,702
.6 
Cost of products sold
208
.8
225
.1
891
.6
890
.0 
Depreciation and amortization
267
.6
284
.8
1,150
.5
1,045
.8 
Integration expenses and other charges
      42
.9
      69
.0
     66
.1
              84
.2 
Total costs and expenses
1,425
.0
1,481
.0
5,784
.9
5,722
.6**OPERATING INCOME
407
.9
346
.0
1,726
.6
1,608
.1          
Equity earnings in unconsolidated partnerships
8
.7
11
.3
54
.3
99
.2
Minority interest in consolidated partnerships
(14
.2)
(16
.8)
(69
.2)
(94
.2)
Other income, net
5
.0
10
.4
27
.8
39
.8
Interest expense
(63
.9)
(80
.8)
(272
.0)
(323
.4)
Gain (loss) on disposal of assets and other
                
-  
     362
.5
      (4
.9)
2,291
.0          
Income before income taxes
343
.5
632
.6
1,462
.6
3,620
.5
Income taxes
         129
.7
  256
.4
577
.5
1,494
.9         
Income before cumulative effect of accounting change
213
.8
376
.2
885
.1
2,125
.6
Cumulative effect of accounting change
           (net of income taxes of $13.0)
               
-  
     19
.5
          
-  
        19
.5 
Net income
213
.8
395
.7
885
.1
2,145.1
Preferred dividends
               
-  
              
-  
              0 
.1 
          0 
.1 
Net income applicable to      common shares
$         213
.8
$395
.7
$885
.0
$2,145
.0**EARNINGS PER SHARE:         
Basic:         
    Income before cumulative effect of    accounting change
$.6
9
$1.2
0
$2.8
5
$6.7
7 
    Cumulative effect of accounting change
      
-
    .0
6
        
-
     .0
6 
    Net income
$.6
9
$1.2
6
$2.8
5
$6.8
3 
Diluted:         
    Income before cumulative effect of    accounting change
$.6
8
$1.1
9
$2.8
3
$6.7
2 
    Cumulative effect of accounting change
      
-
    .0
6
        
-
    .0
6 
    Net income
$.6
8
$1.2
5
$2.8
3
$6.7
8Adjusted net income and earnings per    share amounts assuming 
change in accounting for goodwill and other    indefinite-lived         
intangible assets was applied retroactively:         
    Net income as reported
$ 213
.8
$ 395
.7
$ 885
.1
$2,145
.1 
    Amortization of indefinite-lived    intangible assets, net of tax
         

-
    20
.3
    72
.7
       94
.0 
    Net income as adjusted
$ 213
.8
$ 416
.0
$ 957
.8
$2,239
.1 
    Basic earnings per share as reported
$.6
9
$1.2
6
$2.8
5
$6.8
3 
    Amortization of indefinite-lived    intangible assets, net of tax
     
-
    .0
7
    .2
3
    .3
0 
    Basic earnings per share as adjusted
$.6
9
$1.3
3
$3.0
8
$7.1
3 
    Diluted earnings per share as reported
$.6
8
$1.2
5
$2.8
3
$6.7
8 
    Amortization of indefinite-lived    intangible assets, net of tax
     

-
    .0
7
    .2
3
    .3
0 
    Diluted earnings per share as adjusted
$.6
8
$1.3
2
$3.0
6
$7.0
8
 

 

3

 

 

 

 

 

 

 
**CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Three Months
Twelve Months  
           Ended March 31,     
          Ended March 31,    
(Millions)
2002    
2001    
2002    
2001    **NET CASH PROVIDED FROM OPERATIONS
$ 603
.2
$ 526
.7
$ 2,147
.0
$ 1,674
.3         **CASH FLOWS FROM INVESTING ACTIVITIES:         
Additions to property, plant and equipment
(201
.0)
(207
.0)
(1,255
.9)
(1,213
.5) 
Additions to capitalized software development costs
(38
.5)
(29
.0)
(180
.9)
(112
.4) 
Additions to investments
(1
.1)
(8
.6)
(4
.7)
(19
.1) 
Purchase of property, net of cash acquired
(29
.2)
(16
.4)
(230
.4)
(1,056
.4) 
Proceeds from the lease of cell site towers
7
.5 
 -
531
.9 
 - 
Proceeds from the sale of investments 
 -
 2

.6 

 -
 633
.0 
Proceeds from the return on investments
11
.3
18
.8
54
.3
77
.9 
Proceeds from the sale of assets 
 -
411
.4 
 -
740
.3 
Other, net
    (7
.7)
     1
.7
      53
.2
    (9
.3) 
    Net cash providedby (used in) investing activities
(258
.7)
173
.5
(1,002
.5)
(959
.5)           **CASH FLOWS FROM FINANCING ACTIVITIES:**         
Dividends on preferred and common stock
(105
.7)
(103
.2)
(414
.3)
(405
.2) 
Reductions in long-term debt
(227
.6)
(632
.2)
(377
.8)
(100
.0) 
Purchase of common stock 
 - 
 -
(192
.3)
(164
.3) 
Distributions to minority investors
(12
.5)
(23
.4)
(107
.1)
(75
.2) 
Long-term debt issued 
 - 
 - 
 -
36
.8 
Common stock issued
       9
.8
      7
.2
      30
.4
     3
.3 
    Net cash used in financing activities
(336
.0)
(751
.6)
(1,061
.1)
(704
.6)

Effect of exchange rate changes on cash and short-term         
   investments
(0
.4)
(6
.2)
0
.4
(3
.9)           
Increase (decrease) in cash and short-term investments
8
.1
(57
.6)
83
.8
6
.3           **CASH AND SHORT-TERM INVESTMENTS:**        

Beginning of the period
     85
.3
    67
.2
      9
.6
      3
.3 
End of period
$     93
.4
$    9
.6
$ 93
.4
$      9
.6
 

 

4

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 
****
**1.      General:**

Basis of Presentation  - The consolidated financial statements at March31, 2002 and 2001 and for the three and twelve month periods then ended forALLTEL Corporation ("ALLTEL" or the "Company") are unaudited.The consolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial reporting andSecurities and Exchange Commission rules and regulations. Certain informationand footnote disclosures have been condensed or omitted pursuant to such rulesand regulations. Certain prior year amounts have been reclassified to conform tothe 2002 financial statement presentation. The consolidated financial statementsreflect all adjustments (consisting only of normal recurring adjustments) whichare, in the opinion of management, necessary for a fair presentation of thefinancial position and operating results for the interim periods presented.

Change in Business Segment Reporting  - As of January 1, 2002, ALLTELchanged its business segment reporting presentation by reclassifying theoperating units of its emerging communications businesses to better align itsfinancial reporting with the Company's business segment mix and to provide clearcomparisons to other communications companies within ALLTEL's peer group.In accordance with Statement of Financial Accounting Standards ("SFAS")No. 131 "Disclosures about Segments of an Enterprise and RelatedInformation", allprior period segment information has been restated to conform to this newfinancial reporting presentation.
Under the new reporting presentation, there was no change to ALLTEL'swireless segment, which includes the Company's cellular, PersonalCommunications Services ("PCS") and paging operations.The competitive local exchange ("CLEC") and Internet access operationshave been combined and reported as part of the wireline business segment. Theinformation services segment no longer includes services provided to ALLTELaffiliates. These affiliate transactions have been reported in the correspondingcommunications segments, and accordingly, information services operating resultsonly reflect the Company's financial services business and non-affiliatedtelecommunications operations. All other segments, which include long-distanceand network management services, communications products and directorypublishing, have been reported together under a new segment classificationtitled "Communications Support Services". Thesereclassifications did not affect previously reported consolidated operatingincome, net income or earnings per share of ALLTEL. Consolidated revenues andsales for the three and twelve months ended March 31, 2001 were reduced by $33.5million and $124.5 million, respectively, as a result of reclassifyinginformation services revenues previously billed to the wireline operations thatwere not eliminated pursuant to SFAS No. 71 "Accounting for the Effects ofCertain Types of Regulation".
Change in Reporting Expense Reimbursements  - In the first quarter of2002, the Company changed to a gross basis the reporting presentation forreimbursements of out-of-pocket expenses received from customers under terms ofits information services agreements in accordance with Emerging Issues TaskForce Topic D-103. Previously, the Company netted these reimbursements againstexpenses incurred to provide data processing and consulting services andincluded the net amount in operations expense. Prior period revenue and expenseinformation has been reclassified to conform to the new reporting presentation.This change did not affect previously reported operating income or net income ofthe Company.
**2.      Accounting Changes:**
Effective January 1, 2002, the Company adopted SFAS No. 142 "Goodwilland Other Intangible Assets". This standard changed the accounting forgoodwill and other indefinite-lived intangible assets from an amortizationmethod to an impairment-only approach. As of January 1, 2002, ALLTEL ceasedamortization of goodwill recorded in conjunction with past businesscombinations. In addition, the Company conducted a review of its otheridentifiable intangible assets and determined that its cellular and PCS licenses(the "wireless licenses") and wireless franchise rights met theindefinite life criteria outlined in SFAS No. 142, because the Company expectsboth the renewal by the granting authorities and the cash flows generated fromthese intangible assets to continue indefinitely. Accordingly, ALLTEL alsoceased amortization of the wireless licenses and franchise rights as of January1, 2002. SFAS No. 142 requires intangible assets with indefinite lives to betested for impairment on an annual basis, by comparing the fair value of theassets to their carrying amounts, with the initial impairment review 

5

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**2.        Accounting Changes, Continued:

completed during the first interim period followingadoption of the standard. ALLTEL completed the initial impairment review of itswireless licenses and franchise rights and determined that no write-down in thecarrying value of these assets was required. The wireless licenses and franchiserights are operated as a single asset supporting the Company's wireless businessstrategy, and accordingly were aggregated for purposes of testing impairment.Fair value of these intangible assets was determined based on the discountedcash flows of the wireless business segment. SFAS No. 142 also requiresintangible assets with finite lives to be amortized over their estimated usefullives. ALLTEL determined that, with respect to its intangible assets with finitelives, primarily customer lists, no changes in the remaining useful lives ofthese assets were required.

In accordance with SFAS No. 142, goodwill is to be assigned to a company'sreporting units and an initial impairment test by reporting unit must becompleted by June 30, 2002. Goodwill is to be tested for impairment annuallyusing a consistent measurement date. During 2001, the Company determined itsapplicable reporting units and assigned goodwill to them. During the secondquarter of 2002, ALLTEL will complete the initial impairment review of itsgoodwill. At this time, the Company does not expect that an impairmentwrite-down, if any, in the carrying value of its goodwill will be material tothe Company's consolidated results of operations.

The changes in the carrying amount of goodwill by business segment for thethree months ended March 31, 2002 were as follows:
                                                        Communications                                                                      Support              Information         Millions
Wireless
Wireline    Services                      Services
Total    Balance at December 31, 2001
$2,388.0
$ 226.8
             $  2.3  
$ 16.5
$2,633.6Acquired during the year
            0.9
        17.0
                    -   
        9.3
          27.2Balance at March 31, 2002
$2,388.9
$ 243.8
$  2.3  
$ 25.8
$2,660.8 
During 2002, ALLTEL purchased a wireline property in Georgia, acquired an additionalownership interest in a Texas wireless property and purchased a privately heldcompany serving the financial services industry. In connection with theseacquisitions, the Company paid $29.2 million in cashand assigned the excess of the aggregate purchase price over the fair marketvalue of the tangible net assets acquired to goodwill.
The carrying amount of goodwill by business segment for the three monthsended March 31, 2001 was as follows:

Communications
Support
   Information  (Millions)
Wireless
Wireline
Services
Services
          Total   Balance at March 31, 2001
$2,175.1
$ 232.5
$ 2.4
$ 17.7
$2,427.7
The carrying value (cost less accumulated amortization through December 31,2001) of indefinite-lived intangible assets other than goodwill no longersubject to amortization after January 1, 2002 were as follows as of March 31:
Millions
           2002
          2001Cellular licenses
$ 506.2
$ 413.2PCS licenses
76.9
71.4Franchise rights
        42.9
        45.1
$ 626.0
$ 529.7
The change in the carrying value of cellular licenses from March 31, 2001primarily reflected the final purchase price adjustments recorded in 2001related to the Company's wireless property acquisitions with Bell AtlanticCorporation ("Bell Atlantic"), GTE Corporation ("GTE") andSBC Communications Inc. ("SBC"). The increase in the carrying value ofPCS licenses from March 31, 2001 reflected additional capitalized interestcosts.

6

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**2.       Accounting Changes, Continued:

Intangible assets subject to amortization were as follows as of March 31:

2002
Gross 
Accumulated
Net CarryingMillions
          Cost 
Amortization
          Value    Customer lists
$ 218.0
$ (66.6)
$ 151.4Franchise rights
22.5
(10.4)
12.1Non-compete agreements
          3.1
        (2.4)
            0.7
$ 243.6
$ (79.4)
$ 164.2
 

2001
Gross 
Accumulated
Net CarryingMillions
          Cost 
Amortization
          Value    Customer lists
$      199.1
$        (7.8)
$      191.3Franchise rights
22.5
(9.2)
13.3Non-compete agreements      and other
            5.3
          (3.9)
            1.4
$      226.9
$      (20.9)
$      206.0
Amortization expense for intangible assets subject to amortization was $9.2million and $37.5 million for the three and twelve month periods ended March 31,2002, compared to $10.0 million and $12.0 million for the same periods of 2001.

