UNITED STATES

SECURITIES AND EXCHANGECOMMISSION

Washington, D. C.  20549

 

FORM 10-K

 

| (X)            |   | ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     |
|----------------|--------|-------------------------------------------------------------------------------------------|
|           |   | For the fiscal year  ended December 31, 2003                                              |
|           |   | or                                                                                        |
| (  ) |   | TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|           |   | For the transition  period from ______________ to _______________                         |

 

Commission file number  1-4996

 

| ALLTEL CORPORATION                                              |
|-----------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)         |
|                                                            |   |   |   |   |
| DELAWARE                                                        |   |   |   | 34-0868285 |
| (State or other jurisdiction of  incorporation or organization) |   |   |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |   |   |
|   One Allied Drive, Little Rock, Arkansas             |   |   |   | 72202 |
| (Address of principal executive offices)                        |   |   |   | (Zip Code) |
|                                                            |   |   |   |   |
| Registrant’s telephone number, including area code         |   |   |   | (501) 905-8000 |
|                                                            |   |   |   |   |
| Securities registered pursuant to Section 12(b) of  the Act:    |

 

| Title of each class                                   |   | Name of each exchange on which registered |
|-------------------------------------------------------|--------|-------------------------------------------|
| Common Stock                                          |   | New York and Pacific                      |
| $2.06 No Par  Cumulative Convertible  Preferred Stock |   | New York and Pacific                      |

 

Securities registeredpursuant to Section 12(g) of the Act:

 

| NONE             |
|------------------|
| (Title of Class) |

 

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

YES   X       NO    

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)

 

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

YES   X       NO    

 

Aggregate market value of voting stock held bynon-affiliates as of 

June 30, 2003 -     $15,035,780,250

 

Common shares outstanding, February 24, 2004 -    311,421,490

 

DOCUMENTSINCORPORATED BY REFERENCE

| Document                                                     |   | Incorporated Into |
|--------------------------------------------------------------|--------|-------------------|
| Proxy statement for the 2004 Annual Meeting of  Stockholders |   | Part III          |
| The Exhibit Index is located on pages 30 to 36.              |   |              |

 

 

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

**THE COMPANY**

** **

**GENERAL**

 

ALLTEL Corporation (“ALLTEL” or the “Company”) is a customer-focusedcommunications company.  The Companyowns subsidiaries that provide wireless and wireline local, long-distance,network access and Internet services. Telecommunications products are warehoused and sold by the Company’sdistribution subsidiary.  A subsidiaryalso publishes telephone directories for affiliates and other independenttelephone companies.  In addition, asubsidiary provides billing, customer care and other data processing andoutsourcing services to telecommunications companies.  The Company is incorporated in the state of Delaware.

 

The Company’s web site address is**www.alltel.com**.  ALLTEL files with, or furnishes to, the Securities and ExchangeCommission (the “SEC”) annual reports on Form 10-K, quarterly reports on Form10-Q and current reports on Form 8-K, as well as various other information.  ALLTEL makes available free of charge throughthe Investor Relations page of its web site its annual reports, quarterlyreports and current reports, and all amendments to any of those reports, assoon as reasonably practicable after providing such reports to the SEC.  In addition, on the corporate governancesection of the Investor Relations page of its web site, ALLTEL makes availablethe Board of Director’s Amended and Restated Corporate Governance BoardGuidelines and the charters for the Audit, Compensation, and GovernanceCommittees.  ALLTEL will provide to anystockholder a copy of the Governance Board Guidelines and the CommitteeCharters, without charge, upon written request to Vice President-InvestorRelations, ALLTEL Corporate Services, Inc., One Allied Drive, Little Rock,Arkansas  72202.

** **

**FORWARD-LOOKINGSTATEMENTS**

 

This Form 10-K may include certain “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject to uncertaintiesthat could cause actual future events and results to differ materially fromthose expressed in the forward-looking statements.  These forward-looking statements are based on estimates,projections, beliefs and assumptions and are not guarantees of future eventsand results.  Words such as “expects”,“anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and“should”, and variations of these words and similar expressions, are intendedto identify these forward-looking statements.  ALLTEL disclaims any obligation to update or revise anyforward-looking statement based on the occurrence of future events, the receiptof new information, or otherwise.

 

Actual future events and results may differ materially from thoseexpressed in these forward-looking statements as a result of a number ofimportant factors.  Representativeexamples of these factors include (without limitation) adverse changes ineconomic conditions in the markets served by ALLTEL; the extent, timing, andoverall effects of competition in the communications business; material changesin the communications industry generally that could adversely affect vendorrelationships with equipment and network suppliers and customer relationshipswith wholesale customers; material changes in communications technology; therisks associated with the integration of acquired businesses; adverse changesin the terms and conditions of the Company’s wireless roaming agreements; thepotential for adverse changes in the ratings given to ALLTEL’s debt securitiesby nationally accredited ratings organizations; the availability and cost offinancing in the corporate debt markets; the uncertainties related to ALLTEL’sstrategic investments; the effects of work stoppages; the effects of litigation;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; and theeffects of the Federal Communications Commission’s number portability rules.

 

In addition to these factors, actual future performance, outcomes andresults may differ materially because of other, more general, factors including(without limitation) general industry and market conditions and growth rates,economic conditions, and governmental and public policy changes.

 

1

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

**THE COMPANY (continued)**

** **

**ACQUISITIONS**

 

On August 29, 2003, theCompany purchased for $22.8 million in cash a wireless property with apotential service area covering approximately 205,000 potential customers(“POPs”) in an Arizona Rural Service Area (“RSA”).  On February 28, 2003, the Company purchased for $64.6 million incash wireless properties with a potential service area covering approximately370,000 POPs in southern Mississippi, from Cellular XL Associates, a privatelyheld company.  On February 28, 2003, theCompany also purchased for $60.0 million in cash the remaining ownershipinterest in wireless properties with a potential service area coveringapproximately 355,000 POPs in two Michigan RSAs.  Prior to this acquisition, ALLTEL owned approximately 49 percentof the Michigan properties.  Through thecompletion of these transactions, ALLTEL added approximately 147,000 customersand expanded its wireless operations into new markets in Arizona, Michigan andMississippi.

 

On August 1, 2002,ALLTEL completed its purchase of local telephone properties servingapproximately 589,000 wireline customers in Kentucky from VerizonCommunications Inc. (“Verizon”) for $1.93 billion in cash.  The acquired wireline properties overlappedALLTEL’s existing wireless service in northeastern Kentucky.

 

On August 1, 2002,ALLTEL also completed its purchase of substantially all of the wirelessproperties owned by CenturyTel, Inc. (“CenturyTel”) for approximately $1.59billion in cash.  In this transaction,ALLTEL added properties representing approximately 8.3 million POPs, acquiredapproximately 762,000 customers and expanded its wireless footprint into newmarkets across Arkansas, Louisiana, Michigan, Mississippi, Texas andWisconsin.  Also included in thetransaction were minority partnership interests in cellular operationsrepresenting approximately 1.8 million proportionate POPs and PersonalCommunications Services (“PCS”) licenses covering 1.3 million POPs in Wisconsinand Iowa.

 

On October 3, 2000,ALLTEL purchased wireless properties in New Orleans, Baton Rouge and threerural service areas in Louisiana from SBC Communications, Inc. (“SBC”).  In connection with this transaction, ALLTELpaid SBC $387.6 million in cash and acquired approximately 150,000 wirelesscustomers and 300,000 paging customers. The Company disposed of the paging operations in 2001.

 

On January 31, 2000,ALLTEL, Bell Atlantic Corporation (“Bell Atlantic”) and GTE Corporation (“GTE”)signed agreements to exchange wireless properties in 13 states.  On April 3, 2000, ALLTEL completed theinitial exchange of wireless properties with Bell Atlantic in five states,acquiring operations in Arizona, New Mexico and Texas and divesting operationsin Nevada and Iowa.  In addition to theexchange of wireless assets, ALLTEL also paid Bell Atlantic $624.3 million incash to complete this transaction.  OnJune 30, 2000, ALLTEL completed the remaining wireless property exchanges withBell Atlantic and GTE, in which ALLTEL acquired operations in Alabama, Florida,Ohio, and South Carolina, and divested operations in Illinois, Indiana, NewYork and Pennsylvania.  ALLTEL alsotransferred to Bell Atlantic or GTE certain of its minority investments inunconsolidated wireless properties, representing approximately 2.6 millionPOPs.  In connection with the transferof the remaining wireless assets, ALLTEL received $216.9 million in cash andprepaid vendor credits of $199.6 million and assumed long-term debt of $425.0million.  Through the completion of theabove transactions, ALLTEL acquired interests in 27 wireless markets representingabout 14.6 million POPs and approximately 1.5 million wireless customers, whiledivesting interests in 42 wireless markets representing 6.9 million POPs andapproximately 778,000 customers.  During2000, ALLTEL also acquired the remaining ownership interests in wirelessproperties in Florida and Georgia in which ALLTEL already owned a controllinginterest.  In connection with theseacquisitions, the Company paid $19.1 million in cash.

 

In September 1999, ALLTEL completed its mergers with Liberty Cellular,Inc. (“Liberty”) and its affiliate, KINI L.C. Prior to the merger, Liberty provided wireless, long-distance andInternet services under the name “Kansas Cellular” to approximately 200,000communications customers in Kansas.

 

In July 1999, ALLTEL completed its merger with Aliant CommunicationsInc. (“Aliant”), a communications company that provided wireless, wireline,paging, long-distance and Internet services in Nebraska to more than 600,000communications customers.

 

2

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

**THE COMPANY (continued)**

** **

**ACQUISITIONS(continued)**

 

In January 1999, theCompany completed its merger with Standard Group, Inc. (“Standard”), acommunications company that served more than 71,000 customer lines in northeastGeorgia.  The customer lines acquired inthis transaction were in areas adjacent to the Company’s other wireline marketareas in Georgia and increased ALLTEL’s total wireline customers in the stateto more than 550,000.  The transactionalso included Standard’s cable television operations, which servedapproximately 30,000 customers. Including this acquisition, the Company currently provides cabletelevision service to approximately 37,000 customers in Georgia andMissouri.  These cable television propertiesare not significant to the ongoing operations of ALLTEL.

 

During 1999, the Company acquired a 100 percent ownership interest in awireless services business serving the Dothan, Alabama Metropolitan StatisticalArea (“MSA”), representing approximately 135,000 cellular POPs.  The Company also purchased 100 percentownership interests in a wireless services business serving a Colorado RuralService Area (“RSA”) representing approximately 75,000 cellular POPs, and awireless services business serving an Illinois RSA representing more than200,000 cellular POPs.  In addition, theCompany increased its ownership interest to 100 percent in the Richmond,Virginia market, representing approximately 835,000 cellular POPs, through theexchange of its minority interest investment in a partnership serving theOrlando, Florida market.

 

**DISPOSITIONS**

 

In December 2003, ALLTEL sold to Convergys Information Management Group(“Convergys”) for $37.0 million in cash certain assets and related liabilities,including selected customer contracts and capitalized software developmentcosts, associated with the Company’s telecommunications information servicesoperations.

 

On April 1, 2003, ALLTEL completed the sale of the financial servicesdivision of its information services subsidiary, ALLTEL Information Services,Inc., to Fidelity National Financial Inc. (“Fidelity National”), for $1.05billion, payable in the form of $775.0 million in cash and $275.0 million inFidelity National common stock.  As partof this transaction, Fidelity National acquired ALLTEL’s mortgage servicing,retail and wholesale banking and commercial lending operations, as well as thecommunity/regional bank division. Approximately 5,500 employees of the Company transitioned to FidelityNational as part of the transaction. The telecom division of ALLTEL Information Services, Inc. was retainedby the Company and was not part of the sale transaction with Fidelity National.

 

In January 2003, ALLTEL completed the termination of its businessventure with Bradford & Bingley Group. The business venture, ALLTEL Mortgage Solutions, Ltd., a majority-ownedconsolidated subsidiary of ALLTEL, was created in 2000 to provide mortgageadministration and information technology products in the United Kingdom.  Unfortunately, the business climate in theUnited Kingdom limited the venture’s ability to leverage the business across abroad base of customers.

 

During 2002, the Company sold its majority ownership interest in aPennsylvania cellular partnership to Verizon for a total cash purchase price of$24.1 million.

 

During 2001, the Company sold 20 PCS licenses in six states to VerizonWireless for a total cash purchase price of $410.0 million.

 

During 2000, the Company sold its PCS operations in Birmingham andMobile, Alabama and PCS licenses in nine other markets for approximately $112.0million in cash.

 

**MANAGEMENT**

 

The Company’s staff at its headquarters and regional offices supervise,coordinate and assist subsidiaries in management activities, investorrelations, acquisitions, corporate planning, tax planning, cash management,insurance, sales and marketing support, government affairs, legal matters,engineering services, and technical research. They also coordinate the financing program for all of the Company’soperations.

 

3

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

** **

**THE COMPANY (continued)**

** **

**EMPLOYEES**

 

At December 31, 2003, the Company had 19,986 employees.  Within the Company’s work force,approximately 1,551 employees are part of collective bargaining units.  On October 1, 2003, the Company signed a newcollective bargaining agreement covering approximately 400 ALLTEL employees inKentucky represented by the Communications Workers of America, ending a strikethat began in early June.  During 2003,ALLTEL had no other material work stoppages due to labor disputes with itsunionized employees.

** **

**ORGANIZATIONALSTRUCTURE AND OPERATING SEGMENTS**

 

The Company has focused its communications business strategy on growingits customer base through strategic acquisitions and enhancing the value of itscustomer relationships by offering additional products and services andproviding superior customer service. Since 1998, the Company has significantly expanded its communicationscustomer base.  Beginning with the 1998merger with 360° Communications Company and continuing with the mergers withAliant and Liberty in 1999, the property swaps completed with Bell Atlantic andGTE in 2000, and the acquisition of substantially all of CenturyTel’s wirelessassets in 2002 have significantly expanded ALLTEL’s wireless business andenhanced the Company’s ability to provide multiple communications services toits customers.  The acquisition ofVerizon’s wireline properties in Kentucky, completed in 2002, increasedALLTEL’s total number of wireline customers to more than 3 million.  Including customers of its wireless,wireline and long-distance services, the Company serves more than 12 millioncommunications customers in 26 states. ALLTEL operates its communications businesses as a single operationcapable of delivering to customers one-stop shopping for a full range ofcommunications products and services. In addition to its wireless, wireline and long-distance serviceofferings, the Company also provides Internet, high-speed data transportservices (“DSL”), paging and cable television services in select markets.

 

ALLTEL is organizedbased on the products and services that it offers.  Under this organizational structure, the Company’s communicationsoperations consist of its wireless, wireline and communications supportservices segments.  ALLTEL’s wirelesssegment consists of the Company’s cellular, PCS and paging operations.  The wireline segment consists of ALLTEL’sincumbent local exchange carrier (“ILEC”), competitive local exchange carrier(“CLEC”) and Internet access operations. Communications support services consist of the Company’s long-distanceand network management services, communications products, directory publishingoperations and the retained telecommunications information services operationsof ALLTEL Information Services, Inc. that were not sold to FidelityNational.  For financial informationabout ALLTEL’s operating segments, refer to pages F-67 to F-70 of the FinancialSupplement, which is incorporated by reference herein.

 

**WIRELESS OPERATIONS**

 

As of December 31, 2003, the Company provided wireless communicationsservice to more than 8.0 million customers in 23 states.  ALLTEL owns a majority interest in wirelessoperations in 88 MSAs, representing approximately 40.1 million wireless POPs,and a majority interest in 146 RSAs, representing approximately 20.3 millionwireless POPs.  In addition, ALLTEL ownsa minority interest in 51 other wireless markets, including the Chicago,Illinois and Houston, Texas MSAs.  As ofDecember 31, 2003, ALLTEL’s penetration rate (number of customers as apercentage of the total population in the Company’s service areas) was 13.3percent.

 

ALLTEL has offered PCS service in Jacksonville, Florida, since March1998.  As previously discussed, inconnection with the acquisition of the wireless assets from CenturyTel in 2002,ALLTEL acquired PCS licenses covering 1.3 million POPs in Wisconsin and Iowa.  In 2000, the Company sold its PCS operationsin Birmingham and Mobile, Alabama and PCS licenses in nine other markets, andin 2001, ALLTEL sold 20 additional PCS licenses.  Giving effect to these transactions, the Company has 50 PCSlicenses representing approximately 19.3 million POPs.  ALLTEL provides paging services in selectmarkets to customers on both a facilities-based and resale basis.  The Company operates wide-area,computer-driven paging networks in Arkansas, Florida and Ohio.  As of December 31, 2003, ALLTEL providedpaging service to approximately 101,000 customers.

 

4

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

** **

**WIRELESS OPERATIONS (continued)**

** **

During 2003, ALLTEL continued to upgrade it wireless networkinfrastructure and invest in state-of-the-art code division multiple access(“CDMA”) technology, including 1XRTT. Nearly 95 percent of the Company’s wireless markets operate ondigital-based systems.  In addition, theCompany supplements its wireless service coverage area through roamingagreements with other wireless service providers that allow ALLTEL’s customersto obtain wireless services in those U.S. regions in which ALLTEL does notmaintain a network presence.  Through theseroaming agreements, the Company is able to offer its customers wirelessservices covering approximately 95 percent of the U.S. population.  ALLTEL continues to increase its networkcapacity and coverage area through new network construction, strategic acquisitionsand affiliations with other wireless service providers.

 

**PRODUCTOFFERINGS AND PRICING**

 

Wireless revenues are derived primarily from monthly access and airtimecharges, roaming and long-distance charges and charges for custom calling andother enhanced service features. Wireless revenues comprised 58 percent of ALLTEL’s total operatingrevenues from business segments in 2003, compared to 57 percent in both 2002and 2001.  Prices of wireless servicesare not regulated by the Federal Communications Commission (“FCC”) or by stateregulatory commissions; however, as more fully discussed under the caption“Regulation” on page 8, states are permitted to regulate the terms andconditions of wireless services unrelated to either rates or market entry.

 

ALLTEL strives to address the needs of a variety of customer segments,stimulate usage, increase penetration, and improve customer retention ratesthrough a diverse product offering and pricing strategy.  To accomplish these objectives, the Companyoffers competitive local, statewide, and national service plans.  These service plans include packages ofdaytime, night and weekend, and mobile-to-mobile minutes.  Customers can choose lower monthly accessplans with fewer minutes, while customers needing more minutes can chooseslightly higher access plans with more minutes.  Family Freedom – an offering that gives customers the option toshare minutes by adding additional lines of service at a discounted rate –helps target the growing number of families that have integrated wireless intotheir lives.  In addition, the Companyoffers family-to-family minutes.  Byallowing the lines on an account to designate a home telephone number as awireless phone, customers are also able to receive the benefit of theirmobile-to-mobile minutes when calling their home phone.

 

ALLTEL provides several voice features to enhance its wireless callingplans, including call waiting, call forwarding, caller identification,three-way calling, no-answer transfer, directory assistance call completion andvoicemail.  Depending on the customer’sselection of rate plan, some or all of these features are included as an extravalue to the plan.

 

The wireless industry has shifted to the use of one-rate pricing plans,which include roaming and long-distance at no extra charge for a specifiednumber of minutes.  In order to offerone-rate plans on a profitable basis, the Company has endeavored to negotiatemore favorable terms and conditions under its roaming agreements with otherdomestic wireless companies.  Aspreviously discussed, these roaming agreements provide ALLTEL’s customers withthe capability to use their wireless telephones while traveling outside theCompany’s service areas.  In conjunctionwith the wireless assets exchange transaction completed in 2000, ALLTEL andVerizon (formerly Bell Atlantic and GTE) also signed reciprocal roamingagreements.  These agreements, whichexpire in January 2010, allow customers of each of the companies to roam oneach other’s networks across a footprint that covers approximately 95 percentof the U.S. population.  As a result ofthese roaming agreements, ALLTEL can offer its Total and National Freedom rateplans to customers profitably.  Theserate plans provide national wireless coverage with no long-distance or roamingcharges.  While these national rateplans provide the Company the ability to compete effectively for the highvolume, roaming customer, retail roaming revenues will continue to decline tothe extent customers migrate to these national rate plans.

 

5

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**ALLTEL Corporation**

**Form 10-K, Part I**

# ** **

**Item 1.  Business**

** **

**WIRELESS OPERATIONS (continued)**

** **

**PRODUCTOFFERINGS AND PRICING (continued)**

 

In response to increasing demand, the Company also offers various datasolutions to its customers.  In 2003,ALLTEL launched a brand name, Axcess, for its suite of data services andintroduced many new products, including 1XRTT high-speed data, which wasimplemented in markets covering approximately 23 percent of ALLTEL’s POPs.  Simultaneous with the introduction of theAxcess brand name, the Company introduced downloadable wireless applicationsthat allow customers to download games, entertainment content, weatherapplications and office applications. The Company also introduced several downloadable applications targetingthe small to medium enterprise market segment. Workforce, a work order management and dispatch tool, and BusinessE-mail, a remote electronic mail access program, are two examples of applicationstargeting this segment.  Axcess Picturemessaging, a data service that allows customers to take pictures with theirphones and then send those pictures electronically, launched late in 2003 aswell.  Other initiatives, such asexpanding text messaging to allow ALLTEL customers to send text messages toother carriers’ customers, helped drive growth in existing data services in2003.

 

ALLTEL also offers several prepaid alternatives.  One alternative, “Pay-As-You-Go”, is atraditional prepaid service in which the customer purchases a set amount ofairtime to be used as needed.  Through adistribution agreement with Wal-Mart, the Company also offers prepaid serviceunder the “Simple Freedom” trademark. Simple Freedom offers nationwide calling, a flat rate per minute anddoes not require a deposit or service contract.  Prepaid package plans present customers with slightly differentprepaid solutions by offering monthly access for buckets of anytime and nightand weekend minutes.  This solutiontargets new market segments that desire monthly access and buckets of minutesbut choose prepaid to control expenses. Several voice and data feature enhancements are available with prepaidofferings as well.  As of December 31,2003, prepaid customers represented approximately 10 percent of ALLTEL’swireless customer base.

 

Primarily as a result of the increased sales of the Company’shigher-yield local, regional and national calling plans and increased sales ofdata services, average revenue per customer per month increased to $47.51 in2003, compared to $46.97 in 2002 and $47.09 in 2001.  The increase in average revenue per customer per month in 2003was partially offset by decreased wholesale roaming rates, which alsocontributed to the decrease in average revenue per customer per month in 2002as compared to 2001.

 

Maintaining low postpay customer churn rates (average monthly rate ofcustomer disconnects) is a primary goal of the Company, particularly ascustomer growth rates slow due to increased competition and higher penetrationlevels occur in the marketplace.  ALLTELexperienced an average monthly postpay customer churn rate in its wirelessservice areas of 2.09 percent, 2.23 percent and 2.34 percent for the yearsended December 31, 2003, 2002 and 2001, respectively.  To improve customer retention, the Company offers competitivelypriced rate plans, proactively analyzes customer usage patterns and migratescustomers to newer digital handsets. ALLTEL also continues to upgrade its telecommunications network in orderto offer expanded network coverage and quality and to provide enhanced serviceofferings to its customers.  The Companybelieves that its improvements in customer service levels, proactive retentionefforts, and digital network expansion contributed to the decrease in postpaycustomer churn in 2003.

 

**MARKETING**

 

ALLTEL’s marketing strategy is to create and execute communicationsthat drive growth while optimizing costs and minimizing customer churnrates.  The Company’s marketingcampaigns emphasize that ALLTEL is a customer-focused communications companyworking on continued improvements in service delivery and customersatisfaction.  The Company buildsconsumer awareness and promotes the ALLTEL brand by strategically advertisingpricing plans, promotions and new product introductions that offer increasedvalue and by emphasizing key messages that resonate with customers.  ALLTEL’s brand promise of “gettingcommunications right, every day,” is exemplified in the Company’s “You got thatright” campaign.  The campaign, whichwas launched in May 2003, focuses ALLTEL’s advertising messages on the mostimportant aspect of the wireless experience – getting it right – whilecommunicating the Company’s points of competitive difference:  a common-sense company with a reliablewireless network and an emphasis on customer service.

 

The Company’s marketing campaigns target distinct customer segments byusage patterns including individuals, families, and businesses.  ALLTEL uses segmented marketing to targetnew-to-wireless customers as well as retention efforts that focus on reducingcustomer churn rates and increasing average revenue per customer permonth.  In addition, ALLTEL offerscustomers added value promotions such as high-quality handsets, wireless dataservices, family plans, new products, and the ability to migrate plans.

 

6

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

** **

**WIRELESS OPERATIONS (continued)**

** **

**DISTRIBUTION**

 

ALLTEL utilizes four methods of distributing its wireless products andservices in each of its markets: Company retail stores, Company retail kiosks, dealers and direct salesrepresentatives.  Using multipledistribution channels in each of its markets enables the Company to provideeffective and extensive marketing of ALLTEL’s products and services and toreduce its reliance on any single distribution channel.  Dealer and direct sales channels remainimportant components of the Company’s overall distribution strategy, with theprimary objective for all channels being to produce the best combination oflower customer acquisition costs and higher customer retention rates.

 

ALLTEL currently conducts its retail operations in approximately 1,100locations strategically located in neighborhood retail centers and shoppingmalls to capitalize on favorable demographics and retail traffic patterns.  The Company’s retail focus is to attract newcustomers through competitive service offerings and an efficient salesprocess.  For ALLTEL, the incrementalcost of obtaining a customer through a Company retail store is the lowest ofany distribution channel.

 

ALLTEL also contracts with large national retail stores to sellwireless products and services directly through its own kiosks.  The Company utilizes retail salesrepresentatives at kiosks in large retailers to take advantage of high trafficgenerated by the retailers, to reduce the cost of the sale, and to ensurecustomers receive proper training in the use of wireless equipment andservices.  Existing customers canpurchase wireless telephone accessories, pay bills or inquire about ALLTEL’sservices and features while in retail stores or at kiosks.  Through dedicated customer service at itsretail stores and kiosks, the Company’s goal is to build customer loyalty andincrease the retention rate of new and existing customers.

 

The Company enters into dealer agreements with electronics retailersand discounters in its markets.  Theselocal dealers may offer other wireless services like paging.  In exchange for a commission payment, thesedealers solicit customers for the Company’s wireless service.  The commission payment is subject tocharge-back provisions if the customer fails to maintain service for aspecified period of time.  Thisarrangement increases store traffic and sales volume for the dealers andprovides a valuable source of new customers for the Company.  ALLTEL actively supports its dealers withregular training and promotional support.

 

ALLTEL’s direct sales force focuses its efforts on business customerswith high wireless telephone usage and multiple lines of service.  This channel produces the lowest churncompared with any other distribution channel.

 

**COMPETITION**

 

Substantial and increasing competition exists within the wirelesscommunications industry.  Cellular, PCSand Enhanced Specialized Mobile Radio service providers may operate in the samegeographic area, along with any number of resellers that buy bulk wirelessservices from one of the wireless providers and resell it to theircustomers.  PCS services generallyconsist of wireless two-way communications services for voice, data and othertransmissions employing digital technology. The entry of multiple competitors, including PCS providers, within theCompany’s wireless markets has made it increasingly difficult to attract newcustomers and retain existing ones. Competition for customers among wireless service providers is basedprimarily on the types of services and features offered, call quality, customerservice, system coverage and price. ALLTEL has responded to this growing competitive environment bycapitalizing on its position as an incumbent wireless service provider byproviding high capacity networks, strong distribution channels and superiorcustomer service and by developing innovative rate plans and offering new productsand services.  ALLTEL’s ability tocompete successfully in the future will depend upon the Company’s ability toanticipate and respond to changes in technology, customer preferences, newservice offerings, demographic trends, economic conditions and competitors’pricing strategies.

 

In the current wireless market, ALLTEL’s ability to compete alsodepends on its ability to offer regional and national calling plans to itscustomers.  As previously noted, theCompany depends on roaming agreements with other wireless carriers to provideroaming capabilities in areas not covered by ALLTEL’s network.  These agreements are subject to renewal andtermination if certain events occur, including if network quality standards arenot maintained.  If the Company wereunable to maintain or renew these agreements, ALLTEL’s ability to continue toprovide competitive regional and nationwide wireless service to its customerscould be impaired, which, in turn, would have an adverse effect on its wirelessoperations.

 

7

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

** **

**WIRELESS OPERATIONS (continued)**

** **

**TECHNOLOGY**

 

Since inception, mobilewireless technologies have seen significant improvements in both speed andreliability.  The first generation ofwireless technology was analog, while second generation technologies employdigital signal transmission technologies. Third generation technologies, which are just beginning to be deployedin the U.S., provide even greater data transmission rates and allow theprovision of enhanced data services.

 

Although ALLTEL willmaintain its first generation analog services until it is no longer required bythe FCC, the Company offers quality second generation voice and circuit switch datain markets covering 95 percent of its POPs with its CDMA digital systems.  Second generation digital systems in the U.S. compress voice or data signals enabling a single radio channel tosimultaneously carry multiple signal transmissions.  CDMA digital technology provides expanded channel capacity andthe ability to offer advanced services and functionality.  In addition, digital technology improvescall quality and offers improved customer call privacy.

 

Third generation digitalwireless technologies increase voice capacity, allow high-speed wireless packetdata services and are capable of addressing more complex dataapplications.  The Company will continueto expand its offerings of high speed wireless data services with continuedinvestment in its third generation voice and data networks based on the CDMA2000 1X technology, including high speed packet data service offerings alreadyin place in strategic markets.  ALLTELis also reviewing future generations of broadband technologies to provide even higherdata rate access.  Through itsinvestment in these systems, ALLTEL will be able to deploy innovativetechnologies and applications, including Multimedia Messaging Services.  The Company recently launched “Touch2Talk”,a digital two-way calling service offering that, once fully deployed by the endof the first quarter of 2004, will provide customers with service coverage overALLTEL’s entire digital wireless network.

 

**REGULATION**

 

The Company is subject to regulation by the FCC as a provider ofwireless communications services.  TheFCC has rules governing the construction and operation of wirelesscommunications systems and licensing and technical standards for the provisionof wireless communications service.  TheFCC also regulates the terms under which certain ancillary services may beprovided through wireless facilities. The FCC has exercised its authority to refrain from rate regulation ofwireless communications services, but retains its statutory authority to imposesuch regulation.  The 1993 OmnibusBudget Reconciliation Act largely preempted state rate and entry regulation ofwireless carriers, although the states are permitted to regulate the otherterms and conditions of wireless services unrelated to either rates or marketentry.  States may petition the FCC forauthority to regulate rates if the states demonstrate that (1) the market hasfailed to protect consumers from unreasonable, unjust or discriminatory rates;or (2) market conditions exist such that Commercial Mobile Radio Services (“CMRS”)are a replacement for land line telephone exchange service for a “substantial”portion of the telephone land line exchange service within each state.

 

The Telecommunications Act of 1996 (the “96 Act”) provides wirelesscarriers numerous opportunities to provide an alternative to the telephonyservices provided by local exchange telephone companies and interexchangecarriers.  These opportunities includethe ability to provide calling plans that integrate or bundle both localcalling and long-distance service. Wireless carriers are entitled to compensation from othertelecommunications carriers for calls transmitted from their networks andterminated on the network of the wireless carrier.  Wireless carriers are characterized as “telecommunications carriers”under the 96 Act and not local exchange carriers.  Consequently, wireless carriers are not subject to theinterconnection, resale, unbundling and other obligations applicable to localexchange carriers until such time as the FCC makes a finding that treatment ofwireless carriers as local exchange carriers is warranted.  The 96 Act also eliminated any requirementthat wireless carriers provide subscribers with equal access to their longdistance carrier of choice, although the FCC is empowered under the 96 Act toimpose an equal access requirement on wireless carriers through rule makingshould market conditions so warrant.

 

The Company holds FCC authorizations for Cellular RadiotelephoneService (“CRS”), PCS, and paging services, as well as ancillary authorizationsin the private radio and microwave services (collectively, the “FCCLicenses”).  FCC Licenses are originallyissued for 10-year terms and may be renewed for additional 10-year termssubject to FCC approval of the renewal application.  The Company has routinely sought and been granted renewal of itsFCC Licenses without contest as such licenses become due for renewal andanticipates that future renewals of its FCC Licenses will be granted.  Significant changes in ownership or controlof a FCC license continue to require prior approval by the FCC, and interestedparties are afforded the opportunity to file comments or formal petitionscontesting the transaction.  Minority,non-controlling interests in an FCC

 

8

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

** **

**WIRELESS OPERATIONS (continued)**

** **

**REGULATION(continued)**

 

license generally may be transferred or assigned without prior FCCapproval, subject to compliance with the law’s restriction on ownershipinterests held by foreign entities.

 

All of the Company’s PCS licenses are for 10 MHz broadband PCSsystems.  PCS licenses are granted for10-year terms and must meet certain network build-out requirements establishedby the FCC to maintain the license in good standing.  In order to meet the FCC’s build-out requirements, the Companymust construct networks in each licensed market that provide coverage to atleast 25 percent of the population in the market within five years after theinitial grant of the license or, alternatively, make a showing of “substantialservice” within that same five-year period. ALLTEL met the FCC’s build out requirements for its PCS licenses byproviding coverage to 25 percent or more of the population in each licensedmarket by the end of the five year build out period, April 28, 2002.

 

Cellular systems operate on one of two 25 MHz frequency blocks that theFCC allocates and licenses for CMRS service. Pursuant to a recent FCC decision, the limitation on the amount oflicensed spectrum that a licensee may hold and the limitation on holding bothcellular licenses in MSA markets were eliminated effective in January2003.  Prior FCC rules prohibited anentity from holding a combined attributable interest in broadband PCS, cellularand specialized mobile radio licenses totaling more than 55 MHz of spectrum ina geographic area and prohibited an entity from having an attributable interestin both of the two cellular licenses in a particular market.  FCC rules, however, continue to prohibit anysingle entity from either owning or having a substantial interest in bothcellular licenses in the same RSA market.

 

Under rules established by the FCC, effective November 24, 2002, allCMRS providers, which include cellular and PCS carriers, were required toparticipate in a nationwide number conservation program known as “thousandblock number pooling” in accordance with roll out schedules established by theFCC, and to the extent applicable, state-sponsored number pooling trials.  CMRS providers must modify their networks tocomply with FCC and industry performance criteria for number pooling, includingsupport for roaming customers.  Numberpooling is an FCC-mandated program intended to alleviate the shortage ofavailable telephone numbers by requiring carriers to return unused numbers intheir inventory to a centrally administered pool and taking assignment of newnumbers in blocks of 1,000 instead of the 10,000 number blocks previouslyassigned. The FCC exempted small and rural CMRS and local exchange carriersfrom the pooling requirement until such time as they implement local numberportability in response to a specific request from another carrier.

 

FCC rules also required that CMRS providers implement on November 24,2003, wireless local number portability (“WLNP”), to permit customers to retaintheir existing telephone number when moving from one telecommunications carrierto another.  The FCC, on June 18, 2003,released the rules governing the number of MSAs in which WLNP must be deployed,as well as the process for triggering a carrier’s obligation to provide WLNP inmarkets both within those MSAs and otherwise. The FCC retained the requirement that carriers implement WLNP based uponthe specific request of another carrier and gave the state public servicecommissions authority to require CMRS carriers to implement WLNP in any marketwithin the top 100 MSAs in which they provide service and for which a requestwas not received from a competing carrier.

 

On October 7, 2003, the FCC released a decision providing guidance tocarriers on certain WLNP implementation issues that had been raised in twopetitions for declaratory rulings filed by the Cellular TelecommunicationsIndustry Association (“CTIA”) and to resolve related issues raised through theappeal of a July 3, 2003 letter from the Chief of the WirelessTelecommunications Bureau of the FCC.  In general, the FCC decision noted that portingnumbers between carriers should be performed without obstruction, including anydelay related to efforts to collect outstanding balances; porting intervalsshould be governed by a “reasonableness standard” using the industry’ssuggested 2.5 hour porting interval as the reference point; writteninterconnection agreements between carriers involved in porting are notrequired; and carriers must continue to support nationwide roaming.  Various appeals by wireless carrierschallenging the FCC’s WLNP mandate on the basis of a denial of forbearence bythe FCC as well as a petition for mandamus challenging the FCC’s underlyingauthority to require carriers to implement WLNP were either denied or otherwisedismissed by the U.S. Court of Appeals for the District of Columbia Circuit(the “U.S. District Court”).

 

On November 10, 2003, the FCC released a decision addressing the CTIA petitions and providingguidance on wireline to wireless porting, which is referred to as “intermodalporting”.  The FCC stated thatnumber porting from a wireline carrier to a wireless carrier is required wherethe coverage area of the wireless carrier (i.e. the area in which the wirelesscarrier provides service) overlaps the geographic location in which thewireline number was provisioned. Further, while the FCC required the

 

9

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

** **

**WIRELESS OPERATIONS (continued)**

** **

**REGULATION(continued)**

 

wireless carrier to maintain the rate center designation of the number,it also noted that wireless carriers were not required to have either directconnections or interconnection agreements with wireline carriers nor werewireless carriers required to have numbering resources in the rate center inwhich the wireline number is located in order to subject the wireline number tointermodal porting.  The FCC’s guidancerequires that wireline numbers be ported to wireless carriers acrosstraditional wireline rate centers, however, the FCC left issues governing thepayment of call routing costs to another pending proceeding.  This requirement took effect on November 24,2003 for wireline carriers in the top 100 MSAs, and will take effect on May 24,2004 for wireline carriers operating in markets below the top 100 MSAs.  On January 16, 2004, the FCC granted a limitedwaiver to wireline companies with fewer than two percent of the nation’s accesslines operating in the top 100 MSAs, which extended the deadline by which thesecompanies must implement intermodal porting to May 24, 2004.  Further, the United States TelecommunicationsAssociation (“USTA”), along with certain rural telephone companies, appealedthe FCC’s November 10, 2003 decision to the U.S. District Court.  The appeal remains pending, but has beenaccorded expedited treatment by the Court. Although implementation of WLNP didnot have a significant impact on the Company’s operating results in 2003,ALLTEL believes that these requirements could result in a significantincrease in both its operating costs and customer churn rates in 2004.

 

In addition, wireless service carriers must also provide enhanced 911emergency service (“E-911”) in a two-phased approach.  In phase one, carriers must, within six months of receiving arequest from a phase one enabled Public Safety Answering Point (“PSAP”),deliver both the caller’s number and the location of the cell site to the PSAPserving the geographic territory from which the E-911 call originated.  A phase one enabled PSAP is generally onethat is capable of receiving and utilizing the number and location datatransmitted by the carrier.  ALLTEL hasgenerally complied with the phase one requirements and provides service tophase one capable PSAPs.  Due to thestatus of the PSAPs, as well as other technology and deployment issues, the sixmonth window in which service is to be provided under the FCC rules has, incertain instances, been extended by mutual agreement between ALLTEL and theparticular PSAPs involved.  In phasetwo, CMRS carriers opting for a handset-based solution, as the Company has,must determine for originated calls the location of the caller within fiftymeters for 67 percent of the originated calls and 150 meters for 95 percent ofthe originated calls. The phase two requirements were set to begin by October1, 2001, but, due to technology unavailability and other factors, the Companyrequested a limited waiver of these requirements, as did virtually every othercarrier.  On July 26, 2002, the FCCreleased an order granting a temporary stay of the E-911 emergencyimplementation rules as they applied to the Company.  The FCC order provides for a phased-in deployment of AutomaticLocation Identification (“ALI”) capable network or handset-based technologythat began on March 1, 2003.  ALIcapability will permit immediate identification of the caller’s location byPSAPs.  Under the FCC order, theCompany, which has chosen to employ handset-based ALI technology,  (1) began selling and activating ALI-capable handsets prior to March 1,2003; (2)  ensured that as of May 31,2003 at least 25 percent of all new handsets activated are ALI-capable; (3)ensured that as of November 30, 2003 at least 50 percent of all new handsetsactivated are ALI-capable; (4) will ensure that 100 percent of its digitalhandsets activated are ALI-capable by May 31, 2004; and (5) will ensure thatpenetration of ALI-capable handsets among its customers reaches 95 percent nolater than December 31, 2005.  ALLTELbegan selling ALI-capable handsets in June 2002 and has complied with thehandset deployment thresholds under the FCC’s order.  ALLTEL fully expects to comply with the remainingrequirements.  Although at this time,the Company cannot fully quantify the effects on its communications operationsof implementing ALI technology, ALLTEL believes these requirements, when fullyimplemented, could result in a significant increase in its operating costs.

 

The Company filed petitions with the FCC and various state commissionsduring 2003 seeking certification as an Eligible Telecommunications Carrier(“ETC”).  Certification as an ETC willqualify the Company to receive support from the federal Universal Service Fund(“USF”).  The Company has applicationspending at the FCC for its properties in Alabama, Virginia, Georgia, NorthCarolina and Florida.  ALLTEL hasobtained approval of its petitions from state commissions for its properties inMichigan, Mississippi, Arkansas, Wisconsin and West Virginia and is nowcertified as an ETC in each of those states. The Company expects to begin receiving USF support associated with theseapproved petitions in the first and second quarters of 2004.  The Company has also filed petitionsrequesting ETC certification at the state commissions in Arizona, New Mexico,Kansas and Louisiana, and is currently awaiting commission action on thesepetitions.

 

On January 22, 2004, the FCC approved the petition of VirginiaCellular, LLC for certification as an ETC in Virginia.  In its order granting that approval, the FCCrequired that Virginia Cellular meet certain additional conditions in exchangefor its designation as an ETC.  Additionally, the FCC, in conjunction with the Federal/State Joint Boardon Universal Service, is considering changes to the USF program, including theservices qualified for USF support and the qualifications of ETCs.

 

10

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

 

**WIRELESS OPERATIONS (continued)**

** **

**REGULATION(continued)**

 

At this time, ALLTEL cannot estimate what effect the Virginia Cellularorder and potential FCC changes to the USF program may have on ALLTEL’s abilityto receive support from the USF related to its wireless business.

 

In July 2003, the FCC unanimously adopted an order modifying thewireless phone exemption to the Hearing Aid Compatibility Act and adoptedrequirements governing the compatibility of hearing aids and wirelessphones.  The decision requires thatinterference to hearing aids from digital wireless phones be reduced, and thatcarriers make available wireless phone models engineered to reduce radiofrequency interference to hearing aids. In October 2003, the FCC issued its long awaited order in the proceedinggoverning the sale or leasing of spectrum in the secondary market.  The decision revises standards for transferof control and provided new options for the lease of spectrum to providers ofnew wireless technologies.  At thistime, ALLTEL has not fully evaluated the effects, if any, that these orders mayhave on ALLTEL’s existing wireless operations.

 

Under the Communications Assistance to Law Enforcement Act (“CALEA”),ALLTEL is required to provide assistance to law enforcement for electronicsurveillance of communications, including packet data transmissions.  On November 19, 2003, the FCC issued ablanket extension until January 30, 2004, of the deadline for compliance withthe packet data provisions of CALEA to those carriers with pre-existingextension requests on file.  ALLTEL iscurrently in compliance with the existing CALEA requirements, and anticipatesseeking such further extension of the packet data requirement as may be available.  On February 12, 2004, the FCC announced itwould initiate a rulemaking proceeding to address the technical issuesassociated with law enforcement access to Internet-enabled services.  The proceeding will address the scope ofcovered services, assign responsibility for compliance and identify the wiretapcapabilities required.

 

Under FCC and FederalAviation Administration regulations, wireless carriers must comply with certainregulations regarding the siting, lighting and construction of transmittertowers and antennas.  In addition,federal environmental regulations require carriers to comply with land use andradio frequency standards and require that wireless facilities and handsetscomply with radio frequency radiation guidelines.  The siting and construction of wireless facilities may also besubject to state and local zoning, land use and other regulatory oversight.

 

**WIRELINE OPERATIONS**

 

As previously noted, the Company’s wireline segment consists ofALLTEL’s ILEC, CLEC and Internet access operations.  The Company’s wireline subsidiaries provide local telephoneservice to nearly 3.1 million customers primarily located in rural areas in 15states.  The wireline subsidiaries alsooffer facilities for private line, data transmission and other communicationsservices.  Wireline revenues, whichconsist of local service, network access and long-distance and miscellaneousrevenues, comprised 30 percent of ALLTEL’s total operating revenues frombusiness segments in both 2003 and 2002, compared to 29 percent in 2001.

 

Local service operationsprovide lines from telephone exchange offices to customer premises for theorigination and termination of telecommunications services including basicdial-tone service and dedicated private line facilities for the transport ofdata and video.  ALLTEL also offersvarious enhanced service features including call waiting, call forwarding,caller identification, three-way calling, no-answer transfer and voicemail.  Additional local service revenues arederived from charges for equipment rentals, equipment maintenance contracts,information and directory assistance and public payphone services.

 

Network access andinterconnection services are provided by ALLTEL by connecting the equipment andfacilities of its customers to the communications networks of long-distancecarriers, CLECs, competitive switched and special access providers, andwireless service providers.  Thesecompanies pay access and network usage charges to the Company’s local exchangesubsidiaries for the use of their local networks to originate and terminatetheir voice and data transmissions. Network access revenues also include amounts derived from high-speeddata transport services (digital subscriber line or “DSL”). Miscellaneousrevenues primarily consist of revenues derived from the Company’s Internetaccess services, charges for billing and collections services provided tolong-distance companies, customer premise equipment sales and directoryadvertising services.

 

11

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

** **

**WIRELINE OPERATIONS (continued)**

 

**COMPETITION**

 

Some of the Company’s ILEC operations have begun to experiencecompetition in their local service areas. Sources of competition to ALLTEL’s local exchange business include, butare not limited to, resellers of local exchange services, interexchangecarriers, satellite transmission services, wireless communications providers,cable television companies, and competitive access service providers includingthose utilizing Unbundled Network Elements-Platform (“UNE-P”).  Through December 31, 2003, this competitionhas not had a material adverse effect on the results of operations of ALLTEL’swireline operations, although competition has adversely affected the Company’saccess line growth rates.  Customeraccess lines decreased two percent during the twelve months ended December 31,2003.  The Company lost approximately72,000 lines during 2003, primarily as a result of the effects of wireless andbroadband substitution for the Company’s wireline services.  The Company expects the number of accesslines served by its wireline operations to continue to be adversely affected bywireless and broadband substitution in 2004.

 

To address competition, ALLTEL is focusing its efforts on marketing andselling additional products and services to its customers by bundling togetherand offering at competitive rates its various product offerings, includinglong-distance, Internet and DSL services. Deployment of DSL service is an important strategic initiative forALLTEL.  Currently, DSL service isavailable to approximately 2.0 million, or 64 percent, of the Company’swireline customers.  During 2003, theCompany added approximately 83,000 DSL customers, continuing a two year-longtrend of strong growth in this service offering.  For the twelve months ended December 31, 2003, the number of DSLcustomers more than doubled to approximately 153,000 customers, or 8 percent ofthe Company’s addressable access lines.  During 2003, the growth rate in the Company’s DSL customersoutpaced the rate of decline in customer access lines discussed above.  In addition to its marketing efforts, ALLTELremains focused on providing improved customer service, increasing operating efficienciesand maintaining the quality of its network. As with its wireless business, the Company has focused its wirelineadvertising on promoting ALLTEL’s brand name and promise of “gettingcommunications right, every day,” through the Company’s “You got that right”advertising campaign.  Wirelineadvertising is designed to integrate the Company’s overall brand message whilecommunicating the benefits of product bundling and price offerings.

 

Although DSL services have been a source of revenue and access linegrowth for the Company in 2003 and 2002, that service offering experiencescompetition from other broadband service providers, including cable televisionand satellite transmission service providers. Under the FCC’s recent decision in its Triennial Review proceeding, asfurther discussed below under the caption “Local Service - Regulation” on page13, it appears that the Company’s provisioning of broadband DSL services willbe largely deregulated.  In addition, anumber of carriers have begun offering voice telecommunications servicesutilizing the Internet as the means of transmitting those calls.  This service, commonly know asvoice-over-Internet-protocol (“VoIP”) telephony, is challenging existingregulatory definitions.  As furtherdiscussed below under the caption “Network Access - Regulation” on page 18, onFebruary 12, 2004, the FCC adopted a Notice of Proposed Rulemaking that willconsider the appropriate regulatory treatment of Internet-enabledcommunications services and address which regulatory requirements, for example,those relating to E-911, disability accessibility, access charges, and universalservice, should be extended to Internet-enabled services.  The results of the FCC’s proceedings relatedto VoIP could have a significant effect on the Company’s wireline operations.

 

**LOCAL SERVICE -REGULATION**

 

Prior to 1996, ALLTEL’s wireline subsidiaries provided local telephoneservice under exclusive franchises granted by state regulatory commissions andsubject to regulation by those regulatory commissions.  These regulatory commissions have hadprimary jurisdiction over various matters including local and intrastate tollrates, quality of service, the issuance of securities, depreciation rates, thedisposition of public utility property, the issuance of debt, and theaccounting systems used by those subsidiaries. The FCC has historically had primary jurisdiction over the interstatetoll and access rates of these companies and issues related to interstatetelephone service.

 

The 96 Act substantially modified certain aspects of the states’ andthe FCC’s jurisdictions in the regulation of local exchange telephonecompanies.  The 96 Act prohibits statelegislative or regulatory restrictions or barriers to entry regarding theprovision of local telephone service. The 96 Act also requires ILECs to interconnect with the networks ofother telecommunications carriers, unbundle services into network elements,offer their telecommunications services at wholesale rates to allow resale ofthose services, and allow other telecommunications carriers to locate theirequipment on the premises of the incumbent local exchange carriers for thepurpose of exchanging traffic.

 

12

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

** **

**WIRELINE OPERATIONS (continued)**

 

**LOCALSERVICE - REGULATION (continued)**

 

The 96 Act requires all local exchange telephone companies tocompensate one another for the transport and termination of calls on oneanothers’ networks.

 

Except for certain of its subsidiaries in Nebraska, Ohio and therecently acquired property in Kentucky, the Company’s local exchangesubsidiaries are rural telephone companies, as defined under the 96 Act, andare exempt from certain of the foregoing obligations, unless, in connectionwith a bona fide request, a state regulatory commission removes thatexemption.  All of the Company’s localexchange subsidiaries may seek specific suspensions or modification ofinterconnection obligations under the 96 Act as a company that serves less thantwo percent of the nation’s access lines, where such interconnectionobligations would otherwise cause undue economic burden or are technicallyinfeasible.

 

In 1996, the FCC issued regulations implementing the local competitionprovisions of the 96 Act.  Theseregulations established pricing rules for state regulatory commissions tofollow with respect to entry by competing carriers into the local, intrastatemarkets of ILECs and addressed interconnection, unbundled network elements(“UNEs”) and resale rates.  The FCC’sauthority to adopt such pricing rules, including permitting new entrants to“pick and choose” among the terms and conditions of approved interconnectionagreements, was considered first by the U.S. Eighth Circuit Court of Appeals(the “Eighth Circuit Court”) and then by the U.S. Supreme Court.  In January 1999, the Supreme Courtreinstated the FCC’s “pick and choose” rule and remanded a portion of thedecision to the Eighth Circuit Court for it to rule on certain issues that ithad not previously decided, such as whether the FCC’s pricing rules wereconsistent with the 96 Act.  Otherissues were remanded to the FCC.

 

In July 2000, the Eighth Circuit Court issued a decision on the earlierremand from the Supreme Court and rejected, as contrary to the 96 Act, the useof hypothetical network costs, including total element long-run incrementalcosts methodology (“TELRIC”), which the FCC had used in developing certain ofits pricing rules.  The Eighth CircuitCourt also vacated the FCC’s pricing rules related to UNEs, termination andtransport, but upheld its prior decision that ILECs’ universal servicesubsidies should not be included in the costs of providing networkelements.  Finally, the Eighth CircuitCourt also vacated the FCC’s rules requiring that: (1) ILECs recombineunbundled network elements for competitors in any technically feasiblecombination; (2) all preexisting interconnection agreements be submitted to thestates for review; and (3) the burden of proof for retention of a ruralexemption be shifted to the ILEC.  TheFCC sought review of the Eighth Circuit Court’s invalidation of TELRIC and wasgranted certiorari.  On May 13, 2002,the Supreme Court reversed certain of the Eighth Circuit Court’s findings and affirmedthat the FCC’s rules concerning forward looking economic costs, includingTELRIC, were proper under the 96 Act. The Supreme Court also restored the FCC’s requirement that the ILEC’scombine UNEs for competitors when they are unable to do so themselves.

 

In November 1999, the FCC released an order making unbundlingrequirements applicable to all ILEC network elements uniformly.  UNE-P is created when a competing carrierobtains all the network elements needed to provide service from the ILEC.  In December 1999, the FCC released an orderrequiring the provision of unbundled local copper loops enabling CLECs to offercompetitive Digital Subscriber Loop Internet access.  The FCC reconsidered both orders in its firsttriennial review ofits policies on UNEs completed in early 2003, as further discussed below.

 

On August 21, 2003, the FCC released the text of its Triennial ReviewOrder.  In response to the remand of theUnited States Court of Appeals for the District of Columbia circuit, the FCCadopted new rules governing the obligations of ILECs to unbundle the elementsof their local networks for use by competitors.  The FCC made national findings of impairment or non-impairmentfor loops, transport and, most significantly, switching.  The FCC delegated to the states theauthority to engage in additional fact finding and make alternative impairmentfindings based on a more granular impairment analysis including evaluation ofapplicability of FCC-established “triggers.” The FCC created “mass market” and “enterprise market” customerclassifications that generally correspond to the residential and businessmarkets, respectively.  The FCC foundthat CLECs were not impaired without access to local circuit switching whenserving “enterprise market” customers on a national level.  CLECs, however, were found to be impaired ona national level without access to local switching when serving “mass market”customers.  State commissions had  90 days to ask the FCC to waive the findingof no impairment without switching for “enterprise market” customers.  The FCC presumption that CLECs are impairedwithout access to transport, high capacity loops and “mass market” switching issubject to a more granular nine month review by state commissions pursuant toFCC- established triggers and other economic and operational criteria.

 

13

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

** **

**WIRELINE OPERATIONS (continued)**

 

**LOCALSERVICE - REGULATION (continued)**

 

The FCC also opened a further notice of proposed rulemaking to considerthe “pick and choose” rules under which a competing carrier may select fromamong the various terms of interconnection offered by an ILEC in its variousinterconnection agreements.  Commentshave been filed, but the FCC has not issued a decision.

 

The Triennial Review Order also provided that:

 

•        ILECs are not required tounbundle packet switching as a stand-alone network element.

 

•        Two key components of theFCC’s TELRIC pricing rules were clarified. First, the FCC clarified that the risk-adjusted cost of capital used incalculating UNE prices should reflect the risks associated with a competitivemarket.  Second, the FCC declined tomandate the use of any particular set of asset lives for depreciation, butclarified that the use of an accelerated depreciation mechanism may present amore accurate method of calculating economic depreciation.

 

•        CLECs continue to beprohibited from avoiding any liability under contractual early terminationclauses in the event a CLEC converts a special access circuit to an UNE.

 

ALLTELis monitoring the state commission proceedings and participating wherenecessary as the commissions undertake the 90 day and nine month analyses toestablish rules or make determinations as directed by the Triennial ReviewOrder.  In addition, numerous petitionsand appeals have been filed in the courts and with the FCC challenging many ofthe findings in the Triennial Review Order and seeking a stay on certainportions of the order.  The appeals havebeen consolidated in the U.S. District Court. Oral arguments were heard on January 28, 2004.  A decision could be reached as early as the end of March 2004.  Until all of these proceedings areconcluded, the impact of this order, if any, on ALLTEL’s ILEC operations cannotbe determined.

 

OnSeptember 15, 2003, the FCC launched its first comprehensive review of therules that establish wholesale pricing of UNEs.  The Notice of Proposed Rulemaking sought comment on a variety ofUNE and resale pricing-related issues and on a proposal to make TELRIC rulesmore closely account for the “real-world” attributes of the incumbent carrier’snetwork.  If this proposal were adopted,the result would likely be higher UNE prices.

 

In October 1999, the FCC adopted two orders, later appealed, involvinguniversal service.  In the first order,the FCC completed development of the cost model that will be used to estimatenon-rural ILECs’ forward-looking costs of providing telephone service.  In the second order, the FCC adopted amethodology that uses the costs generated by the cost model to calculate theappropriate level of support for non-rural carriers serving rural areas.  Under the new funding mechanism, high-costsupport will be targeted to the highest cost wire center within the state andsupport will be portable, so that, when a non-rural ILEC loses a customer to acompetitor, the competitor may receive the universal service high-cost supportfor service provided to that customer.

 

In July 2001, the U.S. Tenth Circuit Court of Appeals reversed andremanded aspects of the FCC’s order that dealt with a federal funding mechanismfor non-rural ILECs to support universal service in high cost areas.  The FCC sought and received a RecommendedDecision from the Federal State Joint Board on Universal Service (the “JointBoard”) regarding the issues remanded by the U.S. Tenth Circuit Court ofAppeals.  The Joint Board recommendedcontinued use of statewide average costs and a national benchmark of 135percent to determine non-rural high cost support, but recommended that the FCCmodify the non-rural high cost support mechanism by adopting additionalmeasures to induce states to ensure reasonable comparability of urban and ruralrates.  Relying in large part on theJoint Board’s Recommended Decision, the FCC issued its order on October 27,2003, finding that rural and urban rates are generally comparable and concludedthat the current support level should be maintained.

 

With regard to rural ILECs, the FCC adopted an interim universalservice mechanism on May 23, 2001 that will govern compensation for ruraltelephone companies for the ensuing five years.  Among other provisions, the FCC’s interim plan adopted a modifiedembedded cost mechanism while retaining an indexed cap on the fund.  The high-cost loop support fund will bepermitted to grow, based on annual changes in the Gross Domestic Product -Chained Price Index and the total number of working loops of rural carriers.  This order also adopted three paths for thedisaggregation and targeting of high-cost universal service support.

 

14

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

** **

**WIRELINE OPERATIONS (continued)**

 

**LOCALSERVICE - REGULATION (continued)**

 

In September 2001, the U.S. Fifth Circuit Court of Appeals remandedprovisions of the FCC order that established a $650.0 million Interstate AccessSupport Mechanism.  The Court questionedwhether the funding level was appropriate to provide explicit support for poorand rural customers.   On July 10, 2003,the FCC issued an order on remand concluding that the $650.0 million amountrepresented a reasonable estimate of the implicit support in access charges tobe replaced with explicit support.  Thisorder is not expected to have an impact on ALLTEL’s wireline operations.

 

On November 8, 2002, the FCC requested that the Joint Board onUniversal Service review certain of the FCC’s rules relating to the high-costuniversal support mechanism and the process by which carriers are designatedETCs.  On February 7, 2003, the JointBoard sought comment on these matters, and a recommended decision is expectedshortly.  At this time, ALLTEL cannotestimate what impact, if any, this proceeding may have on its universal servicefunding.

 

On July 10, 2002, the Joint Board recommended that the FCC not modifythe existing list of services supported by universal service.  On July 10, 2003, the FCC adopted the JointBoard’s recommendation to retain the existing list of services supported byuniversal service.  The FCC decided toconsider whether equal access should be included in the list of USF supportedservices as part of the high-cost universal service support and ETC designationproceeding pending before the Joint Board.

 

On December 13, 2002, the FCC released its interim USF contributionreport and order and further notice of proposed rulemaking.  Under this ruling, the method for providingfederal universal service fund contributions changed from the historicinterstate revenue-based arrangement to contributions based on projectedrevenues.  In addition, on April 1,2003, the USF line item on the customer bill was adjusted to reflect only theUSF contribution obligation of the carrier. In the further notice of proposed rulemaking, the FCC has indicated itcontinues to consider adopting a permanent plan for USF contributions andassessment methodology.  Three“connections-based” proposals have been offered as long-term replacements inaddition to the continuation of a revenue-based assessment methodology.  The proposed connection-based methods wouldestablish a universal service charge based either on the number of customerconnections, the capacity and nature of the connection, or on working telephonenumbers.  The interim universal servicechanges have not had a material adverse effect on the Company’s wirelineoperations.  ALLTEL cannot predict atthis time the impact to its wireline operations of any permanent USFcontribution plan that the FCC might adopt.

 

In June 2002, the U.S. Court of Appeals for the Second Circuit foundthat the 96 Act did not create an “implicit immunity” for ILECs from antitrustlaw.  This decision differed from anearlier decision from the U.S. Court of Appeals for the Seventh Circuit.  The Supreme Court agreed to hear the case inMarch 2003, and on January 13, 2004, issued their decision stating that the 96Act provided sufficient regulatory oversight of anti-competitive behavior, andthe slight benefits of antitrust intervention were not justified.  While antitrust laws remain in effect, thisdecision holds that broadening them to cover class-action antitrust lawsuitsagainst ILECs for failing to open their networks to competitive carriers is notappropriate.

 

Section 251(b) of the Communications Act of 1934 (the “34 Act”), asamended, requires, in part, that local exchange carriers provide local numberportability to any requesting telecommunications carrier.  Wireless carriers are generally defined as“telecommunications carriers” under the 34 Act, and are therefore eligible toport numbers with wireline carriers, which is referred to as “intermodalporting”.  The terms and conditions forintermodal porting were the subject of the CTIA’s petitions that sought rulingson: 1) the ability of wireline carriers to port numbers to wireless carriersacross traditional rate center boundaries; 2) the porting interval for suchports; and 3) the absence of any need for direct interconnection arrangementsbetween wireline carriers porting numbers out and wireless carriers receivingthe number.  As previously discussed, onNovember 10, 2003, the FCC released a decision providing guidance on intermodalporting issues and addressing the CTIA petitions.  The FCC stated that number porting from a wireline carrier to awireless carrier is required where the coverage area of the wireless carrier(i.e. the area in which the wireless carrier provides service) overlaps thegeographic location in which the wireline number was provisioned.  Further, while the FCC required the wirelesscarrier to maintain the rate center designation of the number, it also notedthat wireless carriers were not required to have either direct connections orinterconnection agreements with wireline carriers nor were wireless carriersrequired to have numbering resources in the rate center in which the wirelinenumber is located in order to subject the wireline number to intermodalporting.  The FCC’s guidance requiresthat wireline numbers be ported to wireless carriers across traditionalwireline rate centers, although the FCC left issues governing the payment ofcall routing costs to another pending proceeding.  This requirement took effect on November 24, 2003 for wirelinecarriers in the top 100 MSAs, and will take effect on May 24, 2004 for wirelinecarriers operating in markets below the top 100 MSAs.  As noted earlier, on January 16, 2004, the FCC granted a limitedwaiver to

 

15

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

** **

**WIRELINE OPERATIONS (continued)**

 

**LOCALSERVICE - REGULATION (continued)**

wireline companies with fewer than two percent of the nation’s accesslines operating in the top 100 MSAs, which extendedthe deadline bywhich these companies must implement intermodal porting to May 24, 2004.  The USTA, along with certain rural telephonecompanies, appealed the FCC’s November 10, 2003 decision to the U.S. DistrictCourt, and the appeal is pending before the Court.  The majority of the Company’s wireline operations are conductedin markets below the top 100 MSAs that will be subject to the later May 24,2004 implementation date for intermodal porting.  At this time, the Companycannot fully quantify the effects on its wireline operations of implementingintermodal porting or the potential outcome of any court appeal, however, it is likely that these requirements,when implemented, will adversely affect the Company’s wireline operating costsand customer growth rates.

 

Periodically, the Company’s local exchange subsidiaries receive requestsfrom wireless communications providers for renegotiation of existing transportand termination agreements.  In thesecases, the Company’s local exchange subsidiaries renegotiate the appropriateterms and conditions in compliance with the 96 Act.  The Company’s local exchange subsidiaries have also executedcontracts for transport and termination services with CLECs.

 

Certain states in which ALLTEL’s local exchange subsidiaries operatehave adopted alternatives to rate-of-return regulation, either through legislativeor regulatory commission actions.  TheCompany has elected alternative regulation for certain of its local exchangesubsidiaries in Alabama, Arkansas, Florida, Georgia, Kentucky, Missouri,Nebraska, North Carolina, Pennsylvania, South Carolina and Texas.  Operations in the states of Kentucky(property acquired from Verizon in 2002), Mississippi, New York, Ohio, andOklahoma are subject to rate-of-return regulation.  The Company continues to evaluate alternative regulation forother states where its local exchange subsidiaries are regulated underrate-of-return.  The following summarysets forth a description of the alternative regulation plan for each of thestates in which the Company has elected alternative regulation:

 

•        ALLTEL’s regulated Alabamawireline subsidiary has operated since 1996 under a Public Service Commission(“PSC”) established alternative regulation plan.  Under this plan, basic service rates have been capped.  Non-basic service prices may be increasedannually as long as the aggregate annual change is 10 percent or less.  Access charges are also capped under thisplan.  The Alabama alternativeregulation plan is presently being reviewed by the state PSC for possiblemodifications.

 

•        ALLTEL’s regulatedArkansas wireline subsidiary has operated since 1997 under an alternativeregulation plan established by statute. Under this plan, basic local rates and access rates may be adjustedannually by up to 75 percent of the annual change in the Gross DomesticProduct-Price Index (“GDP-PI”).  Otherlocal rates may be changed without PSC approval and become effective upon thefiling of revised tariffs.

 

•        ALLTEL’s regulated Floridawireline subsidiary operates under alternative regulation established byFlorida statute.  Under this plan, basiclocal rates may be increased once in any twelve-month period by an amount notto exceed the twelve month change in the GDP-PI less one percent.  The Company may increase rates for non-basicservices as long as the annual increase for any category does not exceed sixpercent in any twelve-month period. Non-basic rates can be increased by up to 20 percent annually inexchanges where another local provider is providing service.  Intrastate access rates can be increased bythe annual change in GDP-PI or three percent, whichever is less, only afteraccess rates reach parity with the Company’s interstate rates.

 

•        ALLTEL’s regulated Georgiawireline subsidiaries operate under an alternative regulation plan establishedby statute.  Under this plan, basic localrates may be increased annually based on the annual change in GDP-PI.  Other local rates may be increased by filingrevised tariffs.

 

•        ALLTEL has two regulatedoperating subsidiaries in Kentucky.  Thesubsidiary acquired from Verizon is subject to rate of return regulation.  The other subsidiary has operated underalternative regulation established by statute beginning in 1998.  Under this plan, the subsidiary may adjustbasic business and residential rates, zone charges and installation once duringany 24 month period by an amount not to exceed the sum of the annual percentagechange in GDP-PI for the immediately preceding two calendar years multiplied bythe existing rate or charge to be adjusted subject to the followinglimitations: (1) basic business and residence rates may not exceed the averagebasic rates of the state’s largest telephone utility, and (2) rates may not beincreased by more than 20 percent. Access charges may not be adjusted if the change would result inintrastate access rates that exceed the company’s interstate rates.  Other local rates may be adjusted by filingtariffs.

 

16

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

** **

**WIRELINE OPERATIONS (continued)**

 

**LOCALSERVICE - REGULATION (continued)**

 

•        ALLTEL’s regulatedMissouri wireline subsidiary is subject to alternative regulation electionestablished by statute.  UnderMissouri’s alternative regulation, basic local service and intrastate accessrates are capped at December 13, 2001 levels for a period of twelvemonths.  Rate changes thereafter may bechanged annually based on changes to the telephone service component of theConsumer Price Index.  Prices fornon-basic services may be increased up to eight percent per year after theinitial twelve-month period.  The staffof the Missouri PSC has challenged ALLTEL’s price cap election.  The Missouri PSC is expected to address thestaff’s challenge in 2004.

 

•        ALLTEL’s regulatedNebraska operations are subject to alternative regulation established bystatute.  (Nebraska law exemptstelecommunications companies from rate-of-return regulation.)  In exchanges where competition exists,companies are required to file rate lists, which are effective after 10 daysnotice to the PSC.  In exchanges wherecompetition does not exist, companies file rate lists for all services exceptbasic local with 10 days notice to the PSC and basic local rates may beincreased after 90 days notice to affected subscribers.  Basic local rate increases are reviewed bythe PSC only if rates are increased more than 10 percent in twelve consecutivemonths or in response to a formal complaint signed by two percent of affectedsubscribers.

 

•        ALLTEL’s regulated NorthCarolina subsidiary has operated since 1998 under alternative regulation planapproved by the State Utility Commission. Local rates are adjusted annually by the annual change in GDP-PI lesstwo percent.  Rate changes are effectiveupon 14 days notice.  Under the revisedNorth Carolina statute adopted in 2003, this plan will remain in place unlessALLTEL and the State Utility Commission agree to modify the existing plan.

 

•        ALLTEL’s regulatedPennsylvania subsidiary has operated under the Alternative Form of Regulationand Network Modernization Plan (the “Plan”) established by the PennsylvaniaPublic Utility Commission (“PUC”). Under the Plan, rates of competitive services are not regulated, but thePUC retains authority over the quality of these services.  Rate changes for noncompetitive services arerestricted to the GDP-PI less two percent. Revenue neutral rate rebalancing is also permitted for noncompetitiveservices.  Under the plan, the totalamount of an increase in the basic rates cannot exceed $3.50 annually.  The Pennsylvania statute that authorized thePUC to establish this Plan is presently under review by the state legislaturefor either reenactment or modification.

 

•        ALLTEL’s regulated SouthCarolina operations are subject to alternative regulation established bystatute.  Local rates for residentialand single line business service cannot exceed the statewide average localservice rate for a period of two years. After this two-year period, these rates can be adjusted pursuant to aninflation-based index.  All otherservice rates may be increased subject to a complaint process for abuse ofmarket position.  The PSC has determinedthat any allegations of abuse of market position will be investigated on acase-by-case basis.  Rate increasesbecome effective 14 days after filing.

 

•        The Company has twooperating subsidiaries in Texas.  Thesesubsidiaries are subject to alternative regulation established by statute.  All rates are capped for the duration of theplan.

 

**NETWORKACCESS SERVICES - REGULATION**

 

The Company’s local exchange subsidiaries currently receivecompensation from other telecommunications providers, including long-distancecompanies, for origination and termination of inter-exchange traffic throughaccess charges or toll settlements that are established in accordance withstate and federal laws.

 

On April 27, 2001, the FCC released a notice of proposed rulemakingaddressing inter-carrier compensation issues. Under this rulemaking, the FCC asked for comment on a “bill and keep”compensation method that would overhaul the existing rules governing reciprocalcompensation and access charge regulation. A number of state proceedings have been initiated by various wirelinecompanies to address compensation with respect to traffic that originates orterminates with wireless carriers or CLECs. The outcome of the FCC and state proceedings could change the way ALLTELreceives compensation from, and remits compensation to, other carriers and itsend users.  The FCC is expected to issuea further notice of proposed rulemaking on the subject.  Until this proceeding concludes, ALLTELcannot estimate whether any such changes will occur or, if they do, what theeffect of the changes on its wireline revenues and expenses would be.

 

17

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.  Business**

** **

**WIRELINE OPERATIONS (continued)**

 

**NETWORKACCESS SERVICES - REGULATION (continued)**

 

During the first quarter of 2002, the FCC initiated a rulemaking toevaluate the appropriate framework for broadband access tothe Internetover wireline facilities.  In the Noticeof Proposed Rulemaking, the FCC tentatively concluded that wireline broadbandInternet access should be classified as an “information service” rather than atelecommunications service and, therefore, should not be subject to commoncarrier regulation.  The FCC soughtcomments on their tentative conclusion, but has not reached a final order.  In a related proceeding released March 15,2002, the FCC issued a declaratory ruling concluding that cable modem servicewas an interstate “information service” and not a cable service or atelecommunications service.  The FCCsought comment on whether there are legal or policy reasons why it should reachdifferent conclusions with respect to wireline broadband Internet access andcable modem service, but has not reached a final order.  On October 6, 2003, however, the U.S. Courtof Appeals for the Ninth Circuit rejected the FCC’s classification of cablemodem service as solely an unregulated “information service” finding a portionof the service to be “telecommunications service”.  At this time, ALLTEL cannot estimate what impact, if any, thesebroadband proceedings may have on its ILEC operations.