The after-tax net income and earnings per share effects, assuming that thechange in accounting to eliminate the amortization of goodwill and otherindefinite-lived intangible assets was applied retroactively by class ofindefinite-lived intangible asset, were as follows (millions, except per shareamounts):
Twelve MonthsThree MonthsTwelve MonthsEndedEnded Ended March 31,March 31,March 31,Effects on    net income:
2002
2001
2001Goodwill amortization
$ 61.5
$ 16.2
$ 87.2Cellular licenses amortization
9.0
3.3
3.7PCS licenses amortization
0.2
0.1
0.3Franchise rights amortization
        2.0
        0.7
        2.8Net increase to reported net income
$ 72.7
$ 20.3
$ 94.0       
 Effects on    basic earnings per share:Goodwill amortization
$.19
$.05
$.28Cellular licenses amortization
.03
.01
.01PCS licenses amortization
-
-
-Franchise rights amortization
  .01
  .01
.01Net increase to basic earnings      per share
$.23
$.07
$.30       
 Effects on    diluted earnings per share:Goodwill amortization
$.19
$.05
$.28Cellular licenses amortization
.03
.01
.01PCS licenses amortization
-
-
-Franchise rights amortization
  .01
  .01
  .01Net increase to diluted earnings      per share
$.23
$.07
$.30
 

 

7

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**2.        Accounting Changes, Continued:

In the second quarter of 2001, the Company changed its method of accountingfor the defined benefit pension plan of a subsidiary acquired in 1999 to conformwith the accounting principles followed by the ALLTEL Pension Plan (the"ALLTEL Plan"), a defined benefit pension plan covering substantiallyall employees working in the Company's communications and corporate operations.The change in accounting was completed in conjunction with the Company'sdecision to conform future benefits earned under the subsidiary's plan with theALLTEL Plan, effective June 1, 2001. The change in accounting, retroactive toJanuary 1, 2001, affected both the computation and amortization of unrecognizedactuarial gains and losses for purposes of calculating annual pension costrelated to the subsidiary's pension plan. The change included modifying themethod by which the market-related value of plan assets was determined from acalculated five-year average to actual fair value. In addition, unrecognizedactuarial gains or losses that exceed 17.5% of the greater of the projectedbenefit obligation or market-related value of plan assets are amortized on astraight-line basis over five years. Unrecognized actuarial gains and lossesbelow the 17.5% corridor are amortized over the average remaining service lifeof active plan participants (approximately 13 years).

Under the method previously followed by the subsidiary's plan, onlyunrecognized actuarial gains and losses in excess of 10% of the greater of theprojected benefit obligation or market-related value of plan assets wereamortized over the average remaining service life of active plan participants.The Company believes the changes in computing the market-related value of planassets and accelerating the amortization periods are preferable because thesechanges result in more timely recognition of actuarial gains and losses incomputing annual pension cost related to the subsidiary's pension plan, andachieve consistency with the ALLTEL Plan. Effective January 1, 2002, thesubsidiary's plan was merged into the ALLTEL Plan. The cumulative effect ofretroactively applying these changes to periods prior to 2001 resulted in aone-time non-cash credit of $19.5 million, net of income tax expense of $13.0million, and is included in net income for the three and twelve months endedMarch 31, 2001.
**3.      Integration Expenses and Other Charges:**
A summary of theintegration expenses and other charges recorded was as follows for the three andtwelve month periods ended March 31:

 

Three Months    Ended
Twelve Months    Ended(Millions)
2002  
2001  
2002  
2001  Severance and employee benefit costs
$ 13.4
$ 54.9
$ 20.6
$ 58.9Lease and contract termination costs
12.4
5.2
13.3
5.2Write-down of cell site equipment
7.1
-
22.2
-Write-down of software      development costs
4.4
8.9
4.4
8.9Computer system conversion and other    integration costs
3.4
-
3.4
-Equipment removal and other disposal costs
2.2
-
2.2
-Branding and signage costs
-
-
-
15.8Reversal of accrued liabilities
           -
           -
           -
  (4.6)    Total integration expenses and other charges
$ 42.9
$ 69.0
$ 66.1
$ 84.2
 

Number of employees terminated

910
1,247
1,307
1,269Number of lease sites terminated
31
48
46
48
In January 2002,the Company announced its plans to exit its CLEC operations in seven states. TheCompany also consolidated its call center and retail store operations during thefirst quarter of 2002. In connection with these activities, theCompany recorded arestructuring charge consisting of severance and employee benefit costs relatedto a planned workforce reduction, costs associated with terminating certain CLECtransport agreements and lease termination fees related to the closing ofcertain retail and call center locations. In exiting the CLEC operations, theCompany also incurred costs to disconnect and remove switching and othertransmission equipment from central office facilities and expenses to notify andmigrate customers to other
8

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**3.        Integration Expenses and Other Charges, Continued:

service providers.ALLTEL also wrote off certain capitalizedsoftware development costs that had no alternative future use or functionality.The restructuring plans, completed in March 2002, provided for the eliminationof 910 employees primarily in the Company's sales, customer service and networkoperations support functions. As of March 31, 2002, the Company had paid $3.4million in severance and employee-related expenses, and all of the employeereductions had been completed.
During the first quarter of 2002, the Company also recorded the finalwrite-down in the carrying value of certain cell site equipment to fair value.The Company had recorded the initial write-downs in the carrying value of cellsite equipment during the third and fourth quarters of 2001. The write-downsresulted from the Company's exchange of its existing equipment for new equipmentunder terms of a product replacement program initiated by a vendor in 2001. Inthe first quarter of 2002, the Company also incurred expenses related to itspending acquisition of wireline properties in Kentucky from VerizonCommunications, Inc. ("Verizon"). (See Note 8.) These expensesprimarily consisted of computer programming costs associated with convertingVerizon's customer billing records to ALLTEL's internal billing system.

The lease and contract termination costs consisted of $5.0 millionrepresenting the estimated minimum contractual commitments over the next one tofive years for 31 operating locations that the Company has abandoned, net ofanticipated sublease income. The lease and contract termination costs alsoincluded $3.6 million of costs to terminate transport agreements with sixinterexchange carriers. The Company also recorded an additional $2.8 million toreflect the revised estimated costs, net of anticipated sublease income, toterminate leases associated with four operating locations. ALLTEL had previouslyrecorded $6.3 million in lease termination costs related to these four locationsin 1999. The additional charge reflected a reduction in expected sublease incomeattributable primarily to softening in the commercial real estate market andbankruptcy filings by two sublessees. Finally, the lease termination costs alsoincluded $1.0 million of unamortized leasehold improvement costs related to theabandoned locations.

During 2001, theCompany restructured its regional communications, information services, productdistribution and corporate operations. In connection with these restructuringefforts, the Company recorded restructuring charges during each of the fourquarters of 2001. The restructuring charges consisted of $62.1 million inseverance and employee benefit costs related to a planned workforce reduction,$6.1 million in lease termination costs associated with the closing of certainretail and other operatinglocations and a $8.9 million write-down in the carrying value of certainsoftware development costs. Included in the severance and employee benefitcomponent of the restructuring charges are non-cash charges of $22.6 million.These non-cash charges consisted of $21.5 million in additional pension andpostretirement benefit costs related to a special early retirement programoffered by the Company to employees meeting certain age and service requirementsand $1.1 million in compensation expense related to the accelerated vesting ofcertain stock options. Eligible employees who elected the early retirementincentive received five years of additional vested service for purposes ofcalculating their retirement benefits available under the Company's pension andpostretirement benefit plans. During the first quarter of 2001, 230 employeesaccepted the retirement incentive offer. The restructuring plans were completedin December 2001 and resulted in the elimination of 1,644 employees, includingthe employees who accepted the early retirement incentive. The work forcereductions primarily occurred in operations management, engineering, sales andthe corporate support functions. As of March 31, 2002, the Company had paid$38.2 million in severance and employee-related expenses, and all of theemployee reductions had been completed.
The lease termination costs consisted of $5.0 million representing theestimated minimum contractual commitments over the next one to five years for 63operating locations that the Company has abandoned, net of anticipated subleaseincome. The lease termination costs also included $1.1 million of unamortizedleasehold improvement costs related to the abandoned locations. Thewrite-down in the carrying value of certain software development costs resultedfrom the Company's formation of a joint venture with IBM announced in March2001. The joint venture, which operates as ALLTEL Corebanking Solutions, aconsolidated subsidiary of
9

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**3.        Integration Expenses and Other Charges, Continued:

ALLTEL, markets IBM's  Corebank software, a real-time banking system, to financial service  organizations in Europe. Prior to forming the joint venture, ALLTEL had been  developing its own real-time processing software. Following the signing of the  joint venture agreement, the Company ceased further development of its  software product and wrote off the portion of the capitalized software  development costs that had no alternative future use or functionality.
During the fourthquarter of 2000, in connection with the purchase of wireless assets in Louisianafrom SBC, the Company recorded integration expenses and other charges of $1.9million, consisting of branding and signage costs. The Company also recorded a$1.1 million reduction in the liabilities associated with the September 1999restructuring of its wireline operations completed during 2000. This adjustmentprimarily reflected differences between estimated and actual severance costspaid and a slight reduction in the number of employees to be terminated underthe plan from 248 to 242.
In connection with the exchange of wireless assets with Bell Atlantic and GTEcompleted during thesecond and third quarters of 2000,the Company recordedintegration expenses and other charges consisting of severance and employeebenefit costs related to a planned workforce reduction and branding and signagecosts. The integration plan, completed in September 2000, provided for theelimination of 22 employees in the Company's wireless operations management,engineering and sales support functions. In connection with this integrationplan, the Company recorded a charge of $9.2 million in the third quarter of2000, consisting of $8.9 million in branding and signage costs and $0.3 millionin severance and employee-related expenses. In the second quarter, the Companyrecorded a charge of $8.8 million, which consisted of $5.0 million in severanceand employee benefit costs and $3.8 million in branding and signage costs. As ofMarch 31, 2001, the Company had paid $5.3 million in severance andemployee-related expenses and all of the employee reductions had been completed.
During the third quarter of 2000, the Company also recorded a $1.5 millionreduction in the liabilities associated with its merger and integrationactivities initiated during 1999. The reduction consisted of a $1.0 milliondecrease in estimated severance costs to complete the September 1999restructuring of the wireline operations and decreases in estimated severancecosts of $0.3 million and $0.2 million, respectively, related to theacquisitions of Aliant Communications Inc. ("Aliant") and LibertyCellular, Inc. ("Liberty"). The adjustment to the wirelinerestructuring plan reflects a reduction in the expected number of employees tobe terminated from 308 to 248, while the adjustments to the Aliant and Libertymerger and integration plans reflect differences between estimated and actualseverance costs paid. During the second quarter of 2000, the Company alsorecorded a $2.0 million reduction in the merger and integration liabilityrelated to its acquisition of Aliant. This adjustment primarily reflected adecrease in severance and employee benefit costs to be paid as a result ofreducing the expected number of Aliant employees to be terminated from 160 to132. At March 31, 2002, the remaining unpaid liability relating to ALLTEL'sacquisitions of Aliant and Liberty was $3.7 million and consisted of unpaidseverance and employee-related expenses of $1.9 million and unpaid contracttermination fees of $1.8 million.

The following is a summary of activity related to the liabilities associatedwith the Company's integration expenses and other charges for the twelve monthsended March 31:

(Millions)
2002  
2001        Balance,    beginning of period
$ 30.0
$ 59.0Integration expenses and other charges
66.1
88.8Reversal of accrued liabilities
-     
(4.6)Non-cash charges for employee benefits
    -     
(22.6)Non-cash write-down of assets
(27.5)
(11.2)Cash outlays
  (37.8)
  (79.4)Balance, end of period
$ 30.8
$ 30.8
 

 

10

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**3.        Integration Expenses and Other Charges, Continued:

At March 31, 2002,the remaining unpaid liability related to the Company's integration andrestructuring activities consisted of severance and employee-related expenses of$13.1 million and lease cancellation and contract termination costs of $17.7million and is included in other current liabilities in the accompanyingconsolidated balance sheets.

**4.      Gain on Disposal of Assets and Other:**
In the secondquarter of 2001, the Company recorded a pretax adjustment of $4.4 million toreduce the gain recognized from the dissolution of a wireless partnership withBellSouth Mobility, Inc. ("BellSouth") initially recorded in the firstquarter of 2001, as discussed below. The Company also recorded a pretaxadjustment of $2.4 million to increase the gain recognized from the sale of PCSlicenses to Verizon Wireless also completed during the first quarter of 2001.These adjustments primarily reflected differences between the actual andestimated book values of the properties transferred. In addition, during thesecond quarter of 2001, the Company prepaid $73.5 million of long-term debtprior to its stated maturity date and incurred pretax termination fees of $2.9million in connection with the early retirement of that debt.
In the first quarter of 2001, ALLTEL recorded a pretax gain of $345.4 millionfrom the sale of 20 PCS licenses to Verizon Wireless. In addition, the Companyrecorded a pretax gain of $13.9 million upon the dissolution of a wirelesspartnership with BellSouth involving properties in four states. Upondissolution, the partnership assets were distributed to the partners at fairvalue resulting in a gain for financial reporting purposes. Also in the firstquarter of 2001, the Company recorded pretax gains of $3.2 million from the saleof certain investments.

During the fourthquarter of 2000, the Company recorded pretax gains totaling $85.7 million fromthe sale of investments, including ALLTEL's remaining investment in WorldCom,Inc. ("WorldCom") common stock. Proceeds from the investment salesamounted to $102.2 million. The Company also recorded pretax gains of $35.5million from the sale of its PCS operations in Birmingham, Ala. and eight otherPCS licenses. In addition, the Company recorded a pretax adjustment of $5.7million to decrease the gain recognized from the exchange of wireless propertieswith Bell Atlantic and GTE initially recorded in the second quarter of 2000. Inthe third quarter of 2000, the Company recorded pretax gains totaling $476.3million from the sale of a portion of its investment in WorldCom common stock.In addition, the Company recorded a pretax adjustment of $1.4 million to reducethe gain recognized from the exchange of wireless properties with Bell Atlanticand GTE and the sale of certain PCS assets recorded in the second quarter of2000, as discussed below. This adjustment, along with the $5.7 million fourthquarter adjustment previously discussed, primarily reflected differences betweenthe actual and estimated book values of the properties transferred. In thesecond quarter of 2000, the Company recorded pretax gains totaling $1,353.1million from the exchange of wireless properties with Bell Atlantic and GTE andthe sale of its PCS operations in Mobile, Ala. and the PCS license covering thePensacola, Fla. market. In addition, the Company recorded a pretax write-down of$15.0 million on its investment in APEX Global Information Services, Inc.("APEX"), a provider of Internet access services. The write-off wasrecorded due to adverse market conditions and APEX's bankruptcy filing.
 