 

As previously discussed, a number of carriers have begun offering VoIPtelephony services.   Several statepublic utility commissions have initiated proceedings to analyze VoIP and itsregulatory classification.  The U.S.District Court for the District of Minnesota reversed a Minnesota PublicUtility Commission (“Minnesota PUC”) decision and found that VoIP is aninformation service rather than a telecommunications service and is not subjectto state regulation.  The Minnesota PUCis seeking reconsideration of the court decision.  The VoIP provider involved in this Minnesota PUC case has askedthe FCC to also overrule the Minnesota PUC decision.  On February 12, 2004, the FCC granted a Petition for DeclaratoryRuling by Pulver.com in which it determined that Pulver.com’s IP-based, peer-to-peerservice that requires specialized telephone equipment or software for computerswas not a telecommunications service, but rather was an information servicesubject to federal jurisdiction. Although this ruling is not expected to have any immediate impact on theCompany’s telecommunications business, ALLTEL cannot presently estimate thepossible long-term implications that this determination may have on itsoperations.  On February 12, 2004, theFCC also adopted a Notice of Proposed Rulemaking seeking comment on theappropriate regulatory treatment of Internet-enabled communicationsservices.  The proposed rulemaking willaddress differences between Internet-enabled services and traditional telephonyservices, distinguish between the different types of Internet-enabled servicesprovided and determine which regulatory requirements, for example, thoserelating to E-911, disability accessibility, access charges, and universalservice, should be extended to Internet-enabled services.  At this time, ALLTEL cannot determine theresults of these proceedings or evaluate the effects that such decisions willhave upon its operations.

 

On June 14, 2001, the FCC waived certain elements of its Part 69 accesscharge rules to allow non-price cap ILECs to include in their tariff filings anend-user charge to recover their universal service contributions.  (Part 69 established rules for assessingaccess charges for interstate or foreign access services provided bytelecommunications carriers.)  ALLTELILECs tariffed the surcharge in their annual interstate access tariff filingand began assessing the surcharge effective August 1, 2001.

 

On October 11, 2001, the FCC adopted rate-of-return access chargereform and initiated a further round of rulemaking to consider otherrate-of-return carrier issues.  Theorder lowered traffic sensitive switched access rates, increased the subscriberline charge (“SLC”) over time to bring it in line with SLCs adopted for pricecap carriers and phased out carrier common line charges in favor of a newportable “Interstate Common Line Support” universal service mechanism, andretained the authorized 11.25 percent rate of return.  The residential and single-line business SLC cap phase-in beganon January 1, 2002. The final scheduled increase occurred on July 1, 2003.  These changes did not have a materialadverse effect on ALLTEL’s consolidated financial results during 2003.

 

To date, the Company’s local exchange subsidiaries, except for theNebraska operations and the recently acquired properties in Kentucky, haveelected to remain under rate base rate-of-return regulation with respect tointerstate services.  For companiesremaining under rate-of-return regulation, the FCC authorizes a rate-of-returnthat local exchange companies may earn on interstate services theyprovide.  The currently prescribed rateof return is 11.25 percent.  TheNebraska properties and the Kentucky properties acquired from Verizon in 2002operate under interstate price cap regulation pursuant to waivers granted bythe FCC.  On April 17, 2002, the FCCextended ALLTEL’s waiver of the “all-or-nothing” rule with respect to theNebraska properties, and in the same order, the FCC granted a waiver of the“all-or-nothing” rule with respect to the acquired Kentucky properties.  The waivers permit price cap regulation for thesetwo properties while retaining rate-of-return regulation for the Company’sother ILEC properties.  Both waiverswill remain in effect until the FCC completes its pending review to eithermodify or eliminate the “all-or-nothing” rule. The “all-or-nothing” rule was originally intended to ensure that allstudy areas of a carrier and its affiliates are subject to a single form ofpricing regulation.

 

18

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

 

**WIRELINE OPERATIONS (continued)**

 

**TECHNOLOGY**

 

The Company believes the local exchange business is in transition fromcircuit switched technology, which forms the basis of the conventional landlinetelephone network, to digital packet-switched networks, which form the basis ofthe Internet protocols (“IP”) used over the Internet, as evidenced by themarketplace’s request for broadband service. ALLTEL has met this challenge with a strategy of providing data serviceto both business and residential customers through deployment of an IP packetdata network.

 

The backbone fiber network provides the basis for the transport of datatraffic.  ALLTEL has deployed almost14,000 sheath miles of fiber optic cable across its service areas and continuesto increase the capacity of its networks utilizing dense wave divisionmultiplexing in both the core and metropolitan rings that serve both ALLTEL’swireline and wireless markets.  Althoughthe Company believes that significant capital expenditures will be required to continueincreasing the scope of its data and fiber optic networks, ALLTEL believes itsnetworks are well positioned to meet the increasing demand for data services.

 

**CLECOPERATIONS**

 

ALLTEL has authority to provide competitive local exchange services in17 states.  As of December 31, 2003, theCompany provided these services in six markets on both a facilities-based andresale basis, and, where necessary, has negotiated interconnection agreementswith the appropriate incumbent local exchange carriers.  ALLTEL’s strategy is to provide localservice in combination with other services provided by subsidiaries of theCompany, including long-distance, wireless and Internet services.  ALLTEL’s primary focus for marketing andselling its CLEC services is directed toward the business customer segmentthrough the offering of competitively priced and reliable services.  The Company continues to evaluate theprofitability of its existing CLEC operations in all markets.

 

On April 26, 2001 the FCC established a benchmark to govern the accesscharges imposed by CLECs.  The FCCestablished a three-year transition process to phase down access prices chargedby CLECs to rates comparable to their ILEC competitors.  Specifically, beginning on June 20, 2001,CLEC access charges were capped at $.025 per minute, effective June 20, 2002,the cap dropped to $.018 per minute, and effective June 20, 2003, the capdropped to $.012 per minute.  Followingthis final step-down in rates, CLEC access charges will be capped at the ratecharged by the ILEC competitor operating in the CLEC’s market.  The FCC also adopted an exception that wouldpermit rural CLECs competing with non-rural ILECs to charge access rates abovethose charged by the ILEC in certain circumstances.  The Company is currently evaluating the effects on its CLECoperations of the FCC’s Triennial Review and inter-carrier compensationproceedings discussed above.

 

**COMMUNICATIONS SUPPORT SERVICES**

 

Communications support services consist of the Company’s long-distanceand network management services, product distribution, directory publishing andtelecommunications information services operations.  Revenues and sales from communications support services comprised12 percent of ALLTEL’s total operating revenues from business segments in 2003,compared to 13 percent in 2002 and 14 percent in 2001.

 

**LONG-DISTANCEAND NETWORK MANAGEMENT OPERATIONS**

 

Long-distance telecommunications services are provided on both afacilities-based and resale basis by ALLTEL subsidiaries.  During 2003, approximately 70 percent ofALLTEL’s long-distance traffic was transported on its own fiber opticnetworks.  ALLTEL provides long-distanceservice in all of the states in which the Company provides local exchange service.  In addition, ALLTEL offers long-distanceservice outside its ILEC service areas. As of December 31, 2003, ALLTEL provided long-distance service to nearly1.7 million customers.  Thelong-distance marketplace is extremely competitive and continues to receiverelaxed regulation from both the FCC and state regulatory commissions.  To meet the competitive demands of thelong-distance industry, ALLTEL has created several business and residentialservice offerings to attract potential customers, such as volume pricediscounts, calling cards and simplified one-rate plans.  As a long-distance service provider,ALLTEL’s intrastate long-distance business is subject to limited regulation bystate regulatory commissions, and its interstate business is subject to limitedregulation by the FCC.  State regulatorycommissions currently require long-distance service providers to obtain acertificate of operating authority, and the majority of states also requirelong-distance service providers to file tariffs.

 

19

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

 

**COMMUNICATIONS SUPPORT SERVICES (continued)**

 

**LONG-DISTANCEAND NETWORK MANAGEMENT OPERATIONS (continued)**

 

Network management services are currently marketed to businesscustomers in select areas.  Theseservices are ancillary service offerings and are not significant components ofALLTEL’s communications operations.

 

**PRODUCTDISTRIBUTION**

 

The Company’s product distribution subsidiary, ALLTEL CommunicationsProducts, Inc. (“Communications Products”), operates four warehouses and fourcounter-sales showrooms across the United States.  Communications Products is a distributor of telecommunicationsequipment and materials.  CommunicationsProducts supplies equipment to affiliated and non-affiliated communicationscompanies, business systems suppliers, railroads, governments, and retail andindustrial companies.  CommunicationsProducts offers a large variety of telecommunications-related products forsale.  Certain of these products areinventoried including single and multi-line telephone sets, wireless handsets,local area networks, switching equipment modules, interior cable, pole linehardware, and various other telecommunications supply items.  The Company has not encountered any materialshortages or delays in delivery of products from their suppliers.

 

Communications Products experiences substantial competition throughoutits sales territories from other distribution companies and from direct salesby manufacturers.  Competition is basedprimarily on quality, product availability, service, price, and technicalassistance.  Since other competitorsoffer similar products, Communications Products also offers other servicesincluding expert technical assistance, maintaining wide-ranging inventories in strategicallylocated warehouses and counter-sales showrooms to facilitate single suppliersourcing and “just-in-time” delivery, maintaining a full range of productlines, and by providing staging, assembly and other services.  The Company periodically evaluates itsproduct and service offerings to meet customer expectations and positionCommunications Products in the market as a quality customer-focuseddistributor.

 

**DIRECTORYPUBLISHING**

 

ALLTEL Publishing Corporation (“ALLTEL Publishing”) coordinates advertising,sales, printing, and distribution for 364 telephone directory contracts in 37states.  Beginning in 2003, for 78directory contracts, ALLTEL Publishing provided all directory publishingservices, except printing.  The servicesprovided by ALLTEL Publishing included directory yellow page advertising sales,contract management, production, billing, and marketing.  For the remaining 286 contracts published in2003, these services were provided by Verizon Directories Distribution Corp.(“Verizon Directories”) under terms of an agreement that expired on October 15,2003.  ALLTEL Publishing will provideall directory publishing services for the 396 directories the Company expectsto publish in 2004.  Either VerizonDirectories or Quebecor World Printers will perform printing services for thedirectories published in 2004 under two separate service agreements that expirein 2007 and 2008, respectively.

 

**TELECOMMUNICATIONSINFORMATION SERVICES**

 

The Company’s telecommunications information services operations (the“telecom division”) are primarily engaged in the development and marketing ofbilling services and customer care software, including its Virtuoso II billingand customer care product, to local telephone, wireless and PCS companies.  In addition, the telecom division providesdata processing and outsourcing services to both wireline and wirelesstelecommunications service providers. Information processing contracts are generally for a multi-year period.  The telecom division’s primary markets forits telecommunications products and services consist of telephone, cellular andPCS companies in the United States and Canada which serve more than 10,000customers, or a market consisting of approximately 200 telecommunicationscompanies.  As previously discussed, inDecember 2003, the Company sold to Convergys certain assets and relatedliabilities, including selected customer contracts and capitalized softwaredevelopment costs.  The sold customercontracts represented approximately 48 percent of the total revenues and salesreported by the telecommunications information services operations in 2003.

 

The telecom division faces strong competition from internal informationtechnology departments, as well as from other information services companiesthat provide information processing and management services to thetelecommunications industry.  TheCompany competes in each of its markets by providing a high level of serviceand support.

 

20

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 1.  Business**

 

**INVESTMENTS**

 

On April 1, 2003, in connection with the sale of the Company’sfinancial services division previously discussed, ALLTEL received shares of Fidelity National common stock. As of February 24, 2004, ALLTEL owned approximately 11.2 million shares ofFidelity National common stock, representing anapproximate seven percent interest in Fidelity National.  The shares may not be disposed of by ALLTEL,subject to certain conditions specified in the sale agreement, prior to April1, 2004.

 

**Item 2.  Properties**

** **

The Company’s properties do not provide a basis for description bycharacter or location of principal units. All of the Company’s property is considered to be in good workingcondition and suitable for its intended purposes.  A summary of the Company’s investment in property, plant andequipment segregated between the Company’s regulated wireline operations andall other non-regulated business operations is presented below.

 

**WIRELINEPROPERTY**

 

The Company’s wireline subsidiaries own property in their respectiveoperating territories which consists primarily of land and buildings, centraloffice equipment, telephone lines, and related equipment.  The telephone lines include aerial andunderground cable, conduit, poles and wires. Central office equipment includes digital switches and peripheral equipment.  The gross investment by category in wirelineproperty as of December 31, 2003, was as follows:

 

|                                     |   | (Millions) |    |
|------------------------------------------|--------|------------|---------|
| Land                                     |   | $          | 18.7    |   |
| Buildings and  leasehold improvements    |   | 294.6      |    |
| Central office  equipment                |   | 2,766.8    |    |
| Outside plant                            |   | 3,294.1    |    |
| Furniture,  fixtures, vehicles and other |   | 172.4      |    |
| Total                                    |   | $          | 6,546.6 |   |

 

Certain properties of the wireline subsidiaries are pledged ascollateral on $10.2 million of long-term debt.

 

**OTHERPROPERTY**

 

Other properties in service consist primarily of property, plant andequipment used in providing wireless communications services and informationprocessing.  Wireless plant consists ofcell site towers, switching, controllers and other radio frequency equipment.  Non-regulated wireline plant and equipmentconsists of aerial and underground cable, switches, and other peripheralequipment used in the provisioning of Internet, long-distance and competitivelocal access services.  Informationprocessing plant consists of data processing equipment, purchased software andcapitalized internal use software costs. Properties of the product distribution and directory publishingoperations mainly consist of office and warehouse facilities to support thebusiness units in the distribution of telecommunications products and publicationof telephone directories.  The totalinvestment by category for the non-wireline operations of the Company as ofDecember 31, 2003, was as follows:

 

|                                             |   | (Millions) |    |
|--------------------------------------------------|--------|------------|---------|
| Land                                             |   | $          | 240.5   |   |
| Buildings and  leasehold improvements            |   | 758.4      |    |
| Wireless plant  and equipment                    |   | 5,255.8    |    |
| Data processing  equipment and computer software |   | 946.7      |    |
| Non-regulated  wireline plant and equipment      |   | 453.9      |    |
| Furniture,  fixtures, vehicles and other         |   | 309.8      |    |
| Total                                            |   | $          | 7,965.1 |   |

 

21

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**ALLTEL Corporation**

**Form 10-K, Part I**

** **

**Item 3.  Legal Proceedings**

 

On October 3, 2002, the Environmental Protection Agency (“EPA”) servedthe Company with Notices of Violation of the federal Clean Air Act, the Clean Water Act and the EmergencyPlanning and Community Right to Know Act. These notices resulted from an industry-wide investigation intoenvironmental practices conducted by the EPA during 1998 to 2000 and allegedviolations by the Company, dating from 1997, regarding filing andrecord-keeping requirements for fuel storage tanks, as well as generators andbatteries used to supply emergency power at certain ALLTEL facilities.  On October 2, 2003, the Company and the EPAentered into a consent decree that required the Company to pay penalties of$1.06 million, to implement a centralized environmental management system andto verify compliance at its facilities. On December 18, 2003, ALLTEL remitted payment of the penalties requiredunder the consent decree.

 

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

 

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

 

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

 

No matters were submitted to the security holders for a vote during thefourth quarter of 2003.

 

**Form 10-K, Part II**

 

**Item 5.  Market for the Registrant’s Common Equityand Related Stockholder Matters**

 

The outstanding shares of ALLTEL’s Common Stock are listed and tradedon the New York Stock Exchange and the Pacific Exchange and trade under thesymbol AT.  The following table reflectsthe range of high, low and closing prices of ALLTEL’s Common Stock as reportedby Dow Jones & Company, Inc. for each quarter in 2003 and 2002:

 

| Year   |   | Qtr. |   | High   |   | Low    |   | Close  |   | Dividend  Declared |   |
|--------|--------|------|--------|--------|--------|--------|--------|--------|--------|--------------------|--------|
| 2003   |   | 4th  |   |   | $49.98 |   |   | $43.75 |   |               | $46.58 |   |   | $.37 |   |
|   |   | 3rd  |   |   | $50.31 |   |   | $44.51 |   |               | $46.34 |   |   | $.35 |   |
|   |   | 2nd  |   |   | $49.68 |   |   | $43.62 |   |               | $48.22 |   |   | $.35 |   |
|   |   | 1st  |   |   | $56.22 |   |   | $40.68 |   |               | $44.76 |   |   | $.35 |   |
| 2002   |   | 4th  |   |   | $56.28 |   |   | $39.19 |   |               | $51.00 |   |   | $.35 |   |
|   |   | 3rd  |   |   | $47.99 |   |   | $35.33 |   |               | $40.13 |   |   | $.34 |   |
|   |   | 2nd  |   |   | $56.35 |   |   | $43.55 |   |               | $47.00 |   |   | $.34 |   |
|   |   | 1st  |   |   | $63.25 |   |   | $52.15 |   |               | $55.55 |   |   | $.34 |   |

 

As of February 24, 2004, the approximate number of stockholders ofcommon stock including an estimate for those holding shares in brokers’accounts was 251,781.

 

**Item 6.  Selected Financial Data**

 

For information pertaining to Selected Financial Data of ALLTELCorporation, refer to pages F-34 and F-35 of the Financial Supplement, which isincorporated by reference herein.

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

** **

For information pertaining to Management’s Discussion and Analysis ofFinancial Condition and Results of Operations of ALLTEL Corporation, refer topages F-2 to F-33 of the Financial Supplement, which is incorporated byreference herein.

 

22

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**ALLTEL Corporation**

**Form 10-K, Part II**

** **

**Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

For information pertaining to the Company’s market risk disclosures,refer to page F-31 of the Financial Supplement, which is incorporated byreference herein.

 

**Item 8.  Financial Statements and SupplementaryData**

** **

For information pertaining to Financial Statements and SupplementaryData of ALLTEL Corporation, refer to pages F-36 to F-72 of the FinancialSupplement, which is incorporated by reference herein.

 

**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

On May 7, 2002, the Audit Committee of the Board of Directors of ALLTELauthorized (1) the engagement of PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”)as the independent auditors for ALLTEL for the calendar year 2002 and (2) thedismissal of ALLTEL’s existing independent auditors, Arthur Andersen LLP(“Andersen”).

 

During the two fiscal years ended December 31, 2001, and the subsequentinterim period through May 7, 2002, the date of the dismissal of Andersen, (i)there were no disagreements with Andersen on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedures, which disagreements, if not resolved to the satisfaction ofAndersen, would have caused Andersen to make reference in connection with itsreport to the subject matter of the disagreement and (ii) Andersen has notadvised ALLTEL of any reportable events as defined in paragraphs (A) through(D) of Regulation S-K Item 304 (a)(1)(v).

 

The accountant’s report of Andersen on the consolidated financialstatements of ALLTEL and its subsidiaries as of and for the years endedDecember 31, 2001 and 2000 did not contain any adverse opinion or disclaimer ofopinion and was not qualified or modified as to uncertainty, audit scope, oraccounting principles.  A letter fromAndersen was filed as Exhibit 16.1 to ALLTEL’s Current Report on Form 8-K datedMay 7, 2002.

 

During the two fiscal years ended December 31, 2001, and the subsequentinterim period through May 7, 2002, PricewaterhouseCoopers has not beenconsulted by ALLTEL, or by anyone on ALLTEL’s behalf, regarding either theapplication of accounting principles to a specified transaction, eithercompleted or proposed, or the type of audit opinion that might be rendered onthe financial statements of ALLTEL.

 

Since the date of their appointment, there were: (i) no disagreementswith PricewaterhouseCoopers on any matter of accounting principle or practice,financial statement disclosure, or auditing scope or procedure which, if notresolved to PricewaterhouseCoopers’ satisfaction, would have caused them tomake reference to the subject matter in connection with their report onALLTEL’s consolidated financial statements for the fiscal years ended December31, 2003 and 2002; and (ii) there were no reportable events as defined in Item304(a)(1)(v) of Regulation S-K.

 

**Item9(A).  Controls andProcedures**

** **

(a)     Evaluation of disclosurecontrols and procedures.

** **

The term “disclosure controls andprocedures” (defined in SEC Rule 13a-14(c)) refers to the controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by a company in the reports that it files under the SecuritiesExchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarizedand reported within required time periods. ALLTEL’s Chief Executive Officer and Chief Financial Officer have evaluatedthe effectiveness of our disclosure controls and procedures as December 31,2003, and they have concluded that, as of December 31, 2003, such controls andprocedures were effective.

** **

(b)     Changes in internal controls.

** **

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

 

23

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**ALLTEL Corporation**

**Form 10-K, Part III**

** **

**Item 10.  Directors and Executive Officers of theRegistrant**

** **

For information pertaining to Directors of ALLTEL Corporation refer to“Election of Directors” in ALLTEL’s Proxy Statement for its 2004 Annual Meetingof Stockholders, which is incorporated herein by reference.  For information pertaining to the auditcommittee financial expert refer to “Board and Board Committee Matters” inALLTEL’s Proxy Statement for its 2004 Annual Meeting of Stockholders, which isincorporated herein by reference. Executive officers of the Company are as follows:

 

| Name                |   | Age |   | Position                                                                    |
|---------------------|--------|-----|--------|-----------------------------------------------------------------------------|
| Scott T. Ford       |   | 41  |   | President and Chief Executive Officer                                       |
| Kevin L. Beebe      |   | 44  |   | Group President – Operations                                           |
| Jeffrey H. Fox      |   | 41  |   | Group President – Shared Services                                      |
| Francis X. Frantz   |   | 50  |   | Executive Vice  President- External Affairs,  General Counsel and Secretary |
| Jeffery R. Gardner  |   | 44  |   | Executive Vice President – Chief Financial Officer                     |
| Michael T. Flynn    |   | 55  |   | Assistant to the Chief Executive Officer                                    |
| Keith A. Kostuch    |   | 41  |   | Senior Vice President – Strategic Planning                             |
| C.J. Duvall Jr.     |   | 45  |   | Senior Vice President – Human Resources                                |
| Sharilyn S. Gasaway |   | 35  |   | Controller                                                                  |
| Scott H. Settelmyer |   | 35  |   | Treasurer                                                                   |

 

There are no arrangements between any officer and any other personpursuant to which he was selected as an officer.

Scott T. Ford is the son of Joe T. Ford, Chairman of ALLTEL’s Board ofDirectors.

 

Except for Keith A. Kostuch and Sharilyn S. Gasaway, each of theofficers named above has been employed by ALLTEL or a subsidiary for the lastfive years.  Prior to joining ALLTEL inOctober 1999, Mr. Kostuch served as Vice President and Director with The BostonConsulting Group, Inc. (“BCG”).  In hisrole with BCG, Mr. Kostuch specialized in strategic and corporate development,including mergers and acquisitions. Prior to joining ALLTEL in April 1999, Ms. Gasaway was a manager withthe accounting firm of Arthur Andersen LLP in Little Rock, Arkansas.

 

ALLTEL has a code of ethics that applies to all employees and membersof the Board of Directors.  ALLTEL’scode of ethics, referred to as the “Ethics in the Workplace” guidelines, isposted on the Investor Relations page of the Company’s web site(www.alltel.com) under “corporate governance”. ALLTEL will disclose in the corporate governance section of the InvestorRelations page on its web site amendments and waivers with respect to the codeof ethics that would otherwise be required to be disclosed under Item 10 ofForm 8-K.  ALLTEL will provide to anystockholder a copy of the foregoing information, without charge, upon writtenrequest to Vice President-Investor Relations, ALLTEL Corporate Services, Inc.,One Allied Drive, Little Rock, Arkansas 72202.

 

**Item 11.  Executive Compensation**

** **

For information pertaining to Executive Compensation, refer to“Management Compensation” in ALLTEL’s Proxy Statement for its 2004 AnnualMeeting of Stockholders, which is incorporated herein by reference.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

For information pertaining to beneficial ownership of ALLTELsecurities, refer to “Security Ownership of Certain Beneficial Owners andManagement” in ALLTEL’s Proxy Statement for its 2004 Annual Meeting ofStockholders, which is incorporated herein by reference.

 

24

----

 

**ALLTEL Corporation**

**Form 10-K, Part III**

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

Set forth below is additional information as of December 31, 2003,about shares of the Company’s common stock that may be issued upon the exerciseof options under the Company’s existing equity compensation plans, dividedbetween plans approved by ALLTEL’s stockholders and plans not submitted to thestockholders for approval.

 

| (Thousands, except per share amounts)                       |   | (a)                                                                           |   | (b)                                                      |   | (c)                                                                                                                                    |     |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                        |   | Number of securities  to be issued upon  exercise of  outstanding options (2) |   | Weighted-average  exercise price of  outstanding options |   | Number of securities  available for future   issuance under equity  compensation plans,  excluding securities  reflected in column (a) |     |
| Equity compensation  plans approved by security holders (1) |   | 15,420.3                                                                      |   |                                                     | $56.09 |                                                                                                                                   | 17,607.2 |   |
| Equity  compensation plans not approved by security holders |   | —                                                                        |   | —                                                   |   | —                                                                                                                                 |     |
| Totals                                                      |   | 15,420.3                                                                      |   |                                                     | $56.09 |                                                                                                                                   | 17,607.2 |   |

 

(1)           Includes the ALLTELCorporation 1991 Stock Option Plan, ALLTEL Corporation 1994 Stock Option Planfor Employees, ALLTEL Corporation 1994 Stock Option Plan for NonemployeeDirectors, ALLTEL Corporation 1998 Equity Incentive Plan, and the ALLTELCorporation 2001 Equity Incentive Plan.

 

(2)           Does not include491,950 stock options with a weighted-average exercise price of $31.48, whichwere assumed by ALLTEL in connection with the Company’s mergers with 360°Communications Company in 1998 and Aliant Communications Inc. in 1999.  These options were issued under the Amendedand Restated 360° Communications Company 1996 Equity Incentive Plan, 360°Communications Company 1996 Replacement Stock Option Plan, 360° CommunicationsCompany Amended and Restated Director Equity and Deferred Compensation Plan andthe Lincoln Telecommunications Company 1989 Stock and Incentive StockPlan.  These plans have been frozensince the merger dates, with respect to the granting of any additional options.

 

**Item 13.  Certain Relationships and RelatedTransactions**

** **

For information pertaining to Certain Relationships and RelatedTransactions, refer to “Certain Transactions” in ALLTEL’s Proxy Statement forits 2004 Annual Meeting of Stockholders, which is incorporated herein byreference.

** **

**Item 14.  Principal Accountant Fees and Services**

For information pertaining to fees paid to the Company’s principalaccountant and the Audit Committee’s pre-approval policy and procedures withrespect to such fees, refer to “Audit and Non-Audit Fees” in ALLTEL’s ProxyStatement for its 2004 Annual Meeting of Stockholders, which is incorporatedherein by reference.

 

25

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**ALLTEL Corporation**

**Form 10-K, Part IV**

 

**Item 15.  Exhibits, Financial Statement Schedulesand Reports on Form 8-K**

 

(a)           Thefollowing documents are filed as a part of this report:

 

| 1.     |   | Financial Statements:                                                                                                                                                                                            |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   | The following Consolidated Financial Statements of  ALLTEL Corporation and subsidiaries for the year ended December 31, 2003,  included in the Financial Supplement, which is incorporated by reference  herein: |   |   |
|   |   |                                                                                                                                                                                                             |   |   |
|   |   | Report of Independent  Auditors                                                                                                                                                                                  |   |   |
|   |   | Consolidated Statements  of Income -  for the years ended December 31, 2003, 2002 and 2001                                                                                                                       |   |   |
|   |   | Consolidated Balance Sheets  – as of December 31, 2003 and 2002                                                                                                                                             |   |   |
|   |   | Consolidated Statements  of Cash Flows -  for the years ended December 31, 2003, 2002 and 2001                                                                                                                   |   |   |
|   |   | Consolidated  Statements of Shareholders’ Equity -  for the years ended December 31, 2003, 2002 and 2001                                                                                                    |   |   |
|   |   | Notes to  Consolidated Financial Statements                                                                                                                                                                      |   |   |
|   |   |                                                                                                                                                                                                             |   |   |
|   |   |                                                                                                                                                                                                             |   |   |
| 2.     |   | Financial Statement Schedules:                                                                                                                                                                                   |   |   |
|   |   | Report of Independent Auditors                                                                                                                                                                                   |   |   |
|   |   | Schedule II.  Valuation and Qualifying Accounts                                                                                                                                                             |   |   |
|   |   |                                                                                                                                                                                                             |   |   |
| 3.     |   | Exhibits:                                                                                                                                                                                                        |   |   |
|   |   | Exhibit Index                                                                                                                                                                                                    |   |   |

 

(b)           Reportson Form 8-K:

 

|   |   | Current Report on Form 8-K dated October 23, 2003,  reporting under Item 12 “Disclosure of Results of Operations and Financial  Condition”, the Company’s Press Release announcing ALLTEL’s third quarter  2003 unaudited consolidated results of operations.              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                           |
|   |   | No other reports on Form 8-K were filed during the  fourth quarter of 2003.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                           |
|   |   | Current Report on Form 8-K dated January 23, 2004,  reporting under Item 12, “Disclosure of Results of Operations and Financial  Condition”, the Company’s Press Release announcing ALLTEL’s fourth quarter  and annual 2003 unaudited consolidated results of operations. |

 

Separate condensed financial statements of ALLTEL Corporation have beenomitted since the Company meets the tests set forth in Regulation S-X Rule 4-08(e)(3).  All other schedules are omitted since therequired information is not present or is not present in amounts sufficient torequire submission of the schedule, or because the information required isincluded in the consolidated financial statements and notes thereto.

 

26

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

| ALLTEL Corporation |                                                 |
|--------------------|------------------------------------------------------|
| Registrant         |                                                 |
|               |                                                 |
| By                 | /s/ Scott T. Ford                                    |   | Date:   March 5, 2004 |
|               | Scott T. Ford, President and Chief Executive Officer |   |
|                    |                                                      |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

| By                                                               | /s/ Jeffery R Gardner                                                   |                                      | Date:   March 5, 2004 |
|------------------------------------------------------------------|-------------------------------------------------------------------------|-------------------------------------------|--------------------------------------|
|                                                             | Jeffery R. Gardner, Executive Vice President -  Chief Financial Officer |                                      |
|                                                             | (Principal Financial Officer)                                           |                                      |
|                                                             |                                                                    |
| *Scott T. Ford, President, Chief Executive Officer  and Director |                                                                    |
|                                                             | By                                                                      | /s/ Jeffery R. Gardner                    |                                 |
| *Sharilyn S. Gasaway, Controller                                 |                                                                    | * (Jeffery R. Gardner,  Attorney-in-fact) |                                 |
|                                                             | (Principal Accounting Officer)                                          | Date:  March  5, 2004                |
|                                                             |                                                                    |
| *Joe T. Ford, Chairman and Director                              |                                                                    |
|                                                             |                                                                    |
| *John R. Belk, Director                                          |                                                                    |
|                                                             |                                                                    |
| *Dennis E. Foster, Director                                      |                                                                    |
|                                                             |                                                                    |
| *Lawrence L. Gellerstedt III, Director                           |                                                                    |
|                                                             |                                                                    |
| *Charles H. Goodman, Director                                    |                                                                    |
|                                                             |                                                                    |
| *Emon A. Mahony, Jr., Director                                   |                                                                    |
|                                                             |                                                                    |
| *John P. McConnell, Director                                     |                                                                    |
|                                                             |                                                                    |
| *Josie C. Natori, Director                                       |                                                                    |
|                                                             |                                                                    |
| *Gregory W. Penske, Director                                     |                                                                    |
|                                                             |                                                                    |
| *Frank E. Reed, Director                                         |                                                                    |
|                                                             |                                                                    |
| *Fred W. Smith, Director                                         |                                                                    |
|                                                             |                                                                    |
| *Warren A. Stephens, Director                                    |                                                                    |
|                                                             |                                                                    |
| *Ronald Townsend, Director                                       |                                                                    |
|                                                                  |                                                                         |                                           |                                      |  |  |  |

 

27

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**Report of Independent****Auditorson**

**FinancialStatement Schedules**

 

To the Shareholders ofALLTEL Corporation:

 

Ouraudits of the consolidated financial statements referred to in our report datedJanuary 21, 2004 appearing in this 2003 Annual Report on Form 10-K of ALLTELCorporation (the “Company”) also included an audit of the financial statementschedule listed in Item 15(a)(2) of this Form 10-K.  In our opinion, this financial statement schedule presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.

 

 

| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
|                            |
|                            |
| Little Rock, Arkansas,          |
| January 21, 2004                |

 

28

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ALLTEL CORPORATION

SCHEDULE II - VALUATION ANDQUALIFYING ACCOUNTS

(Dollars in Millions)

 

| Column A                                                               |   | Column B                       |      | Column C                     |   | Column D                  |   | Column E           |   |
|------------------------------------------------------------------------|--------|--------------------------------|-----------|------------------------------|--------|---------------------------|--------|--------------------|--------|
|                                                                   |   |                           |      | Additions                    |   |                      |   |               |   |
| Description                                                            |   | Balance at  Beginningof Period |      | Charged to  Cost andExpenses |   | Charged  to OtherAccounts |   | DeductionsDescribe |   | Balance at  End ofPeriod |   |
| Allowance for  doubtful accounts,  customers and other:                |   |                           |      |                         |   |                      |   |               |   |   |   |
| December 31,  2003                                                     |   | $                              | 68.4      |                         | $      | 184.7                     |   | $                  | — |   | $ | 206.8 | (A) | $ | 46.3 |   |
| December 31,  2002                                                     |   | $                              | 49.7      |                         | $      | 265.9                     |   | $                  | — |   | $ | 247.2 | (A) | $ | 68.4 |   |
| December 31,  2001                                                     |   | $                              | 50.1      |                         | $      | 142.8                     |   | $                  | — |   | $ | 143.2 | (A) | $ | 49.7 |   |
|                                                                   |   |                           |      |                         |   |                      |   |               |   |   |   |
| Valuation  allowance for deferred tax  assets:                         |   |                           |      |                         |   |                      |   |               |   |   |   |
| For the years  ended:                                                  |   |                           |      |                         |   |                      |   |               |   |   |   |
| December 31,  2003                                                     |   | $                              |  6.0 |                         | $      |   7.5                |   | $                  | — |   | $ | — |   | $ | 13.5 |   |
| December 31,  2002                                                     |   | $                              |  3.9 |                         | $      |   2.1                |   | $                  | — |   | $ | — |   | $ |  6.0 |   |
| December 31,  2001                                                     |   | $                              |  3.4 |                         | $      |   0.5                |   | $                  | — |   | $ | — |   | $ |  3.9 |   |
|                                                                   |   |                           |      |                         |   |                      |   |               |   |   |   |
| Accrued  liabilities related to integration expenses and other charges |   |                           |      |                         |   |                      |   |               |   |   |   |
| For the years  ended:                                                  |   |                           |      |                         |   |                      |   |               |   |   |   |
| December 31,  2003                                                     |   | $                              | 13.1      |                         | $      |  19.0                | (B)    | $                  | — |   | $ |  28.3 | (C) | $ |  3.8 |   |
| December 31,  2002                                                     |   | $                              | 13.8      |                         | $      |  69.9                | (D)    | $                  | — |   | $ |  70.6 | (E) | $ | 13.1 |   |
| December 31,  2001                                                     |   | $                              | 13.8      |                         | $      |  76.3                | (F)    | $                  | — |   | $ |  76.3 | (G) | $ | 13.8 |   |

 

Notes:

(A)  Accounts charged off net ofrecoveries of amounts previously written off.

(B)   During 2003, the Company recordedintegration expenses and other charges of $8.5 million in connection with therestructuring of the Company’s call center operations.  The Company also recorded a $2.7 millionreduction in the liabilities associated with various restructuring activitiesinitiated prior to 2003, and ALLTEL also wrote off $13.2 million of capitalizedsoftware development costs that had no alternative future use or functionality.

(C)   Includes cash outlays of $13.1million for expenses paid in 2003 and non-cash charges of $15.2 million,primarily consisting of the write-off of capitalized computer softwaredevelopment costs discussed in Note (B).

(D)  These charges included awrite-down in the carrying value of certain cell site equipment of $7.1 millionand integration expenses totaling $28.8 million incurred in connection with theacquisition of wireline properties in Kentucky and wireless properties fromCenturyTel.  The integration expensesincluded branding and signage costs and costs to convert the acquiredproperties to the Company’s internal billing and operations supportsystems.  In addition, the Company alsorecorded charges of $34.0 million in connection with the restructuring of theCompany’s CLEC, call center, retail and product distribution operations.

(E)   Includes cash outlays of $58.0million for expenses paid in 2002 and non-cash charges of $12.6 million,primarily consisting of the write-downs in the carrying value of capitalizedcomputer software costs and cell site equipment discussed in Note (D).

(F)   During 2001, the Companyrecorded integration expenses and other charges of $61.2 million incurred inconnection with the restructuring of the Company’s regional communications,product distribution and corporate operations. The Company also recorded write-downs in the carrying value of certaincell site equipment totaling $15.1 million.

(G)   Includes cash outlays of $38.6million for expenses paid in 2001 and non-cash charges of $37.7 millionconsisting of the write-down in the carrying value of cell site equipmentdiscussed in Note (F) and $21.5 million in additional pension andpostretirement benefit costs related to a special early retirement programoffered to employees meeting certain age and service requirements and $1.1million in compensation expense related to the accelerated vesting of certainstock options.

 

See Note 8 on pages F-60 to F-62 of the Financial Supplement, which isincorporated herein by reference, for additional information regarding themerger and integration expenses and other charges recorded by the Company in2003, 2002 and 2001.

 

29

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EXHIBIT INDEX

 

| Number and Name |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (3)(a)(1)       |   | Amended and Restated Certificate of Incorporation of  ALLTEL Corporation (incorporated herein by reference to Exhibit B to Proxy  Statement, dated March 9, l990).                                                                                                                                                                                                     |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (a)(2)          |   | Amendment No. 1 to Amended and Restated Certificate  of Incorporation of ALLTEL Corporation (incorporated herein by reference to  Annex F of ALLTEL Corporation Registration Statement (File No. 333-51915) on  Form S-4 dated May 6, 1998).                                                                                                                           |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (b)             |   | Bylaws of ALLTEL Corporation (As amended as of  January 29, 1998) (incorporated herein by reference to Exhibit 3(b) to Form  10-K for the fiscal year ended December 31, 1997).                                                                                                                                                                                        |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (4)(a)          |   | Rights Agreement dated as of January 30, l997,  between ALLTEL Corporation and First Union National Bank of North Carolina  (incorporated herein by reference to Form 8-K dated February 3, 1997, filed  with the Commission on February 4, 1997).                                                                                                                     |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (b)             |   | The Company agrees to provide to the Commission,  upon request, copies of any agreement defining rights of long-term debt  holders.                                                                                                                                                                                                                                    |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)             |   | Indenture dated as of March 7, 1996, between 360°  Communications Company and Citibank, N.A., as Trustee (the “1996 360°  Indenture”) (incorporated herein by reference to Exhibit 4.2 to 360°  Communications Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1995).                                       |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (d)             |   | Form of 7 1/2% Senior Note Due 2006 issued under the  1996 360° Indenture  (incorporated herein by reference to Exhibit 4.1 to 360°  Communications Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1995).                                                                                                                 |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (e)             |   | First Supplemental Indenture dated as of February 1,  1999, among 360° Communications  Company, ALLTEL Corporation and Citibank, N.A. as trustee (incorporated  herein by reference to Exhibit 4(e) to Form 10-Q for the period ended March  31, 2003).                                                                                                           |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (f)             |   | Indenture dated as of March 1, 1997, between 360°  Communications Company and Citibank, N.A., as Trustee (the “1997 360°  Indenture”) (incorporated herein by reference to Exhibit 4.6 to 360°  Communications Company’s Current Report on Form 8-K dated March 17, 1997).                                                               |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (g)             |   | Form of 7.60% Senior Note Due 2009 issued under the  1997 360° Indenture  (incorporated herein by reference to Exhibit 4.7 to 360°  Communications Company’s Current Report on Form 8-K dated March 17, 1997).                                                                                                                                          |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (h)             |   | Form of 6.65% Senior Note Due 2008 issued under the  1997 360° Indenture  (incorporated herein by reference to Exhibit 4.8 to 360°  Communications Company’s Current Report on Form 8-K dated January 13, 1998).                                                                                                                                        |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (i)             |   | First Supplemental Indenture dated as of February 1,  1999, among 360° Communications  Company, ALLTEL Corporation and Citibank, N.A. as trustee (incorporated  herein by reference to Exhibit 4(i) to Form 10-Q for the period ended March  31, 2003).                                                                                                           |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (10)(a)(1)      |   | Amended and Restated Credit Agreement dated as of  June 28, 2001, between ALLTEL Corporation and Bank of America, N.A., The  Chase Manhattan Bank, Citibank, N.A., KeyBank National Association, and Banc  of America Securities LLC (incorporated herein by reference to Form 10-K for  the fiscal year ended December 31, 2001).                                     |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (a)(2)          |   | Amendment No. 1 to Amended and Restated Credit  Agreement dated as of June 28, 2001, between ALLTEL Corporation and Bank of  America, N.A., The Chase Manhattan Bank, Citibank, N.A., KeyBank National  Association, and Banc of America Securities LLC (incorporated herein by  reference to Exhibit 10(a)(2) to Form 10-Q for the period ended September 30,  2002). |   | *      |

 

 *     Incorporated herein byreference as indicated.

(a)   Filed herewith.

 

30

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EXHIBIT INDEX, Continued

 

| Number and Name |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (10)(a)(3)      |   | Amendment No. 2 to Amended and Restated Credit  Agreement dated as of August 29, 2003 between ALLTEL Corporation and Bank of  America, N.A., Bank One, NA, Citibank, N.A., Merrill Lynch Bank USA, PNC  Bank, National Association, Union Bank of California, N.A., Wachovia Bank,  National Association (incorporated herein by reference to Exhibit 10(a)(3) to  Form 10-Q for the period ended September 30, 2003). |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (a)(4)          |   | 364 Day Revolving Credit Agreement dated as of July  30, 2003 between ALLTEL Corporation and Bank of America, N.A., Banc of  America Securities LLC, Merrill Lynch, Pierce, Fenner & Smith  Incorporated, Citibank, N.A., Wachovia Bank, National Association, Bank One,  NA, and JPMorgan Chase Bank (incorporated herein by reference to Exhibit 10(a)(1)  to Form 10-Q for the period ended June 30, 2003).     |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (b)(1)          |   | Agreement by and between ALLTEL Corporation and Joe  T. Ford effective as of July 26, 2001 (incorporated herein by reference to  Exhibit 10(b)(4) to Form 10-K for the fiscal year ended December 31, 2001).                                                                                                                                                                                                           |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (b)(2)          |   | Employment Agreement by and between ALLTEL  Corporation and Scott T. Ford effective as of July 24, 2003 (incorporated  herein by reference to Exhibit 10(c)(9) to Form 10-Q for the period ended  September 30, 2003).                                                                                                                                                                                                 |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(1)          |   | Change in Control Agreement by and between the  Company and Scott T. Ford effective as of April 25, 1996 (incorporated herein  by reference to Exhibit 10(c)(6) to Form 10–Q for the period ended June 30,  1996).                                                                                                                                                                                                |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(1)(a)       |   | Amendment to Change in Control Agreement by and  between the Company and Scott T. Ford effective as of July 24, 2003  (incorporated herein by reference to Exhibit 10(c)(10) to Form 10-Q for the  period ended September 30, 2003).                                                                                                                                                                                   |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(2)          |   | Change in Control Agreement by and between the  Company and Kevin L. Beebe effective as of July 23, 1998 (incorporated herein  by reference to Exhibit 10(c)(2) to Form 10–K for the fiscal year ended  December 31, 1998).                                                                                                                                                                                       |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(2)(a)       |   | Amendment to Change in Control Agreement by and  between the Company and Kevin L. Beebe effective as of October 23, 2003.                                                                                                                                                                                                                                                                                              |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(3)          |   | Change in Control Agreement by and between the  Company and Jeffrey H. Fox effective as of January 30, 1997 (incorporated  herein by reference to Exhibit 10(c)(4) to Form 10–K for the fiscal year  ended December 31, 1998).                                                                                                                                                                                    |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(3)(a)       |   | Amendment to Change in Control Agreement by and  between the Company and Jeffrey H. Fox effective as of October 23, 2003.                                                                                                                                                                                                                                                                                              |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(4)          |   | Change in Control Agreement by and between the  Company and Francis X. Frantz effective as of October 24, 1994 (incorporated  herein by reference to Exhibit 10(c)(4) to Form 10-K for the fiscal year  ended December 31, 1994).                                                                                                                                                                                      |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(4)(a)       |   | Amendment to Change in Control Agreement by and  between the Company and Francis X. Frantz effective as of October 23, 2003.                                                                                                                                                                                                                                                                                           |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(5)          |   | Change in Control Agreement by and between the  Company and Jeffery R. Gardner effective as of January 28, 1999 (incorporated  herein by reference to Exhibit 10(c)(8) to Form 10-K for the fiscal year  ended December 31, 1998).                                                                                                                                                                                     |   | *      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| (c)(5)(a)       |   | Amendment to Change in Control Agreement by and  between the Company and Jeffery R. Gardner effective as of October 23, 2003.                                                                                                                                                                                                                                                                                          |   | (a)    |

 

 *     Incorporated herein byreference as indicated.

(a)   Filed herewith.

 

31

----

 

EXHIBIT INDEX, Continued

 

| Number and Name |   |                                                                                                                                                                                                                                                       |   |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (10)(c)(6)      |   | Change in Control Agreement by and between the  Company and Keith A. Kostuch effective as of February 15, 2001 (incorporated  herein by reference to Exhibit 10(c)(9) to Form 10-K for the fiscal year  ended December 31, 2000).                          |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (c)(7)          |   | Change in Control Agreement by and between the  Company and C.J. Duvall Jr. effective as of March 12, 2003 (incorporated  herein by reference to Exhibit 10(c)(9) to Form 10-Q for the period ended  March 31, 2003).                                      |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (c)(8)          |   | Change in Control Agreement by and between the  Company and Sharilyn S. Gasaway effective as of March 12, 2003 (incorporated  herein by reference to Exhibit 10(c)(10) to Form 10-Q for the period ended  March 31, 2003).                                 |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (c)(9)          |   | Change in Control Agreement by and between the  Company and Scott H. Settelmyer effective as of March 8, 2002 (incorporated  herein by reference to Exhibit 10(c)(8) to Form 10-K for the fiscal year  ended December 31, 2002).                           |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (d)             |   | Split-dollar Life Insurance Agreement by and between  the Company and Francis X. Frantz effective as of March 1, 1994 (incorporated  herein by reference to Exhibit 10(d)(2) to Form 10-K for the fiscal year  ended December 31, 1994).                   |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (e)(1)          |   | Amended and Restated ALLTEL Corporation Supplemental  Executive Retirement Plan (incorporated herein by reference to Exhibit  10(e)(1) to Form 10-K for the fiscal year ended December 31, 2001).                                                          |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (e)(2)          |   | Amendment No. 1 to Amended and Restated ALLTEL  Corporation Supplemental Executive Retirement Plan effective October 23,  2003.                                                                                                                            |   | (a)    |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(1)          |   | Executive Deferred Compensation Plan of ALLTEL  Corporation, as amended and restated effective October 1, 1993 (incorporated  herein by reference to Exhibit 10(e) to Form 10-K for the fiscal year ended  December 31, 1993).                             |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(2)          |   | Amendment No. 1 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective January  29, 1998 (incorporated herein by reference to Exhibit 10(f)(2) to Form 10-K  for the fiscal year ended December 31, 1997). |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(3)          |   | Amendment No. 2 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective April 23,  1998 (incorporated herein by reference to Exhibit 10(f)(3) to Form 10-K for  the fiscal year ended December 31, 2002).   |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(4)          |   | Amendment No. 3 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective January  28, 1999 (incorporated herein by reference to Exhibit 10(f)(4) to Form 10-K  for the fiscal year ended December 31, 2002). |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(5)          |   | Amendment No. 4 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective April 21,  1999 (incorporated herein by reference to Exhibit 10(f)(5) to Form 10-K for  the fiscal year ended December 31, 2002).   |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(6)          |   | Amendment No. 5 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective April 25,  2002 (incorporated herein by reference to Exhibit 10(f)(6) to Form 10-K for  the fiscal year ended December 31, 2002).   |   | *      |
|            |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(7)          |   | Deferred Compensation Plan for Directors of ALLTEL  Corporation, as amended and restated effective October 1, 1993 (incorporated  herein by reference to Exhibit 10(f) to Form 10-K for the fiscal year ended  December 31, 1993).                         |   | *      |

 

 *     Incorporated herein byreference as indicated.

(a)   Filed herewith.

 

32

----

 

EXHIBIT INDEX, Continued

 

| Number and Name |   |                                                                                                                                                                                                                                                         |   |   |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (10)(f)(8)      |   | Amendment No. 1 to Deferred Compensation Plan for  Directors of ALLTEL Corporation (October 1, 1993 Restatement) (incorporated  herein by reference to Exhibit 10(f)(3) to Form 10-K for the fiscal year  ended December 31, 1996).                          |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (f)(9)          |   | Amendment No. 2 to Deferred Compensation Plan for  Directors of ALLTEL Corporation (October 1, 1993 Restatement) effective April  25, 2002 (incorporated herein by reference to Exhibit 10(f)(9) to Form 10-K  for the fiscal year ended December 31, 2002). |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (f)(10)         |   | ALLTEL Corporation 1999 Nonemployee Directors Stock  Compensation Plan (as Amended and Restated effective January 22, 2004).                                                                                                                                 |   | (a)    |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (f)(11)         |   | ALLTEL Corporation 1998 Management Deferred  Compensation Plan, effective June 23, 1998 (incorporated herein by reference  to Exhibit 10(f)(5) to Form 10-Q for the period ended June 30, 1998).                                                             |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (f)(12)         |   | Amendment No. 1 to the ALLTEL Corporation 1998  Management Deferred Compensation Plan effective June 23, 1998 (incorporated  herein by reference to Exhibit 10(f)(11) to Form 10-K for the fiscal year  ended December 31, 2002).                            |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (f)(13)         |   | Amendment No. 2 to the ALLTEL Corporation 1998  Management Deferred Compensation Plan effective April 25, 2002 (incorporated  herein by reference to Exhibit 10(f)(12) to Form 10-K for the fiscal year  ended December 31, 2002).                           |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (f)(14)         |   | ALLTEL Corporation 1998 Directors’ Deferred  Compensation Plan, effective June 23, 1998 (incorporated herein by reference  to Exhibit 10(f)(6) to Form 10-Q for the period ended June 30, 1998).                                                        |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (f)(15)         |   | Amendment No. 1 to the ALLTEL Corporation 1998  Directors’ Deferred Compensation Plan, effective April 25, 2002 (incorporated  herein by reference to Exhibit 10(f)(14) to Form 10-K for the fiscal year  ended December 31, 2002).                     |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (g)(1)          |   | ALLTEL Corporation 1991 Stock Option Plan  (incorporated herein by reference to Exhibit A to Proxy Statement, dated  March 8, 1991).                                                                                                                         |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (g)(2)          |   | First Amendment to ALLTEL Corporation 1991 Stock  Option Plan (incorporated herein by reference to Exhibit 10(g)(3) to Form  10-K for the fiscal year ended December 31, 2000).                                                                              |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (g)(3)          |   | ALLTEL Corporation 1994 Stock Option Plan for  Employees (incorporated herein by reference to Exhibit A to Proxy Statement  dated March 4, 1994).                                                                                                            |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (g)(4)          |   | First Amendment to ALLTEL Corporation 1994 Stock  Option Plan for Employees (incorporated herein by reference to Exhibit  10(g)(5) to Form 10-K for the fiscal year ended December 31, 2000).                                                                |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (g)(5)          |   | ALLTEL Corporation 1994 Stock Option Plan for  Nonemployee Directors (incorporated herein by reference to Exhibit B to Proxy  Statement dated March 4, 1994).                                                                                                |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (g)(6)          |   | First Amendment to ALLTEL Corporation 1994 Stock  Option Plan for Nonemployee Directors (incorporated herein by reference to  Exhibit 10(g)(5) to Form 10-K for the fiscal year ended December 31, 1996).                                                    |   | *      |
|            |   |                                                                                                                                                                                                                                                         |   |   |
| (g)(7)          |   | Second, Third and Fourth Amendments to ALLTEL  Corporation 1994 Stock Option Plan for Nonemployee Directors (incorporated  herein by reference to Exhibit 10(g)(8) to Form 10-K for the fiscal year  ended December 31, 2000).                               |   | *      |

 

 *     Incorporated herein byreference as indicated.

(a)   Filed herewith.

 

33

----

 

EXHIBIT INDEX, Continued

 

| Number and Name |   |                                                                                                                                                                                                                                                                             |   |    |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (10)(g)(8)      |   | ALLTEL Corporation 1998 Equity Incentive Plan  (incorporated herein by reference to Annex G of ALLTEL Corporation  Registration Statement (File No. 333-51915) on Form S-4 dated May 6, 1998).                                                                                   |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (g)(9)          |   | First and Second Amendments to ALLTEL Corporation  1998 Equity Incentive Plan (incorporated herein by reference to Exhibit  10(g)(9) to Form 10-K for the fiscal year ended December 31, 2000).                                                                                  |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (g)(10)         |   | ALLTEL Corporation 2001 Equity Incentive Plan  (incorporated herein by reference to Appendix C to Proxy Statement dated  March 5, 2001).                                                                                                                                         |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (h)(1)          |   | Amended and Restated 360° Communications Company  1996 Equity Incentive Plan (incorporated herein by reference to Form S-8  (File No. 333-88923) of ALLTEL Corporation filed with the Commission on  October 13, 1999).                                                     |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (h)(2)          |   | Lincoln Telecommunications Company 1989 Stock and  Incentive Stock Plan (incorporated herein by reference to Form S-8 (File No.  333-88907) of ALLTEL Corporation filed with the Commission on October 13,  1999).                                                               |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (i)(1)          |   | ALLTEL Corporation Performance Incentive  Compensation Plan as amended, effective January 1, 1993 (Exhibit 10(i) to  Form SE dated February 17, 1993).                                                                                                                           |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (i)(2)          |   | Amendment No. 1 to ALLTEL Corporation Performance  Incentive Compensation Plan, effective January 29, 1998 (incorporated herein  by reference to Exhibit 10(i)(1) to Form 10-K for the fiscal year ended  December 31, 1997).                                                    |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (j)(1)          |   | ALLTEL Corporation Long-Term Performance Incentive  Compensation Plan, as amended and restated effective January 1, 1993 (Exhibit  10(j) to Form SE dated February 17, 1993).                                                                                                    |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (j)(2)          |   | Amendment No. 1 to ALLTEL Corporation Long-Term  Performance Incentive Compensation Plan as amended and restated effective  January 1, 1993 (incorporated herein by reference to Exhibit 10(j)(1) to  Amendment No. 1 to Form 10-K for the fiscal year ended December 31, 1993). |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (j)(3)          |   | Amendment No. 2 to ALLTEL Corporation Long-Term  Performance Incentive Compensation Plan (January 1, 1993 Restatement),  effective January 29, 1998 (incorporated herein by reference to Exhibit  10(j)(2) to Form 10-K for the fiscal year ended December 31, 1997).            |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (k)(1)          |   | ALLTEL Corporation Pension Plan (January 1, 2001  Restatement) (incorporated herein by reference to Exhibit 10(k) to Form 10-K  for the fiscal year ended December 31, 2001).                                                                                                    |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (k)(2)          |   | Amendment No. 1 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement) (incorporated herein by reference to Exhibit  10(k)(1) to Form 10-Q for the period ended September 30, 2002).                                                                                  |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (k)(3)          |   | Amendment No. 2 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement) (incorporated herein by reference to Exhibit  10(k)(3) to Form 10-K for the fiscal year ended December 31, 2002).                                                                              |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (k)(4)          |   | Amendment No. 3 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement) (incorporated herein by reference to Exhibit  10(k)(4) to Form 10-Q for the period ended June 30, 2003).                                                                                       |   | *       |
|            |   |                                                                                                                                                                                                                                                                             |   |    |
| (k)(5)          |   | Amendment No. 5 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement).                                                                                                                                                                                               |   | (a) (b) |

 

 *     Incorporated herein byreference as indicated.

(a)   Filed herewith.

(b)   Amendment No. 4 to ALLTELCorporation Pension Plan (January 1, 2001 Restatement) has not been executedand is intentionally omitted.

 

34

----

 

EXHIBIT INDEX, Continued

 

| Number and Name |   |                                                                                                                                                                                                       |   |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                                                                       |   |   |
| (10)(k)(6)      |   | Amendment No. 6 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement).                                                                                                                         |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (k)(7)          |   | Amendment No. 7 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement).                                                                                                                         |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (k)(8)          |   | Amendment No. 8 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement).                                                                                                                         |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (1)(1)          |   | ALLTEL Corporation Profit-Sharing Plan (January 1,  2002 Restatement) (incorporated herein by reference to Exhibit 10(l)to Form  10-Q for the period ended March 31, 2002).                                |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (l)(2)          |   | Amendment No. 1 to ALLTEL Corporation Profit-Sharing  Plan (January 1, 2002 Restatement) (incorporated herein by reference to  Exhibit 10(l)(2) to Form 10-K for the fiscal year ended December 31, 2002). |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (l)(3)          |   | Amendment No. 2 to ALLTEL Corporation Profit-Sharing  Plan (January 1, 2002 Restatement).                                                                                                                  |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (l)(4)          |   | Amendment No. 3 to ALLTEL Corporation Profit-Sharing  Plan (January 1, 2002 Restatement).                                                                                                                  |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (l)(5)          |   | Amendment No. 4 to ALLTEL Corporation Profit-Sharing  Plan (January 1, 2002 Restatement).                                                                                                                  |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (m)             |   | ALLTEL Corporation Benefit Restoration Plan (January  1, 1996 Restatement) (incorporated herein by reference to Exhibit 10(m) to  Form 10-K for the fiscal year ended December 31, 1995).                  |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (n)(1)          |   | Amended and Restated ALLTEL Corporation Supplemental  Medical Expense Reimbursement Plan (incorporated herein by reference to  Exhibit 10(p) to Form 10-K for the fiscal year ended December 31, 1990).    |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (n)(2)          |   | First Amendment to ALLTEL Corporation Supplemental  Medical Expense Reimbursement Plan (incorporated herein by reference to  Exhibit 10(n)(1) to Form 10-K for the fiscal year ended December 31, 2001).   |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (o)(1)          |   | ALLTEL Corporation 401(k) Plan (January 1, 2001  Restatement) (incorporated herein by reference to Exhibit 10(o) to Form 10-K  for the fiscal year ended December 31, 2001).                               |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (o)(2)          |   | Amendment No. 1 to ALLTEL Corporation 401(k) Plan  (January 1, 2001 Restatement) (incorporated herein by reference to Exhibit  10(o)(2) to Form 10-K for the fiscal year ended December 31, 2002).         |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (o)(3)          |   | Amendment No. 2 to ALLTEL Corporation 401(k) Plan  (January 1, 2001 Restatement) (incorporated herein by reference to Exhibit  10(o)(3) to Form 10-K for the fiscal year ended December 31, 2002).         |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (o)(4)          |   | Amendment No. 3 to ALLTEL Corporation 401(k) Plan  (January 1, 2001 Restatement) (incorporated herein by reference to Exhibit  10(o)(4) to Form 10-Q for the period ended June 30, 2003).                  |   | *      |
|            |   |                                                                                                                                                                                                       |   |   |
| (o)(5)          |   | Amendment No. 4 to ALLTEL Corporation 401(k) Plan  (January 1, 2001 Restatement).                                                                                                                          |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (o)(6)          |   | Amendment No. 5 to ALLTEL Corporation 401(k) Plan  (January 1, 2001 Restatement).                                                                                                                          |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (11)            |   | Statement Re: Computation of per share earnings.                                                                                                                                                           |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (21)            |   | Subsidiaries of ALLTEL Corporation.                                                                                                                                                                        |   | (a)    |
|            |   |                                                                                                                                                                                                       |   |   |
| (23)            |   | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                     |   | (a)    |

 

 *     Incorporated herein byreference as indicated.

(a)   Filed herewith.

 

35

----

 

EXHIBIT INDEX, Continued

 

| Number and Name |   |                                                                                                                                                 |   |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                 |   |   |
| (31)(a)         |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |   | (a)    |
|            |   |                                                                                                                                                 |   |   |
| (31)(b)         |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |   | (a)    |
|            |   |                                                                                                                                                 |   |   |
| (32)(a)         |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |   | (a)    |
|            |   |                                                                                                                                                 |   |   |
| (32)(b)         |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   | (a)    |

 

 

 *     Incorporated herein byreference as indicated.

(a)   Filed herewith.

 

36

----

 

**ALLTEL CORPORATION**

 

**FINANCIAL SUPPLEMENT**

**TO ANNUAL REPORT ON FORM 10-K**

**FOR THE YEAR ENDED DECEMBER 31, 2003**

 

----

 

**ALLTEL CORPORATION**

** **

**INDEX TO FINANCIAL SUPPLEMENT**

**TO ANNUAL REPORT ON FORM 10-K**

**FOR THE YEAR ENDED DECEMBER 31, 2003**

 

| **Management’s Discussion and Analysis of  Financial Condition  and Results of Operations**            |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| **Selected  Financial Data**                                                                                |   |
|                                                                                                        |   |
| **Report  of Management**                                                                                   |   |
|                                                                                                        |   |
| **Report of Independent  Auditors**                                                                         |   |
|                                                                                                        |   |
| **Annual  Financial Statements:**                                                                           |   |
|                                                                                                        |   |
| Consolidated  Statements of Income  for the years ended December 31, 2003, 2002 and 2001                    |   |
|                                                                                                        |   |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                               |   |
|                                                                                                        |   |
| Consolidated  Statements of Cash Flows  for the years ended December 31, 2003, 2002 and 2001                |   |
|                                                                                                        |   |
| Consolidated  Statements of Shareholders’ Equity  for the years ended December 31, 2003, 2002 and 2001 |   |
|                                                                                                        |   |
| Notes to  Consolidated Financial Statements                                                                 |   |

 

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**MANAGEMENT’S****DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Executive Summary

ALLTEL Corporation (“ALLTEL” or the “Company”) is a customer-focusedcommunications company providing wireless, local telephone, long-distance,Internet and high-speed data services to more than 12 million residential andbusiness customers in 26 states.  Amongthe highlights in 2003, ALLTEL:

 

•      Achieved solid financialresults driven primarily by the effects of the Company’s August 2002acquisitions, increased sales of ALLTEL’s higher-yield Total and NationalFreedom wireless rate plans and additional sales of enhanced communicationsproducts and services.  These factorsoffset the effects of increased competition in ALLTEL’s wireless business and a2 percent decline in wireline access lines due to wireless and broadbandsubstitution.

 

•      Improved the Company’sfinancial flexibility and simplified its business strategically through thesale of its financial services operations.

 

•      Invested more than $1.1billion in its telecommunications network in order to increase voice capacityand provide customers with access to high-speed wireless and wireline dataservices.

 

•      Operationally delivered improvementsin overall service quality to ALLTEL’s customers at its retail stores, in itscall centers and on its networks, resulting in a year-over-year decline inwireless postpay churn, growth in average revenue per customer, and an increasein DSL customers that more than offset the loss in wireline access lines notedabove.

 

ALLTEL used the proceeds from the sale of the financial servicesdivision along with the cash generated from its continuing business operationsto decrease long-term debt by over $750 million in 2003 and to increase itscash, short-term investments and marketable equity securities to more than $1.0billion at the end of the year.

 

During 2004, the Company will continue to face significant challengesresulting from continued competition in the telecommunications industry andchanges in the regulatory environment, including the effects of the FederalCommunications Commission’s (“FCC”) number portability rules and potentialchanges to the rules governing Universal Service and inter-carriercompensation.  In addressing thesechallenges, ALLTEL will continue to focus its efforts on improving customerservice, enhancing the quality of its networks and expanding its product andservice offerings.  During the firstquarter of 2004, the Company will change its organizational structure tosupport continued improvements in service delivery and customer satisfaction,while reducing annual operating costs by approximately $20 million.  In connection with these efforts, theCompany expects to record a pretax restructuring charge of approximately $15million during the first quarter of 2004.

 

**DISPOSALOF FINANCIAL SERVICES BUSINESS**

On April 1, 2003, ALLTEL completed the sale of the financial servicesdivision of its information services subsidiary, ALLTEL Information Services,Inc., to Fidelity National Financial Inc. (“Fidelity National”), for $1.05billion, payable in the form of $775.0 million in cash and $275.0 million inFidelity National common stock.  As partof this transaction, Fidelity National acquired ALLTEL’s mortgage servicing,retail and wholesale banking and commercial lending operations, as well as thecommunity/regional bank division. Approximately 5,500 employees of the Company transitioned to FidelityNational as part of the transaction.  Asa result of this transaction, the financial services division has beenreflected as discontinued operations and as assets held for sale in theCompany’s consolidated financial statements for all periods presented.  The telecom division of ALLTEL InformationServices, Inc. was retained by the Company and was not part of the saletransaction with Fidelity National.  Theoperations of the retained telecom division are included in the communicationssupport services segment.  In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosuresabout Segments of an Enterprise and Related Information”, all prior periodsegment information has been reclassified to conform to this new financialreporting presentation.

 

In January 2003, ALLTEL completed the termination of its businessventure with Bradford & Bingley Group. The business venture, ALLTEL Mortgage Solutions, Ltd., a majority-ownedconsolidated subsidiary of ALLTEL, was created in 2000 to provide mortgageadministration and information technology products in the United Kingdom.  Unfortunately, the business climate in theUnited Kingdom limited the venture’s ability to leverage the business across abroad base of customers.  As a result,the operations of ALLTEL Mortgage Solutions, Ltd. were also reflected asdiscontinued operations and as assets held for sale in the Company’sconsolidated financial statements for all periods presented.  (See Note 11 to the consolidated financialstatements for additional information regarding the disposal of the financialservices operations.)

 

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**ACQUISITIONS**

On August 29, 2003, the Company purchased for $22.8 million in cash awireless property with a potential service area covering approximately 205,000potential customers (“POPs”) in an Arizona Rural Service Area (“RSA”).  During the third quarter of 2003, theCompany also purchased for $5.7 million in cash additional ownership interestsin wireless properties in Mississippi, New Mexico and Virginia in which theCompany owned a majority interest.  OnApril 1, 2003, the Company paid $7.5 million to increase its ownership interestfrom 43 percent to approximately 86 percent in a wireless property with apotential service area covering about 145,000 POPs in a Wisconsin RSA.  On February 28, 2003, the Company purchasedfor $72.0 million in cash wireless properties with a potential service areacovering approximately 370,000 POPs in southern Mississippi, from Cellular XLAssociates (“Cellular XL”), a privately held company.  Of the total purchase price, ALLTEL paid $64.6 million toCellular XL at the date of purchase with the remaining cash payment, subject toadjustments as specified in the purchase agreement, payable with interest, 12months after the closing date.  OnFebruary 28, 2003, the Company also purchased for $60.0 million in cash theremaining ownership interest in wireless properties with a potential servicearea covering approximately 355,000 POPs in two Michigan RSAs.  Prior to this acquisition, ALLTEL ownedapproximately 49 percent of the Michigan properties.  Through the completion of these transactions, ALLTEL addedapproximately 147,000 customers.

 

On August 1, 2002, ALLTEL completed its purchase of local telephoneproperties serving approximately 589,000 wireline customers in Kentucky fromVerizon Communications Inc. (“Verizon”) for $1.93 billion in cash.  The acquired wireline properties overlappedALLTEL’s existing wireless service in northeastern Kentucky and increased theCompany’s total access lines by approximately 23 percent to nearly 3.2 millionwireline customers.  On August 1, 2002,ALLTEL also completed its purchase of substantially all of the wirelessproperties owned by CenturyTel, Inc. (“CenturyTel”) for approximately $1.59billion in cash.  Through the completionof the transaction, ALLTEL added properties representing approximately 8.3million POPs, acquired approximately 762,000 customers, increasing its wirelesscustomer base to more than 7.5 million customers, and expanded its wirelessfootprint into new markets across Arkansas, Louisiana, Michigan, Mississippi,Texas and Wisconsin.  Also included inthe transaction were minority partnership interests in cellular operationsrepresenting approximately 1.8 million proportionate POPs, and PersonalCommunications Services (“PCS”) licenses covering 1.3 million POPs in Wisconsinand Iowa.

 

The accounts and results of operations of the acquired wireline andwireless properties are included in the accompanying consolidated financialstatements from the date of acquisition. (See Note 3 to the consolidated financial statements for additionalinformation regarding these acquisitions.)

 

To fund the cost of the acquisition of wireline properties in Kentuckyand wireless properties from CenturyTel discussed above, during the secondquarter of 2002, ALLTEL sold 27.7 million equity units and received netproceeds 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 stockon May 17, 2005.  The number of sharesto 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.  The equity units also included $50 principalamount of senior notes, which bear interest at 6.25 percent and mature on May17, 2007.  In June 2002, the Companyalso issued $1.5 billion of unsecured long-term debt consisting of $800.0million of 7.0 percent senior notes due July 1, 2012 and $700.0 million of7.875 percent senior notes due July 1, 2032. Net proceeds from this debt issuance were $1.47 billion, after deductingthe underwriting discount and other offering expenses.  The net proceeds from the issuance of theequity units and long-term debt of $2.81 billion were invested until completionof the acquisitions.  (See Note 4 to theconsolidated financial statements for additional information regarding theequity units.)

 

**ACCOUNTINGAND FINANCIAL REPORTING CHANGES**

In May 2003, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”.  SFAS No. 150, with an effective date of July 1, 2003, requiresall financial instruments included within its scope to be initially recorded atfair value or settlement value, depending upon the nature of the financialinstrument, and subsequently remeasured at each balance sheet date.  Certain of the Company’s consolidatednon-wholly owned wireless partnerships have finite lives specified in theirpartnership agreements, and, accordingly, must be legally dissolved andterminated, at a specified future date, usually 50 or 99 years after formation,and the proceeds distributed to the partners. Under the provisions of SFAS No. 150, the minority interests associatedwith these partnerships are considered mandatorily redeemable financial instruments,and as such, would be required to be reported as liabilities in ALLTEL’sconsolidated financial statements, initially measured at settlement value, andsubsequently remeasured at each balance sheet date with changes in settlementvalues reported as a component of interest expense.  On November 7, 2003, the FASB issued Staff Position No. 150-3,“Effective Date, Disclosures, and Transition for Mandatorily RedeemableFinancial Instruments of Certain Nonpublic Entities and Certain MandatorilyRedeemable Noncontrolling Interests under FASB Statement No. 150” (“FSP No.150-3”).  FSP No. 150-3 deferred 

 

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indefinitely the recognition and measurement provisions of SFAS No. 150applicable to mandatorily redeemable noncontrolling interests, including theminority interests associated with the Company’s consolidated non-wholly ownedpartnerships with finite lives. Accordingly, the adoption of SFAS No. 150 did not affect the Company’sconsolidated results of operations, financial position, or cash flows as of andfor the year ended December 31, 2003.

 

Except for certain wireline subsidiaries as further discussed below,ALLTEL adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”,effective January 1, 2003.  SFAS No. 143addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  This standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development, or normal use of theassets.  SFAS No. 143 requires that aliability for an asset retirement obligation be recognized when incurred andreasonably estimable, recorded at fair value and classified as a liability inthe balance sheet.  When the liabilityis initially recorded, the entity capitalizes the cost and increases thecarrying value of the related long-lived asset.  The liability is then accreted to its present value, and thecapitalized cost is depreciated over the estimated useful life of the relatedasset.  At the settlement date, theentity will recognize a gain or loss after settlement of the obligation.

 

ALLTEL evaluated the effects of SFAS No. 143 on its operations and hasdetermined that, for telecommunications and other operating facilities in whichALLTEL owns the underlying land, the Company has no contractual or legalobligation to remediate the property if ALLTEL were to abandon, sell orotherwise dispose of the property. Certain of ALLTEL’s cell site and switch site operating lease agreementscontain clauses requiring restoration of the leased site at the end of thelease term.  Similarly, certain of theCompany’s lease agreements for office and retail locations require restorationof the leased site upon expiration of the lease term.  Accordingly, ALLTEL is subject to asset retirement obligationsassociated with these leased facilities under the provisions of SFAS No.143.  The application of SFAS No. 143 tothe cell site and switch site operating leases and the leased office and retaillocations did not have a material impact on ALLTEL’s consolidated results ofoperations, financial position or cash flows as of or for the year endedDecember 31, 2003.

 

In accordance with federal and state regulations, depreciation expensefor the Company’s wireline operations has historically included an additionalprovision for cost of removal.  Theadditional cost of removal provision does not meet the recognition and measurementprinciples of an asset retirement obligation under SFAS No. 143.  On December 20, 2002, the FCC notifiedwireline carriers that they should not adopt the provisions of SFAS No. 143unless specifically required by the FCC in the future.  As a result of the FCC ruling, ALLTEL willcontinue to record a regulatory liability for cost of removal for its wirelinesubsidiaries that follow the accounting prescribed by SFAS No. 71 “Accountingfor the Effects of Certain Types of Regulation”.  For the acquired Kentucky and Nebraska wireline operations notsubject to SFAS No. 71, effective January 1, 2003, the Company ceasedrecognition of the cost of removal provision in depreciation expense andeliminated the cumulative cost of removal included in accumulateddepreciation.  The cumulative effect ofretroactively applying these changes to periods prior to January 1, 2003,resulted in a non-cash credit of $15.6 million, net of income tax expense of$10.3 million, and was included in net income for the year ended December 31,2003.  The cessation of the cost ofremoval provision in depreciation expense for the acquired Kentucky andNebraska wireline operations did not have a material impact on the Company’sconsolidated results of operations for the year ended December 31, 2003.