 

 

 

 

 

 

 

 

 

 

 

11

 
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**5.       Comprehensive Income:

Comprehensive income was as follows for the three and twelve month periods  ended March 31:

Three Months    Ended
Twelve Months    Ended(Millions)
       2002   
2001   
2002   
2001   Net income
$213.8
$395
.7
$ 885.1
$ 2,145.1Other comprehensive loss:    Unrealized holding losses on    investments             arising in the period
(3.0)
(6
.8)
(15.5)
(225.8)    Income tax benefit
     (1.2)
     (2
.3)
     (5.4)
         (68.5)
     (1.8)
     (4
.5)
   (10.1)
    (157.3)    Less: reclassification adjustments             for gains included in net income-
(2
.4)-
(564.3)    Income tax expense
           -  
          1
.0
           -  
        225.7
           -  
         (1
.4)
           -  
    (338.6)         Net unrealized losses
(3.0)
(9
.2)
(15.5)
(790.1)         Income tax benefit
     (1.2)
         (3
.3)
     (5.4)
    (294.2)
     (1.8)
         (5
.9)
   (10.1)
    (495.9)         Foreign currency translation adjustment
(0.4)
(6
.2)
0.4
(3.9)         Other comprehensive loss before tax
(3.4)
(15
.4)
(15.1)
(794.0)         Income tax benefit
         (1.2)
         (3
.3)
         (5.4)
        (294.2)         Other comprehensive loss
         (2.2)
    (12
.1)
         (9.7)
        (499.8)Comprehensive income
$ 211.6
$ 383
.6
$ 875.4
$ 1,645.3**6.       Earnings per Share:

A reconciliationof the net income and number of shares used in computing basic and dilutedearnings per share was as follows for the three and twelve month periods endedMarch 31:
Three      Months EndedTwelve      Months Ended(Millions, except per share    amounts)
2002    
2001     
2002    
2001    **Basic earnings per share:**Income before cumulative effect of    accounting change
$ 213.8
$ 376
.2
$ 885.1
$ 2,125.6Preferred dividends
                -  
            
-  
          0.1
             0.1Net income applicable to common    shares before cumulativeeffect of accounting change
$ 213.8
$ 376
.2
$ 885.0
$ 2,125.5Weighted average common shares    outstanding for the period
310.8
313
.1
310.8
313.9Basic earnings per share
$.69  
$1.20      
$2.85      
$6.77      
 

12
**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)
 
**6.       Earnings per Share, Continued:**Three      Months EndedTwelve      Months Ended(Millions, except per share    amounts)
2002    
2001     
2002    
2001    **Diluted****earnings per share:**Net income applicable to common      shares before cumulative    effect of      accounting change
$ 213.8
$ 376
.2
$ 885.0
$ 2,125.5Adjustment for convertible      preferred stock dividends
                -  
            
-  
          0.1
             0.1Net income applicable to common    shares before cumulative    effect of accounting change      and assuming conversion of    preferred stock
$ 213.8
$ 376
.2
$ 885.1
$ 2,125.6Weighted average common shares    outstanding for the period
310.8
313
.1
310.8
313.9Increase in shares resulting from:    Exercise of      stock options
1.5
1
.9
1.6
2.1    Conversion of      preferred stock
      0.3
      0
.4
      0.4
      0.4Weighted average common shares      assuming conversion
  312.6
  315
.4
  312.8
  316.4Diluted earnings per share
$.68  
$1.19      
$2.83      
$6.72      
 
**7.        Business Segment Information:**
ALLTEL manages itsbusiness operations based on differences in products and services. The Companyevaluates performance based on segment revenues and sales and operating income,excluding special charges and unusual items. Segment operating results were asfollows for the three and twelve month periods ended March 31:

Three Months    Ended
Twelve Months    Ended(Millions)
2002    
2001    
2002    
2001    **Revenues and Sales from    External Customers:**Wireless
$  944.1
$  919
.2
$ 3,857.0
$3,679.1Wireline
460.6
449
.4
1,836.2
1,749.2Communications support services
118.6
141
.4
557.9
618.6Information services
        239.2
        259
.9
  1,014.5
  1,033.6    Total business segments
$1,762.5
$1,769
.9
$7,265.6
$7,080.5       
 **Intersegment Revenues and    Sales:**Wireless
$             -
$             
-
$             -
$         
-Wireline
38.5
35
.6
142.7
133.1Communications support services
64.0
56
.7
250.5
285.8Information services
              -
              
-
              -
               -    Total business segments
$   102.5
$         92
.3
$   393.2
$   418.9       
 **Total****Revenues and    Sales:**Wireless
$   944.1
$   919
.2
$3,857.0
$3,679.1Wireline
499.1
485
.0
1,978.9
1,882.3Communications support services
182.6
198
.1
808.4
904.4Information services
    239.2
        259
.9
  1,014.5
  1,033.6    Total business segments
  1,865.0
1,862
.2
7,658.8
7,499.4    Less:       intercompany eliminations
       32.1
       35.2
     147.3
     168.7Total revenues and sales
$1,832.9
$1,827.0
$7,511.5
$7,330.7
 

13
** 

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS-(Continued)**
 
**7.        Business Segment Information, Continued:

Three Months    Ended
Twelve Months    Ended(Millions)
2002    
2001    
2002   
2001    **Operating Income:**Wireless
$ 220.2
$ 190
.4
$ 857.5
$ 839.6Wireline
190.1
178
.5
744.2
669.0Communications support services
13.6
22
.0
82.3
77.4Information services
    35.2
    33
.7
   147.9
   146.7    Total business segments
  459.1
  424
.6
1,831.9
1,732.7Corporate operations
(8.3)
(9
.6)
(39.2)
(40.4)Integration expenses and other    charges
(42.9)
(69
.0)
(66.1)
(84.2)    Total corporate expenses
    (51.2)
    (78
.6)
    (105.3)
    (124.6)Total operating income
$ 407.9 
$ 346
.0 
$1,726.6 
$1,608.1 
Segment assets were as follows as of March 31:

(Millions)
2002     
2001     Wireless
$ 7,462.1
$ 7,076.7Wireline
3,413.0
3,346.5Communications support services
450.3
693.7Information services
        686.9
        607.9    Total business segments
12,012.3
11,724.8Corporate headquarters assets not allocated to    segments
551.5
300.0Less: elimination of intersegment receivables
           (37.3)
         (276.9)    Consolidated total assets
$12,526.5 
$11,747.9 **8.        Pending Acquisitions:

On October 31, 2001, ALLTEL signed an agreement with Verizon Communications  Inc. ("Verizon") to purchase local telephone properties located in  the state of Kentucky. Under terms of the purchase agreement, ALLTEL will  acquire approximately 600,000 access lines for $1.9 billion in cash. The  acquired wireline properties will overlap ALLTEL's existing wireless service  in northeastern Kentucky and will increase the Company's total access lines by  approximately 25 percent to more than 3.0 million wireline customers. The  transaction is expected to be completed in the third quarter of 2002. Upon the  signing of this purchase agreement, ALLTEL paid Verizon a deposit equal to 10  percent of the total purchase price, or $190.7 million, with the balance of  the cash payment (net of interest on the $190.7 million deposit) due at the  time the transaction is completed. This prepayment is included in prepaid  expenses and other current assets in the accompanying consolidated balance  sheets.

On March 19, 2002, ALLTEL announced an agreement to purchase all the  wireless properties owned by CenturyTel, Inc. for $1.65 billion in cash.  Following the completion of the transaction, ALLTEL will add more than 700,000  customers and expand its wireless footprint into new markets across Arkansas,  Louisiana, Michigan, Mississippi, Texas and Wisconsin and will have 7.4  million wireless customers in 24 states. Also included in the transaction are  minority partnership interests in cellular operations of approximately 2.0  million proportionate POPs, or potential customers, and PCS licenses covering  1.3 million POPs in Wisconsin and Iowa. The transaction is expected to close  in the third quarter of 2002.

 

 

 

 

 

 

14
**ALLTEL CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Financial Conditionand Results of Operations**GENERAL**
The following is a discussion and analysis of the historical results ofoperations and financial condition of ALLTEL Corporation ("ALLTEL" orthe "Company"). This discussion should be read in conjunction with theunaudited consolidated financial statements, including the notes thereto, forthe interim periods ended March 31, 2002 and 2001, and the Company's AnnualReport on Form 10-K, as amended, for the year ended December 31, 2001.

 
**PENDING ACQUISITIONS**
On October 31, 2001, ALLTEL signed an agreement with Verizon CommunicationsInc. ("Verizon") to purchase local telephone properties located in thestate of Kentucky. Under terms of the purchase agreement, ALLTEL will acquireapproximately 600,000 access lines for $1.9 billion in cash. The acquiredwireline properties will overlap ALLTEL's existing wireless service innortheastern Kentucky and will increase the Company's total access lines byapproximately 25 percent to more than 3.0 million wireline customers. Thetransaction is expected to be completed in the third quarter of 2002. Upon thesigning of this purchase agreement, ALLTEL paid Verizon a deposit equal to 10percent of the total purchase price, or $190.7 million, with the balance of thecash payment (net of interest on the $190.7 million deposit) due at the time thetransaction is completed.

On March 19, 2002, ALLTEL announced an agreement to purchase all the wirelessproperties owned by CenturyTel, Inc. for $1.65 billion in cash. Following thecompletion of the transaction, ALLTEL will add more than 700,000 customers andexpand its wireless footprint into new markets across Arkansas, Louisiana,Michigan, Mississippi, Texas and Wisconsin and will have 7.4 million wirelesscustomers in 24 states. Also included in the transaction are minoritypartnership interests in cellular operations of approximately 2.0 millionproportionate POPs, or potential customers, and PCS licenses covering 1.3million POPs in Wisconsin and Iowa. This transaction is also expected to closein the third quarter of 2002.
**ACCOUNTING AND FINANCIAL REPORTING CHANGES**
Effective January 1, 2002, the Company adopted Statement of FinancialAccounting Standards ("SFAS") No. 142 "Goodwill and OtherIntangible Assets". This standard changed the accounting for goodwill andother indefinite-lived intangible assets from an amortization method to animpairment-only approach. As of January 1, 2002, ALLTEL ceased amortization ofgoodwill recorded in conjunction with past business combinations. In addition,the Company conducted a review of its other identifiable intangible assets anddetermined that its cellular and Personal Communications Services("PCS") licenses and wireless franchise rights met the indefinite lifecriteria outlined in SFAS No. 142, because the Company expects both the renewalby the granting authorities and the cash flows generated from these intangibleassets to continue indefinitely. Accordingly, ALLTEL also ceased amortization ofthe wireless licenses and franchise rights as of January 1, 2002.

As of January 1, 2002, ALLTEL changed its business segment reportingpresentation by reclassifying the operating units of its emerging communicationsbusinesses to better align its financial reporting with the Company's businesssegment mix and to provide clear comparisons to other communications companieswithin ALLTEL's peer group. In accordance with SFAS No. 131 "Disclosuresabout Segments of an Enterprise and Related Information", ALLTEL hasrestated all previously reported segment information to conform to the newfinancial reporting presentation.

Under the new reporting presentation, there was no change to ALLTEL'swireless segment, which includes the Company's cellular, PCS and pagingoperations. The competitive local exchange ("CLEC") and Internetaccess operations have been combined and reported as part of the wirelinebusiness segment. The information services segment no longer includes servicesprovided to ALLTEL affiliates. These affiliate transactions have

 

15

been reported in the corresponding communications segments, and accordingly,information services operating results only reflect the Company's financialservices business and non-affiliated telecommunications operations. All othersegments, which include long-distance and network management services,communications products and directory publishing, have been reported togetherunder a new segment classification titled "Communications SupportServices". These reclassifications did not affect previously reportedconsolidated operating income, net income or earnings per share of ALLTEL.Consolidated revenues and sales for prior periods were reduced as a result ofreclassifying information services revenues previously billed to the wirelineoperations that were not eliminated pursuant to SFAS No. 71 "Accounting forthe Effects of Certain Types of Regulation".

Also as of January 1, 2002, the Company changed to a gross basis thereporting presentation for reimbursements of out-of-pocket expenses receivedfrom customers under terms of its information services agreements in accordancewith Emerging Issues Task Force Topic D-103. Previously, the Company nettedthese reimbursements against expenses incurred to provide data processing andconsulting services and included the net amount in operations expense. Priorperiod revenue and expense information has been reclassified to conform to thenew reporting presentation. This change did not affect previously reportedoperating income or net income of the Company. (See Note 2 to the unauditedinterim consolidated financial statements for additional information regardingthese changes in accounting and financial reporting).
**OVERVIEW-CONSOLIDATED RESULTS OF OPERATIONS
  Three Months EndedTwelve Months Ended
March      31,
March      31,(Millions, except per share amounts) 2002200120022001Revenues and sales $1,832.9$1,827.0$7,511.5$7,330.7Operating income $   407.9$   346.0$1,726.6$1,608.1Net income $   213.8$   395.7$   885.1$2,145.1Basic earnings per share $.69$1.26$2.85$6.83Diluted earnings per share $.68$1.25$2.83$6.78
Revenues and sales increased $5.9 million or less than one percent and $180.8million or 2 percent in the three and twelve month periods ended March 31, 2002,respectively, reflecting modest growth in the Company's core communicationsbusinesses. Revenue growth rates in 2002 were lower than ALLTEL experienced in2001 primarily due to the general decline in economic conditions and the highlycompetitive marketplace in which the Company's wireless business operates.Reduced revenues from the sales of wireless handsets and accessories reflectingdecreases in retail prices and higher equipment subsidies driven by competitionand a slight reduction in new customer activations, as well as decreases in thesales of telecommunications and data products also affected revenue growthduring 2002.

Operating results for the three and twelve month periods ended March 31, 2002reflected the elimination of amortization of goodwill and other indefinite-livedintangible assets pursuant to SFAS No. 142, as previously discussed. Reportedoperating income, net income and earnings per share for the three and twelvemonth periods ended March 31, 2002 and 2001 also included the effects of variousspecial charges and unusual items. These special charges and unusual itemsincluded integration expenses and other charges and gains realized from theexchange or sale of assets. Adjusted to exclude the effects of the amortizationof indefinite-lived intangible assets and the special charges and unusual itemsin each period, operating income would have increased $15.2 million or 3 percentand $71.4 million or 4 percent in the three and twelve month periods ended March31, 2002, respectively. For the same periods of 2002, net income would haveincreased $18.1 million or 8 percent and $64.2 million or 7 percent,respectively. When excluding the effects of the amortization of indefinite-livedintangible assets and the special charges and unusual items in each period,basic earnings per share would have increased 8 percent in both the three andtwelve month periods ended March 31, 2002, and diluted earnings per share wouldhave increased 10 percent and 8 percent, respectively.

 

16

Operating results for both periods ended March 31, 2002 reflected reducedinterest expense of $16.9 million and $51.4 million, respectively, primarily dueto a reduction in borrowings outstanding under the Company's commercial paperprogram. The reduced borrowings reflected the monetizing of certainnon-strategic assets completed by ALLTEL during the past fifteen monthsincluding the sale of 20 PCS licenses and the leasing of 1,773 wireless cellsite towers, as further discussed below.

Operating income, net income and earnings per share adjusted to reflect theelimination of amortization of indefinite-lived intangible assets and thenon-extraordinary, special charges and unusual items in each period aresummarized in the following tables:

Three Months    Ended
Twelve Months    Ended
March 31,
March 31,(Millions)
2002         
2001        
2002         
2001         Operating income, as reported
$ 407.9
$ 346
.0
$1,726.6
$1,608.1Amortization of indefinite-lived    intangible assets-
20
.6
80.1
97.6Special charges and unusual items:    Litigation settlement-
--
11.5    Integration expenses and other    charges
     42.9
     69
.0
         66.1
         84.2Operating income, as adjusted
$ 450.8
$ 435
.6
$1,872.8
$1,801.4Net income, as reported
$ 213.8
$ 395
.7
$ 885.1
$2,145.1Amortization of indefinite-lived    intangible          assets, net of tax-
20
.3
72.7
94.0Special charges and unusual items,    net of tax:    Cumulative effect of accounting    change-
(19
.5)-
(19.5)    Litigation settlement-
--
7.0    Integration expenses and other    charges
26.1
40
.9
40.1
50.1    Gain (loss) on disposal of assets    and other
            - 
(215
.6)
            2.9
(1,340.1)Net income, as adjusted
$ 239.9
$ 221
.8
$1,000.8
$   936.6Basic earnings per share, as    reported
$.69 
$1.26
$2.85 
$6.83 Amortization of indefinite-lived    intangible    assets, net of tax
- 
.07 
.23 
.30 Special charges and unusual items,    net of tax    Cumulative effect of accounting    change
- 
(.06) 
- 
(.06)     Litigation settlement
- 
- 
- 
.02     Integration expenses and other    charges
.08 
.13 
.13 
.16     Gain (loss) on disposal of assets    and other
        - 
(.69) 
       .01 
(4.27) Basic earnings per share, as    adjusted
$.77 
$ .71 
$3.22 
$2.98 Diluted earnings per share, as    reported
$.68 
$1.25 
$2.83 
$6.78 Amortization of indefinite-lived    intangible    assets, net of tax
- 
.06 
.23 
.30 Special charges and unusual items,    net of tax    Cumulative effect of accounting    change
- 
(.06) 
- 
(.06)     Litigation settlement
- 
- 
- 
.02     Integration expenses and other    charges
.09 
.13 
.13 
.16     Gain (loss) on disposal of assets    and other
        - 
(.68) 
       .01 
(4.24) Diluted earnings per share, as    adjusted
$.77 
$ .70 
$3.20 
$2.96 
The operating income, net income and earnings per share effects of theelimination of amortization of indefinite-lived intangible assets and specialcharges and unusual items have been presented as supplemental information only.The special charges and unusual items reflected in the above tables arediscussed in reference to the caption in the consolidated statements of incomein which they are reported.

 

17

Cumulative Effect of Accounting Change

As reported in Note 2 to the unaudited interim consolidated financialstatements, during the second quarter of 2001, ALLTEL changed the method ofaccounting for the defined benefit pension plan of a subsidiary acquired in 1999to conform with the accounting principles followed by the ALLTEL Pension Plan(the "ALLTEL Plan"), a defined benefit pension plan coveringsubstantially all employees working in the Company's communications andcorporate operations. The change in accounting was completed in conjunction withthe Company's decision to conform future benefits earned under the subsidiary'splan with the ALLTEL Plan, effective June 1, 2001. The change in accounting,retroactive to January 1, 2001, affected both the computation and amortizationof unrecognized actuarial gains and losses for purposes of computing annualpension cost related to the subsidiary's pension plan. The change includedmodifying the method by which the market-related value of plan assets wasdetermined from a calculated five-year average to actual fair value. Inaddition, unrecognized actuarial gains or losses that exceed 17.5% of thegreater of the projected benefit obligation or market-related value of planassets will be amortized on a straight-line basis over five years. Unrecognizedactuarial gains and losses below the 17.5% corridor will be amortized over theaverage remaining service life of active plan participants (approximately 13years). Under the method previously followed by the subsidiary's plan, onlyunrecognized actuarial gains and losses in excess of 10% of the greater of theprojected benefit obligation or market-related value of plan assets wereamortized over the average remaining service life of active plan participants.The Company believes the changes in computing the market-related value of planassets and accelerating the amortization periods are preferable because thesechanges result in more timely recognition of actuarial gains and losses incomputing annual pension cost related to the subsidiary's pension plan, andachieve consistency with the ALLTEL Plan.

 

Litigation Settlement

In September 2000, ALLTEL and the Georgia Public Service Commission("Georgia PSC") reached a final settlement agreement to resolve allpending litigation involving the two parties. Under terms of the finalagreement, ALLTEL agreed to issue a one-time credit of about $25 toapproximately 450,000 wireline customers in Georgia. The credits were issued tobusiness and residential customers during the fourth quarter of 2000 and totaled$11.5 million. The Company recorded the credits as a reduction in wirelineoperating revenues. The one-time customer credits were in addition to othercommitments agreed to by ALLTEL under an earlier version of the settlementagreement signed in April 2000. As part of the earlier agreement, ALLTEL agreedto accelerate deployment of digital subscriber lines and Internet service to itscustomers in Georgia and to reduce certain optional local calling plan rates. Inaddition, ALLTEL agreed to future reductions in funds received from the GeorgiaUniversal Service Fund.

 

Integration Expenses and Other Charges

A summary of the integration expenses and other charges recorded was asfollows for the three and twelve month periods ended March 31:

 

Three Months    Ended
Twelve Months    Ended(Millions)
2002 
2001 
2002 
2001 Severance and employee benefit costs
$ 13.4
$ 54.9
$ 20.6
$ 58.9Lease and contract termination costs
12.4
5.2
13.3
5.2Write-down of cell site equipment
7.1
-
22.2
-Write-down of software      development costs
4.4
8.9
4.4
8.9Computer system conversion and other    integration costs
3.4
-
3.4
-Equipment removal and other disposal costs
2.2
-
2.2
-Branding and signage costs
-
-
-
15.8Reversal of accrued liabilities
           -
           -
           -
  (4.6)    Total integration expenses and other charges
$ 42.9
$ 69.0
$ 66.1
$ 84.2
 

 

Number of employees terminated

910
1,247
1,307
1,269Number of lease sites terminated
31
48
46
48
 

 

18

In evaluating its existing CLEC operations, the Company determined that abusiness model that relied on interconnection with other carriers had limitedpotential for profitably acquiring market share. Accordingly, on January 24,2002, the Company announced its plans to exit its CLEC operations in sevenstates representing less than 20 percent of ALLTEL's CLEC access lines. In thecourse of exiting these markets, ALLTEL will honor all existing customercontracts, licenses and other obligations and work to minimize the inconvenienceto affected customers by migrating these customers to other service providers.During the first quarter of 2002, the Company also consolidated its call centerand retail store operations. In connection with these activities,theCompany recorded arestructuring charge consisting of severance and employee benefit costs relatedto a planned workforce reduction, costs associated with terminating certain CLECtransport agreements and lease termination fees incurred with the closing ofcertain retail and call center locations. In exiting the CLEC operations, theCompany also incurred costs to disconnect and remove switching and othertransmission equipment from central office facilities and expenses to notify andmigrate customers to other service providers. ALLTEL also wrote off certain capitalizedsoftware development costs that had no alternative future use or functionality.The restructuring plans, completed in March 2002, provided for the eliminationof 910 employees primarily in the Company's sales, customer service and networkoperations support functions. As of March 31, 2002, the Company had paid $3.4million in severance and employee-related expenses, and all of the employeereductions had been completed.
During the first quarter of 2002, the Company also recorded the finalwrite-down in the carrying value of certain cell site equipment to fair value.The Company had recorded the initial write-downs in the carrying value of cellsite equipment during the third and fourth quarters of 2001. The write-downsresulted from the Company's exchange of its existing equipment for new equipmentunder terms of a product replacement program initiated by a vendor in 2001. Inthe first quarter of 2002, the Company also incurred expenses related to itspending acquisition of wireline properties in Kentucky from Verizon. Theseexpenses primarily consisted of computer programming costs associated withconverting Verizon's customer billing records to ALLTEL's internal billingsystem.

The lease and contract termination costs consisted of $5.0 millionrepresenting the estimated minimum contractual commitments over the next one tofive years for 31 operating locations that the Company has abandoned, net ofanticipated sublease income. The lease and contract termination costs alsoincluded $3.6 million of costs to terminate transport agreements with sixinterexchange carriers. The Company also recorded an additional $2.8 million toreflect the revised estimated costs, net of anticipated sublease income, toterminate leases associated with four operating locations. ALLTEL had previouslyrecorded $6.3 million in lease termination costs related to these four locationsin 1999. The additional charge reflected a reduction in expected sublease incomeprimarily due to softening in the commercial real estate market and thebankruptcy filings by two sublessees. Finally, the lease termination costs alsoincluded $1.0 million of unamortized leasehold improvement costs related to theabandoned locations.

During 2001, the Company restructured its regional communications,information services, product distribution and corporate operations. Inconnection with these restructuring efforts, the Company recorded restructuringcharges during each of the four quarters of 2001. The restructuring chargesconsisted of $62.1 million in severance and employee benefit costs related to aplanned workforce reduction, $6.1 million in lease termination costs associatedwith the closing of certain retail and other operating locations and a $8.9million write-down in the carrying value of certain software development costs.Included in the severance and employee benefit component of the restructuringcharges are non-cash charges of $22.6 million. These non-cash charges consist of$21.5 million in additional pension and postretirement benefit costs related toa special early retirement program offered by the Company to employees meetingcertain age and service requirements and $1.1 million in compensation expenserelated to the accelerated vesting of certain stock options. Eligible employeeswho elected the early retirement incentive received five years of additionalvested service for purposes of calculating their retirement benefits availableunder the Company's pension and postretirement benefit plans. During the firstquarter of 2001, 230 employees accepted the retirement incentive offer. Therestructuring plans were completed in December 2001 and resulted in theelimination of 1,644 employees,

 

19

including the employees who accepted the early retirement incentive. The workforce reductions primarily occurred in operations management, engineering, salesand the corporate support functions. As of March 31, 2002, the Company had paid$38.2 million in severance and employee-related expenses and all of the employeereductions had been completed.

The lease termination costs consisted of $5.0 million representing theestimated minimum contractual commitments over the next one to five years for 63operating locations that the Company has abandoned, net of anticipated subleaseincome. The lease termination costs also included $1.1 million of unamortizedleasehold improvement costs related to the abandoned locations. The write-downin the carrying value of certain software development costs resulted from theCompany's formation of a joint venture with IBM announced in March 2001. Thejoint venture which operates as ALLTEL Corebanking Solutions, a consolidatedsubsidiary of ALLTEL, markets IBM's Corebank software, a real-time bankingsystem, to financial service organizations in Europe. Prior to forming the jointventure, ALLTEL had been developing its own real-time processing software.Following the signing of the joint venture agreement, the Company ceased furtherdevelopment of its software product and wrote off the portion of the capitalizedsoftware development costs that had no alternative future use or functionality.

During the fourth quarter of 2000, in connection with the purchase ofwireless assets in Louisiana from SBC Communications, Inc., the Company recordedintegration expenses and other charges of $1.9 million, consisting of brandingand signage costs. The Company also recorded a $1.1 million reduction in theliabilities associated with the September 1999 restructuring of its wirelineoperations completed during 2000. This adjustment primarily reflecteddifferences between estimated and actual severance costs paid and a slightreduction in the number of employees to be terminated under the plan from 248 to242.

In connection with the exchange of wireless assets with Bell AtlanticCorporation ("Bell Atlantic") and GTE Corporation ("GTE")completed during the second and third quarters of 2000, the Company recordedintegration expenses and other charges consisting of severance and employeebenefit costs related to a planned workforce reduction and branding and signagecosts. The integration plan, completed in September 2000, provided for theelimination of 22 employees in the Company's wireless operations management,engineering and sales support functions. In connection with this integrationplan, the Company recorded a charge of $9.2 million in the third quarter of2000, consisting of $8.9 million in branding and signage costs and $0.3 millionin severance and employee-related expenses. In the second quarter, the Companyrecorded a charge of $8.8 million, which consisted of $5.0 million in severanceand employee benefit costs and $3.8 million in branding and signage costs. As ofMarch 31, 2001, the Company had paid $5.3 million in severance andemployee-related expenses and all of the employee reductions had been completed.