 

Effective January 1, 2003, the Company adopted Emerging Issues TaskForce (“EITF”) Issue 00-21 “Accounting for Revenue Arrangements with MultipleDeliverables” for all new arrangements entered into on or after that date.  Issue 00-21 addresses the accounting by avendor for arrangements under which it will perform multiple revenue-generatingactivities.  Specifically, Issue 00-21addresses how to determine whether an arrangement involving multiple deliverablescontains one or more units of accounting and how arrangement considerationshould be measured and allocated to the separate units of accounting.  Upon adoption, the Company ceased deferralof fees assessed to wireless communications customers to activate service anddirect incremental customer acquisition costs incurred in the activation ofservice.  The adoption of Issue 00-21did not have a material impact on the Company’s consolidated results ofoperations for the year ended December 31, 2003.

 

Effective January 1, 2002, the Company adopted SFAS No. 142 “Goodwilland Other Intangible Assets”.  Thisstandard changed the accounting for goodwill and other indefinite-livedintangible assets from an amortization method to an impairment-only approach.  As of January 1, 2002, ALLTEL ceasedamortization of goodwill recorded in conjunction with past businesscombinations.  In addition, the Companyconducted a review of its other identifiable intangible assets and determinedthat its cellular and PCS licenses ( the “wireless licenses”) 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 also ceased amortization of the wirelesslicenses as of January 1, 2002.

 

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In 2001, ALLTEL changed the method of accounting for the definedbenefit pension plan of a subsidiary acquired in 1999 to conform to theaccounting principles followed by the ALLTEL Pension Plan (the “ALLTEL Plan”),a defined benefit pension plan covering substantially all employees working inthe Company’s communications and corporate operations.  The change in accounting was completed inconjunction with the Company’s decision to conform future benefits earned underthe subsidiary’s plan with the ALLTEL 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 computing annual pension costrelated to the subsidiary’s pension plan. The change included modifying the method by which the market-relatedvalue of plan assets was determined from a calculated five-year average toactual fair value.  In addition,unrecognized actuarial gains or losses that exceed 17.5 percent of the greaterof the projected benefit obligation or market-related value of plan assets willbe amortized on a straight-line basis over five years.  Unrecognized actuarial gains and lossesbelow the 17.5 percent corridor will be amortized over the average remainingservice life of active plan participants (approximately 13 years).  Under the method previously followed by thesubsidiary’s plan, only unrecognized actuarial gains and losses in excess of 10percent of the greater of the projected benefit obligation or market-relatedvalue of plan assets were amortized over the average remaining service life ofactive plan participants.  ALLTELbelieves the changes in computing the market-related value of plan assets andaccelerating the amortization periods are preferable because these changesresult in more timely recognition of actuarial gains and losses in computingannual pension cost related to the subsidiary’s plan, and achieve consistencywith the ALLTEL Plan.  The effect ofthese changes in 2001 was to increase pension income by $1.7 million and incomebefore cumulative effect of accounting change by $1.0 million.  (See Notes 1 and 2 to the consolidated financialstatements for additional information regarding these accounting changes.)

 

**CONSOLIDATEDRESULTS OF OPERATIONS**

| (Millions, except per share amounts)                             |   | 2003    |    | 2002    |   | 2001    |   |
|------------------------------------------------------------------|--------|---------|---------|---------|--------|---------|--------|
| Revenues and  sales:                                             |   |    |    |    |   |    |   |
| Service revenues                                                 |   | $       | 7,156.1 |    | $      | 6,428.9 |   | $ | 5,900.0 |   |
| Product sales                                                    |   | 823.8   |    | 683.5   |   | 715.8   |   |
| Total revenues  and sales                                        |   | 7,979.9 |    | 7,112.4 |   | 6,615.8 |   |
| Costs and  expenses:                                             |   |    |    |    |   |    |   |
| Cost of services                                                 |   | 2,273.6 |    | 2,039.0 |   | 1,800.5 |   |
| Cost  of products sold                                           |   | 1,043.5 |    | 891.3   |   | 907.2   |   |
| Selling,  general, administrative and other                      |   | 1,498.1 |    | 1,297.0 |   | 1,201.1 |   |
| Depreciation and  amortization                                   |   | 1,247.7 |    | 1,095.5 |   | 1,082.0 |   |
| Integration  expenses and other charges                          |   | 19.0    |    | 69.9    |   | 76.3    |   |
| Total costs and  expenses                                        |   | 6,081.9 |    | 5,392.7 |   | 5,067.1 |   |
| Operating income                                                 |   | 1,898.0 |    | 1,719.7 |   | 1,548.7 |   |
| Non-operating  expense, net                                      |   | (3.2    | )       | (5.3    | )      | (14.1   | )      |
| Interest  expense                                                |   | (378.6  | )       | (355.1  | )      | (261.2  | )      |
| Gain on disposal  of assets, write-down of investments and other |   | 17.9    |    | 1.0     |   | 357.6   |   |
| Income  from continuing operations before income taxes           |   | 1,534.1 |    | 1,360.3 |   | 1,631.0 |   |
| Income taxes                                                     |   | 580.6   |    | 510.2   |   | 653.0   |   |
| Income  from continuing operations                               |   | 953.5   |    | 850.1   |   | 978.0   |   |
| Income  from discontinued operations, net of income taxes        |   | 361.0   |    | 74.2    |   | 69.5    |   |
| Cumulative  effect of accounting change, net of income taxes     |   | 15.6    |    | —  |   | 19.5    |   |
| Net  income                                                      |   | $       | 1,330.1 |    | $      | 924.3   |   | $ | 1,067.0 |   |
| Basic earnings  per share:                                       |   |    |    |    |   |    |   |
| Income from  continuing operations                               |   | $       | 3.06    |    | $      | 2.73    |   | $ | 3.14 |   |
| Income from  discontinued operations                             |   | 1.16    |    | .24     |   | .22     |   |
| Cumulative  effect of accounting change                          |   | .05     |    | —  |   | .06     |   |
| Net income                                                       |   | $       | 4.27    |    | $      | 2.97    |   | $ | 3.42 |   |
| Diluted earnings  per share:                                     |   |    |    |    |   |    |   |
| Income from  continuing operations                               |   | $       | 3.05    |    | $      | 2.72    |   | $ | 3.12 |   |
| Income from  discontinued operations                             |   | 1.15    |    | .24     |   | .22     |   |
| Cumulative  effect of accounting change                          |   | .05     |    | —  |   | .06     |   |
| Net income                                                       |   | $       | 4.25    |    | $      | 2.96    |   | $ | 3.40 |   |

 

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Revenues and sales increased $867.5 million, or 12 percent, in 2003 and$496.6 million, or 8 percent, in 2002. Service revenues increased $727.2 million, or 11 percent, in 2003 and$528.9 million, or 9 percent, in 2002. The increases in service revenues in both years primarily reflectedgrowth in ALLTEL’s communications customer base resulting primarily fromacquisitions and the corresponding increase in access revenues.  The acquisitions of wireless and wirelineproperties completed in 2003 and 2002, as previously discussed, accounted forapproximately $544.4 million and $360.7 million of the overall increases in servicerevenues and $569.8 million and $369.9 million of the overall increase in totalrevenues and sales in 2003 and 2002, respectively.  In addition to the effects of the acquisitions, service revenuesfor 2003 also reflected increased wireless access revenues resulting fromnonacquisition-related customer growth, increased sales of ALLTEL’shigher-yield national rate plans and continued growth in average monthlyminutes of use per customer.  Servicerevenues for 2003 also reflected an increase in the amounts billed to customersto offset costs related to certain regulatory mandates, including UniversalService funding.  Growth in theCompany’s Internet operations and increased revenues derived from wireless dataservices and from the sale of enhanced communications services, includingcaller identification, voice mail and communications equipment protection plansalso contributed to the increases in service revenues in both 2003 and2002.  The increase in service revenuesin 2003 attributable to acquisitions, higher network usage, additionalregulatory mandate fees billed to customers and growth in Internet, wirelessdata and enhanced communications services were partially offset by lowerwireless airtime and retail roaming revenues as compared to 2002, the loss ofwireline access lines, and a decrease in telecommunications informationservices revenues.  The increase inservice revenues in 2002 attributable to acquisitions and growth in Internet,wireless data and enhanced communications services were partially offset bylower average revenue per wireless customer compared to 2001 and the loss ofwireline access lines, which declined in both 2003 and 2002 primarily due tothe effects of broadband and wireless substitution.

 

Product sales increased $140.3 million, or 21 percent, in 2003 anddecreased $32.3 million, or 5 percent, in 2002.  The increase in product sales in 2003 primarily resulted fromhigher retail prices realized on the sale of wireless handsets and accessoriesdriven by growth in gross customer additions and increased retention efforts bythe Company.  The wireless and wirelineacquisitions discussed above accounted for approximately $25.4 million of theoverall increase in product sales in 2003. Product sales for 2003 also reflected increased sales oftelecommunications and data products to non-affiliates of $60.0 million,primarily reflecting increased sales of wireless handsets to retailers andother distributors.  Product salesdecreased in 2002 primarily due to a reduction in revenues derived from thesales of wireless handsets and accessories, reflecting decreases in retailprices driven by competition.  Directorypublishing revenues also decreased in 2002 primarily due to the loss of onemajor customer.  A decline in customerpremise equipment sales consistent with ALLTEL’s decision to exit certainCompetitive Local Exchange Carrier (“CLEC”) markets, as further discussedbelow, also contributed to the decrease in product sales in 2002.  These decreases were partially offset in2002 by increased product sales of $9.2 million attributable to the wirelessand wireline property acquisitions.

 

Cost of services increased $234.6 million, or 12 percent, in 2003 and$238.5 million, or 13 percent, in 2002. The acquisitions of wireless and wireline properties completed in 2003and 2002 accounted for approximately $214.4 million and $101.6 million of theoverall increases in cost of services in 2003 and 2002, respectively.  In addition to the effects of the acquisitions,cost of services for 2003 and 2002 also reflected increases in network-relatedcosts for the wireless operations of $44.5 million and $34.7 million,respectively, primarily resulting from increased network traffic resulting fromcustomer growth and expansion of calling areas.  Cost of services for 2003 also reflected increases in wirelessregulatory fees of $40.5 million, principally related to the Universal ServiceFund, reflecting changes in FCC regulations effective April 1, 2003.  Cost of services for 2003 also includedincremental expenses of approximately $14.9 million associated with a strikethat began in early June and ended on October 1, 2003, when the Company signeda new collective bargaining agreement impacting approximately 400 ALLTELemployees in Kentucky represented by the Communications Workers ofAmerica.  The increases in cost ofservices attributable to acquisitions, increased wireless network-relatedcosts, higher regulatory fees and incremental expenses associated with thestrike were partially offset by reductions in bad debt expense.  Losses sustained from bad debts decreased$81.2 million in 2003, primarily reflecting the Company’s continued efforts tomonitor its customer credit policies, evaluate minimum deposit requirements forhigh-credit risk customers and improve collection practices by adding newtechnologies and proactively managing the efforts of its collectionagencies.  Conversely, cost of servicesin 2002 reflected increased bad debt expense of $123.1 million, primarily dueto the overall decline in economic conditions, weakening consumer credit andthe effects of fourth quarter 2001 marketing programs directed toward thecredit-challenged wireless customer segment. Bad debt expense for 2002 also included a $14.0 million write-down inreceivables resulting from an interexchange carrier’s bankruptcy filing.

 

Cost of products sold increased $152.2 million, or 17 percent, in 2003and decreased $15.9 million, or 2 percent, in 2002. The increase in cost ofproducts sold in 2003 was consistent with the growth in wireless customeractivations and the Company’s continued retention efforts.  In addition, the wireless and wirelineproperty acquisitions accounted for $46.8 million of the overall increase incost of products sold in 2003.  Cost ofproducts sold decreased in 2002 consistent with the overall decline in productsales noted above and the effects of lower gross profit margins earned from thesale of 

 

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telecommunications and data products. The reduction in gross profit margins earned by the product distributionoperations reflected lower margins earned on affiliated sales and increasedcompetition from other distributors and from direct sales bymanufacturers.  These decreases werepartially offset in 2002 by increased cost of products sold of $17.3 millionattributable to the wireless and wireline property acquisitions.

 

Selling, general, administrative and other operating expenses increased$201.1 million, or 16 percent, in 2003 and $95.9 million, or 8 percent, in2002.  The wireless and wirelineproperty acquisitions accounted for $123.2 million and $63.3 million of theoverall increases in selling, general, administrative and other expenses in2003 and 2002, respectively. Advertising costs increased $33.6 million in 2003primarily due to increased promotional activities, including the launch of anew advertising campaign to promote ALLTEL’s brand name recognition amongconsumers.  Wireless general andadministrative expenses increased $34.8 million in 2003, primarily due toadditional costs incurred to complete, for various acquisitions, the conversionof these operations to the Company’s billing and operational supportsystems.  In addition to the effects ofthe acquisitions, selling, general, administrative and other expenses for 2002reflected increased commission costs of $46.6 million consistent with thegrowth in gross wireless customer additions and increased sales of ALLTEL’sTotal and National Freedom wireless service rate plans.  Commissions expense also reflected increasedcommissions paid to outside agents reflecting a shift in the Company’sdistribution and product mix.  Theincreases resulting from acquisitions and higher commissions costs werepartially offset by cost savings from ALLTEL’s restructuring of its CLEC andretail store operations completed during the first quarter of 2002, as furtherdiscussed below, and decreased advertising costs of $13.5 million resultingfrom discounted pricing received by ALLTEL due to purchasing advertising inbulk as part of centralizing the Company’s advertising efforts.

 

Depreciation and amortization expense increased $152.2 million, or 14percent, in 2003 and $13.5 million, or 1 percent, in 2002.  The wireless and wireline propertyacquisitions accounted for $101.3 million and $54.2 million of the overallincreases in depreciation and amortization expense in 2003 and 2002,respectively.  In addition to theeffects of the acquisitions, depreciation and amortization expense increased$50.9 million and $57.6 million in 2003 and 2002, respectively, primarily as aresult of growth in communications plant in service.  The increase in depreciation and amortization expense in 2002attributable to acquisitions and growth in communications plant in service werepartially offset by a reduction in amortization expense of $98.3 million due tono longer amortizing goodwill and other indefinite-lived intangible assets inaccordance with SFAS No. 142.

 

Pension expense, which is included in both cost of services andselling, general, administrative and other expenses, increased $32.2 million in2003 and remained flat in 2002 compared to 2001.  The increase in pension expense for 2003 reflected a reduction inthe discount rate used to measure annual pension costs from 7.25 percent in2002 to 6.85 percent in 2003.  Inaddition, pension expense for 2003 included $20.7 million of additionalamortization of unrecognized actuarial losses, primarily reflecting negativeinvestment returns earned on pension plan assets during the three years endedDecember 31, 2002.  (See “Pension Plans”below for an additional discussion of the factors affecting the Company’sannual pension costs.)

 

Operating income increased $178.3 million, or 10 percent, in 2003 and$171.0 million, or 11 percent, in 2002. The increases in operating income in both periods primarily reflectedthe growth in revenues and sales, as noted above.  The wireless and wireline acquisitions accounted for $84.1million and $133.5 million of the overall increases in operating income in 2003and 2002, respectively.  Operatingmargins attributable to the acquisitions declined in 2003 compared to 2002,primarily reflecting the incremental strike-related costs discussed above, theeffects of migrating the acquired CenturyTel operations to ALLTEL’s negotiatedroaming rates, increased selling-related expenses due to volume growth in newwireless customer activations, and the additional costs incurred to convert theacquired operations to the Company’s billing and operational support systems.  Operating income for both 2003 and 2002 alsoincluded the effects of integration expenses, restructuring and other chargesas further discussed below.

 

Integration Expenses and Other Charges

A summary of theintegration and other charges recorded in the second quarter of 2003 was asfollows:

 

| (Millions)                                    |   | Total |   |
|-----------------------------------------------|--------|-------|--------|
| Severance and  employee benefit costs         |   | $     | 6.3    |   |
| Lease and  contract termination costs         |   | (0.5  | )      |
| Write-down of  software development costs     |   | 13.2  |   |
| Total  integration expenses and other charges |   | $     | 19.0   |   |

 

The Company recorded arestructuring charge of $8.5 million consisting of severance and employeebenefit costs related to a planned workforce reduction, primarily resultingfrom the closing of certain call center locations.  As of December 31, 

 

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2003, the Company hadpaid $8.3 million in severance and employee-related expenses, and all of theemployee reductions had been completed. The Company also recorded a $2.7 million reduction in the liabilitiesassociated with various restructuring activities initiated prior to 2003,consisting of $2.2 million in severance and employee benefit costs and $0.5million in lease termination costs.  Thereduction primarily reflected differences between estimated and actual costspaid in completing the previous planned workforce reductions and leaseterminations.  During the second quarterof 2003, ALLTEL also wrote off certain capitalized software development coststhat had no alternative future use or functionality.

 

A summary of theintegration and other charges recorded in 2002 by quarter was as follows:

 

| (Millions)                                              |   | 1st  Quarter |   | 2nd  Quarter |   | 3rd  Quarter |   | 4th  Quarter |   | Total  |   |
|---------------------------------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------|--------|
| Severance and  employee benefit costs                   |   | $            | 13.4   |         | $      | —       |   | $            | 1.9    |   | $      | (0.5 | ) | $ | 14.8 |   |
| Lease and  contract termination costs                   |   | 12.4         |   | —       |   | 2.2          |   | (2.0         | )      | 12.6   |   |
| Computer system  conversion and other integration costs |   | 3.4          |   | 9.0          |   | 8.6          |   | —       |   | 21.0   |   |
| Write-down of  cell site equipment                      |   | 7.1          |   | —       |   | —       |   | —       |   | 7.1    |   |
| Write-down of  software development costs               |   | 4.4          |   | —       |   | —       |   | —       |   | 4.4    |   |
| Branding and  signage costs                             |   | —       |   | —       |   | 7.8          |   | —       |   | 7.8    |   |
| Equipment  removal and other disposal costs             |   | 2.2          |   | —       |   | —       |   | —       |   | 2.2    |   |
| Total  integration expenses and other charges           |   | $            | 42.9   |         | $      | 9.0          |   | $            | 20.5   |   | $      | (2.5 | ) | $ | 69.9 |   |
| Number of  employees terminated                         |   | 910          |   | —       |   | 130          |   | —       |   | 1,040  |   |
| Number of lease  sites terminated                       |   | 31           |   | —       |   | 7            |   | —       |   | 38     |   |

 

During the fourth quarter of 2002, the Company recorded a $2.5 millionreduction in the liabilities associated with the restructuring of its CLECoperations initiated during the first quarter of 2002, as discussed below.  The reduction primarily reflecteddifferences between estimated and actual costs to exit certain CLEC markets.

 

During the third quarter of 2002, the Company recorded a restructuringcharge of $4.1 million consisting of severance and employee benefit costsrelated to a planned workforce reduction and lease termination costs primarilyrelated to the closing of seven product distribution centers.  The lease termination costs consisted of$1.2 million, primarily representing the estimated minimum contractualcommitments over the ensuing one to four years for operating locations that theCompany abandoned, net of anticipated sublease income.  The lease termination costs also included anadditional $1.0 million to reflect the revised estimated costs, net ofanticipated sublease income, to terminate leases associated with four operatinglocations.  ALLTEL had previouslyrecorded $9.1 million in lease termination costs related to these fourlocations ($2.8 million during the first quarter of 2002 and $6.3 million in1999), as further discussed below.  Theadditional charge reflected a further reduction in expected sublease incomeattributable primarily to softening demand in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 130 employees primarily in theCompany’s product distribution operations. As of December 31, 2003, the Company had paid $1.9 million in severanceand employee-related expenses, and all of the employee reductions had beencompleted.

 

In connection with the purchase of wireline properties in Kentucky fromVerizon and wireless properties from CenturyTel, the Company incurred brandingand signage costs of $7.8 million during the third quarter of 2002.  In connection with these acquisitions, theCompany also incurred computer system conversion and other integration costsduring each of the first three quarters of 2002.  These expenses included internal payroll and employee benefitcosts, contracted services, and other computer programming costs incurred inconnection with expanding ALLTEL’s customer service and operations supportfunctions to handle increased customer volumes resulting from the acquisitionsand to convert Verizon’s customer billing and operations support systems toALLTEL’s internal systems.

 

In 2001, during the evaluation of its existing CLEC operations, theCompany determined that a business model that relied heavily on interconnectionwith other carriers had limited potential for profitably acquiring marketshare.  Accordingly, in January 2002,the Company announced its plans to exit its CLEC operations in seven statesrepresenting less than 20 percent of ALLTEL’s CLEC access lines.  In the course of exiting these markets,ALLTEL honored all existing customer contracts, licenses and other obligationsand worked to minimize the inconvenience to affected customers by migratingthese customers to other service providers. During the first quarter of 2002, the Company also consolidated its callcenter and retail store operations.  Inconnection with these activities, the Company recorded a restructuring chargeconsisting of severance and employee benefit costs related to a plannedworkforce reduction, costs associated with terminating certain CLEC transportagreements and lease termination fees incurred with the closing of certainretail and call center locations.  Inexiting the CLEC operations, the Company also incurred costs to disconnect andremove switching and other transmission equipment from central officefacilities and expenses to notify and migrate 

 

F-8

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customers to other service providers. ALLTEL also wrote off certain capitalized software development coststhat had no alternative future use or functionality.  The restructuring plans, completed in March 2002, provided forthe elimination of 910 employees primarily in the Company’s sales, customerservice and network operations support functions.  As previously discussed, in the fourth quarter of 2002, ALLTELreduced the liabilities associated with these restructuring plans by $2.5million.  As of December 31, 2003, theCompany had paid $12.3 million in severance and employee-related expenses, andall of the employee reductions had been completed.

 

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

 

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

 

During 2001, the Company restructured its regional communications,product distribution and corporate operations and recorded write-downs in thecarrying value of certain cell site equipment to fair value in connection withthe product replacement program previously discussed.  A summary of the restructuring and other charges recorded in 2001was as follows:

 

| (Millions)                             |   | Total |   |
|----------------------------------------|--------|-------|--------|
| Severance and  employee benefit costs  |   | $     | 56.5   |   |
| Lease and  contract termination costs  |   | 4.7   |   |
| Write-down of  cell site equipment     |   | 15.1  |   |
| Total  restructuring and other charges |   | $     | 76.3   |   |

 

As indicated in thetable above, the restructuring and other charges consisted of $56.5 million inseverance and employee benefit costs related to planned workforce reductions,$4.7 million in lease termination costs associated with the closing of certainretail and other operating locations, and the write-down in the carrying valueof certain cell site equipment, as previously discussed.  Included in the severance and employeebenefit component of the restructuring charge were non-cash charges of $22.6million.  These non-cash chargesconsisted of $21.5 million in additional pension and post-retirement benefitcosts related to a special early retirement program offered by the Company toemployees meeting certain age and service requirements and $1.1 million incompensation expense related to the accelerated vesting of certain stockoptions.  Eligible employees who electedthe early retirement incentive received five years of additional vested servicefor purposes of calculating their retirement benefits available under theCompany’s pension and post-retirement benefit plans and 230 employees acceptedthe retirement incentive offer.  Therestructuring plan was completed in December 2001 and resulted in theelimination of 1,493 employees, including the employees who accepted the earlyretirement incentive.  The work forcereductions occurred primarily in operations management, engineering, sales andthe corporate support functions.  As ofDecember 31, 2003, the Company had paid $33.9 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.  The lease termination costsconsisted of $3.6 million representing the estimated minimum contractualcommitments over the next one to five years for 62 operating locations that theCompany abandoned, net of anticipated sublease income.  The lease termination costs also included$1.1 million of unamortized leasehold improvement costs related to theabandoned locations.

 

As of December 31, 2003, the remaining unpaid liability related to theCompany’s integration and restructuring activities was $3.8 million, consistingof lease cancellation and contract termination costs of $3.1 million andseverance and employee-related expenses of $0.7 million.  Cash outlays for the remainingemployee-related expenses and lease termination costs will be disbursed overthe ensuing 12 to 48 months.  Fundingfor the remaining unpaid liability will be internally financed from operating cashflows.  The integration expenses andother charges decreased net income $11.5 million, $42.3 million and $45.3million for the years ended December 31, 2003, 2002 and 2001, respectively.

 

F-9

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The integration expenses and other charges discussed above were notallocated to the Company’s business segments, as management evaluates segmentperformance excluding the effects of these items. (See Note 8 to theconsolidated financial statements for additional information regarding thesecharges.)

 

Non-Operating Expense, Net

| (Millions)                                      |   | 2003  |   | 2002   |   | 2001  |   |
|-------------------------------------------------|--------|-------|--------|--------|--------|-------|--------|
| Equity earnings  in unconsolidated partnerships |   | $     | 64.4   |   | $      | 65.8  |   | $ | 56.9 |   |
| Minority  interest in consolidated partnerships |   | (78.6 | )      | (73.4  | )      | (75.2 | )      |
| Other income,  net                              |   | 11.0  |   | 2.3    |   | 4.2   |   |
| Non-operating  expense, net                     |   | $     | (3.2   | )      | $      | (5.3  | )      | $ | (14.1 | ) |

 

Non-operating expense, net decreased $2.1 million, or 40 percent, in2003 and $8.8 million, or 62 percent, in 2002. Equity earnings in unconsolidated partnerships in 2003 and 2002 included$17.9 million and $15.1 million, respectively, of additional income resultingfrom the acquisition of certain minority partnership interests from CenturyTel,as previously discussed.  The increasesin equity earnings in both years attributable to the CenturyTel acquisitionwere partially offset in 2003 by the effects of the acquisitions of additionalownership interests in the Michigan and Wisconsin wireless properties and in2002 by the 2001 acquisition of a controlling interest in a Texas wirelesspartnership, in which the Company previously held a minority ownershipinterest.  Minority interest expense in2003 and 2002 included $8.8 million and $5.6 million, respectively, ofadditional expense resulting from the acquisition of certain non-wholly ownedpartnership interests from CenturyTel. In addition to the effects of the CenturyTel acquisition, minorityinterest expense increased in 2003 due to improved earnings in ALLTEL’smajority-owned wireless operations as compared to 2002.  The increase in minority interest expenseattributable to the CenturyTel acquisition was offset in 2002 by the transferto ALLTEL of the remaining ownership interest in two South Carolina MSAs aspart of the dissolution of a wireless partnership with BellSouth Mobility, Inc.(“BellSouth”) that was completed in 2001. Other income, net for 2003 included additional dividend income of $8.3million earned on the Company’s equity investments, principally FidelityNational common stock.  Conversely,other income, net for 2002 included additional interest income of $8.2 millionfrom investing the cash proceeds from ALLTEL’s equity unit and long-term debtofferings, as previously discussed. Other income, net for 2002 also included net losses of $12.1 millionrelated to the disposal of certain assets.

 

Interest Expense

Interest expense increased $23.5 million, or 7 percent, in 2003 and$93.9 million, or 36 percent, in 2002. The increases in both years primarily reflected the additional interestexpense resulting from ALLTEL’s equity unit and long-term debt offerings tofinance the cost of its 2002 wireline and wireless property acquisitionspreviously discussed.  The increase ininterest expense in 2003 attributable to the equity unit and long-term debtofferings was partially offset by the effects of the repayment of $763.4million of long-term debt.  In March2003, the Company repaid a $450.0 million unsecured note using commercial paperborrowings.  In the second quarter of2003, ALLTEL repaid all outstanding commercial paper borrowings and prepaid$249.1 million of long-term debt outstanding under the Rural UtilitiesServices, Rural Telephone Bank and Federal Financing Bank programs.  The debt repayments in the second quarter werefunded primarily from the cash proceeds received from the sale of the financialservices division to Fidelity National previously discussed.

 

Gain on Disposal of Assets, Write-Down of Investmentsand Other

In 2003, ALLTEL sold to Convergys Information Management Group(“Convergys”) certain assets and related liabilities, including selectedcustomer contracts and capitalized software development costs, associated withthe Company’s telecommunications information services operations.  In connection with this sale, the Companyreceived proceeds of $37.0 million and recorded a pretax gain of $31.0million.  ALLTEL also recorded pretaxwrite-downs totaling $6.0 million to reflect other-than-temporary declines inthe fair value of certain investments in unconsolidated limitedpartnerships.  As noted above, duringthe second quarter of 2003, ALLTEL retired, prior to stated maturity dates,$249.1 million of long-term debt.  Inconnection with the early retirement of this debt, the Company incurred pretaxtermination fees of $7.1 million.  Thesetransactions increased net income $10.7 million in 2003.

 

In 2002, the Company recorded a pretax gain of $22.1 million from thesale of a wireless property in Pennsylvania to Verizon Wireless.  The Company also recorded pretax write-downstotaling $15.1 million related to its investment in Hughes Tele.com Limited(“HTCL”).  The initial write-down of$12.5 million was recorded during the second quarter of 2002 in connection withHTCL’s agreement to merge with a major Indian telecommunications company and another-than-temporary decline in the fair value of HTCL’s common stock.  In December 2002, ALLTEL exchanged itsshares of HTCL for non-voting, mandatory redeemable convertible preferredshares of Tata Teleservices Limited (“Tata”), a privately held Indian company.  Subsequently, ALLTEL decided to liquidatethis investment by selling the Tata preferred shares.  The additional $2.6 million write-down of the Tata investmentrecorded in the fourth quarter of 2002 reflected the 

 

F-10

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difference between the carrying amount of the Tata preferred shares andthe estimated sales proceeds to be realized by ALLTEL upon completion of thesale, which occurred in February 2003. During 2002, the Company also recorded a pretax adjustment of $4.8million to reduce the gain recognized from the dissolution of the wirelesspartnership with BellSouth involving wireless properties in four states.  As discussed below, this gain was initiallyrecorded in 2001.  This additionaladjustment reflected a true up for cash distributions payable to BellSouth inconjunction with the dissolution of the partnership.  In 2002, the Company also recorded a pretax write-down of $1.2million related to an other-than-temporary decline in ALLTEL’s investment inAirspan Networks, Inc., a provider of wireless telecommunicationsequipment.  The effect of thesetransactions increased net income $0.6 million in 2002.

 

In 2001, ALLTEL recorded pretax gains of $347.8 million from the saleof 20 PCS licenses to Verizon Wireless. The Company also recorded a pretax gain of $9.5 million upon thedissolution of the partnership with BellSouth. Upon dissolution, the partnership’s assets were distributed to thepartners at fair value resulting in a gain for financial reportingpurposes.  ALLTEL also recorded pretaxgains of $3.2 million from the sale of certain investments and prepaid $73.5million of long-term debt prior to its stated maturity date.  In connection with the early retirement ofthat debt, ALLTEL incurred pretax termination fees of $2.9 million.  These transactions increased net income$212.7 million in 2001.

 

Income Taxes

Income tax expense increased $70.4 million, or 14 percent, in 2003consistent with the overall growth in segment income as further discussed belowunder “Results of Operations by Business Segment”.  Income tax expense decreased $142.8 million, or 22 percent, in2002 primarily due to the tax-related effects of the integration expenses andother charges, gain on disposal of assets and write-down of investmentspreviously discussed.  The tax-relatedeffects of these items accounted for $156.7 million of the overall decrease inincome tax expense in 2002 and was partially offset by growth in segmentincome.  Income tax expense for 2002also reflected an approximate two percent reduction in ALLTEL’s effectiveincome tax rate from 2001 as a result of no longer amortizing goodwill andother indefinite-lived intangible assets for financial statement purposespursuant to SFAS No. 142.

 

Discontinued Operations

As previously discussed, as a result of the April 1, 2003 sale of thefinancial services division to Fidelity National and the January 2003termination of ALLTEL’s business venture with Bradford & Bingley Group, theCompany’s financial services operations have been reflected as discontinuedoperations in ALLTEL’s consolidated financial statements for all periodspresented.  The following table includescertain summary income statement information related to the financial servicesoperations reflected as discontinued operations for the years ended December31:

 

| (Millions)                                      |   | 2003   |   | 2002   |   | 2001   |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Revenues and  sales                             |   | $      | 210.3  |   | $      | 871.0  |   | $ | 889.8 |   |
| Operating  expenses                             |   | 148.1  |   | 775.1  |   | 773.8  |   |
| Operating income                                |   | 62.2   |   | 95.9   |   | 116.0  |   |
| Minority  interest in consolidated partnerships |   | — |   | 3.5    |   | 3.4    |   |
| Other income  (expense), net                    |   | (0.1   | )      | 5.8    |   | 1.4    |   |
| Gain on sale of  discontinued operations        |   | 555.1  |   | — |   | — |   |
| Pretax income  from discontinued operations     |   | 617.2  |   | 105.2  |   | 120.8  |   |
| Income tax  expense                             |   | 256.2  |   | 31.0   |   | 51.3   |   |
| Income from  discontinued operations            |   | $      | 361.0  |   | $      | 74.2   |   | $ | 69.5 |   |

 

The depreciation of long-lived assets related to the financial servicesdivision ceased as of January 28, 2003, the date of the agreement to sell suchoperations.  The cessation of depreciationhad the effect of reducing operating expenses by approximately $13.0 million in2003.  The Company recorded an after-taxgain of $323.9 million upon completion of the sale of the financial servicesdivision.  Included in operatingexpenses for 2002 was a $42.3 million charge associated with discontinuing theCompany’s business venture with Bradford & Bingley Group.  The charge primarily consisted of thewrite-off of capitalized software development costs that had no alternative useor functionality.  The charge alsoincluded the write-off of unamortized leasehold improvements and other costs tounwind the business venture.

 

Net Income and Earnings per Share

Net income increased $405.8 million, or 44 percent, in 2003 anddecreased $142.7 million, or 13 percent, in 2002.  Both basic and diluted earnings per share also increased 44percent in 2003 and decreased 13 percent in 2002.  The increase in net income and earnings per share in 2003primarily reflected growth in segment income, as further discussed below under“Results of Operations by Business Segment”, the gain realized from the sale ofthe financial services division and the cumulative effect of adopting SFAS No.143.  These increases were partiallyoffset by the effects of integration expenses and other charges, investmentwrite-downs and termination fees on the early retirement of long-termdebt.  Conversely, 

 

F-11

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reported net income and earnings per share for 2002 included theeffects of integration expenses and other charges, gains realized from the saleof assets and investment write-downs. In addition, operating results for 2002 reflected the effects of nolonger amortizing indefinite-lived intangible assets pursuant to the adoptionof SFAS No. 142, additional net interest cost due to prefunding ALLTEL’swireline and wireless acquisitions, and the write-down in receivables due to aninterexchange carrier’s bankruptcy filing. The effect of these items accounted for $171.3 million of the overalldecrease in net income in 2002 and was partially offset by growth in segmentincome.

 

Average Common Shares Outstanding

The average number of common shares outstanding increased slightly in2003 compared to a slight decrease in average shares outstanding in 2002.  The increase in 2003 primarily reflectedadditional shares issued upon the exercise of options granted under ALLTEL’semployee stock-based compensation plans. The decrease in 2002 was primarily due to the Company’s repurchase of3.3 million of its common shares in 2001, as further discussed below.  The effect on the average number of commonshares outstanding resulting from the repurchase of stock was partially offsetin 2002 by additional shares issued upon the exercise of options granted under ALLTEL’semployee stock-based compensation plans.