During the third quarter of 2000, the Company also recorded a $1.5 millionreduction in the liabilities associated with its merger and integrationactivities initiated during 1999. The reduction consisted of a $1.0 milliondecrease in estimated severance costs to complete the September 1999restructuring of the wireline operations and decreases in estimated severancecosts of $0.3 million and $0.2 million, respectively, related to theacquisitions of Aliant Communications Inc. ("Aliant") and LibertyCellular, Inc. ("Liberty"). The adjustment to the wirelinerestructuring plan reflects a reduction in the expected number of employees tobe terminated from 308 to 248, while the adjustments to the Aliant and Libertymerger and integration plans reflect differences between estimated and actualseverance costs paid. During the second quarter of 2000, the Company alsorecorded a $2.0 million reduction in the merger and integration liabilityrelated to its acquisition of Aliant. This adjustment primarily reflected adecrease in severance and employee benefit costs to be paid as a result ofreducing the expected number of Aliant employees to be terminated from 160 to132. At March 31, 2002, the remaining unpaid liability relating to ALLTEL'sacquisitions of Aliant and Liberty was $3.7 million and consisted of unpaidseverance and employee-related expenses of $1.9 million and unpaid contracttermination fees of $1.8 million.

 

 

20

At March 31, 2002, the unpaid liability related to ALLTEL's integration andrestructuring activities was $30.8 million, consisting of severance andemployee-related expenses of $13.1 million and lease cancellation and contracttermination costs of $17.7 million. Cash outlays for the remaining unpaidliability will be disbursed over the next 12 to 48 months and will be fundedfrom operating cash flows. (See Note 3 to the unaudited interim consolidatedfinancial statements for additional information regarding the integrationexpenses and other charges).

Gain (Loss) on Disposal of Assets and Other

In the second quarter of 2001, the Company recorded a pretax adjustment of$4.4 million to reduce the gain recognized from the dissolution of a wirelesspartnership with BellSouth Mobility, Inc. ("BellSouth") initiallyrecorded in the first quarter of 2001, as discussed below. The Company alsorecorded a pretax adjustment of $2.4 million to increase the gain recognizedfrom the sale of PCS licenses to Verizon Wireless also completed during thefirst quarter of 2001. These adjustments primarily reflected differences betweenthe actual and estimated book values of the properties transferred. In addition,during the second quarter of 2001, the Company prepaid $73.5 million oflong-term debt prior to its stated maturity date and incurred pretax terminationfees of $2.9 million in connection with the early retirement of that debt.

In the first quarter of 2001, the Company recorded a pretax gain of $345.4million from the sale of 20 PCS licenses to Verizon Wireless completed inFebruary 2001. In addition, the Company recorded a pretax gain of $13.9 millionupon the dissolution of a partnership with BellSouth, involving wirelessproperties in four states. Upon dissolution, the partnership's assets weredistributed to the partners at fair value resulting in a gain for financialreporting purposes. Also in the first quarter of 2001, the Company recordedpretax gains of $3.2 million from the sale of investments.

In addition to including the pretax gains recorded in the first quarter of2001 discussed above, the twelve month period ended March 31, 2001 also includedpretax gains of $562.0 million from the sale of investments, including ALLTEL'sremaining investment in WorldCom, Inc. ("WorldCom") common stock. TheCompany also recorded pretax gains totaling $1,345.5 million from the exchangeof wireless properties with Bell Atlantic and GTE. In addition, the Companyrecorded pretax gains of $36.0 million from the sale of certain PCS assets. ThePCS assets sold included the operations in Birmingham and Mobile, Ala. and PCSlicenses in nine other markets including Pensacola, Fla. Followingcompletion of these sales transactions, the Company has 42 PCS licensesrepresenting approximately 17.0 million POPs.The Company also recorded a pretax write-down of $15.0 million on its investmentin APEX Global Information Services, Inc. ("APEX"), a provider ofInternet access services. The write-off was recorded due to adverse marketconditions and APEX's bankruptcy filing.**RESULTS OF OPERATIONS BY BUSINESS SEGMENT**
Communications - Wireless Operations
**Three Months    Ended
Twelve Months    Ended(Millions)
March 31,
March 31,
2002
2001
2002
2001Revenues and sales:    Service revenues
$914.7
$864.3
$3,690.2
$3,473.1    Product sales
   29.4
   54.9
        166.8
        206.0             Total revenues and sales
944.1
919.2
  3,857.0
  3,679.1Costs and expenses    Operations
482.9
459.8
1,941.4
1,928.3    Cost of products sold
109.8
119.6
457.4
383.4    Depreciation and amortization
  131.2
  149.4
         600.7
         527.8             Total costs and expenses
  723.9
  728.8
2,999.5
2,839.5Operating income
$220.2
$190.4
$  857.5
$  839.6
 

21

Three Months    Ended
Twelve Months    Ended(Customers in thousands)
March 31,
March 31,
2002
2001
2002
2001Customers
6,763.2
6,350.4Gross customer additions
568.8
581.2
2,285.3
3,005.5Net customer additions
80.3
108.8
412.8
1,226.9Market penetration
13.2%
12.8%Churn
2.31%
2.44%
2.31%
2.36%Average revenue per customer per month
$45.54
$45.87
$47.00
$48.74Cost to acquire a new customer
$316
$266
$315
$302
ALLTEL added nearly 2.3 million gross customers during the twelve monthperiod ended March 31, 2002. As a result of this increase in gross customeradditions, the total number of wireless customers served by ALLTEL increased bymore than 412,000 customers or 7 percent during the past twelve month period. Asa result of customer growth, the Company's market penetration rate (number ofcustomers as a percent of the total population in ALLTEL's service areas)increased to 13.2 percent as of March 31, 2002. The level of customer growthduring 2002 will be dependent upon the Company's ability to attract newcustomers in an increasingly competitive marketplace currently supporting up toseven competitors in each market. Economic factors, including weakening customerdemand and consumer credit, affected the wireless industry in the fourth quarterof 2001 and continued to affect customer growth rates during the first quarterof 2002. The Company will continue to focus its efforts on sustainingvalue-added customer growth by managing its distribution channels and customersegments, offering attractively priced rate plans and enhanced services andother features, selling additional phones to existing customers and makingstrategic acquisitions. In 2002, managing the growth of a value-creatingcustomer base will likely result in slower customer growth rates than ALLTELexperienced in 2001.

The Company continues to focus its efforts on lowering customer churn(average monthly rate of customer disconnects). To improve customer retention,the Company offers competitively-priced rate plans, analyzes customer usagepatterns and proactively notifies the customer if a better rate plan isavailable and migrates customers from analog to digital equipment through theuse of equipment subsidies. In addition, the Company continues to upgrade itstelecommunications network in order to provide enhanced service offerings tocustomers. As a result of these efforts, customer churn decreased slightly inboth the three and twelve months ended March 31, 2002, despite heightenedcompetition and declining economic conditions.

Wireless revenues and sales increased $24.9 million or 3 percent and $177.9million or 5 percent for the three and twelve month periods ended March 31,2002, respectively. Service revenues increased 6 percent in both the three andtwelve month periods ended March 31, 2002, or $50.4 million and $217.1 million,respectively. Product sales revenues decreased $25.5 million or 46 percent and$39.2 million or 19 percent for the three and twelve month periods ended March31, 2002, respectively. The decreases in product sales in both periods wereprimarily due to lower retail prices and higher equipment subsidies driven byincreased competition. The slight decrease in gross customer additions alsoaffected product sales growth in the three month period of 2002.

Service revenues increased in both 2002 periods primarily driven by customergrowth, partially offset by lower airtime and retail roaming revenues,reflecting the expansion of local, regional and national calling areas and adecrease in wholesale roaming rates. The decreases in average revenue percustomer per month during the three and twelve month periods of 2002 reflectedthe effects of the local, regional and national calling plans, decreasedwholesale roaming rates and continued penetration into more competitive retailand non-traditional market segments. Service revenues also reflected increasesin the sale of enhanced services and rental revenues. Revenues from enhancedservices increased $7.7 million and $31.4 million in the three and twelve monthperiods of 2002, respectively, reflecting increase demand for these serviceofferings. Rental revenues increased $7.3 million and $26.3 million for thethree and twelve month periods ended March 31,

 

22

2002, respectively. The increases in rental revenues in both periodsprimarily resulted from ALLTEL's agreement with American Tower Corporation("American Tower") to lease 1,773 of the Company's cell site towersfor cash. Proceeds from this leasing transaction are recognized as servicerevenues on a straight-line basis over the fifteen-year lease term. Servicerevenue growth during 2002 will depend upon ALLTEL's ability to maintain marketshare in an increasingly competitive marketplace by adding new customers,retaining existing customers, increasing customer usage, and selling additionalenhanced services.

Operating income increased $29.8 million or 16 percent and $17.9 million or 2percent for the three and twelve month periods ended March 31, 2002,respectively. In addition to reflecting the growth in operating revenues notedabove, wireless operating income in the three and twelve month periods of 2002was also favorably impacted by the effect of no longer amortizing goodwill andother indefinite-lived intangibles assets pursuant to SFAS No. 142, aspreviously discussed. Excluding the effects of amortization of indefinite-livedintangible assets in all periods, wireless operating income would have increased$12.1 million or 6 percent and $3.3 million or less than one percent in thethree and twelve month periods ended March 31, 2002, respectively.

Operations expense increased $23.1 million or 5 percent and $13.1 million or1 percent for the three and twelve month periods ended March 31, 2002,respectively. Bad debt expense increased $21.2 million and $46.5 million for thethree and twelve month periods ended March 31, 2002, respectively, primarily dueto the overall decline in economic conditions and weakening consumer credit.Operations expense for both 2002 periods also reflected increased selling andmarketing expenses, principally advertising costs. The increased advertisingcosts related to the rollout of new rate plans and other promotional activities.Selling and marketing expenses in the three month period also reflected anincrease in commissions paid to local dealers, as a result of a specialincentive plan initiated during the first quarter of 2002 to induce dealers topromote ALLTEL's wireless service in their stores. The increases in operationsexpense attributable to increased bad debt expense and higher selling andmarketing costs were partially offset by reduced interconnect toll and roamingexpenses, which decreased $7.2 million and $51.3 million during the three andtwelve month periods of 2002, respectively. The reduction in interconnect tolland roaming expenses primarily resulted from negotiated declines in roamingrates attributable to ALLTEL's reciprocal roaming agreement with VerizonWireless that significantly lowered the roaming and toll rates charged by eachcompany to one another. Cost of products sold decreased $9.8 million or 8percent and increased $74.0 million or 19 percent for the three and twelve monthperiods ended March 31, 2002, respectively. The decrease in cost of productssold for the three month period was consistent with the overall decline inproduct sales discussed above. The increase for the twelve month period of 2002was primarily due to the selling of higher-priced digital phones and theCompany's continuing efforts to migrate customers from analog to digital as partof ALLTEL's customer retention efforts. The decrease in depreciation andamortization expense in the three month period of 2002 primarily reflected theeffects of no longer amortizing goodwill and other indefinite-lived intangibleassets as discussed above. The increase in depreciation and amortization expenseduring the twelve month period of 2002 primarily resulted from growth inwireless plant in service, partially offset by the effects of the elimination ofamortization of goodwill and other indefinite-lived intangible assets.

The cost to acquire a new wireless customer represents sales, marketing andadvertising costs and the net equipment cost for each new customer added. Theincreases in per unit customer acquisition costs during the three and twelvemonth periods of 2002 primarily reflected the increase in selling and marketingexpenses noted above and the effect of higher equipment subsidies. The cost toacquire a new customer in the three month period of 2002 also reflected theeffect of spreading the customer acquisition costs over a slightly lower numberof gross customer additions compared to the prior year. The Company has expandedits internal sales distribution channels through Company retail stores andkiosks located in shopping malls and other retail outlets. Incremental salescosts at a Company retail store or kiosk are significantly lower thancommissions paid to dealers. While ALLTEL intends to manage the costs ofacquiring new customers during 2002 by continuing to expand and enhance itsinternal distribution channels, the Company will also continue to utilize itslarge dealer network.

23

Regulatory Matters-Wireless Operations

The Company is subject to regulation by the Federal Communications Commission("FCC") as a provider of wireless communications services. TheTelecommunications Act of 1996 (the "96 Act") provides wirelesscarriers numerous opportunities to provide an alternative to the long distanceand local exchange services provided by local exchange telephone companies andinterexchange carriers. Wireless carriers are also entitled to compensation fromother telecommunications carriers for calls transmitted from the other carriers'networks and terminated on the wireless carriers' networks.

In accordance with FCC guidance, all Commercial Mobile Radio Services ("CMRS")providers must provide number portability in the nation's largest MetropolitanStatistical Area markets and comply with certain FCC performance criteria,including support for roaming customers, by November 24, 2002. In addition,wireless service carriers must also provide 911 emergency service in atwo-phased approach. In phase one, the carriers must provide servicecapabilities to determine station locations for originated calls. In phase two,wireless carriers must determine the location of a caller within fifty meters ofan originated call. The second phase requirements were set to begin by October1, 2001, but, due to technology unavailability, the Company requested a limitedwaiver of these requirements. The FCC has stated that no enforcement or otheraction will be taken against the Company or other carriers pending FCC action onthe waiver requests.