 

**RESULTSOF OPERATIONS BY BUSINESS SEGMENT**

Communications-Wireless Operations

| (Dollars in millions, customers in thousands) |   | 2003    |    | 2002    |   | 2001    |   |
|-----------------------------------------------|--------|---------|---------|---------|--------|---------|--------|
| Revenues and  sales:                          |   |    |    |    |   |    |   |
| Service revenues                              |   | $       | 4,466.5 |    | $      | 3,999.2 |   | $ | 3,639.8 |   |
| Product sales                                 |   | 261.9   |    | 161.0   |   | 192.2   |   |
| Total revenues  and sales                     |   | 4,728.4 |    | 4,160.2 |   | 3,832.0 |   |
| Costs and  expenses:                          |   |    |    |    |   |    |   |
| Cost of services                              |   | 1,367.8 |    | 1,246.1 |   | 1,039.2 |   |
| Cost of products  sold                        |   | 536.7   |    | 430.6   |   | 467.1   |   |
| Selling,  general, administrative and other   |   | 1,154.9 |    | 958.0   |   | 879.0   |   |
| Depreciation and  amortization                |   | 671.0   |    | 577.6   |   | 619.0   |   |
| Total costs and  expenses                     |   | 3,730.4 |    | 3,212.3 |   | 3,004.3 |   |
| Segment income                                |   | $       | 998.0   |    | $      | 947.9   |   | $ | 827.7 |   |
| Customers                                     |   | 8,023.4 |    | 7,601.6 |   | 6,683.0 |   |
| Gross customer  additions (a)                 |   | 2,856.8 |    | 3,157.0 |   | 2,297.6 |   |
| Net customer  additions (a)                   |   | 421.8   |    | 1,032.5 |   | 441.4   |   |
| Prepaid customer  unit adjustment (b)         |   | —  |    | (113.9  | )      | —  |   |
| Market  penetration rate                      |   | 13.3    | %       | 12.9    | %      | 13.5    | %      |
| Postpay customer  churn                       |   | 2.09    | %       | 2.23    | %      | 2.34    | %      |
| Total churn                                   |   | 2.59    | %       | 2.50    | %      | 2.41    | %      |
| Average revenue  per customer per month       |   | $       | 47.51   |    | $      | 46.97   |   | $ | 47.09 |   |
| Cost to acquire  a new customer (c)           |   | $       | 308     |    | $      | 304     |   | $ | 302 |   |

 

Notes toCommunications-Wireless Operations Table:

(a)     Includes the effects ofacquisitions and dispositions.  Excludesreseller customers for all periods presented.

 

(b)     In integrating the operationsof the former CenturyTel properties, the Company standardized disconnectpolicies across its entire wireless operations, the primary effects of whichwere a two-month advancement of customer disconnects among the Company’sprepaid customer segment and a reduction of ALLTEL’s customer base.  This policy change did not affect reportedoperating results because the customer accounts disconnected were inactive.

 

(c)     Cost to acquire a newcustomer is calculated by dividing the sum of product sales, cost of productssold and sales and marketing expenses (included within “Selling, general,administrative and other”) by the number of internal gross customer additionsduring the period.  Customer acquisitioncosts exclude amounts related to the customer retention efforts.  A reconciliation of the revenues, expensesand customer additions used in computing cost to acquire a new customer was asfollows:

 

| (Millions, except customers in thousands)         |   | 2003    |   | 2002    |   | 2001    |   |
|---------------------------------------------------|--------|---------|--------|---------|--------|---------|--------|
| Product sales                                     |   | $       | (176.4 | )       | $      | (118.0  | )      | $ | (161.5 | ) |
| Cost of products  sold                            |   | 296.8   |   | 269.0   |   | 333.9   |   |
| Sales and  marketing expense                      |   | 714.0   |   | 579.3   |   | 521.1   |   |
| Total costs  incurred to acquire new customers    |   | $       | 834.4  |    | $      | 730.3   |   | $ | 693.5 |   |
| Gross customer  additions, excluding acquisitions |   | 2,709.4 |   | 2,404.2 |   | 2,297.6 |   |
| Cost to acquire  a new customer                   |   | $       | 308    |    | $      | 304     |   | $ | 302 |   |

 

F-12

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During 2003, the total number of wireless customers served by ALLTELincreased by more than 400,000 customers, or 6 percent, compared to an annualgrowth rate in customers of 14 percent in 2002.  As previously discussed, in 2003, the Company purchased wirelessproperties in Arizona, Michigan, Mississippi and Wisconsin.  These acquisitions accounted forapproximately 147,000 of the overall increase in wireless customers thatoccurred during 2003.  Conversely, theacquisition of wireless properties from CenturyTel accounted for approximately762,000 of the overall increase in wireless customers that occurred in2002.  Overall, the Company’s wirelessmarket penetration rate (number of customers as a percent of the totalpopulation in ALLTEL’s service areas) increased to 13.3 percent as of December31, 2003.

 

Excluding the effects of the acquisitions, gross customer additionsincreased to 2,709,000 in 2003, an increase of 13 percent compared to2002.  The level of customer growth in2004 will be dependent upon the Company’s ability to attract new customers inan increasingly competitive marketplace currently supporting up to sevencompetitors in each market.  The Companywill continue to focus its efforts on sustaining value-added customer growth byimproving service quality and customer satisfaction, managing its distributionchannels and customer segments, offering attractively priced rate plans and newor enhanced services and other features, selling additional phone lines andservices to existing customers and pursuing strategic acquisitions.  Consistent with this focus, the Companyrecently launched “Touch2Talk”, ALLTEL’s push-to-talk wireless offering that,once fully deployed by the end of the first quarter of 2004, will provide customerswith service coverage over ALLTEL’s entire digital wireless network.

 

The Company continues to focus its efforts on lowering postpay customerchurn (average monthly rate of customer disconnects).  During the second quarter of 2003, the Company launched severaloperational initiatives designed to improve overall service quality to itscustomers both at its retail stores and in its call centers.  To improve customer retention, the Companyoffers competitively priced rate plans, proactively analyzes customer usagepatterns and migrates customers to newer digital handsets.  ALLTEL also continues to upgrade itstelecommunications network in order to offer expanded network coverage andquality and to provide enhanced service offerings to its customers.  The Company believes that its improvementsin customer service levels, proactive retention efforts, and digital networkexpansion contributed to the decrease in postpay customer churn in 2003.  Total churn increased in 2003 primarily dueto an increase in the number of prepaid customer disconnects as compared to2002, primarily driven by the Company’s decision to phase-out offeringunlimited prepaid service in 11 markets, as well as the change in the Company’sprepaid disconnect policy, effective in the fourth quarter of 2002, as furtherdiscussed in Note (b) to the Communications-Wireless Operations Table.  Customers subscribing to the unlimitedprepaid plans represent less than one percent of the Company’s total wirelesscustomer base.

 

Wireless revenues and sales increased $568.2 million, or 14 percent, in2003 and $328.2 million, or 9 percent, in 2002.  Service revenues increased $467.3 million, or 12 percent in 2003and $359.4 million, or 10 percent, in 2002. The increases in service revenues in both years primarily reflectedgrowth in ALLTEL’s customer base and the resulting increase in accessrevenues.  The acquisition of thewireless properties accounted for approximately $301.8 million and $179.3million of the overall increases in service revenues and $321.3 million and$186.4 million of the overall increases in total revenues and sales in 2003 and2002, respectively.  In addition to theeffects of the acquisitions, access revenues increased $209.6 million and$168.1 million in 2003 and 2002, respectively, primarily because ofnonacquisition-related customer growth, increased sales of the Company’shigher-yield Total and National Freedom rate plans and growth in averagemonthly minutes of use per customer. Service revenues in both 2003 and 2002 also reflected increases inrevenues earned from data messaging services and from the sale of enhancedservices, including caller identification, voicemail and equipment protectionplans.  Revenues from data and enhancedservices increased $44.1 million and $33.8 million in 2003 and 2002,respectively, reflecting increased demand for these service offerings.  Service revenues also included increases inregulatory and other fees of $41.4 million in 2003 and $45.7 million in2002.  The increase in fees in 2003reflected additional amounts billed to customers to offset costs related tocertain regulatory mandates, including universal service funding, primarilyresulting from changes in FCC regulations applicable to universal service feesthat were effective on April 1, 2003. Conversely, the increase in fees in 2002 reflected additional amountsassessed for early disconnection, late payment and reconnection services ascompared to 2001, resulting from enhancements to ALLTEL’s billing systems toconsistently charge for these services and the overall decline in economicconditions and weakening consumer credit. Service revenue growth in 2003 and 2002 attributable to increased accessrevenues from customer growth, additional revenues earned from data andenhanced services, and increased regulatory and other fees were partiallyoffset by lower local airtime and retail roaming revenues of $110.7 million and$39.3 million, respectively.  Thedecreases in local airtime and retail roaming revenues primarily reflected theexpansion of local, regional and national calling areas.  Service revenues for 2002 also reflected anincrease in rental revenues of $16.0 million primarily resulting from ALLTEL’sagreement with American Tower Corporation (“American Tower”) to lease toAmerican Tower 1,773 of the Company’s cell site towers for $531.9 million ofcash paid in advance.  This transactionclosed in several phases throughout 2001 and was completed in February2002.  Proceeds from this leasing transactionare recognized as service revenues on a straight-line basis over the fifteen-yearlease term.

 

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Average revenue per customer per month in 2003 increased one percentcompared to 2002, primarily reflecting increased sales of the Company’shigher-yield Total and National Freedom rate plans and growth in averageminutes of use per customer per month, partially offset by decreased wholesaleroaming rates and slightly dilutive effects of migrating the acquiredCenturyTel markets to ALLTEL’s roaming rate structure.  The increase in regulatory mandate feesbilled to customers did not have a significant impact on average revenue percustomer per month during 2003.  Thedecrease in average revenue per customer per month in 2002 primarily resultedfrom decreased wholesale roaming rates, the effects of which were partiallyoffset by increased sales of the Company’s higher-yield Total and NationalFreedom rate plans.  Growth in servicerevenues and average revenue per customer per month during 2004 will dependupon ALLTEL’s ability to maintain market share in an increasingly competitivemarketplace by adding new customers, retaining existing customers, increasingcustomer usage, and selling data and additional enhanced services.

 

Product sales increased $100.9 million, or 63 percent, in 2003 anddecreased $31.2 million, or 16 percent, in 2002.  The increase in product sales in 2003 primarily resulted fromhigher retail prices, growth in gross customer additions and increasedretention efforts by the Company focused on migrating existing wirelesscustomers to new digital technologies.  In addition, the acquisitions of wireless properties discussedabove accounted for approximately $19.5 million of the overall increase inproduct sales in 2003.  The decrease inproduct sales in 2002 was primarily due to lower retail prices driven by increasedcompetition and reduced wholesale volumes, as compared to 2001.  These decreases were partially offset in2002 by increased product sales of $7.1 million attributable to the wirelessproperty acquisitions.

 

Cost of services increased $121.7 million, or 10 percent, in 2003 and$206.9 million, or 20 percent, in 2002. The acquisition of wireless properties accounted for approximately$108.4 million and $48.8 million of the overall increases in cost of servicesin 2003 and 2002, respectively.  Cost ofservices for both 2003 and 2002 reflected increases in network-related costs,which increased $44.5 million in 2003 and $34.2 million in 2002, primarily dueto increased network traffic resulting from customer growth and expansion ofcalling areas.  Cost of services for2003 also reflected increases in regulatory fees of $40.5 million, principallyrelated to the Universal Service Fund, reflecting changes in FCC regulationseffective April 1, 2003.  The increasesin cost of services in 2003 attributable to acquisitions and increasednetwork-related costs and regulatory fees were partially offset by a reductionin bad debt expense.  Compared to 2002,bad debt expense decreased $84.6 million primarily as a result of the Company’scontinued efforts to reduce losses sustained from bad debts by monitoring itscustomer credit policies, evaluating minimum deposit requirements forhigh-credit risk customers, and improving collection practices by adding newtechnologies and proactively managing the efforts of the Company’s collectionagencies.  In addition to the effects ofthe acquisitions and increased network-related costs, cost of services for 2002also reflected increases in customer service and bad debt expenses.  Customer service expense increased $20.1million in 2002 reflecting the expansion of ALLTEL’s customer service andoperations support functions to handle increased customer volumes resultingfrom the CenturyTel acquisition.  Baddebt expense increased $100.2 million in 2002 primarily reflecting the effects offourth quarter 2001 marketing programs directed toward the credit-challengedcustomer segment and weakening consumer credit, as previously noted.

 

Cost of products sold increased $106.1 million, or 25 percent, in 2003and decreased $36.5 million, or 8 percent, in 2002.  The increase in cost of products sold in 2003 was consistent withthe growth in wireless customer activations, the selling of higher-priceddigital phones and the Company’s continued efforts to migrate customers fromanalog to digital equipment as part of ALLTEL’s customer retentionefforts.  In addition, the wirelessproperty acquisitions accounted for $41.7 million of the overall increase incost of products sold in 2003.  Cost ofproducts sold decreased in 2002 consistent with the overall decline in wirelessproduct sales noted above, partially offset by increased cost of products soldof $14.8 million attributable to the CenturyTel acquisition.

 

Selling, general, administrative and other expenses increased $196.9million, or 21 percent, in 2003 and $79.0 million, or 9 percent, in 2002.  The acquisition of the wireless propertiesaccounted for approximately $101.5 million and $41.2 million of the overallincreases in selling, general, administrative and other expenses in 2003 and2002, respectively.  Advertising costsalso increased $31.5 million in 2003 primarily due to increased promotionalactivities, including the launch of a new national advertising campaigndesigned to promote ALLTEL’s brand name recognition among consumers.  Data processing costs increased $15.4million in 2003, consistent with non-acquisition-related growth in wirelesscustomers, while general and administrative expenses increased $34.8 million in2003, primarily due to additional costs incurred to complete, for variousacquisitions, the conversion of these operations to ALLTEL’s billing andoperational support systems.  Inaddition to the effects of the CenturyTel property acquisition, selling,general, administrative and other expenses for 2002 reflected increased commissioncosts of $46.6 million consistent with the growth in gross customer additionsand increased sales of the Company’s Total and National Freedom rateplans.  Commissions expense alsoreflected increased commissions paid to outside agents reflecting a shift inALLTEL’s distribution and product mix, as further discussed below.  Commission rates paid to the Company’sinternal sales force and outside agents are higher on the sales of ALLTEL’smore profitable Total and National Freedom rate plans than comparable ratespaid on other lower-

 

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margin rate plans offered by the Company.  The increase in selling, general, administrative and otherexpenses in 2002 attributable to the CenturyTel acquisition and highercommissions expense was partially offset by decreased advertising costs of$21.0 million.  The decrease inadvertising expense reflected discounted pricing received by ALLTEL due topurchasing advertising in bulk, as a result of centralizing the Company’sadvertising efforts.

 

Depreciation and amortization expense increased $93.4 million, or 16percent, in 2003 and decreased $41.4 million, or 7 percent, in 2002.  The acquisitions of wireless propertiesaccounted for approximately $41.3 million of the overall increase indepreciation and amortization expense in 2003. In addition to the effects of the acquisitions, depreciation andamortization expense increased in 2003 primarily as a result of growth in wirelessplant in service consistent with ALLTEL’s plans to expand and upgrade itsnetwork facilities.  Conversely, thedecrease in depreciation and amortization expense in 2002 primarily resultedfrom the effects of no longer amortizing goodwill and other indefinite-livedintangible assets pursuant to SFAS No. 142, as previously discussed, whichaccounted for $90.6 million of the overall decrease in depreciation andamortization expense in 2002.  Theeffects of the cessation of amortization of indefinite-lived intangible assetsin 2002 was partially offset by increased depreciation expense associated withgrowth in wireless plant in service and $16.4 million of additionaldepreciation expense attributable to the CenturyTel acquisition.

 

Primarily as a result of growth in revenues and sales discussed above,wireless segment income increased $50.1 million, or 5 percent, in 2003 and$120.2 million, or 15 percent, in 2002. The acquisitions of the wireless properties accounted for approximately$28.4 million and $65.2 million of the overall increases in segment income in2003 and 2002, respectively. Although revenues and sales attributable to thewireless property acquisitions increased $321.3 million in 2003, thecorresponding increase in operating expenses of $292.9 million nearly offsetthe growth in revenues and sales.  Thereduction in operating margin in 2003 attributable to the acquisitionsprimarily reflected the effects of transitioning the acquired CenturyTelproperties to ALLTEL’s negotiated wholesale roaming rates, increasedselling-related expenses due to volume growth in new customer activations andthe additional costs incurred to convert the acquired operations to ALLTEL’sbilling and operational support systems. Segment income in 2003 also reflected $25.0 million of the overallincrease in ALLTEL’s pension expense previously discussed.  In addition to the effects of the CenturyTelacquisition, segment income in 2002 was also favorably affected by thecessation of amortizing goodwill and other indefinite-lived intangibles assetsin accordance with SFAS No. 142. Conversely, segment income in 2002 was adversely affected by $3.1million related to the write-down of receivables due to an interexchangecarrier’s bankruptcy filing.

 

Cost to acquire a new customer is used to measure the average cost ofadding a new customer and represents sales, marketing and advertising costs andthe net equipment cost, if any, for each new customer added.  Cost to acquire a new customer increased in2003 primarily due to the increase in advertising costs previously discussed,partially offset by lower equipment subsidies and the effects of spreading thecustomer acquisition costs over a proportionately higher number of grosscustomer additions (excluding acquisitions) as compared to 2002.  The improved margins on the sale of wirelesshandsets in 2003 primarily reflected increased retail prices associated withthe selling of higher-priced digital phones and the effects of increased vendorrebates and purchase volume discounts received by ALLTEL.  The increase in per unit customeracquisition costs in 2002 primarily reflected the increase in commissions paidto outside agents, reflecting a shift in the Company’s distribution and productmix, as proportionately higher sales volumes were generated from ALLTEL’sexternal sales distribution channels. During 2003 and 2002, approximately 66 percent and 70 percent,respectively, of the gross customer additions came through ALLTEL’s internaldistribution channels, compared to approximately 80 percent in 2001.  ALLTEL’s internal sales distributionchannels include Company retail stores and kiosks located in shopping malls,other retail outlets and mass merchandisers. Incremental sales costs at a Company retail store or kiosk are significantlylower than commissions paid to dealers. Although ALLTEL intends to manage the costs of acquiring new customersduring 2004 by continuing to enhance its internal distribution channels, theCompany will also continue to utilize its large dealer network.

 

Set forth below is a summary of the integration expenses and othercharges related to the wireless operations that were not included in thedetermination of segment income for the years ended December 31:

 

| (Millions)                                              |   | 2003   |   | 2002   |   | 2001   |   |
|---------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Severance and  employee benefit costs                   |   | $      | 1.3    |   | $      | 6.4    |   | $ | 29.3 |   |
| Lease and  contract termination costs                   |   | — |   | 5.2    |   | 2.8    |   |
| Computer system  conversion and other integration costs |   | — |   | 4.0    |   | — |   |
| Write-down of  cell site equipment                      |   | — |   | 7.1    |   | 15.1   |   |
| Write-down of  software development costs               |   | 7.6    |   | 0.3    |   | — |   |
| Branding  and signage costs                             |   | — |   | 4.1    |   | — |   |
| Total  integration expenses and other charges           |   | $      | 8.9    |   | $      | 27.1   |   | $ | 47.2 |   |

 

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Regulatory Matters-Wireless Operations

ALLTEL is subject to regulation by the FCC as a provider of wirelesscommunications services.  TheTelecommunications Act of 1996 (the “96 Act”) provides wireless carriersnumerous opportunities to provide an alternative to the long-distance and localexchange services provided by local exchange telephone companies andinterexchange carriers.  Wirelesscarriers are also entitled to compensation from other telecommunicationscarriers for calls transmitted from the other carriers’ networks and terminatedon the wireless carriers’ networks. Presently, the Company’s wireless operations do not bill access chargesto interexchange carriers, although a FCC decision issued on referral from theU.S. District Court for the Western District Court of Missouri (the “StateDistrict Court”) noted that wireless operators are not precluded from billingthese access charges.  In April 2001,the FCC released a notice of proposed rulemaking addressing inter-carriercompensation issues.  Under this rulemaking,the FCC has proposed a “bill and keep” compensation method that would overhaulthe existing rules governing reciprocal compensation and access chargeregulation.  A further notice ofproposed rulemaking on this matter is expected in the first quarter of 2004.  Individual wireless carriers have filed anumber of petitions with the FCC seeking determinations as to the type andamount of compensation due to and from local exchange carriers and/orinterexchange carriers for the termination of traffic.  Further, various wireline companies haveinitiated a number of state proceedings to address inter-carrier compensationfor traffic that originates or terminates on wireless carriers’ networks.  The outcome of the FCC and state proceedingscould change the way ALLTEL receives compensation from and pays compensation toother carriers as well as its wireless customers.  At this time, the Company cannot estimate whether any suchchanges will occur or, if they do, what the effect of the changes would be onits wireless revenues and expenses.

 

Under rules established by the FCC, Cellular Radiotelephone Service(“CRS”) and PCS providers were required, as of November 24, 2002, toparticipate in a nationwide number conservation program known as thousand blocknumber pooling in accordance with roll-out schedules established by the FCC.  These providers were required to modifytheir networks to comply with FCC and industry performance criteria for numberpooling, including support for roaming customers.  Number pooling is a FCC-mandated program intended to alleviatethe shortage of available telephone numbers by requiring carriers to returnunused numbers in their inventory to a centrally administered pool and takingassignment of new numbers in blocks of 1,000 instead of the 10,000 numberblocks previously assigned.  In adecision released June 18, 2003, the FCC affirmed that all carriers mustparticipate in the nationwide pooling roll-out.  The FCC exempted small and rural Commercial Mobile Radio Services(“CMRS”) and local exchange carriers from the pooling requirement until suchtime as they implement local number portability in response to a specificrequest from another carrier.

 

FCC rules also required that CMRS providers implement on November 24,2003 wireless local number portability (“WLNP”) to permit customers to retaintheir existing telephone number when moving from one telecommunications carrierto another.  The FCC, on June 18, 2003,released the rules governing the number of Metropolitan Statistical Areas(“MSAs”) in which WLNP must be deployed, as well as the process for triggeringa carrier’s obligation to provide WLNP in markets both within those MSAs andotherwise.  The FCC retained therequirement that carriers implement WLNP based upon the specific request ofanother carrier and gave the state public service commissions authority torequire CMRS carriers to implement WLNP in any market within the top 100 MSAsin which they provide service and for which a request was not received from acompeting carrier.

 

On October 7, 2003, the FCC released a decision providing guidance tocarriers on certain WLNP implementation issues that had been raised in twopetitions for declaratory rulings filed by the Cellular TelecommunicationsIndustry Association (“CTIA”) and to resolve related issues raised through theappeal of a July 3, 2003 letter from the Chief of the WirelessTelecommunications Bureau of the FCC.  In general, the FCC decision noted that portingnumbers between carriers should be performed without obstruction, including anydelay related to efforts to collect outstanding balances; porting intervalsshould be governed by a “reasonableness standard” using the industry’ssuggested 2.5 hour porting interval as the reference point; writteninterconnection agreements between carriers involved in porting are notrequired; and carriers must continue to support nationwide roaming.  Various appeals by wireless carrierschallenging the FCC’s WLNP mandate on the basis of a denial of forbearence bythe FCC as well as a petition for mandamus challenging the FCC’s underlyingauthority to require carriers to implement WLNP were either denied or otherwisedismissed by the U.S. Court of Appeals for the District of Columbia Circuit(the “U.S. District Court”).

 

On November 10, 2003, the FCC released a decision addressing the CTIA petitions and providing guidanceon wireline to wireless porting, which is referred to as “intermodal porting”.  The FCC stated that number porting from awireline carrier to a wireless carrier is required where the coverage area ofthe wireless carrier (i.e. the area in which the wireless carrier providesservice) overlaps the geographic location in which the wireline number wasprovisioned.  Further, while the FCCrequired the wireless carrier to maintain the rate center designation of the number,it also noted that wireless carriers were not required to have either directconnections or interconnection agreements with wireline carriers nor werewireless carriers required to have numbering resources in the rate center inwhich the wireline number is located in order to subject

 

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the wireline number to intermodal porting.  The FCC’s guidance requires that wireline numbers be ported towireless carriers across traditional wireline rate centers; however, the FCCleft issues governing the payment of call routing costs to another pendingproceeding.  This requirement tookeffect on November 24, 2003 for wireline carriers in the top 100 MSAs, and willtake effect on May 24, 2004 for wireline carriers operating in markets belowthe top 100 MSAs.  On January 16, 2004,the FCC granted a limited waiver to wireline companies with fewer than twopercent of the nation’s access lines operating in the top 100 MSAs, whichextended the deadline by which these companies must implement intermodal portingto May 24, 2004.  The United StatesTelecommunications Association (“USTA”), along with certain rural telephonecompanies, appealed the FCC’s November 10, 2003 decision to the U.S. DistrictCourt.  The appeal remains pending, buthas been accorded expedited treatment by the Court.  At this time, ALLTEL cannotfully quantify the effects on its communications operations of implementingWLNP or the potential outcome of any court appeal.  Althoughimplementation of WLNP did not have a significant impact on the Company’soperating results in 2003, ALLTEL believes that these requirements couldresult in a significant increase in both its operating costs and customer churnrates in 2004.

 

In addition, wireless service carriers must also provide enhanced 911emergency service (“E-911”) in a two-phased approach.  In phase one, carriers must, within six months of receiving arequest from a phase one enabled Public Safety Answering Point (“PSAP”),deliver both the caller’s number and the location of the cell site to the PSAPserving the geographic territory from which the E-911 call originated.  A phase one enabled PSAP is generally onethat is capable of receiving and utilizing the number and location datatransmitted by the carrier.  ALLTEL hasgenerally complied with the phase one requirements and provides service tophase one capable PSAPs.  Due to thestatus of the PSAPs, as well as other technology and deployment issues, the sixmonth window in which service is to be provided under the FCC rules has, incertain instances, been extended by mutual agreement between ALLTEL and theparticular PSAPs involved.  In phasetwo, CMRS carriers opting for a handset-based solution, as the Company has,must determine for originated calls the location of the caller within fiftymeters for 67 percent of the originated calls and 150 meters for 95 percent ofthe originated calls. The phase two requirements were set to begin by October1, 2001, but, due to technology unavailability and other factors, the Companyrequested a limited waiver of these requirements, as did virtually every othercarrier.  On July 26, 2002, the FCCreleased an order granting a temporary stay of the E-911 emergencyimplementation rules as they applied to the Company.  The FCC order provides for a phased-in deployment of AutomaticLocation Identification (“ALI”) capable network or handset-based technologythat began on March 1, 2003.  ALIcapability will permit immediate identification of the caller’s location by PSAPs.  Under the FCC order, the Company, which haschosen to employ handset-based ALI technology, (1) began selling and activating ALI-capable handsets prior to March 1,2003; (2) ensured that as of May 31, 2003 at least 25 percent of all newhandsets activated were ALI-capable; (3) ensured that as of November 30, 2003at least 50 percent of all new handsets activated were ALI-capable; (4) willensure that 100 percent of its digital handsets activated are ALI-capable byMay 31, 2004; and (5) will ensure that penetration of ALI-capable handsets amongits customers reaches 95 percent no later than December 31, 2005.  ALLTEL began selling ALI-capable handsets inJune 2002 and has complied with the handset deployment thresholds under theFCC’s order.  ALLTEL fully expects tocomply with the remaining requirements. Although at this time, the Company cannot fully quantify the effects onits communications operations of implementing ALI technology, ALLTEL believesthese requirements, when fully implemented, could result in a significantincrease in its operating costs.

 

The Company filed petitions with the FCC and various state commissionsduring 2003 seeking certification as an Eligible Telecommunications Carrier(“ETC”).  Certification as an ETC willqualify the Company to receive support from the federal Universal Service Fund(“USF”).  The Company has applicationspending at the FCC for its properties in Alabama, Virginia, Georgia, NorthCarolina and Florida.  ALLTEL has obtainedapproval of its petitions from state commissions for its properties in Michigan,Mississippi, Arkansas, Wisconsin and West Virginia and is now certified as anETC in each of those states.  TheCompany expects to begin receiving USF support associated with these approvedpetitions in the first and second quarters of 2004.  The Company has also filed petitions requesting ETC certificationat the state commissions in Arizona, New Mexico, Kansas and Louisiana and isawaiting commission action on those petitions.

 

On January 22, 2004, the FCC approved the petition of Virginia Cellular,LLC for certification as an ETC in Virginia. In its order granting that approval, the FCC required that VirginiaCellular meet certain additional conditions in exchange for its designation asan ETC.   Additionally, the FCC, inconjunction with the Federal/State Joint Board on Universal Service, isconsidering changes to the USF program, including the services qualified forUSF support and the qualifications of ETCs. At this time, ALLTEL cannot estimate what effect the Virginia Cellularorder and potential FCC changes to the USF program may have on ALLTEL’s abilityto receive support from the USF related to its wireless business.

 

In July 2003, the FCC unanimously adopted an order modifying thewireless phone exemption to the Hearing Aid Compatibility Act and adoptedrequirements governing the compatibility of hearing aids and wirelessphones.  The decision requires thatinterference to hearing aids from digital wireless phones be reduced, and thatcarriers make available wireless phone models engineered to reduce radiofrequency interference to hearing aids. In October 2003, the FCC issued 

 

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its long awaited order in the proceeding governing the sale or leasingof spectrum in the secondary market.  Thedecision revises standards for transfer of control and provides new options forthe lease of spectrum to providers of new wireless technologies.  At this time, ALLTEL has not fully evaluatedthe effects, if any, that these orders may have on ALLTEL’s existing wirelessoperations.

 

Communications-Wireline Operations

| (Dollars in millions, except access lines in thousands) |   | 2003    |    | 2002    |   | 2001    |   |
|---------------------------------------------------------|--------|---------|---------|---------|--------|---------|--------|
| Revenues and  sales:                                    |   |    |    |    |   |    |   |
| Local service                                           |   | $       | 1,136.8 |    | $      | 1,017.9 |   | $ | 909.6 |   |
| Network access  and long-distance                       |   | 1,055.5 |    | 943.5   |   | 855.0   |   |
| Miscellaneous                                           |   | 243.8   |    | 218.3   |   | 200.3   |   |
| Total revenues  and sales                               |   | 2,436.1 |    | 2,179.7 |   | 1,964.9 |   |
| Costs and  expenses:                                    |   |    |    |    |   |    |   |
| Cost of services                                        |   | 737.2   |    | 645.1   |   | 565.6   |   |
| Cost of products  sold                                  |   | 29.1    |    | 24.8    |   | 28.4    |   |
| Selling, general,  administrative and other             |   | 259.4   |    | 251.2   |   | 226.2   |   |
| Depreciation and  amortization                          |   | 526.5   |    | 465.6   |   | 412.0   |   |
| Total costs and  expenses                               |   | 1,552.2 |    | 1,386.7 |   | 1,232.2 |   |
| Segment income                                          |   | $       | 883.9   |    | $      | 793.0   |   | $ | 732.7 |   |
| Access lines in  service (excludes DSL lines)           |   | 3,095.6 |    | 3,167.3 |   | 2,612.3 |   |

 

Wireline operations consist of ALLTEL’s Incumbent Local ExchangeCarrier (“ILEC”), CLEC and Internet operations.  Wireline revenues and sales increased $256.4 million, or 12percent, in 2003 and $214.8 million, or 11 percent, in 2002. Customer accesslines decreased two percent during the twelve months ended December 31,2003.  The Company lost approximately72,000 access lines during 2003, primarily as a result of the effects of wirelessand broadband substitution for the Company’s wireline services.  The Company expects the number of accesslines served by its wireline operations to continue to be adversely affected bywireless and broadband substitution in 2004. As previously discussed, on August 1, 2002, the Company completed thepurchase from Verizon of wireline properties in Kentucky.  This acquisition accounted for approximately589,000 of the overall increase in wireline customers that occurred during2002.  Excluding the effects of theacquisition, customer access lines decreased approximately one percent during2002, reflecting declines in both primary and secondary access lines andALLTEL’s decision to exit CLEC markets in seven states, as previouslydiscussed.  Slower economic growth,along with the effects of wireless and broadband substitution, also adverselyaffected the Company’s internal access line growth rates in 2002.

 

To maintain revenue growth in 2004, the Company will continue toemphasize sales of enhanced services and bundling of its various productofferings including Internet, long-distance and high-speed data transportservices (digital subscriber line or “DSL”). Deployment of DSL service is an important strategic initiative forALLTEL.  Currently, DSL service isavailable to approximately 2.0 million, or 64 percent, of the Company’swireline customers.  During 2003, theCompany added approximately 83,000 DSL customers, continuing a two-year longtrend of strong growth in this service offering.  For the twelve months ended December 31, 2003, the number of DSLcustomers more than doubled to approximately 153,000 customers, or 8 percent ofthe Company’s addressable access lines. During 2003, the growth rate in the Company’s DSL customers outpaced therate of decline in customer access lines discussed above.

 

Local service revenues increased 12 percent in both 2003 and 2002, or$118.9 million and $108.3 million, respectively.  The acquisition of wireline properties in Kentucky accounted for$119.9 million and $91.6 million of the overall increases in local servicerevenues in 2003 and 2002, respectively. In addition to the effects of the acquisition, local service revenues in2003 and 2002 also reflected growth in revenues derived from the sales ofenhanced products and services, reflecting increased demand for theseservices.  Revenues from these enhancedservices increased $9.3 million in 2003 and $10.0 million in 2002.  Revenues derived from integrated digitalnetwork services, which increased $3.9 million, and from the sale of equipmentprotection plans, which increased $3.2 million, also contributed to the growthin local service revenues in 2002.  Theincrease in local service revenues in 2003 attributable to the Kentuckyacquisition and additional revenues earned from enhanced products and serviceswere partially offset by the effects of the overall decline in primary andsecondary access lines noted above.

 

Network access and long-distance revenues increased $112.0 million, or12 percent, in 2003 and $88.5 million, or 10 percent, in 2002.  The acquisition of wireline properties inKentucky accounted for $109.8 million and $79.7 million of the overallincreases in network access and long-distance revenues in 2003 and 2002,respectively.  In addition to the effectsof the acquisition, network access and long-distance revenues in 2003 and 2002also reflected growth in revenues from data 

 

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services of $12.6 million and $5.5 million, respectively, reflectingincreased demand for these services. The increase in network access and long-distance revenues in 2003attributable to the acquisition and growth in data services was partiallyoffset by reductions in intrastate network access usage and toll revenues,which decreased $19.6 million from 2002, consistent with the overall decline inprimary and secondary access lines discussed above.  Network access and long-distance revenues in 2002 also reflectedhigher volumes of network usage, partially offset by a reduction in intrastatetoll revenues and a $8.4 million reduction in revenues received from theGeorgia Universal Service Fund resulting from a litigation settlement betweenALLTEL and the Georgia Public Service Commission that was finalized in 2000.

 

Miscellaneous revenues primarily consist of charges for billing andcollections services provided to long-distance companies, customer premiseequipment sales, directory advertising and Internet services.  Miscellaneous revenues increased $25.5million, or 12 percent, in 2003 and $18.0 million, or 9 percent, in 2002.  The acquisition of wireline properties inKentucky accounted for $18.8 million and $12.3 million of the overall increasesin miscellaneous revenues in 2003 and 2002, respectively.  In addition to the effects of theacquisition, miscellaneous revenues in 2003 also reflected growth in revenuesderived from Internet services, partially offset by a decrease in revenuesearned from billing and collection services. Revenues from Internet services increased $12.8 million in 2003,primarily due to customer growth, while the decrease in revenues from billingand collection of $2.5 million was consistent with the overall decline in tollrevenues previously discussed. Miscellaneous revenues in 2002 reflected the effects of the acquisitionand growth in Internet service and directory advertising revenues.  Internet service revenues increased $9.8million in 2002, primarily due to customer growth and an increase in thestandard monthly rate charged to customers for this service initiated duringthe fourth quarter of 2001, while directory advertising revenues increased $2.4million in 2002.  Partially offsettingthe growth in Internet service and directory advertising revenues in 2002 weredeclines in customer premise equipment sales, which decreased $12.2 million.  The decrease primarily occurred in theCompany’s CLEC operations and reflected ALLTEL’s strategic decision in 2002 toexit CLEC operations in seven markets, as previously discussed.

 

Cost of services increased $92.1 million, or 14 percent, in 2003 and$79.5 million, or 14 percent, in 2002. The acquisition of wireline properties in Kentucky accounted for $106.0million and $52.8 million of the overall increases in cost of services in 2003and 2002, respectively.  Included incost of services for the acquired wireline properties in Kentucky were $6.0million of additional maintenance costs incurred during the first quarter of2003 to repair damage caused by severe winter storms and incremental expensesof approximately $14.9 million associated with a strike that began in earlyJune and ended on October 1, 2003, when the Company signed a new collectivebargaining agreement impacting approximately 400 ALLTEL employees in Kentuckyrepresented by the Communications Workers of America.  The increase in 2003 attributable to the acquisition waspartially offset by a reduction in interconnection expenses, which decreased$9.9 million in 2003, consistent with the decrease in toll revenues notedabove.  In addition to the effects ofthe acquisition, cost of services for 2002 reflected increased network-relatedcosts of $13.1 million, primarily due to increased network usage, and $10.9million of additional bad debt expense attributable to the write-down ofreceivables due to an interexchange carrier’s bankruptcy filing previouslydiscussed.

 

Cost of products sold increased $4.3 million, or 17 percent, in 2003and decreased $3.6 million, or 13 percent, in 2002.  The acquisition of wireline properties in Kentucky accounted for$5.1 million of the overall increase in cost of products sold in 2003.  Cost of products sold decreased in 2002consistent with the overall decline in customer premise equipment sales notedabove, partially offset by increased cost of products sold of $2.5 millionattributable to the acquired wireline properties in Kentucky.

 

Selling, general, administrative and other expenses increased $8.2million, or 3 percent, in 2003 and $25.0 million, or 11 percent, in 2002.  The acquisition of the wireline propertiesin Kentucky accounted for approximately $21.7 million and $22.1 million of theoverall increases in selling, general, administrative and other expenses in2003 and 2002, respectively.  Theincrease in 2003 attributable to the acquisition was partially offset by areduction in data processing charges, which decreased $15.4 million in 2003.

 

Depreciation and amortization expense increased $60.9 million, or 13percent, in 2003 and $53.6 million, or 13 percent, in 2002.  Depreciation expense increased in both yearsdue to growth in wireline plant in service and additional depreciationattributable to the acquisition of wireline properties in Kentucky.  The acquisition accounted for $60.0 millionand $37.8 million of the overall increases in depreciation and amortizationexpense in 2003 and 2002, respectively. Depreciation and amortization expense in 2002 also included the effectsof no longer amortizing goodwill in accordance with SFAS No. 142, as previouslydiscussed.  The effects of the cessationof amortization of indefinite-lived intangible assets resulted in a reductionof depreciation and amortization expense of $4.6 million in 2002.

 

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Wireline segment income increased $90.9 million, or 11 percent, in 2003and $60.3 million, or 8 percent, in 2002. The acquisition of wireline properties in Kentucky accounted for $55.7million and $68.3 million of the overall increases in segment income in 2003and 2002, respectively.  Segment incomefor 2003 also reflected the effect of the incremental strike-related expensesand $6.6 million of the overall increase in ALLTEL’s pension expense previouslydiscussed, partially offset by cost savings resulting from the Company’scontinued efforts to control operating expenses.  Conversely, wireline segment income for 2002 included the effectsof the write-down of receivables due to an interexchange carrier’s bankruptcyfiling, as previously discussed, partially offset by the effect of no longeramortizing goodwill in accordance with SFAS No. 142.

 

Set forth below is a summary of the integration expenses and othercharges related to the wireline operations that were not included in thedetermination of segment income for the years ended December 31:

 

| (Millions)                                              |   | 2003   |   | 2002   |   | 2001   |   |
|---------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Severance and  employee benefit costs                   |   | $      | 7.0    |   | $      | 6.6    |   | $ | 18.5 |   |
| Lease and  contract termination costs                   |   | — |   | 3.8    |   | — |   |
| Computer system  conversion and other integration costs |   | — |   | 17.0   |   | — |   |
| Write-down of  software development costs               |   | 1.8    |   | 4.1    |   | — |   |
| Branding and  signage costs                             |   | — |   | 3.7    |   | — |   |
| Equipment  removal and other disposal costs             |   | — |   | 2.2    |   | — |   |
| Total  integration expenses and other charges           |   | $      | 8.8    |   | $      | 37.4   |   | $ | 18.5 |   |

 

Regulatory Matters-Wireline Operations

Except for the Kentucky properties acquired in 2002 and the Nebraskaoperations acquired in 1999, ALLTEL’s ILEC operations follow the accounting forregulated enterprises prescribed by SFAS No. 71, “Accounting for the Effects ofCertain Types of Regulation”.  Criteriathat would give rise to the discontinuance of SFAS No. 71 include (1) increasingcompetition restricting the ILEC subsidiaries’ ability to establish prices torecover specific costs and (2) significant changes in the manner in which ratesare set by regulators from cost-based regulation to another form of regulation.  On a quarterly basis, the Company reviewsthe criteria to determine whether the continuing application of SFAS No. 71 isappropriate.  Some of the Company’s ILECoperations have begun to experience competition in their local serviceareas.  Sources of competition toALLTEL’s local exchange business include, but are not limited to, resellers oflocal exchange services, interexchange carriers, satellite transmissionservices, wireless communications providers, cable television companies, andcompetitive access service providers including those utilizing UnbundledNetwork Elements-Platform (“UNE-P”). Through December 31, 2003, this competition has not had a materialadverse effect on the results of operations of ALLTEL’s ILEC operations.

 

Although the Company believes that the application of SFAS No. 71continues to be appropriate, it is possible that changes in regulation,legislation or competition could result in the Company’s ILEC operations nolonger qualifying for the application of SFAS No. 71 in the future.  If ALLTEL’s ILEC operations no longerqualified for the application of SFAS No. 71, the accounting impact to theCompany would be an extraordinary non-cash credit to operations.  The non-cash credit would consist primarilyof the reversal of the regulatory liability for cost of removal included inaccumulated depreciation, which amounted to $160.6 million as of December 31,2003.  ALLTEL does not expect to recordany impairment charge related to the carrying value of its ILEC plant.  Under SFAS No. 71, ALLTEL currentlydepreciates its ILEC plant based upon asset lives approved by regulatoryagencies or as otherwise allowed by law. Upon discontinuance of SFAS No. 71, ALLTEL would be required to revisethe lives of its property, plant and equipment to reflect the estimated usefullives of the assets.  The Company doesnot expect any revisions in asset lives to have a material adverse effect onits ILEC operations.

 

Most states in which the Company’s ILEC subsidiaries operate haveadopted alternatives to rate-of-return regulation, either through legislativeor state public service commission actions. ALLTEL has elected alternative regulation for certain of its ILECsubsidiaries in Alabama, Arkansas, Florida, Georgia, Kentucky, Missouri,Nebraska, North Carolina, Pennsylvania, South Carolina and Texas.  The Company continues to evaluatealternative regulation options in other states where its ILEC subsidiariesoperate.  The acquired Nebraska andKentucky properties operate under interstate price cap regulation pursuant towaivers granted by the FCC.  On April17, 2002, the FCC extended ALLTEL’s waiver of the “all-or-nothing” rule withrespect to the Nebraska properties and granted a waiver of the “all-or-nothing”rule with respect to the acquired Kentucky properties.  The waivers permit price cap regulation forthese two properties while retaining rate-of-return regulation for ALLTEL’sother ILEC properties.  Both waiverswill remain in effect until the FCC completes its pending review to eithermodify or eliminate the “all-or-nothing” rule. The “all-or-nothing” rule was originally intended to ensure that allstudy areas of a carrier and its affiliates are subject to a single form ofpricing regulation.

 

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A number of carriers have begun offering voice telecommunicationsservices utilizing the Internet as the means of transmitting those calls.  This service, commonly know asvoice-over-Internet-protocol (“VoIP”) telephony, is challenging existingregulatory definitions.  Several statepublic utility commissions have initiated proceedings to analyze VoIP and itsregulatory classification.  The U.S.District Court for the District of Minnesota reversed a Minnesota PublicUtility Commission (“Minnesota PUC”) decision and found that VoIP is aninformation service rather than a telecommunications service and is not subjectto state regulation.  The Minnesota PUCis seeking reconsideration of the court decision.  The VoIP provider involved in this Minnesota PUC case has askedthe FCC to also overrule the Minnesota PUC decision.  On February 12, 2004, the FCC granted a Petition for DeclaratoryRuling by Pulver.com in which it determined that Pulver.com’s IP-based,peer-to-peer service that requires specialized telephone equipment or softwarefor computers was not a telecommunications service, but rather was aninformation service subject to federal jurisdiction.  Although this ruling is not expected to have any immediate impacton the Company’s telecommunications business, ALLTEL cannot presently estimatethe possible long-term implications that this determination may have on itsoperations.  On February 12, 2004, theFCC also adopted a Notice of Proposed Rulemaking seeking comment on theappropriate regulatory treatment of Internet-enabled communicationsservices.  The proposed rulemaking willaddress differences between Internet-enabled services and traditional telephonyservices, distinguish between the different types of Internet-enabled servicesprovided and determine which regulatory requirements, for example, thoserelating to E-911, disability accessibility, access charges, and universalservice, should be extended to Internet-enabled services.  At this time, ALLTEL cannot determine theresults of these proceedings or evaluate the effects that such decisions willhave upon its operations.

 

In April 2001, the FCC released a notice of proposed rulemakingaddressing inter-carrier compensation. Under this rulemaking, the FCC asked for comment on a “bill and keep”compensation method that would overhaul the existing rules governing reciprocalcompensation and access charge regulation. A number of state proceedings have been initiated by various wirelinecompanies to address compensation with respect to traffic that originates orterminates with wireless carriers or CLECs. The outcome of the FCC and stateproceedings could change the way ALLTEL receives compensation from, and remitscompensation to, other carriers and its end users.  The FCC is expected to issue a further notice of proposedrulemaking on the subject.  Until thisproceeding concludes, ALLTEL cannot estimate the potential impact of anychanges on its ILEC revenues and expenses.

 

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

 

On November 8, 2002, the FCC requested that the Federal/State JointBoard on Universal Service (the “Joint Board”) review certain of the FCC’srules relating to the high-cost universal support mechanism and the process bywhich carriers are designated ETCs.  OnFebruary 7, 2003, the Joint Board sought comment on these matters, and arecommended decision is expected shortly. At this time, ALLTEL cannot estimate what impact, if any, thisproceeding may have on its universal service funding.

 

On July 10, 2002, the Joint Board recommended that the FCC not modifythe existing list of services supported by universal service.  On July 10, 2003, the FCC adopted the JointBoard’s recommendation to retain the existing list of services supported byuniversal service.  The FCC decided toconsider whether equal access should be included in the list of USF supportedservices as part of the high-cost universal service support and ETC designationproceeding pending before the Joint Board.

 

In October 2001, the FCC adopted rate-of-return access charge reformand initiated a further round of rulemaking to consider other rate-of-returncarrier issues.  The order loweredtraffic sensitive switched access rates, increased the subscriber line charge(“SLC”) over time to bring it in line with SLCs adopted for price cap carriers,phased out carrier 

 

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common line charges in favor of a new portable “Interstate Common LineSupport” universal service mechanism, and retained the authorized 11.25 percentrate of return.  The residential andsingle-line business SLC cap phase-in began on January 1, 2002.  The final scheduled increase occurred onJuly 1, 2003.  These changes did nothave a material effect on the Company’s consolidated financial results during2003.

 

On December 20, 2001, the FCC released a notice of proposed rulemakinginitiating the first triennial review of the FCC’s policies on unbundlednetwork elements (“UNEs”) including UNE-P. UNE-P is created when a competing carrier obtains all the networkelements needed to provide service from the ILEC at a discounted rate.  On August 21, 2003, the FCC released thetext of its Triennial Review Order.  Inresponse to the remand of the U.S. District Court, the FCC adopted new rulesgoverning the obligations of ILECs to unbundle the elements of their localnetworks for use by competitors.  TheFCC made national findings of impairment or non-impairment for loops, transportand, most significantly, switching.  TheFCC delegated to the states the authority to engage in additional fact findingand make alternative impairment findings based on a more granular impairmentanalysis including evaluation of applicability of FCC-established“triggers”.  The FCC created “massmarket” and “enterprise market” customer classifications that generallycorrespond to the residential and business markets, respectively.  The FCC found that CLECs were not impairedwithout access to local circuit switching when serving “enterprise market”customers on a national level.  CLECs,however, were found to be impaired on a national level without access to localswitching when serving “mass market” customers.  State commissions had 90 days to ask the FCC to waive the findingof no impairment without switching for “enterprise market” customers.  The FCC presumption that CLECs are impairedwithout access to transport, high capacity loops and “mass market” switching issubject to a more granular nine month review by state commissions pursuant toFCC-established triggers and other economic and operational criteria. The FCCalso opened a further notice of proposed rulemaking to consider the “pick and choose”rules under which a competing carrier may select from among the various termsof interconnection offered by an ILEC in its various interconnectionagreements.  Comments have been filedwith the FCC, but the FCC has yet to issue a decision.

 

The Triennial Review Order also provided that:

 

•      ILECs are not required tounbundle packet switching as a stand-alone network element.

 

•      Two key components of theFCC’s total element long-run incremental cost methodology (“TELRIC”) pricingrules were clarified.  First, the FCCclarified that the risk-adjusted cost of capital used in calculating UNE pricesshould reflect the risks associated with a competitive market.  Second, the FCC declined to mandate the useof any particular set of asset lives for depreciation, but clarified that theuse of an accelerated depreciation mechanism may present a more accurate methodof calculating economic depreciation.

 

•      CLECs continue to beprohibited from avoiding any liability under contractual early terminationclauses in the event a CLEC converts a special access circuit to an UNE.

 

ALLTEL is monitoring the state commission proceedings and participatingwhere necessary as the commissions undertake the 90 day and nine month analysesto establish rules or make determinations as directed by the Triennial ReviewOrder.  Additionally, numerous petitionsand appeals have been filed in the courts and with the FCC challenging many ofthe findings in the Triennial Review Order and seeking a stay on certainportions of the order.  The appeals havebeen consolidated in the U.S. District Court. Oral arguments were heard on January 28, 2004.  A decision could be reached as early as the end of March 2004.  Until all of these proceedings areconcluded, the impact of this order, if any, on ALLTEL’s ILEC operations cannotbe determined.

 

On September 15, 2003, the FCC launched its first comprehensive reviewof the rules that establish wholesale pricing of UNEs.  The Notice of Proposed Rulemaking soughtcomment on a variety of UNE and resale pricing-related issues and on a proposalto make TELRIC rules more closely account for the “real-world” attributes ofthe incumbent carrier’s network. If this proposal were adopted, the resultwould likely be higher UNE prices.

 

During the first quarter of 2002, the FCC initiated a rulemaking toevaluate the appropriate framework for broadband access to the Internet overwireline facilities.  In the notice ofproposed rulemaking, the FCC tentatively concluded that wireline broadbandInternet access should be classified as an “information service” rather than atelecommunications service and, therefore, should not be subject to commoncarrier regulation.  The FCC soughtcomments on their tentative conclusion, but has not reached a final order.  In a related proceeding released March 15,2002, the FCC issued a declaratory ruling concluding that cable modem servicewas an interstate “information service” and not a cable service or atelecommunications service.  The FCCsought comment on whether there are legal or policy reasons why it should 

 

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reach different conclusions with respect to wireline broadband Internetaccess and cable modem service, but has not reached a final order.  On October 6, 2003, the U.S. Court ofAppeals for the Ninth Circuit rejected the FCC’s classification of cable modemservice as solely an unregulated “information service”, finding a portion ofthe service to be a “telecommunications service”.  At this time, ALLTEL cannot estimate what impact, if any, thesebroadband proceedings may have on its ILEC operations.

 

Section 251(b) of the Communications Act of 1934 (the “34 Act”), asamended, requires, in part, that local exchange carriers provide local numberportability to any requesting telecommunications carrier.  Wireless carriers are generally defined as“telecommunications carriers” under the 34 Act, and are therefore eligible toport numbers with wireline carriers, which is referred to as “intermodalporting”.  The terms and conditions forintermodal porting were the subject of the CTIA’s petitions that sought rulingson: 1) the ability of wireline carriers to port numbers to wireless carriersacross traditional rate center boundaries; 2) the porting interval for suchports; and 3) the absence of any need for direct interconnection arrangementsbetween wireline carriers porting numbers out and wireless carriers receivingthe number.  As previously discussed, onNovember 10, 2003, the FCC released a decision providing guidance on intermodalporting issues and addressing the CTIA petitions.  The FCC stated that number porting from a wireline carrier to awireless carrier is required where the coverage area of the wireless carrier(i.e. the area in which the wireless carrier provides service) overlaps thegeographic location in which the wireline number was provisioned.  Further, while the FCC required the wirelesscarrier to maintain the rate center designation of the number, it also notedthat wireless carriers were not required to have either direct connections orinterconnection agreements with wireline carriers nor were wireless carriersrequired to have numbering resources in the rate center in which the wirelinenumber is located in order to subject the wireline number to intermodal porting.  The FCC’s guidance requires that wirelinenumbers be ported to wireless carriers across traditional wireline ratecenters, although the FCC left issues governing the payment of call routingcosts to another pending proceeding. This requirement took effect on November 24, 2003 for wireline carriersin the top 100 MSAs, and will take effect on May 24, 2004 for wireline carriersoperating in markets below the top 100 MSAs. As noted earlier, on January 16, 2004, the FCC granted a limited waiverto wireline companies with fewer than two percent of the nation’s access linesoperating in the top 100 MSAs, which extended the deadline by which thesecompanies must implement intermodal porting to May 24, 2004.  The USTA, along with certain rural telephonecompanies, appealed the FCC’s November 10, 2003 decision to the U.S. DistrictCourt, and the appeal is pending before the Court.  The majority of the Company’s wireline operations are conductedin markets below the top 100 MSAs that will be subject to the later May 24,2004 implementation date for intermodal porting.  At this time, the Companycannot fully quantify the effects on its wireline operations of implementingintermodal porting or the potential outcome of any court appeal; however, it is likely that these requirements,when implemented, will adversely affect the Company’s wireline operating costsand customer growth rates.

 

Because certain of the regulatory matters discussed above are under FCCor judicial 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 Operations

| (Millions, except customers in thousands)      |   | 2003    |   | 2002    |   | 2001    |   |
|------------------------------------------------|--------|---------|--------|---------|--------|---------|--------|
| Revenues and  sales:                           |   |    |   |    |   |    |   |
| Product  distribution                          |   | $       | 407.4  |    | $      | 371.3   |   | $ | 367.7 |   |
| Long-distance  and network management services |   | 320.1   |   | 316.2   |   | 309.9   |   |
| Directory  publishing                          |   | 122.6   |   | 119.1   |   | 146.2   |   |
| Telecommunications  information services       |   | 108.9   |   | 119.1   |   | 145.4   |   |
| Total revenues  and sales                      |   | 959.0   |   | 925.7   |   | 969.2   |   |
| Costs and  expenses:                           |   |    |   |    |   |    |   |
| Cost of services                               |   | 299.0   |   | 295.3   |   | 310.1   |   |
| Cost of products  sold                         |   | 486.9   |   | 439.2   |   | 444.7   |   |
| Selling, general,  administrative and other    |   | 60.5    |   | 69.2    |   | 78.5    |   |
| Depreciation and  amortization                 |   | 36.2    |   | 37.8    |   | 30.8    |   |
| Total costs and  expenses                      |   | 882.6   |   | 841.5   |   | 864.1   |   |
| Segment income                                 |   | $       | 76.4   |    | $      | 84.2    |   | $ | 105.1 |   |
| Long-distance  customers                       |   | 1,680.2 |   | 1,542.2 |   | 1,265.7 |   |

 

Communications support services revenues and sales increased $33.3million, or 4 percent, in 2003 and decreased $43.5 million, or 4 percent, in2002.  As noted in the table above, theincrease in revenues and sales in 2003 primarily reflected growth in sales oftelecommunications and data products, which increased $36.1 million from2002.  Sales to non-affiliates 

 

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increased $60.0 million in 2003, primarily due to increased sales ofwireless handsets to retailers and other distributors.  Conversely, the general reduction in capitalspending by telecommunications companies adversely affected sales tonon-affiliates in 2003, reflecting current economic conditions and theindustry’s emphasis on controlling costs. In 2003, sales to affiliates decreased $23.9 million from 2002,consistent with the overall reduction in capital expenditures related toALLTEL’s wireline operations.  Comparedto 2002, revenues from long-distance and network management services increased$3.9 million in 2003, primarily due to 9 percent growth in ALLTEL’s customerbase for long-distance services, partially offset by reductions in customerbilling rates due to competition. Directory publishing revenues increased $3.5 million in 2003, primarilyreflecting additional revenues of $6.1 million attributable to growth in thenumber of directory contracts published. The revenues earned from these additional contracts were partiallyoffset by a change in accounting for directory contracts in which the Companyhas a secondary delivery obligation. ALLTEL began deferring a portion of its revenues and related costs toprovide for secondary deliveries effective January 1, 2003.  Telecommunications information servicesrevenues decreased $10.2 million in 2003, primarily resulting from a reductionin programming services provided to one customer, lost operations due to acontract termination and the completion in 2002 of customer specific conversionprojects and other transitional services. As previously discussed, in December 2003, the Company sold to Convergyscertain assets and related liabilities, including selected customer contractsand capitalized software development costs. The sold customer contracts represented approximately 48 percent of thetotal revenues and sales reported by the telecommunications informationservices operations in 2003.

 

Revenues and sales decreased in 2002 due to reductions in directorypublishing and telecommunications information services, partially offset bygrowth in sales of telecommunications and data products and increased revenuesfrom long-distance and network management services.  Directory publishing revenues decreased $27.1 million due to areduction in the number of directory contracts published, primarily as a resultof the loss of one large customer. Revenues from telecommunications information services decreased $26.3million in 2002, primarily due to reduced revenues earned from several largecustomers.  Sales of telecommunicationsand data products increased $3.6 million in 2002, as sales to affiliatesincreased $12.5 million, primarily due to additional purchases made by ALLTEL’swireline subsidiaries reflecting the Verizon acquisition.  Sales to non-affiliates decreased $8.9million in 2002, reflecting a reduction in capital spending bytelecommunications companies.  Revenuesfrom long-distance and network management services increased $6.3 million in2002, primarily driven by growth in ALLTEL’s customer base for these services,partially offset by a decrease in customer billing rates due to competition.

 

Although revenues and sales increased in 2003, communications supportservices segment income decreased primarily due to lower profit marginsrealized by the product distribution and directory publishing operations.  Profit margins for the product distributionoperations decreased in 2003 due to a shift in the mix of products sold tonon-affiliates, as a proportionately higher percentage of these sales consistedof lower margin wireless handsets as noted above.  Profit margins for the directory publishing operations reflectedincreased selling, marketing and other start-up costs incurred in order for theCompany’s publishing subsidiary to begin providing all directory publishingservices, except printing, for a limited number of directory contractspublished in 2003.  For the remainingdirectory contracts published, these publishing services were contracted out toa third party.  The decrease in segmentincome in 2002 reflected the overall reduction in revenues and sales notedabove, lower gross profit margins realized by the product distribution andlong-distance operations and an increase in depreciation expense.  Gross profit margins for the long-distanceoperations primarily reflected the reduction in customer billing rates andincreased network-related expenses due to growth in its customer base.  Gross profit margins for the productdistribution operations reflected lower margins earned on affiliated sales andthe effects of increased competition from other distributors and from directsales by manufacturers.  Depreciationand amortization expense increased $7.0 million in 2002, due mainly to thegrowth in plant in service supporting the long-distance and network managementoperations.

 

Set forth below is a summary of the integration expenses and othercharges related to the communications support services operations that were notincluded in the determination of segment income for the years ended December31:

 

 

| (Millions)                                    |   | 2003 |   | 2002   |   | 2001   |   |
|-----------------------------------------------|--------|------|--------|--------|--------|--------|--------|
| Severance and  employee benefit costs         |   | $    | — |   | $      | 1.8    |   | $ | 5.3 |   |
| Lease and  contract termination costs         |   | (0.5 | )      | 3.6    |   | 1.9    |   |
| Write-down  of software development costs     |   | 3.8  |   | — |   | — |   |
| Total  integration expenses and other charges |   | $    | 3.3    |   | $      | 5.4    |   | $ | 7.2 |   |

 

F-24

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Segment Capital Requirements

The primary uses of cash for ALLTEL’s operating segments are capitalexpenditures for property, plant and equipment and expenditures for capitalizedsoftware development to support the Company’s wireless and wirelineoperations.  Capital expenditures andexpenditures for software development by operating segment are forecasted asfollows for the year ended December 31, 2004:

 

| (Millions)                       |   | Capital Expenditures |    | Software  Development |   | Totals  |   |
|----------------------------------|--------|----------------------|---------|-----------------------|--------|---------|--------|
| Wireless                         |   | $                    | 785.0   | -                     | $      | 860.0   |   | $ | 50.0 |   | $ | 835.0 | - | $ | 910.0 |   |
| Wireline                         |   | 330.0                | -       | 340.0                 |   | 10.0    |   | 340.0 | - | 350.0 |   |
| Communications  support services |   | 20.0                 | -       | 30.0                  |   | —  |   | 20.0 | - | 30.0 |   |
| Corporate                        |   | 5.0                  | -       | 10.0                  |   | —  |   | 5.0 | - | 10.0 |   |
| Totals                           |   | $                    | 1,140.0 | -                     | $      | 1,240.0 |   | $ | 60.0 |   | $ | 1,200.0 | - | $ | 1,300.0 |   |

 

Capital expenditures for 2004 will be primarily incurred for furtherdeployment of digital wireless technology, including high-speed wireless datacapabilities, in the Company’s existing and acquired wireless markets.  The forecasted spending levels in 2004 aresubject to revision depending on changes in future capital requirements of theCompany’s business segments.  Each ofALLTEL’s operating segments in 2003 generated positive cash flows sufficient tofund the segments’ day-to-day operations and to fund their capitalrequirements.  The Company expects eachof the operating segments to continue to generate sufficient cash flows in 2004to fund their operations and capital requirements.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

| (Millions, except per share amounts)       |   | 2003     |     | 2002     |   | 2001     |   |
|--------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Cash flows from  (used in):                |   |     |     |     |   |     |   |
| Operating  activities                      |   | $        | 2,474.7  |     | $      | 2,392.2  |   | $ | 1,882.1 |   |
| Investing  activities                      |   | (1,265.9 | )        | (4,494.6 | )      | (427.0   | )      |
| Financing  activities                      |   | (1,218.2 | )        | 2,079.5  |   | (1,479.5 | )      |
| Discontinued  operations                   |   | 531.8    |     | 91.3     |   | 54.7     |   |
| Effect of  exchange rate changes           |   | 0.8      |     | 3.0      |   | (5.4     | )      |
| Change in cash  and short-term investments |   | $        | 523.2    |     | $      | 71.4     |   | $ | 24.9 |   |
| Total capital  structure (a)               |   | $        | 12,881.6 |     | $      | 12,639.2 |   | $ | 9,478.8 |   |
| Percent equity  to total capital (b)       |   | 54.5     | %        | 47.5     | %      | 58.7     | %      |
| Book value per  share (c)                  |   | $        | 22.46    |     | $      | 19.27    |   | $ | 17.92 |   |

 

Notes:

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

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

(c)   Computed by dividing totalshareholders’ equity less preferred stock by the total number of common sharesoutstanding at the end of the year.

 

Cash Flows from Operations

Cash provided from operations continued to be ALLTEL’s primary sourceof funds.  Cash provided from operationsin 2003 and 2002 reflected growth in earnings from the Company’s businesssegments.  In addition to earningsgrowth, the increases in both years also reflected changes in working capitalrequirements, including timing differences in the billing and collection ofaccounts receivables and the payment of trade payables and taxes.  Cash provided from operations also reflectedcontributions to ALLTEL’s qualified pension plan of $100.0 million in 2003 and$50.0 million in 2002.

 

Cash Flows from Investing Activities

Capital expenditures continued to be ALLTEL’s primary use of capitalresources.  Capital expenditures were$1,137.7 million in 2003, $1,154.8 million in 2002 and $1,170.1 million in2001.  Capital expenditures in each ofthe past three years were incurred to construct additional network facilities,to deploy digital wireless technology in the Company’s existing and acquiredwireless markets and to upgrade ALLTEL’s telecommunications network in order tooffer other communications services, including long-distance, Internet, DSL andpush-to-talk communications services. During each of the past three years, the Company funded substantiallyall of its capital expenditures through internally generated funds.  As indicated in the table above under“Segment Capital Requirements”, ALLTEL expects capital expenditures to beapproximately $1,140.0 million to $1,240.0 million for 2004, which will befunded primarily from internally generated funds.  Investing activities also included outlays for capitalizedsoftware development costs.  Additionsto capitalized software were $56.7 million in 2003, $58.4 million in 2002 and$80.5 million in 2001.  Capitalizedsoftware development 

 

F-25

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costs for 2001 included additional spending for the development andenhancement of internal use software to support the Company’s retailoperations.  Spending levels in 2002 forcapitalized software development costs reflected the completion of theseprojects.  As indicated in the tableabove under “Segment Capital Requirements”, the Company expects expenditures forcapitalized software development to be approximately $60.0 million for 2004,which also will be funded primarily from internally generated funds.

 

During 2003, cash outlays for the purchase of property, net of cashacquired, were $160.6 million.  In 2003ALLTEL purchased wireless properties in Arizona and Mississippi for $87.4million in cash, acquired the remaining ownership interest in two wirelessproperties in Michigan for $60.0 million in cash, and purchased additionalownership interests in wireless properties in Mississippi, New Mexico, Virginiaand Wisconsin for $13.2 million in cash. Cash outlays for the purchase of property, net of cash acquired, were$3,365.5 million in 2002 and primarily consisted of $1,735.2 million for thepurchase of wireline properties in Kentucky from Verizon ($1,928.7 milliontotal purchase price less $193.5 million deposit including accrued interestpaid in October 2001) and $1,595.3 million for the purchase of wireless assetsfrom CenturyTel.  In addition, during2002, ALLTEL also purchased a wireline property in Georgia for $17.9 millionand acquired additional ownership interests in wireless properties in Arkansas,Louisiana and Texas for $17.1 million in cash. Cash flows used in investing activities for 2001 included cash outlaysof $214.3 million for the purchase of property, principally consisting of the$190.7 million deposit paid by ALLTEL in connection with the Company’s purchaseof wireline properties in Kentucky, as previously discussed.

 

Cash flows from investing activities included $7.5 million in 2002 and$524.4 million in 2001 of advance lease payments received from American Towerfor the leasing of 1,773 of the Company’s cell site towers.  As further discussed in Note 14 to theconsolidated financial statements, ALLTEL signed an agreement to lease AmericanTower certain of the Company’s cell site towers in exchange for cash paid inadvance.  ALLTEL is obligated to payAmerican Tower a monthly fee per tower for management and maintenance servicesfor the duration of the fifteen-year lease agreement.

 

Cash flows from investing activities for 2003 included proceeds fromthe sale of assets of $46.1 million, principally consisting of $37.0 millionreceived by ALLTEL from the sale of certain assets related to the Company’stelecommunications information services operations, as previouslydiscussed.  Cash flows from investingactivities for 2002 included proceeds from the sale of assets of $24.1 millionreceived by ALLTEL in connection with the sale of a wireless property inPennsylvania, as previously discussed. Cash flows from investing activities for 2001 included $411.4 million ofproceeds from the sale of assets, principally consisting of $410.1 millionreceived by ALLTEL from the sale of 20 PCS licenses, as previouslydiscussed.  The proceeds received in2001 from the asset sales and the leasing of cell site towers were usedprimarily to reduce borrowings under the Company’s commercial paper program.

 

Cash flows from investing activities also included proceeds from thereturn on or sale of investments of $48.3 million in 2003, $51.9 million in2002 and $57.0 million in 2001.  Theseamounts primarily consisted of cash distributions received from ALLTEL’swireless minority investments.  Thedecrease in 2003 primarily reflected ALLTEL’s acquisitions of the remainingownership interest in two wireless properties in Michigan and of a controllinginterest in a Wisconsin wireless partnership completed during 2003, aspreviously discussed.

 

Cash Flows from Financing Activities

Dividend payments remained a significant use of the Company’s capitalresources.  Common and preferreddividend payments amounted to $436.4 million in 2003, $423.1 million in 2002and $411.8 million in 2001.  Theincreases in each year primarily reflected growth in the annual dividend rateson ALLTEL’s common stock.  In October2003, the Company’s Board of Directors increased the quarterly common stockdividend rate 6 percent from $.35 to $.37 per share.  This action raised the annual dividend rate to $1.48 per shareand marked the 43rd consecutive year in which ALLTEL has increased its commonstock dividend.  The Company expects tocontinue the payment of cash dividends during 2004.

 

ALLTEL’s maximum borrowing capacity under its commercial paper programis $1.5 billion.  ALLTEL classifies commercialpaper borrowings as long-term debt, because they are intended to be maintainedon a long-term basis and are supported by the Company’s revolving creditagreements.  ALLTEL has a $1.0 billionline of credit under a revolving credit agreement. During 2003, the Companyamended this revolving credit agreement such that the expiration date of theentire $1.0 billion line of credit is now October 1, 2005.  On July 30, 2003, the Company entered intoan additional $500.0 million, 364-day revolving credit agreement that willexpire on July 28, 2004, and allows the Company to convert any outstandingborrowings under this agreement into term loans maturing in 2005.  No borrowings were outstanding under therevolving credit agreements as of December 31, 2003, 2002 and 2001.

 

Under the commercial paper program, commercial paper borrowings arefully supported by the available borrowings under the revolving creditagreements.  Accordingly, the totalamount outstanding under the commercial paper program 

 

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and the indebtedness incurred under the revolving credit agreements maynot exceed $1.5 billion.  No commercialpaper borrowings were outstanding at December 31, 2003, compared to $25.0million, $230.1 million and $835.5 million outstanding as of December 31, 2002,2001 and 2000, respectively.  During2003, the Company incurred additional commercial paper borrowings to fund thewireless property acquisitions in Arizona, Mississippi and Michigan, aspreviously discussed, and to retire a $450.0 million, 7.125 percent seniorunsecured note that was due March 1, 2003. As previously discussed, during the second quarter of 2003, the Companyrepaid all borrowings outstanding under its commercial paper program utilizinga portion of the cash proceeds ALLTEL received in connection with the April 1,2003 sale of the financial services division of its information servicessubsidiary to Fidelity National.  ALLTELalso used a portion of the cash proceeds from the sale to retire all long-termdebt outstanding under the Rural Utilities Services, Rural Telephone Bank andFederal Financing Bank programs as further discussed below.  During 2002, the Company incurred commercialpaper borrowings in the amount of $442.5 million to fund a portion of thepurchase price of the Verizon and CenturyTel acquisitions.  Borrowings in 2001 under the commercialpaper program were incurred primarily to finance the deposit delivered inconnection with the Verizon wireline property acquisition and to fund stockrepurchases.

 

Retirements of long-term debt amounted to $763.4 million in 2003,$265.8 million in 2002 and $781.8 million in 2001. Retirements of long-termdebt in 2003 included the repayment of a $450.0 million unsecured note dueMarch 1, 2003 and the retirement of $249.1 million of long-term debtoutstanding under the Rural Utilities Services, Rural Telephone Bank andFederal Financing Bank programs. Retirements of long-term debt in 2003 also included the net reductionfrom December 31, 2002 in commercial paper borrowings of $25.0 million.  The net reductions from December 31, 2001and 2000 in commercial paper borrowings of $205.1 million and $605.4 million,respectively, represented the majority of the long-term debt retired in 2002and 2001.  Retirements of long-term debtfor 2001 also included the early retirement of $73.5 million of high-cost debtcompleted in the second quarter of 2001, as previously discussed. Additionalscheduled long-term debt retirements, net of commercial paper and theprepayment of long-term debt, amounted to $39.3 million in 2003, $60.7 millionin 2002 and $102.9 million in 2001. (See Note 4 to the consolidated financialstatements for additional information regarding the Company’s long-term debt.)

 

As previously discussed, during May 2002, the Company sold 27.7 millionequity units and received net proceeds of $1.34 billion.  In June 2002, the Company issued $1.5billion of unsecured long-term debt consisting of $800.0 million of 7.0 percentsenior notes due July 1, 2012 and $700.0 million of 7.875 percent senior notesdue July 1, 2032.  Net proceeds from thedebt issuance were $1.47 billion, after deducting the underwriting discount andother offering expenses.  The netproceeds from the issuance of the equity units and debt securities of $2.81billion represented all of the long-term debt issued in 2002.

 

Distributions to minority investors were $67.5 million in 2003,compared to $57.9 million in 2002 and $117.8 million in 2001.  The decrease in 2002 primarily reflected thetransfer to ALLTEL of the remaining ownership interest in two South CarolinaMSAs related to the dissolution of a partnership with BellSouth previouslydiscussed.  In addition, distributionsin 2001 included additional payments of $48.4 million, representing theminority partners’ share of the proceeds received from the leasing of cell sitetowers discussed above.