Communications-Wireline Operations

Three Months    Ended

Twelve Months    Ended
(Dollars in millions, access lines in    thousands)

March 31,
March 31,
2002 
2001
2002
2001Revenues and sales    Local service
$231.1
$222.6
$ 918.0
$ 857.2    Network access and long-distance
217.4
215.7
856.8
841.2    Miscellaneous
   50.6
   46.7
   204.1
   183.9             Total revenues and sales
499.1
485.0
1,978.9
1,882.3Costs and expenses:    Operations
200.4
198.1
794.1
798.8    Cost of products sold
5.3
6.4
27.3
26.6    Depreciation and amortization
   103.3
   102.0
   413.3
   387.9             Total costs and expenses
   309.0
   306.5
1,234.7
1,213.3Operating income
$190.1
$178.5
$ 744.2
$ 669.0Access lines in service
2,623.2
2,597.7
Wireline operations consist of the Company's Incumbent Local Exchange Carrier("ILEC"), CLEC and Internet operations. Wireline revenues and salesincreased $14.1 million or 3 percent and $96.6 million or 5 percent for thethree and twelve months ended March 31, 2002, respectively. Wireline operatingincome increased $11.6 million or 6 percent and $75.2 million or 11 percent forthe three and twelve months ended March 31, 2002, respectively. Operating incomein the three and twelve month periods of 2002 was favorably impacted by theeffect of no longer amortizing goodwill in accordance with SFAS No. 142. Inaddition, wireline operating results for the twelve months ended March 31, 2001included the effect of the $11.5 million Georgia PSC litigation settlementpreviously discussed. Excluding the effects of this settlement and theamortization of goodwill, wireline revenues and sales would have increased $85.1million or 4 percent in the twelve month period of 2002 and operating incomewould have increased $10.0 million or 6 percent and $61.5 million or 9 percentin the three and twelve month periods ended March 31, 2002, respectively. In thepast twelve months, customer access lines increased 1 percent, reflectingincreased sales of residential and second access lines. Internal access linegrowth during 2002 is expected to result primarily from population growth in theCompany's service areas. As with its wireless business, ALLTEL expects that thecontinuation of slower economic growth will lower internal access line growthrates during 2002. To drive revenue growth in 2002, the Company will continue toemphasize customer service and sales of enhanced services.

 

24

Local service revenues increased $8.5 million or 4 percent and $60.8 millionor 7 percent for the three and twelve months ended March 31, 2002, respectively.Local service revenues for the twelve month period of 2001 included the effectof the Georgia PSC litigation settlement. Excluding the effect of thesettlement, local service revenues would have increased $49.3 million or 6percent in the twelve month period ended March 31, 2002. Net of the litigationsettlement, the increases in local service revenues in both 2002 periodsreflected growth in revenues derived from the sales of enhanced products andservices. Growth in custom calling and other enhanced services, reflectingincreased demand for these service offerings, increased $3.4 million and $17.1million for the three and twelve months ended March 31, 2002, respectively.Revenues earned from integrated service digital network services increased $1.8million and $8.3 million and revenues from the sale of equipment protectionplans increased $1.9 million and $7.1 million for the three and twelve monthsended March 31, 2002, respectively. Growth in customer access lines accountedfor less than $1.0 million and $10.3 million of the overall growth in localservice revenues during the three and twelve month periods of 2002,respectively.

Network access and long-distance revenues increased $1.7 million or 1 percentand $15.6 million or 2 percent in the three and twelve months ended March 31,2002, respectively. The increases in network access and long-distance revenuesin both 2002 periods primarily reflected higher volumes of network usage andgrowth in customer access lines, partially offset by reductions in intrastatetoll revenues. Network access and long-distance revenues for the three andtwelve month periods of 2002 also reflected reductions in revenues received fromthe Georgia Universal Service Fund of $4.2 million and $14.3 million,respectively. These revenue reductions resulted from the Georgia PSC litigationsettlement previously discussed.

Miscellaneous revenues primarily consist of charges for billing andcollections services provided to long-distance companies, customer premiseequipment sales, directory advertising and Internet services. Miscellaneousrevenues increased $3.9 million or 8 percent and $20.2 million or 11 percent inthe three and twelve months ended March 31, 2002, respectively. The increases inboth 2002 periods were mainly attributable to growth in the Internet operations,as Internet service revenues increased $2.7 million and $10.7 million in thethree and twelve months ended March 31, 2002, respectively. Internet revenuesincreased primarily due to customer growth and an increase in the standardmonthly rate charged to customers for this service initiated during the fourthquarter of 2001. Directory advertising revenues increased $1.0 million and $4.0million for the three and twelve months ended March 31, 2002, respectively, alsocontributing to the growth in miscellaneous revenues.

Growth in operating income for both periods of 2002 reflected the increasesin wireline operating revenues and reductions in customer service and othergeneral and administrative expenses, primarily resulting from the Company'srestructuring efforts, as previously discussed. The increases in operatingincome attributable to revenue growth and cost savings were partially offset byincreases in network-related expenses, depreciation and amortization and sellingand marketing expenses. Network-related expenses increased in both periodsprimarily due to the growth in customer access lines and network usage, whiledepreciation and amortization expense increased in both periods primarily due togrowth in wireline plant in service. Selling and marketing expenses increased inboth periods primarily due to additional advertising costs associated with theCompany's nationwide branding campaign.

Regulatory Matters - Wireline Operations

ALLTEL's ILEC operations, except for the Nebraska operations, follow theaccounting for regulated enterprises prescribed by SFAS No. 71, "Accountingfor the Effects of Certain Types of Regulation". Criteria that would giverise to the discontinuance of SFAS No. 71 include (1) increasing competitionthat restricts 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. TheCompany periodically reviews these criteria to determine whether the continuingapplication of SFAS No. 71 is appropriate. As a result of the passage of the 96Act and state telecommunications reform legislation or regulations, ALLTEL'sILEC operations have begun to experience some competition in their local serviceareas.

 

25

Through March 31, 2002, this competition had not had a material adverseeffect on the results of operations of ALLTEL's ILEC operations.

While the Company believes that the application of SFAS No. 71 continues tobe appropriate, it is possible that changes in regulation, legislation orcompetition could result in the Company's ILEC operations no longer qualifyingfor the application of SFAS No. 71 in the near future. If ALLTEL's ILECoperations no longer qualified for the application of SFAS No. 71, theaccounting impact to the Company would be an extraordinary non-cash charge tooperations ranging in an amount of approximately $15.0 to $25.0 million. Thenon-cash charge would consist primarily of the write-off of previouslyestablished regulatory assets and liabilities, as the Company would not expectto record any impairment charge related to the carrying value of its ILEC plant.Under SFAS No. 71, the Company currently depreciates its ILEC plant based uponasset lives approved by regulatory agencies. Upon discontinuance of SFAS No. 71,the Company will be required to revise the lives of its property, plant andequipment to reflect the estimated economic useful lives of the assets. TheCompany does not expect that the revisions in asset lives would be significant.

Certain states in which the Company's ILEC subsidiaries operate have adoptedalternatives to rate-of-return regulation, either through legislative orregulatory commission actions. The Company has elected alternative regulationfor certain of its ILEC subsidiaries in Alabama, Arkansas, Florida, Georgia,Kentucky, North Carolina, Pennsylvania and Texas.

The Company continues to evaluate alternative regulation options in otherstates where its ILEC subsidiaries operate. The Nebraska ILEC properties, whichwere acquired in 1999, operate under price cap regulation pursuant to waiversgranted by the FCC which were to expire on July 1, 2002. On April 17, 2002, theFCC adopted an order extending ALLTEL's waiver of price cap regulationassociated with its Nebraska ILEC properties until such time that the FCCcompletes a comprehensive review of the waiver process.

In April 2001, the FCC released a notice of proposed rulemaking addressinginter-carrier compensation issues. Under this rulemaking, the FCC has proposed a"bill and keep" compensation method that would overhaul the existingrules governing reciprocal compensation and access charge regulation. Theoutcome of this proceeding could change the way ALLTEL receives compensationfrom other carriers and its end users. At this time, ALLTEL cannot estimatewhether any such changes will occur or, if they do, what the effect of thechanges on its ILEC revenues and expenses would be.

In May 2001, the FCC adopted an interim universal service mechanism that willgovern compensation for rural telephone companies for the ensuing five years.Among other provisions, the FCC's interim plan adopted a modified embedded costmechanism while retaining an indexed cap on the fund. 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 rural carriers.

Also in May 2001, the FCC released an order adopting the recommendation ofthe Federal-State Joint Board to impose an interim freeze of the Part 36category relationships and jurisdictional cost allocation factors for price capILECs and a freeze of all allocation factors for rate-of-return ILECs. Thisorder also gave rate-of-return ILECs a one-time option to freeze their Part 36category relationships in addition to their jurisdictional allocation factors.ALLTEL opted not to freeze its allocation factors. In June 2001, the FCC waivedcertain elements of its Part 69 access charge rules to allow non-price cap ILECsto include in their tariff filings an end-user charge to recover their universalservice contributions. ALLTEL ILECs tariffed the surcharge in their annualinterstate access tariff filing and began assessing the surcharge effectiveAugust 1, 2001.

In October 2001, the FCC adopted rate-of-return access charge reform andinitiated a further round of rulemaking to consider other rate-of-return carrierissues. The order lowered access charges per minute, increased the subscriberline charge ("SLC") over time to bring it in line with SLCs adoptedfor price cap carriers and phased out carrier common line charges in favor of anew portable "Interstate Common Line

 

26

Support" universal service mechanism, and retained the authorized 11.25percent rate of return. The residential and single-line business SLC capphase-in began on January 1, 2002, and may increase again on July 1, 2002 and onJuly 1, 2003, subject to a FCC review of SLC caps for price cap carriers. TheCompany does not expect that the order will have a material adverse effect onits consolidated financial results during 2002 and 2003.

Because certain of the regulatory matters discussed above are under FCC orjudicial review, resolution of these matters continues to be uncertain, andALLTEL cannot predict at this time the specific effects, if any, that the 96Act, regulatory decisions and rulemakings, and future competition willultimately have on its ILEC operations.

Communications Support Services

Three Months    Ended
Twelve Months    Ended(Dollars in millions, customers in thousands)
March 31,
March 31,
2002 
2001 
2002 
2001 Revenues and sales
$182.6
$198.1
$808.4
$904.4Costs and expenses:    Operations
67.6
66.6
267.1
266.4    Cost of products sold
94.7
104.5
434.8
541.6    Depreciation and amortization
        6.7
        5.0
   24.2
   19.0             Total costs and expenses
169.0
176.1
726.1
827.0Operating income
$ 13.6
$  22.0
$  82.3
$ 77.4Long-distance customers
1,318.0
1,159.6
Communications support services revenues and sales decreased $15.5 million or8 percent and $96.0 million or 11 percent for the three and twelve month periodsended March 31, 2002, respectively. The decrease in revenues and sales in bothperiods primarily resulted from a reduction in sales of telecommunications anddata products, which decreased $12.5 million and $132.0 for the three and twelvemonth periods, respectively. Sales to non-affiliates declined $13.7 million and$59.6 million in the three and twelve month periods, respectively, primarily dueto a general reduction in capital spending by telecommunications companies as aresult of current economic conditions and the industry's emphasis on controllingcosts. Sales to affiliates decreased $72.4 million in the twelve month period of2002, primarily due to timing differences in the purchases of materials andequipment related to long-term construction projects. Revenues fromlong-distance and network management services decreased $1.1 million andincreased $22.7 million in the three and twelve months ended March 31, 2002,respectively. The decrease in the three month period of 2002 reflected reducedminutes of usage and a decrease in customer billing rates as a result ofcompetition. The increase in the twelve month period of 2002 was primarilydriven by growth in ALLTEL's customer base for these services. Directorypublishing revenues decreased $1.9 million and increased $13.3 million in thethree and twelve months ended March 31, 2002, respectively. The changes indirectory revenues were attributable to changes in the number of directorycontracts published compared to the same periods 2001. Fourteen fewer directorycontracts were published during the first three months of 2002, compared to thecorresponding 2001 period. Conversely, sixty-one more contracts were publishedduring the twelve months ended March 31, 2002 compared to the same 2001 period.

Operating income from communications support services decreased $8.4 millionor 38 percent and increased $4.9 million or 6 percent for the three and twelvemonths ended March 31, 2002, respectively. The changes in cost of products soldfor both 2002 periods were consistent with the changes in revenues and salesnoted above. Although revenues and sales overall declined in the twelve monthperiod of 2002, operating income increased slightly primarily due to growth inthe Company's higher-margin long-distance operations and slightly improved grossprofit margins earned by the product distribution operations on its sales tonon-regulated affiliates.

 

 

27

Information Services

Three Months    Ended
Twelve Months    Ended(Millions)
March 31,
March 31,
2002 
2001
2002
2001Revenues and sales
$239.2
$259.9
$1,014.5
$1,033.6Costs and expenses:    Operations
181.5
202.3
773.2
791.9    Cost of products sold
-
0.5
0.3
2.2    Depreciation and amortization
        22.5
         23.4
            93.1
            92.8             Total costs and expenses
 204.0
  226.2
          866.6
          886.9Operating income
$ 35.2
$  33.7
$   147.9
$   146.7
Information services revenues and sales decreased $20.7 million or 8 percentand $19.1 million or 2 percent for the three and twelve month periods endedMarch 31, 2002, respectively. Financial services revenues, which includes theresidential lending and international operations, decreased $11.0 million in thethree month period ended March 31, 2002, primarily due to reduced revenues fromseveral large customers, partially offset by revenues earned from new businessesand growth in existing data processing contracts. Financial services revenuesincreased $14.3 million in the twelve month period ended March 31, 2002,primarily due to revenues earned from new businesses and growth in mortgageprocessing revenues, partially offset by reduced revenues from several largecustomers. Mortgage processing revenues reflected an increase in mortgagerefinancing activity due to declines in consumer borrowing rates and additionalsoftware maintenance revenues. During 2000, ALLTEL formed ALLTEL MortgageSolutions, a joint venture with Bradford & Bingley Group, a large UnitedKingdom mortgage lender. In March 2001, the Company also announced the formationof a joint venture with IBM, which operates as ALLTEL Corebanking Solutions, andwill provide corebanking software to financial service organizations in Europe.These new businesses accounted for $13.6 million of the overall increase infinancial services revenues for the twelve month period ended March 31, 2002.The decreases in revenues from several large financial services customers inboth 2002 periods primarily resulted from completion during 2001 of certaincustomer specific software development and conversion projects and lostoperations due to consolidation in the financial services industry.Telecommunications revenues decreased $9.7 million and $33.4 million for thethree and twelve month periods ended March 31, 2002, respectively, resultingfrom reduced revenues earned from several large customers, partially offset byadditional services provided to existing customers. The reduced revenues fromseveral large telecommunications customers reflected lost operations due tocontract terminations and the completion during 2001 of customer specificconversion projects and other transitional services.

The changes in operations expense for the three and twelve month periods of2002 were consistent with the changes in revenues and sales noted above. Inaddition, operations expenses for both 2002 periods reflected reduced overheadand other general and administrative expenses resulting from the Company'srestructuring activities, as previously discussed. Primarily as a result of thechanges in operating expenses, operating income increased $1.5 million or 4percent and $1.2 million or 1 percent in the three and twelve month periodsended March 31, 2002, respectively.

In connection with the Company's joint ventures with IBM and with Bradford& Bingley Group, ALLTEL capitalized $35.8 million in software developmentcosts during 2001. The Company expects to capitalize in 2002 approximately $20.0to $25.0 million of additional software development costs related to these jointventures. During the first quarter of 2002, the Company capitalized $5.8 millionof software development costs related to these joint ventures. The process ofdeveloping new software products is complex and requires the Company to makelong-term investments and commit significant resources before realizing revenuestreams from these joint ventures. Accordingly, the future profitability ofthese joint ventures and the Company's ability to recover its investment will bedependent upon ALLTEL's success in marketing the software and related servicesto customers.

 

28

Corporate Expenses

Three Months    Ended
Twelve Months    Ended(Millions)
March 31,
March 31,
2002
2001
2002
2001Corporate operating expenses
$ 8.3
$ 9.6
$  39.2
$  40.4Integration expenses and other charges
  42.9
  69.0
         66.1
         84.2    Total corporate expenses
$51.2
$78.6
$105.3
$124.6
As indicated in the table, corporate expenses included integration expensesand other charges, as previously discussed. Corporate expenses for the three andtwelve month periods of 2002 were favorably impacted by the effect of no longeramortizing goodwill in accordance with SFAS No. 142. Excluding the effects ofthe amortization of goodwill and integration expenses and other charges in eachperiod, corporate expenses would have decreased $0.6 million or 7 percent and$0.5 million or 1 percent for the three and twelve month periods ended March 31,2002. Net of goodwill and the integration expenses and other charges, thedecrease in corporate expenses in both 2002 periods reflected a reduction inemployee-related benefit costs primarily resulting from the Company'srestructuring activities and its continued focus on controlling costs.

Non-Operating Income, Net

Three Months    Ended
Twelve Months    Ended
(Millions)

March 31,
March 31,
2002    
2001    
2002    
2001    Equity earnings in unconsolidated    partnerships
$ 8.7
$11
.3
$54.3
$99.2Minority interest in consolidated    partnerships
(14.2)
(16
.8)
(69.2)
(94.2)Other income, net
         5.0
  10
.4
  27.8
  39.8    Non-operating income (expense),    net
$(0.5)
$ 4
.9
$12.9
$44.8
As indicated in the table above, non-operating income, net decreased $5.4million or 110 percent and $31.9 million or 71 percent in the three and twelvemonths ended March 31, 2002, respectively. The decreases in equity earnings inunconsolidated partnerships in both 2002 periods, primarily reflected thetransfer to BellSouth of certain minority investments in unconsolidated wirelessproperties resulting from the dissolution of a partnership completed in 2001, aspreviously discussed. In addition, the fourth quarter 2001 acquisition of acontrolling interest in a Texas wireless partnership, in which the Companypreviously held a minority ownership interest, also contributed to the decreasein equity earnings in both 2002 periods. The decreases in minority interestexpense in both the three and twelve months of 2002 primarily reflected thetransfer to ALLTEL of the remaining ownership interest in two South CarolinaMSAs in connection with the dissolution of the BellSouth partnership. Otherincome, net for the three and twelve month periods ended March 31, 2001 includeda $5.0 million pretax gain from the sale of a miscellaneous investment.

Interest Expense

Interest expense decreased $16.9 million or 21 percent and $51.4 million or16 percent in the three and twelve month periods ended March 31, 2002,respectively. As previously discussed, the changes in interest expense in bothperiods reflected decreases in both the weighted average borrowing amounts andrates applicable to ALLTEL's commercial paper program. The reduced commercialpaper borrowings reflected the monetizing of certain non-strategic assetscompleted by ALLTEL during the past fifteen months including the sale of 20 PCSlicenses and the leasing of 1,773 wireless cell site towers.

 

 

 

 

 

 

 

29

Income Taxes

Income tax expense decreased $126.7 million or 49 percent and $917.4 millionor 61 percent for the three and twelve month periods ended March 31, 2002,respectively. The decreases in income tax expense in each period primarilyreflected the tax-related impact of the gains recognized from the sale of PCSlicenses, the exchange of wireless assets and the sale of WorldCom stock, aswell as the other special charges and unusual items previously discussed.Excluding the effect on tax expense of the special charges and unusual items ineach period, income tax expense would have increased $8.7 million or 6 percentand $22.8 million or 4 percent in the three and twelve month periods ended March31, 2002, respectively, consistent with the overall growth in the Company'searnings from continuing operations excluding special charges and unusual items.

 

Average Common Shares Outstanding

The average number of common shares outstanding decreased 1 percent in thethree and twelve month periods ended March 31, 2002, respectively. The decreasesin both periods primarily reflected the Company's repurchase of 3.3 million ofits common shares during the second quarter of 2001, as further discussed below.
**FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Three Months    Ended
Twelve Months    Ended(Millions, except per share    amounts)
March 31,
March 31,
2002     
2001     
2002     
2001     Cash flows from (used in):    Operating activities
$  603.2
$         526
.7
$2,147.0
$1,674.3    Investing activities
(258.7)
173
.5
(1,002.5)
(959.5)    Financing activities
(336.0)
(751
.6)
(1,061.1)
(704.6)    Effect of exchange rate changes
             (0.4)
             (6
.2)
              0.4
             (3.9)Change in cash and short-term    investments
$            8.1
$         (57
.6)
$          83.8
$            6.3Total capital structure
$9,368.2
$9,410
.3Percent of equity to total capital
60.7%
57
.0%Book value per share
$18.27  
$17
.11 
 

Operating Activities

Cash provided from operations continued to be ALLTEL's primary source ofliquidity. The increases in the three and twelve month periods ended March 31,2002 reflected growth in earnings of the Company before depreciation andamortization, interest expense, income taxes and special charges and unusualcharges. The increases in cash provided from operations resulting from earningsgrowth in both periods of 2002 were partially offset by changes in workingcapital requirements, including timing differences in the receipt and payment oftrade receivables and payables.

 

Investing Activities

Capital expenditures continued to be ALLTEL's primary use of capitalresources. Capital expenditures for the three and twelve month periods endedMarch 31, 2002 were $201.0 million and $1,226.0 million, respectively, comparedto $207.0 million and $1,213.5 million for the same periods in 2001. During thepast two-year period, the Company funded most of its capital expendituresthrough internally generated funds. Capital expenditures were incurred primarilyto construct additional network facilities and to deploy digital wirelesstechnology. Capital expenditures were also incurred to upgrade ALLTEL'stelecommunications network in order to offer other communications services,including long-distance, Internet and local competitive access services. TheCompany expects capital expenditures to be approximately $1.2 billion for 2002,which will be funded primarily from internally generated funds.

 

 

 

 

30

Investing activities also included outlays for capitalized softwaredevelopment costs. Additions to capitalized software for the three and twelvemonth periods ended March 31, 2002 were $38.5 million and $180.9 million,respectively, compared to $29.0 million and $112.4 million for the same periodsin 2001. The increases in both 2002 periods reflected additional spending oncertain of the Company's proprietary financial services software products andcosts incurred for the development and enhancement of internal use software tosupport the Company's retail operations.

Cash outlays for the purchase of property were $29.2 million and $230.4million for the three and twelve months ended March 31, 2002, respectively.During the first quarter of 2002, ALLTEL purchased a wireline property inGeorgia for $17.9 million, acquired an additionalownership interest in a Texas wireless property and purchased a privately heldcompany serving the financial services industry. In connection with the lattertwo acquisitions, the Company paid $11.3 million in cash. Inaddition to including the first quarter 2002 acquisitions, the twelve monthperiod ended March 31, 2002 also included the $190.7 million deposit paid byALLTEL in connection with the Company's pending purchase of wireline propertiesin Kentucky, as previously discussed. This deposit is forfeitable if ALLTELfails to meet certain financing or other commitments. Cash flows used ininvesting activities for the twelve month period of 2001 included cash outlaysfor the acquisition of property of $1,056.4 million. This amount principallyconsisted of $624.3 million paid by ALLTEL in connection with the exchange ofwireless assets with Bell Atlantic completed in April 2000 and $387.6 millionpaid by ALLTEL in October 2000 to acquire wireless properties in Louisiana. Alsoduring the twelve month period ended March 31, 2001, the Company acquiredadditional ownership interests in wireless properties in Florida and Georgia andpurchased two privately held companies serving the financial services industry.In connection with these acquisitions, the Company paid $28.1 million in cashand issued approximately 730,000 shares of ALLTEL common stock.
Cash flows from investing activities for the three and twelve month periodsended March 31, 2002 included $7.5 million and $531.9 million, respectively, ofadvance lease payments received from American Tower for the leasing of cell sitetowers. In December 2000, ALLTEL signed an agreement to lease American Towercertain of the Company's cell site towers in exchange for cash. In turn, ALLTELis obligated to pay American Tower a monthly fee per tower for management andmaintenance services for the duration of the fifteen year lease agreement.During February 2002, the Company closed on the remaining towers under thisagreement. Upon completion of this transaction, ALLTEL had leased 1,773 cellsite towers to American Tower.

Cash flows from investing activities for the three and twelve month periodsended March 31, 2001 included proceeds from the sale of assets of $411.4 millionand $740.3 million, respectively. These amounts primarily consisted of $410.1million received by ALLTEL from the sale of 20 PCS licenses in February 2001, aspreviously discussed. Proceeds from the sale of assets for the twelve monthperiod of 2001 also included cash proceeds of $216.9 million received by ALLTELto complete the exchange of wireless assets with GTE in June 2000 and $112.0million received from the sale of PCS assets. As previously discussed, the PCSassets sold included the operations in Birmingham and Mobile, Ala. and PCSlicenses in nine other markets. Cash flows from investing activities for thetwelve month period ended March 31, 2001 also included proceeds from the sale ofinvestments of $633.0 million, principally consisting of proceeds of $595.8million received from the sale of a portion of the Company's investment inWorldCom common stock. The proceeds received from the leasing of cell sitetowers and asset sales were used primarily to reduce borrowings under theCompany's commercial paper program.

Investing activities for the three and twelve month periods ended March 31,2002 also included proceeds from the return on investments of $11.3 million and$54.3 million, respectively, compared to $18.8 million and $77.9 million for thesame periods of 2001. These amounts primarily consisted of cash distributionsreceived from ALLTEL's wireless minority investments. The decreases in both the2002 periods primarily reflected the transfer to BellSouth of certain minorityinvestments and the fourth quarter 2001 acquisition of a controlling interest ina Texas wireless partnership, as previously discussed.

31

Financing Activities

Dividend payments remain a significant use of capital resources for ALLTEL.Common and preferred dividend payments were $105.7 million and $414.3 millionfor the three and twelve month periods ended March 31, 2002, respectively,compared to $103.2 million and $405.2 million for the same periods in 2001. Theincreases in dividend payments in both periods primarily reflected growth in theannual dividend rate on ALLTEL's common stock. In October 2001, the Company'sBoard of Directors approved an increase in the quarterly common stock dividendrate from $.33 to $.34 per share, raising the annual dividend rate to $1.36 pershare.

The Company has a $1.0 billion line of credit under a revolving creditagreement of which $50.0 million will expire in October 2003 and $950.0 millionwill expire in October 2005. No borrowings were outstanding under the revolvingcredit agreement at March 31, 2002, December 31, 2001 or March 31, 2001. TheCompany also has established a commercial paper program with a maximum borrowingcapacity of $1.25 billion. Under this program, commercial paper borrowings aresupported by the Company's revolving credit agreement and are deducted from therevolving credit agreement in determining the amount available for borrowingunder that agreement. Accordingly, the total amount outstanding under thecommercial paper program and the indebtedness incurred under the revolvingcredit agreement may not exceed $1.25 billion. ALLTEL classifies commercialpaper borrowings up to $1.0 billion as long-term debt because the revolvingcredit agreement supports these borrowings. Commercial paper borrowingsoutstanding at March 31, 2002 were $21.0 million and had a weighted averageinterest rate of 2.1 percent. Commercial paper borrowings outstanding atDecember 31, 2001 and March 31, 2001 were $230.1 million and $261.5 million,respectively, compared to $835.5 million and $224.7 million that wereoutstanding at December 31, 2000 and March 31, 2000, respectively. The increasein commercial paper borrowings outstanding from March 31, 2000 represented allof the long-term debt issued in the twelve month period of 2001.

Retirements of long-term debt were $227.6 million and $377.8 million for thethree and twelve months ended March 31, 2002, respectively, compared to $632.2million and $100.0 million for the same periods of 2001. The net reductions fromDecember 31, 2001 and March 31, 2001 in commercial paper borrowings of $209.1million and $240.5 million, respectively, represented the majority of thelong-term debt retired in the three and twelve month periods of 2002.Retirements of long-term debt for the twelve month period of 2002 also includedthe early retirement of $73.5 million of high-cost debt completed in the secondquarter of 2001, as previously discussed. The decrease in commercial paperborrowings from December 31, 2000 of $574.0 million represented the majority ofthe long-term debt retired in the three month period of 2001. Scheduledlong-term debt retirements, net of commercial paper activity and the prepaymentof long-term debt, amounted to $18.5 million and $63.8 million for the three andtwelve month periods of 2002, respectively, compared to $58.3 million and $100.0million for the same periods of 2001.

Distributions to minority investors were $12.5 million and $107.1 million forthe three and twelve months ended March 31, 2002, respectively, compared to$23.4 million and $75.2 million for the same periods in 2001. The decrease inthe three month period primarily reflected the transfer to ALLTEL of theremaining ownership interest in two South Carolina MSAs related to thedissolution of a partnership with BellSouth previously discussed. In addition toreflecting this transaction, the decrease in the twelve month period alsoreflected the effects of the acquisition of the remaining minority interests inwireless properties in Florida and Georgia and the disposition of certainmajority-owned partnerships in connection with the property exchanges with BellAtlantic and GTE, as previously discussed. Distributions for the three andtwelve month periods of 2002 included additional payments of $1.1 million and$49.5 million, respectively, representing the minority investors' share of theproceeds received from the leasing of cell site towers discussed above.

On July 20, 2000, ALLTEL's Board of Directors adopted a stock repurchase planthat allowed the Company to repurchase up to 7.5 million shares of itsoutstanding common stock. During the twelve months ended March 31, 2002, ALLTELrepurchased on the open market 1.4 million of its common shares at a total costof $78.1 million, compared to 3.0 million common shares repurchased at a totalcost of $164.3 million during the twelve months ended March 31, 2001. InNovember 2000, the Company entered into three forward

32

purchase contracts with a financial institution in conjunction with the stockrepurchase program. Under terms of the contracts, the Company agreed to purchaseALLTEL common shares from the financial institution at a specified price (the"forward price"). The forward price was equal to the financialinstitution's cost to acquire the shares plus a premium based on the netcarrying cost of the shares to the financial institution and accrued over theperiod that the contract was outstanding. During the second quarter of 2001, theCompany settled these contracts by acquiring 1.9 million of its common shares ata cost of $114.2 million. Through March 31, 2002, ALLTEL had repurchased 6.3million of the 7.5 million shares the Company was authorized to repurchase underthe stock repurchase plan.

The Company believes it has adequate operating cash flows to finance itsongoing operating requirements including capital expenditures and the payment ofdividends. On April 9, 2002, ALLTEL deregistered its May 2001 $1.0 billion shelfregistration statement, under which no debt securities had been issued. On March28, 2002, the Company filed a new shelf registration statement providing for theissuance of up to $5.0 billion in the aggregate initial offering price ofunsecured debt and equity securities. On April 10, 2002, the Securities andExchange Commission declared this shelf registration statement effective, andduring May 2002, the Company sold 27.7 million equity units under this shelfregistration statement and received net proceeds of $1.34 billion. The equityunits had a stated amount of $50 per unit and included a purchase contractpursuant to which the holder agreed to purchase shares of ALLTEL common stock onMay 17, 2005. ALLTEL will make quarterly contract adjustment payments to theholder at the rate of 1.50 percent of the stated amount per year. The number ofshares to be purchased will be determined at the time the purchase contracts aresettled based on the then current price of ALLTEL's common stock and will rangebetween 0.8280 and 1.0101 shares of ALLTEL common stock per equity unit. Theequity units also included $50 principal amount of senior notes, which bearinterest at 6.25 percent, and mature on May 17, 2007. In addition to the netproceeds from this offering, the Company expects that the primary sources forfunding the remaining $3.35 billion cost of its announced wireline and wirelessacquisitions will be additional funds borrowed or received under (1) a seniorbridge credit facility for which ALLTEL has received firm commitments fromseveral financial institutions, (2) additional borrowings available to theCompany under its $1.25 billion commercial paper program and (3) additionallong-term debt securities issued under the $5.0 billion shelf registrationstatement.

ALLTEL's commercial paper and long-term credit ratings with Moody's InvestorsService ("Moody's"), Standard & Poor's Corporation ("Standard& Poor") and Fitch Ratings were unchanged from December 31, 2001 andwere Prime-1, A-1 and F1 for commercial paper, respectively and A2, A and A forlong-term credit, respectively. Factors that could affect ALLTEL's short andlong-term credit ratings would include, but not be limited to, a substantialdecline in the Company's operating results and increased debt levels relative tooperating cash flows resulting from future acquisitions or increased capitalexpenditure requirements. The Company believes that using a combination ofequity units and debt to finance its pending purchases of wireline and wirelessproperties should not adversely affect the Company's current short and long-termcredit ratings. If ALLTEL's credit ratings were to be downgraded from currentlevels, the Company would incur higher interest costs on new borrowings and theCompany's access to the public capital markets could be adversely affected. Adowngrade in ALLTEL's current short or long-term credit ratings would notaccelerate scheduled principal payments of ALLTEL's existing long-term debt.

The revolving credit agreement contains various covenants and restrictionsincluding a requirement that, at the end of each calendar quarter, ALLTELmaintain a long-term debt-to-capitalization ratio of less than 65 percent. Forpurposes of calculating this ratio under the agreement, long-term debt wouldinclude amounts classified as long-term debt, current maturities related tolong-term debt outstanding and any borrowings under the revolving creditagreement. As of March 31, 2002, the Company's long-term debt to capitalizationratio was 39.3 percent. Following the completion of financing its pendingwireline and wireless acquisitions, the Company expects its long-termdebt-to-capitalization ratio to be between 50 and 55 percent. Under terms of therevolving credit agreement, if the Company were to lose its investment graderating (defined as Baa3 or higher by Moody's and BBB- by Standard & Poor's),the Company would be restricted from incurring new short-term debt, but wouldnot be restricted from borrowing under the revolving credit agreement.

 

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Under the Company's long-term debt borrowing agreements, acceleration ofprincipal payments would occur upon payment default, violation of debt covenantsnot cured within 30 days or breach of certain other conditions set forth in theborrowing agreements. At March 31, 2002, the Company was in compliance with allof its debt covenants. There are no provisions within the Company's leasingagreements that would trigger acceleration of future lease payments.

At March 31, 2002, current maturities of long-term debt were $500.1 millionand included a $450.0 million, 7.13 percent senior unsecured note due March 1,2003. The Company expects to fund the payment of this note at maturity througheither operating cash flows or refinancing all or a portion of the obligationthrough the issuance of additional commercial paper borrowings or otherunsecured long-term debt.

The Company does not use securitization of trade receivables, affiliationwith special purpose entities or synthetic leases to finance its operations.Additionally, the Company has not entered into any arrangement requiring theCompany to guarantee payment of third party debt or to fund losses of anunconsolidated special purpose entity.

Legal Proceedings

ALLTEL is party to various legal proceedings arising in the ordinary courseof business. Although the ultimate resolution of these various proceedingscannot be determined at this time, management of the Company does not believethat such proceedings, individually or in the aggregate, will have a materialadverse effect on the future results of operations or financial condition ofALLTEL. In addition, management of the Company is currently not aware of anyenvironmental matters that, individually or in the aggregate, would have amaterial adverse effect on the consolidated financial condition or results ofoperations of the Company.

 

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143"Accounting for Asset Retirement Obligations". SFAS No. 143 will applyto fiscal years beginning after June 15, 2002, and will address financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. Thisstandard applies to legal obligations associated with the retirement oflong-lived assets that result from the acquisition, construction, development ornormal use of the assets and requires that a liability for an asset retirementobligation be recognized when incurred, recorded at fair value and classified asa liability in the balance sheet. The Company does not expect that this standardwill have a material effect on its consolidated financial statements.

 

Other Information

On May 7, 2002, the Audit Committee of the Board of Directors of ALLTELauthorized (1) the engagement of PricewaterhouseCoopers LLP as the independentauditors for ALLTEL for the calendar year 2002 and (2) the dismissal of ALLTEL'sexisting independent auditors, Arthur Andersen LLP.

 

 

 

 

 

 

 

 

 

 

 

 

 

34
**ALLTEL CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risks at March 31, 2002 are similar to the market risksdiscussed in ALLTEL's Annual Report on Form 10-K, as amended, for the year endedDecember 31, 2001. The Company is exposed to market risk from changes inmarketable equity security prices and from changes in interest rates on itslong-term debt obligations that affect the fair value of these obligations. TheCompany has estimated its market risk using sensitivity analysis. Market risk isdefined as the potential change in fair value of a financial instrument due to ahypothetical adverse change in market prices or interest rates. Fair value forinvestments is determined using quoted market prices, if available, or thecarrying amount of the investment if no quoted market price is available. Fairvalue of long-term debt obligations is determined based on a discounted cashflow analysis, using the rates and maturities of these obligations compared toterms and rates currently available in the long-term markets. The results of thesensitivity analysis used to estimate market risk are presented below, althoughthe actual results may differ from these estimates.

At March 31, 2002, investments of the Company are recorded at fair value of$232.5 million compared to $251.6 million at December 31, 2001. Marketableequity securities amounted to $16.1 million and $19.1 million and includedunrealized holding losses of $6.3 million and $4.5 million at March 31, 2002 andDecember 31, 2001, respectively. A hypothetical 10 percent decrease in quotedmarket prices would result in a $1.6 million decrease in the fair value of thesesecurities at March 31, 2002.

Substantially all of the Company's long-term debt obligations are fixed rateobligations. Changes in interest rates can result in fluctuations in the fairvalue of the Company's long-term debt obligations. There have been no materialchanges in the weighted average maturity or weighted average interest ratesapplicable to the Company's outstanding long-term debt since December 31, 2001.At March 31, 2002, the fair value of the Company's long-term debt was estimatedto be $3,925.3 million compared to a carrying value of $3,185.0 million. Ahypothetical increase of 70 basis points (10 percent of the Company's overallweighted average borrowing rate) would result in an approximate $118.3 milliondecrease in the fair value of the Company's long-term debt at March 31, 2002.

The Company uses derivative instruments to reduce its exposure to adversefluctuations in interest rates and to obtain a targeted mixture of variable andfixed-interest-rate long-term debt, such that the portion of debt subject tovariable rates does not exceed 30 percent of the Company's total long-term debtoutstanding. The Company has established policies and procedures for riskassessment and the approval, reporting and monitoring of derivative instrumentactivities. The Company does not hold or issue derivative financial instrumentsfor trading purposes or enter into interest rate transactions for speculativepurposes. Management continually reviews the Company's exposure to interest ratefluctuations and implements strategies to mitigate the exposure. During thethird quarter of 2001, the Company entered into four, pay variable receivefixed, interest rate swap agreements on notional amounts totaling $500.0 millionto convert fixed interest rate payments to variable. As of March 31, 2002, thefair market value of the interest rate swaps was $0.1 million. A hypotheticalincrease of 70 basis points (ten percent of the Company's overall weightedaverage borrowing rate) would result in an approximate $20.9 million decrease inthe fair value of the Company's interest rate swaps as of March 31, 2002.Conversely, a hypothetical decrease of 70 basis points would result in anapproximate $22.1 million increase in the fair value of the Company's interestrate swaps as of March 31, 2002.

The Company's business operations in foreign countries are not material tothe Company's consolidated operations, financial condition and liquidity.Foreign currency translation gains and losses were not material to the Company'sconsolidated results of operations for the three and twelve months ended March31, 2002 and 2001. Additionally, the Company is not currently subject tomaterial foreign currency exchange rate risk from the effects that exchange ratemovements of foreign currency would have on the Company's future costs or onfuture cash flows it would receive from its foreign subsidiaries. The Companyhas not entered into any significant foreign currency forward exchange contractsor other derivative financial instruments to hedge the effects of adversefluctuations in foreign currency exchange rates.

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**ALLTEL CORPORATION
FORM 10-Q

Part II - OTHER INFORMATION

Item 6.         Exhibits and Reports on Form 8-K
   (a)                        See the exhibits specified on the Index of Exhibits located            at Page 38.

   (b)                        Reports on Form 8-K:

Current Report on Form 8-K dated May 7, 2002, reporting under Item 4,        Changes in Registrant's Certifying Accountant, that the Audit        Committee of the Board of Directors of ALLTEL authorized (1) the        engagement of PricewaterhouseCoopers LLP as the independent auditors for        ALLTEL for the calendar year 2002 and (2) the dismissal of ALLTEL's        existing independent auditors, Arthur Andersen LLP.

Current Report on Form 8-K dated May 6, 2002, reporting under Item 5,        Other Events, that on March 28, 2002, ALLTEL filed a registration        statement on form S-3 (File No. 333-85142), which was declared effective        on April 10, 2002 (the "Registration Statement"). On April 30,        2002, the Company entered into a Terms Agreement between the Company and        the underwriters named therein, relating to the offering and sale of up        to 25,000,000 (or 28,750,000 if the underwriters' overallotment option        is exercised in full) of the Company's equity units (the "Equity        Units") under the Registration Statement. On May 2, 2002, the        Company filed the final Prospectus Supplement, dated April 30, 2002,        which included the Prospectus, dated April 10, 2002, relating to the        offering and sale of the Equity Units. On May 6, 2002, the Company        consummated the closing of the sale of 25,000,000 Equity Units, which        may be increased to 28,750,000 Equity Units if the underwriters'        overallotment is exercised in full. The Equity Units initially consist        of units referred to as corporate units, each with a stated amount of        $50. Each corporate unit includes a purchase contract pursuant to which        the purchaser has, subject to certain conditions, agreed to purchase        shares of the Company's common stock on May 17, 2005 at a settlement        rate to be determined depending on the price of the Company's common        stock at such time. Each corporate unit also includes $50 principal        amount of the Company's senior notes due May 17, 2007. Copies of certain        agreements related to the offering were attached as exhibits to the Form        8-K filing.

Current Report on Form 8-K dated April 30, 2002, reporting under Item        5, Other Events, that on April 29, 2002, the Company filed, pursuant to        Rule 424(b)(5), a Preliminary Prospectus Supplement, dated April 25,        2002, which included the Prospectus dated April 10, 2002, relating to        the offering of up to 25,000,000 (or 28,750,000 if the underwriters'        overallotment option is exercised in full) of the Company's equity        units. Copies of certain agreements related to the offering were        attached as exhibits to the Form 8-K filing.

Current Report on Form 8-K dated April 25, 2002, reporting under Item        5, Other Events, the Company's Press Release announcing ALLTEL's first        quarter 2002 unaudited consolidated results of operations. These results        reflected the Company's new business segment reporting presentation.

Current Report on Form 8-K dated March 19, 2002, reporting under Item        5, Other Events, the Company's Press Release announcing ALLTEL's        agreement to purchase all of the wireless properties owned by        CenturyTel, Inc. for $1.65 billion in cash. This transaction is expected        to close in the third quarter of 2002.

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

 

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

                ALLTEL CORPORATION           ********************************************************