 

Under a stock repurchase plan adopted by ALLTEL’s Board of Directors inJuly 2000, the Company repurchased 1.4 million of its common shares at a totalcost of $78.1 million in 2001.  In 2000,the Company entered into three forward purchase contracts with a financialinstitution in conjunction with this stock repurchase program.  Under terms of the contracts, the Companyagreed to purchase ALLTEL common shares from the financial institution at aspecified price (the “forward price”). The forward price was equal to the financial institution’s cost toacquire the shares plus a premium based on the net carrying cost of the sharesto the financial institution and was accrued over the period that the contractwas outstanding.  In 2001, the Companysettled these contracts by acquiring 1.9 million of its common shares at a costof $114.2 million.  On January 22, 2004,ALLTEL’s Board of Directors adopted a new stock repurchase plan authorizing theCompany to repurchase up to $750.0 million of its outstanding common stock overa two year period ended December 31, 2005. Under the repurchase plan, ALLTEL may repurchase shares, from time totime, on the open market or in negotiated transactions, as circumstanceswarrant, depending upon market conditions and other factors.  Sources of funding the stock buyback programinclude available cash on hand, operating cash flows, borrowings under theCompany’s commercial paper program and proceeds from monetizing ALLTEL’sinvestment portfolio.  Through February24, 2004, the Company had repurchased, using available cash on hand, 1.4 millionof its common shares at a total cost of $70.9 million.

 

Liquidity and Capital Resources

ALLTEL believes it has sufficient cash and short-term investments onhand ($657.8 million at December 31, 2003) and has adequate operating cashflows to finance its ongoing operating requirements, including capitalexpenditures, repayment of long-term debt, payment of dividends, and the stockrepurchase program.  Additional sourcesof funding available to the Company include: (1) $1.5 billion of borrowingsavailable under the Company’s commercial paper 

 

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program and revolving credit agreements, (2) additional debt or equitysecurities under ALLTEL’s March 28, 2002, $5.0 billion shelf registrationstatement, of which approximately $730 million remained available for issuanceat December 31, 2003 and (3) additional debt securities issued in the privateplacement market.  ALLTEL’s commercialpaper and long-term credit ratings with Moody’s Investors Service (“Moody’s”),Standard & Poor’s Corporation (“Standard & Poor’s”) and Fitch Ratings(“Fitch”) were unchanged from December 31, 2002 and were as follows:

 

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

 

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

 

During 2002, the Company amended its $1.0 billion revolving creditagreement to conform certain of its provisions to corresponding provisions ofthe Company’s 364-day revolving credit agreement.  The revolving credit agreements contain various covenants andrestrictions including a requirement that, as of the end of each calendarquarter, ALLTEL maintain a total debt-to-capitalization ratio of less than 65percent.  For purposes of calculatingthis ratio under the revolving credit agreement, total debt would includeamounts classified as long-term debt (excluding mark-to-market adjustments forinterest rate swaps), current maturities of long-term debt outstanding,short-term debt and any letters of credit or other guarantee obligations.  As of December 31, 2003, the Company’s totaldebt to capitalization ratio was 45.3 percent.

 

At December 31, 2003, current maturities of long-term debt were $277.2million and included a $250.0 million, 7.25 percent senior unsecured note dueApril 1, 2004.  The Company expects tofund the payment of this note at maturity through either operating cash flows,available cash on hand or refinancing all or a portion of the obligationthrough the issuance of additional commercial paper borrowings or otherunsecured long-term debt.

 

Pension Plans

ALLTEL maintains a qualified defined benefit pension plan, which coverssubstantially all employees other than employees of ALLTEL’s directorypublishing subsidiary.  The Company alsomaintains a supplemental executive retirement plan that provides unfunded,non-qualified supplemental retirement benefits to a select group of managementemployees.  In addition, the Company hasentered into individual retirement agreements with certain retired executivesproviding for unfunded supplemental pension benefits.  As further illustrated in Note 7 to the consolidated financialstatements, total pension expense related to these plans was $41.0 million in2003 and $8.8 million in both 2002 and 2001. ALLTEL’s pension expense for 2004 is estimated to be approximately $33.6million.

 

Annual pension expense for 2004 was calculated based upon a number ofactuarial assumptions, including an expected long-term rate of return onqualified pension plan assets of 8.50 percent and a discount rate of 6.40percent.  In developing the expectedlong-term rate of return assumption, ALLTEL evaluated historical investmentperformance, as well as input from its investment advisors.  Projected returns by such advisors werebased on broad equity and bond indices. The Company also considered the pension plan’s historical returns since1975 of 11.1 percent.  ALLTEL’s expectedlong-term rate of return on qualified pension plan assets is based on atargeted asset allocation of 70 percent to equities, with an expected long-termrate of return of 10 percent, and 30 percent to fixed income assets, with anexpected long-term rate of return of 5 percent.  Because of market fluctuations and cash contributions funded inlate December to the qualified pension plan by ALLTEL of $100.0 million thathad not yet been reinvested, the actual asset allocation as of December 31,2003 was 66.1 percent to equities, 19.9 percent to fixed income assets and 14.0percent in money market funds and other interest bearing investments.  The Company regularly reviews the actualasset allocation of its qualified pension plan and periodically rebalances itsinvestments to achieve the targeted allocation.  ALLTEL continues to believe that 8.50 percent is a reasonablelong-term rate of return on its qualified pension plan assets.  For the year ended December 31, 2003, theactual return on qualified pension plan assets was 21.5 percent.  ALLTEL will continue to evaluate itsactuarial assumptions, including the expected rate of return, at leastannually, and will adjust them as necessary. Lowering the expected long-term rate of return on the qualified pensionplan assets by 0.5 percent (from 8.50 percent to 8.0 percent) would result inan increase in pension expense of approximately $4.1 million in 2004.

 

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The discount rate selected is based on a review of current marketinterest rates of high-quality, fixed-rate debt securities adjusted to reflectthe duration of expected future cash outflows for pension benefitpayments.  In developing the discountrate assumption for 2003, ALLTEL reviewed the high grade bond indices publishedby Moody’s as of December 31, 2003, which are based on debt securities withaverage maturities of 30 years.  Thesematurities are shorter than the term of the Company’s expected future cashoutflows, reflecting the younger workforce in the Company’s wirelessbusiness.  To account for the longerduration of its expected future pension benefit payments, the Company analyzedmarket data and yield curves for U.S. Treasury and corporate securities andestimated an appropriate duration adjustment. The discount rate determined onthis basis decreased from 6.85 percent at December 31, 2002 to 6.40 percent atDecember 31, 2003.  Lowering thediscount rate by 0.25 percent (from 6.40 percent to 6.15 percent) would resultin an increase in pension expense of approximately $3.7 million in 2004.

 

As of December 31, 2003, ALLTEL had cumulative unrecognized actuariallosses of $181.7 million, compared to $209.6 million at December 31, 2002.  These actuarial losses are included in thecalculation of the Company’s annual pension expense subject to the followingamortization methodology.  Unrecognizedactuarial gains or losses that exceed 17.5 percent of the greater of theprojected benefit obligation or market-related value of plan assets areamortized into pension expense on a straight-line basis over five years.  Unrecognized actuarial gains and lossesbelow the 17.5 percent corridor are amortized over the average remainingservice life of active plan participants (approximately 14 years at December31, 2003).  In applying thisamortization method, the estimated pension expense of $33.6 million for 2004includes $19.8 million of the unrecognized actuarial loss at December 31, 2003.

 

ALLTEL made a $100.0 million contribution to its qualified pension planin December 2003.  ALLTEL does notexpect that any contribution to the plan calculated in accordance with theminimum funding requirements of the Employee Retirement Income Security Act of1974 will be required in 2004.  Futurecontributions to the plan will depend on various factors, including futureinvestment performance, changes in future discount rates and changes in thedemographics of the population participating in the Company’s qualified pensionplan.

 

Off-Balance Sheet Arrangements

The Company does not use securitization of trade receivables,affiliation with special purpose entities, variable interest entities orsynthetic leases to finance its operations. Additionally, the Company has not entered into any arrangement requiringALLTEL to guarantee payment of third party debt or to fund losses of anunconsolidated special purpose entity.

 

As defined by the Securities and Exchange Commission’s rules andregulations, the Company is a party to off-balance sheet arrangements,consisting of certain guarantees related to the sale of assets and ALLTEL’sfuture obligation to sell a variable number of its common shares.  Information pertaining to these arrangementsis presented below.

 

Guarantees

As further discussed in Note 11 to the consolidated financialstatements, in conjunction with the sale of the financial services division toFidelity National, ALLTEL agreed to indemnify Fidelity National for any damagesresulting from ALLTEL’s breach of warranty or non-fulfillment of certaincovenants under the sales agreement, that exceed 1.5 percent of the purchaseprice, or $15.75 million, up to a maximum of 15 percent of the purchase price,or $157.5 million.  The Company believesbecause of the low probability of being required to pay any amount under thisindemnification, the fair value of this obligation is immaterial to theconsolidated results of operations, cash flows and financial condition of theCompany.  Accordingly, the Company hasnot recorded a liability related to it. ALLTEL also agreed to indemnify Fidelity National from any future taxliability imposed on the financial services division related to periods priorto the date of sale.  ALLTEL’sobligation to Fidelity National under this indemnification is not subject to amaximum amount.  The Company hasrecorded a liability for tax contingencies of approximately $34.0 millionrelated to the operations of the financial services division for periods priorto the date of sale that management has assessed as probable and estimable,which should adequately cover any obligation under this indemnification.

 

In connection with the sale of assets to Convergys, ALLTEL agreed toindemnify Convergys for any damages resulting from ALLTEL’s breach of warrantyunder the sales agreement that exceed $500,000, up to a maximum of $10.0million.  In addition, the Companyagreed to indemnify Convergys for any damages resulting from non-fulfillment ofcertain covenants or liabilities arising from the ownership, operation or useof the assets included in the sale. This indemnification is not subject to a maximum obligation.  The Company believes because of the lowprobability of being required to pay any amount under these indemnifications,the fair value of these obligations is immaterial to the consolidated resultsof operations, cash flows and financial condition of the Company.  Accordingly, the Company has not recorded aliability related to these indemnifications.

 

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Obligation to Sell Shares of ALLTEL Common Stock

As previously discussed, to fund the cost of the acquisitions completedin August 2002, ALLTEL sold 27.7 million equity units and received net proceedsof $1.34 billion.  The equity unitsinclude a purchase contract which obligates the holder to purchase, andobligates ALLTEL to sell, on May 17, 2005, for $50, a variable number of newlyissued common shares of ALLTEL.  Thenumber of ALLTEL shares issued will be determined at the time the purchasecontracts are settled based upon the then current price of ALLTEL’s common stock.  If the price of ALLTEL’s common stock isequal to or less than $49.50, then ALLTEL will deliver 1.0101 shares to theholder of the equity unit.  If the priceof ALLTEL’s common stock is greater than $49.50 but less than $60.39, thenALLTEL will deliver a fraction of shares equal to $50 divided by the thencurrent price of ALLTEL’s common stock. Finally, if the price of ALLTEL’s common stock is equal to or greaterthan $60.39, then ALLTEL will deliver 0.8280 shares to the holder.  Accordingly, upon settlement of the purchasecontracts on May 17, 2005, ALLTEL will receive proceeds of approximately$1,385.0 million and will deliver between 22.9 million and 28.0 million commonshares in the aggregate.

 

Contractual Obligations and Commitments

Set forth below is asummary of ALLTEL’s material contractual obligations and commitments as ofDecember 31, 2003:

 

|                                            |   | Payments Due by Period |   |
|-------------------------------------------------|--------|------------------------|--------|
| (Millions)                                      |   | Less than   1 Year     |   | 1-3  Years |   | 3-5  Years |   | More than  5 Years |   | Total |   |
| Long-term debt, including current maturites (a) |   | $                      | 277.2  |   | $ | 862.3 |   | $ | 1,532.0 |   | $ | 3,107.2 |   | $ | 5,778.7 |   |
| Operating leases                                |   | 97.6                   |   | 137.6 |   | 68.6 |   | 81.4 |   | 385.2 |   |
| Purchase  obligations (b)                       |   | 239.8                  |   | 247.0 |   | 118.2 |   | 0.4 |   | 605.4 |   |
| Site maintenance  fees – cell sites (c)    |   | 28.7                   |   | 61.8 |   | 68.2 |   | 328.4 |   | 487.1 |   |
| Other long-term  liabilities (d)                |   | 204.4                  |   | 477.8 |   | 454.5 |   | 1,017.1 |   | 2,153.8 |   |
| Total  contractual obligations and commitments  |   | $                      | 847.7  |   | $ | 1,786.5 |   | $ | 2,241.5 |   | $ | 4,534.5 |   | $ | 9,410.2 |   |

 

(a)   Excludes the fair value ofinterest rate swap agreements at December 31, 2003 of $79.7 million.

 

(b)   Purchase obligations includecommitments for wireless handset purchases, network facilities and transportservices, and agreements for software licensing and long-term marketingprograms.

 

(c)   In connection with the leasing of1,773 of the Company’s cell site towers to American Tower, ALLTEL is obligatedto pay American Tower a monthly fee per tower for management and maintenanceservices for the duration of the fifteen-year lease agreement.

 

(d)   Other long-term liabilities primarilyconsist of deferred tax liabilities, minority interests, other postretirementbenefit obligations, and deferred compensation.  Deferred rental revenue of $411.2 million related to ALLTEL’sagreement to lease cell site towers to American Tower was not included in thetable above.  The deferred rentalrevenue represents cash proceeds received in advance by ALLTEL under terms ofthe agreement and will be recognized as revenue ratably over the remaininglease term.

 

Under the Company’s long-term debt borrowing agreements, accelerationof principal payments would occur upon payment default, violation of debtcovenants not cured within 30 days or breach of certain other conditions setforth in the borrowing agreements.  AtDecember 31, 2003, the Company was in compliance with all of its debtcovenants. There are no provisions within the Company’s leasing agreements thatwould trigger acceleration of future lease payments.  (See Notes 4, 13 and 14 to the consolidated financial statementsfor additional information regarding certain of the obligations and commitmentslisted above.)

 

Legal Proceedings

ALLTEL is party to various legal proceedings arising in the ordinarycourse of business.  Although theultimate resolution of these various proceedings cannot be determined at thistime, management of the Company does not believe that such proceedings,individually or in the aggregate, will have a material adverse effect on thefuture results of operations or financial condition of ALLTEL.  In addition, management of the Company iscurrently not aware of any environmental matters that, individually or in theaggregate, would have a material adverse effect on the consolidated financialcondition or results of operations of the Company.

 

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Market Risk

The Company is exposed to market risk from changes in marketable equitysecurity prices, interest rates, and foreign exchange rates.  The Company has estimated its market riskusing sensitivity analysis.  Formarketable equity securities, market risk is defined as the potential change infair value attributable to a hypothetical adverse change in market prices.  For all other financial instruments, marketrisk is defined as the potential change in earnings resulting from ahypothetical adverse change in market prices or interest rates.  The results of the sensitivity analysis usedto estimate market risk are presented below, although the actual results maydiffer from these estimates.

 

Equity Price Risk

Changes in equity prices primarily affect the fair value of ALLTEL’sinvestments in marketable equity securities. Fair value for investments was determined using quoted market prices, ifavailable, or the carrying amount of the investment, if no quoted market pricewas available.  At December 31, 2003,investments of the Company were recorded at fair value of $722.7 million,compared to $325.8 million at December 31, 2002.  The increase in fair value primarily reflected the value of theFidelity National common stock acquired by ALLTEL in connection with the April1, 2003 sale of its financial services division, as previously discussed.  Marketable equity securities amounted to$395.8 million at December 31, 2003 and included unrealized holding gains of$73.6 million.  Comparatively,investments in marketable equity securities were only $0.2 million at December31, 2002.  A hypothetical 10 percentdecrease in quoted market prices would result in a $39.6 million decrease inthe fair value of the Company’s marketable equity securities at December 31,2003.

 

Interest Rate Risk

The Company’s earnings are affected by changes in variable interestrates related to ALLTEL’s issuance of short-term commercial paper and interestrate swap agreements.  The Companyenters into interest rate swap agreements to obtain a targeted mixture ofvariable and fixed-interest-rate debt such that the portion of debt subject tovariable rates does not exceed 30 percent of ALLTEL’s total debtoutstanding.  The Company hasestablished policies and procedures for risk assessment and the approval,reporting, and monitoring of interest rate swap activity.  ALLTEL does not enter into interest rateswap agreements, or other derivative financial instruments, for trading orspeculative purposes.  Management periodicallyreviews ALLTEL’s exposure to interest rate fluctuations and implementsstrategies to manage the exposure.

 

As of December 31, 2003, the Company had no borrowings outstandingunder its commercial paper program, compared to  $25.0 million of outstanding commercial paper at December 31,2002.  As of December 31, 2003 and 2002,the Company has entered into six, pay variable receive fixed, interest rateswap agreements on notional amounts totaling $1.0 billion to convert fixedinterest rate payments to variable.  Thematurities of the six interest rate swaps range from March 1, 2006 to November1, 2013.  The weighted average fixedrate received by ALLTEL on these swaps is 5.5 percent, and the variable ratepaid by ALLTEL is the three month LIBOR (London-Interbank Offered Rate).  The weighted average variable rate paid byALLTEL was 1.2 percent and 1.5 percent at December 31, 2003 and 2002,respectively.  A hypothetical increaseof 100 basis points in variable interest rates would have reduced annual pre-taxearnings in 2003 by approximately $10.0 million.  Conversely, a hypothetical decrease of 100 basis points invariable interest rates would have increased annual pre-tax earnings in 2003 byapproximately $10.0 million. Comparatively, a hypothetical increase of 100 basis points would havereduced pre-tax earnings in 2002 by approximately $10.3 million, while ahypothetical decrease of 100 basis points would have increased pre-tax earningsin 2002 by approximately $10.3 million.

 

Foreign Exchange Risk

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

 

Critical Accounting Policies

ALLTEL prepares its consolidated financial statements in accordancewith accounting principles generally accepted in the United States.  ALLTEL’s significant accounting policies arediscussed in detail in Note 1 to the consolidated financial statements.  Certain of these accounting policies asdiscussed below require management to make estimates and assumptions aboutfuture events that could materially affect the reported amounts of assets,liabilities, revenues and expenses and disclosure of contingent assets andliabilities.  These critical accountingpolices include the following:

 

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Service revenues for the Company’s communications business arerecognized based upon minutes of use processed and contracted fees, net of anycredits and adjustments.  Due to varyingcustomer billing cycle cut-off times, the Company must estimate servicerevenues earned but not yet billed at the end of each reporting period.  These estimates are based on historicalminutes of use processed.  Changes inestimates for revenues are recognized in the period in which they are determinable,and such changes could occur and have a material effect on the Company’s consolidatedoperating results in the period of change.

 

In evaluating the collectibility of its trade receivables, ALLTELassesses a number of factors including a specific customer’s ability to meetits financial obligations to the Company, as well as general factors, such asthe length of time the receivables are past due and historical collectionexperience.  Based on these assessments,the Company records both specific and general reserves for bad debt to reducethe related receivables to the amount the Company ultimately expects to collectfrom customers.  If circumstancesrelated to specific customers change or economic conditions worsen such thatthe Company’s past collection experience is no longer relevant, ALLTEL’sestimate of the recoverability of its trade receivables could be furtherreduced from the levels provided for in the consolidated financial statements.

 

The calculation of the annual costs of providing pension andpostretirement benefits are based on certain key actuarial assumptions as disclosedin Note 7 to the consolidated financial statements.  As previously discussed, the discount rate selected is based on areview of current market interest rates on high-quality, fixed-rate debtsecurities adjusted to reflect the Company’s longer duration of expected futurecash outflows for benefit payments.  Theexpected return on plan assets reflects management’s view of the long-termreturns available in the investment market based on historical averages and consultationwith investment advisors.  Thehealthcare cost trend rate is based on the Company’s actual medical claimsexperience and future projections of medical costs.  Changes in these key assumptions could have a material effect onthe projected benefit obligations, funding requirements and future periodicbenefit costs incurred by the Company.

 

The calculation of depreciation and amortization expense is based onthe estimated economic useful lives of the underlying property, plant andequipment and finite-lived intangible assets. Although ALLTEL believes it is unlikely that any significant changes tothe useful lives of its tangible or finite-lived intangible assets will occurin the near term, rapid changes in technology or changes in market conditionscould result in revisions to such estimates that could materially affect thecarrying value of these assets and the Company’s future consolidated operatingresults.  Specifically, the previouslydiscussed effects on customer churn rates due to competition and the FCC’snumber portability rules could adversely affect the useful lives of customerlists, resulting in a material increase in annual amortization expense or awrite-down in the carrying value of these assets.

 

In accordance with SFAS No. 142, ALLTEL tests its goodwill and otherindefinite-lived intangible assets for impairment at least annually, whichrequires the Company to determine the fair value of these intangible assets, aswell as the fair value of its reporting units. For purposes of testing goodwill, fair value of the reporting units isdetermined utilizing a combination of the discounted cash flows of thereporting units and calculated market values of comparable public companies asdetermined by a third party appraiser. Fair value of the other indefinite-lived intangible assets is determinedbased on the discounted cash flows of the related business segment.  During 2003 and 2002, no write-downs in thecarrying values of either goodwill or indefinite-lived intangible assets wererequired based on their calculated fair values.  In addition, reducing the calculated fair values of goodwill andthe other indefinite-lived intangible assets by 10 percent would not haveresulted in an impairment of the carrying value of the related assets in either2003 or 2002.  Changes in the key assumptionsused in the discounted cash flow analysis due to changes in market conditionscould adversely affect the calculated fair values of goodwill and otherindefinite-lived intangible assets, materially affecting the carrying value ofthese assets and the Company’s future consolidated operating results.

 

Recently Issued Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),“Consolidation of Variable Interest Entities”, an Interpretation of AccountingResearch Bulletin No. 51, which addressed consolidation by business enterprisesof variable interest entities either: (1) that do not have sufficient equityinvestment at risk to permit the entity to finance its activities withoutadditional subordinated financial support, or (2) in which the equity investorslack an essential characteristic of a controlling financial interest.  In December 2003, the FASB completeddeliberations of proposed modifications to FIN 46 (the “RevisedInterpretations”) resulting in multiple effective dates based on the nature, aswell as the creation date of the variable interest entity.  For variable interest entities created priorto January 1, 2004, the Revised Interpretations must be applied no later thanthe first quarter of 2004.  The RevisedInterpretations must be applied to all variable interest entities created afterJanuary 1, 2004.  Because the Companydoes not have affiliation with any special purpose or variable interestentities, this standard will not have a material effect on ALLTEL’sconsolidated financial statements.

 

F-32

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On December 8, 2003, the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”) became law.  Beginning in 2006, the Act will provide for a prescription drugbenefit under Medicare Part D, as well as a federal subsidy to plan sponsors ofretiree healthcare plans that provide a prescription drug benefit toparticipants that is at least actuarially equivalent to the benefit that will beavailable under Medicare.  The amount ofthe federal subsidy will be based on 28 percent of an individual beneficiary’sannual eligible prescription drug costs ranging between $250 and $5,000.  On January 12, 2004, the FASB issued StaffPosition No. 106-1, “Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSPNo. 106-1”).  ALLTEL has not fullyquantified the effects of the Act, although it is likely to result in areduction in both the Company’s future benefit costs and accumulated benefitobligation related to its postretirement healthcare plan.  In accordance with the provisions of FSP No.106-1, ALLTEL has not reflected the effects of the Act in the accompanyingconsolidated financial statements.  Theauthoritative guidance addressing the accounting for the federal subsidy isunder consideration by the FASB, and once issued, could require the Company torestate previously reported amounts related to its postretirement healthcareplan.

 

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition andResults of Operations includes, and future filings by the Company on Form 10-K,Form 10-Q and Form 8-K and future oral and written statements by ALLTEL and itsmanagement may include, certain “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject touncertainties that could cause actual future events and results to differmaterially from those expressed in the forward-looking statements.  These forward-looking statements are basedon estimates, projections, beliefs and assumptions and are not guarantees offuture events and results.  Words suchas “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”,“estimates”, and “should”, and variations of these words and similarexpressions, are intended to identify these forward-looking statements.  Examples of such forward-looking statementsinclude statements regarding ALLTEL’s future cash dividend policy, forecasts ofsegment capital requirements for 2004, and future contractual obligation andcommitment payments.  ALLTEL disclaimsany obligation to update or revise any forward-looking statement based on theoccurrence of future events, the receipt of new information, or otherwise.

 

Actual future events and results may differ materially from thoseexpressed in these forward-looking statements as a result of a number ofimportant factors.  Representativeexamples of these factors include (without limitation) adverse changes ineconomic conditions in the markets served by ALLTEL; the extent, timing, andoverall effects of competition in the communications business; material changesin the communications industry generally that could adversely affect vendorrelationships with equipment and network suppliers and customer relationshipswith wholesale customers; material changes in communications technology; therisks associated with the integration of acquired businesses; adverse changesin the terms and conditions of the Company’s wireless roaming agreements; thepotential for adverse changes in the ratings given to ALLTEL’s debt securitiesby nationally accredited ratings organizations; the availability and cost of financingin the corporate debt markets; the uncertainties related to ALLTEL’s strategicinvestments; the effects of work stoppages; the effects of litigation; ongoingderegulation (and the resulting likelihood of significantly increased price andproduct/service competition) in the communications business as a result offederal and state legislation, rules, and regulations; the final outcome offederal, state and local regulatory initiatives and proceedings related to theterms and conditions of interconnection, access charges, universal service andunbundled network elements and resale rates; and the effects of the FederalCommunications Commission’s number portability rules.

 

In addition to these factors, actual future performance, outcomes andresults may differ materially because of other, more general, factors including(without limitation) general industry and market conditions and growth rates,economic conditions, and governmental and public policy changes.

 

F-33

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**SELECTEDFINANCIAL DATA**

 

The following table presents certain selected consolidated financialdata as of and for the years ended December 31:

** **

| (Millions, except per share amounts)                                  |   | 2003    |       | 2002    |       | 2001     |       | 2000    |       | 1999    |       | 1998     |       |
|-----------------------------------------------------------------------|--------|---------|------------|---------|------------|----------|------------|---------|------------|---------|------------|----------|------------|
| **Revenues and sales**                                                |   | $       | 7,979.9    |    | $          | 7,112.4  |       | $       | 6,615.8    |    | $          | 6,308.9  |       | $ | 5,634.9 |   | $ | 4,931.9 |   |
| Operating  expenses                                                   |   | 6,062.9 |       | 5,322.8 |       | 4,990.8  |       | 4,757.4 |       | 4,157.8 |       | 3,736.4  |       |
| Merger and  integration expenses and other charges                    |   | 19.0    |       | 69.9    |       | 76.3     |       | 15.3    |       | 88.2    |       | 307.0    |       |
| Total costs and  expenses                                             |   | 6,081.9 |       | 5,392.7 |       | 5,067.1  |       | 4,772.7 |       | 4,246.0 |       | 4,043.4  |       |
| **Operating income**                                                  |   | 1,898.0 |       | 1,719.7 |       | 1,548.7  |       | 1,536.2 |       | 1,388.9 |       | 888.5    |       |
| Non-operating  income (expense), net                                  |   | (3.2    | )          | (5.3    | )          | (14.1    | )          | 27.6    |       | (4.1    | )          | 35.1     |       |
| Interest expense                                                      |   | (378.6  | )          | (355.1  | )          | (261.2   | )          | (284.3  | )          | (240.7  | )          | (242.6   | )          |
| Gain on disposal  of assets, write-down of investments and other      |   | 17.9    |       | 1.0     |       | 357.6    |       | 1,928.5 |       | 43.1    |       | 292.7    |       |
| Income from  continuing operations before income taxes                |   | 1,534.1 |       | 1,360.3 |       | 1,631.0  |       | 3,208.0 |       | 1,187.2 |       | 973.7    |       |
| Income taxes                                                          |   | 580.6   |       | 510.2   |       | 653.0    |       | 1,325.3 |       | 487.5   |       | 444.6    |       |
| Income from  continuing operations                                    |   | 953.5   |       | 850.1   |       | 978.0    |       | 1,882.7 |       | 699.7   |       | 529.1    |       |
| Discontinued  operations, net of tax                                  |   | 361.0   |       | 74.2    |       | 69.5     |       | 82.7    |       | 83.9    |       | 74.0     |       |
| Income before  cumulative effect of accounting change                 |   | 1,314.5 |       | 924.3   |       | 1,047.5  |       | 1,965.4 |       | 783.6   |       | 603.1    |       |
| Cumulative  effect of accounting change, net of tax                   |   | 15.6    |       | —  |       | 19.5     |       | (36.6   | )          | —  |       | —   |       |
| **Net income**                                                        |   | 1,330.1 |       | 924.3   |       | 1,067.0  |       | 1,928.8 |       | 783.6   |       | 603.1    |       |
| Preferred  dividends                                                  |   | 0.1     |       | 0.1     |       | 0.1      |       | 0.1     |       | 0.9     |       | 1.2      |       |
| Net income  applicable to common shares                               |   | $       | 1,330.0    |    | $          | 924.2    |       | $       | 1,066.9    |    | $          | 1,928.7  |       | $ | 782.7 |   | $ | 601.9 |   |
| **Basic earnings per share:**                                         |   |    | ** ** |    | ** ** |     | ** ** |    | ** ** |    | ** ** |     | ** ** |
| Income from  continuing operations                                    |   | $       | 3.06       |    | $          | 2.73     |       | $       | 3.14       |    | $          | 5.99     |       | $ | 2.23 |   | $ | 1.73 |   |
| Income from  discontinued operations                                  |   | 1.16    |       | .24     |       | .22      |       | .26     |       | .27     |       | .24      |       |
| Cumulative  effect of accounting change                               |   | .05     |       | —  |       | .06      |       | (.12    | )          | —  |       | —   |       |
| Net income                                                            |   | $       | 4.27       |    | $          | 2.97     |       | $       | 3.42       |    | $          | 6.13     |       | $ | 2.50 |   | $ | 1.97 |   |
| **Diluted earnings per share:**                                       |   |    | ** ** |    | ** ** |     | ** ** |    | ** ** |    | ** ** |     | ** ** |
| Income from  continuing operations                                    |   | $       | 3.05       |    | $          | 2.72     |       | $       | 3.12       |    | $          | 5.94     |       | $ | 2.21 |   | $ | 1.71 |   |
| Income from  discontinued operations                                  |   | 1.15    |       | .24     |       | .22      |       | .26     |       | .26     |       | .24      |       |
| Cumulative  effect of accounting change                               |   | .05     |       | —  |       | .06      |       | (.12    | )          | —  |       | —   |       |
| Net income                                                            |   | $       | 4.25       |    | $          | 2.96     |       | $       | 3.40       |    | $          | 6.08     |       | $ | 2.47 |   | $ | 1.95 |   |
| Dividends per  common share                                           |   | $       | 1.42       |    | $          | 1.37     |       | $       | 1.33       |    | $          | 1.29     |       | $ | 1.235 |   | $ | 1.175 |   |
| Weighted average  common shares:                                      |   |    |       |    |       |     |       |    |       |    |       |     |       |
| Basic                                                                 |   | 311.8   |       | 311.0   |       | 311.4    |       | 314.4   |       | 312.8   |       | 305.3    |       |
| Diluted                                                               |   | 312.8   |       | 312.3   |       | 313.5    |       | 317.2   |       | 316.8   |       | 308.4    |       |
| Pro forma  amounts assuming accounting changes applied retroactively: |   |    |       |    |       |     |       |    |       |    |       |     |       |
| Net income                                                            |   | $       | 1,314.5    |    | $          | 925.5    |       | $       | 1,047.9    |    | $          | 1,970.5  |       | $ | 768.3 |   | $ | 596.8 |   |
| Basic earnings  per share                                             |   | $       | 4.22       |    | $          | 2.98     |       | $       | 3.36       |    | $          | 6.27     |       | $ | 2.45 |   | $ | 1.95 |   |
| Diluted earnings  per share                                           |   | $       | 4.20       |    | $          | 2.96     |       | $       | 3.34       |    | $          | 6.21     |       | $ | 2.42 |   | $ | 1.93 |   |
| Total assets                                                          |   | $       | 16,661.1   |    | $          | 16,244.6 |       | $       | 12,500.7   |    | $          | 12,087.2 |       | $ | 10,774.2 |   | $ | 10,155.5 |   |
| Total  shareholders’ equity                                      |   | $       | 7,022.2    |    | $          | 5,998.1  |       | $       | 5,565.8    |    | $          | 5,095.4  |       | $ | 4,205.7 |   | $ | 3,632.0 |   |
| Total redeemable  preferred stock and long-term debt                  |   | $       | 5,582.2    |    | $          | 6,146.4  |       | $       | 3,862.0    |    | $          | 4,611.7  |       | $ | 3,749.7 |   | $ | 3,683.5 |   |

 

Notesto Selected Financial Information:

See Note 11for a discussion of the Company’s discontinued information services operations.

 

A.    Netincome for 2003 included pretax charges of $8.5 million primarily related tothe closing of certain call center locations and the write-off of $13.2 millionof certain capitalized software development costs with no alternative futureuse or functionality.  The Company alsorecorded a $2.7 million reduction in the liabilities associated with various restructuringactivities initiated prior to 2003 to reflect differences between estimated andactual costs paid in completing the previous planned restructuringactivities.  These transactionsdecreased net income $11.5 million or $.04 per share. (See Note 8 to theconsolidated financial statements.)  Netincome for 2003 also included a pretax gain of $31.0 million realized from thesale of certain assets of the telecommunications information servicesoperations, partially offset by pretax write-downs totaling $6.0 million toreflect other-than-temporary declines in the fair value of certain investmentsin unconsolidated limited partnerships. In addition, the Company incurred pretax termination fees of $7.1million related to the early retirement of long-term debt.  These transactions increased net income$10.7 million or $.04 per share. (See Note 9 to the consolidated financialstatements.)  Effective January 1, 2003,ALLTEL adopted SFAS No. 143 in accounting for asset retirement obligations.  The cumulative effect of this accountingchange resulted in a one-time non-cash credit of $15.6 million, net of incometax expense of $10.3 million, or $.05 per share. (See Note 2 to theconsolidated financial statements.)

 

F-34

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Notesto Selected Financial Information**,**Continued:

B.    Net income for 2002 included pretax charges of$34.0 million incurred in connection with restructuring ALLTEL’s competitivelocal exchange carrier, call center and retail store operations and with theclosing of seven product distribution centers. The Company also incurred integration expenses of $28.8 million relatedto its acquisitions of wireline properties from Verizon Communications, Inc.and wireless properties from CenturyTel, Inc. ALLTEL also recorded write-downs in the carrying value of certain cellsite equipment of $7.1 million.  Thesecharges decreased net income $42.3 million or $.14 per share. (See Note 8 tothe consolidated financial statements.) Net income for 2002 included a pretax gain of $22.1 million realized fromthe sale of a wireless property, partially offset by pretax write-downs of$16.3 million related to investments in marketable securities.  ALLTEL also recorded a pretax adjustment of$4.8 million to reduce the gain recognized from the dissolution of a wirelesspartnership that was initially recorded in 2001.  These transactions increased net income $0.6 million or less than$.01 per share. (See Note 9 to the consolidated financial statements.)

 

As furtherdiscussed in Note 1 to the consolidated financial statements, effective January1, 2002, the Company changed its accounting for goodwill and otherindefinite-lived intangible assets from an amortization method to animpairment-only approach in accordance with SFAS No. 142.  Accordingly, the Company ceased amortizationof goodwill and indefinite-lived intangible assets as of January 1, 2002.  The adjusted after-tax income fromcontinuing operations, income before cumulative effect of accounting change,net income and the related earnings per share effects, assuming that the changein accounting to eliminate the amortization of goodwill and otherindefinite-lived intangible assets was applied retroactively were as followsfor the years ended December 31:

* *

| (Millions, except per share amounts)                  |   | 2001 |    | 2000   |   | 1999    |   | 1998 |   |
|-------------------------------------------------------|--------|------|---------|--------|--------|---------|--------|------|--------|
| Income from  continuing operations                    |   | $    | 1,068.9 |   | $      | 1,972.7 |   | $    | 751.9  |   | $ | 574.9 |   |
| Basic earnings  per share                             |   | $    | 3.43    |   | $      | 6.27    |   | $    | 2.40   |   | $ | 1.88 |   |
| Diluted earnings  per share                           |   | $    | 3.41    |   | $      | 6.22    |   | $    | 2.37   |   | $ | 1.86 |   |
| Income before  cumulative effect of accounting change |   | $    | 1,140.6 |   | $      | 2,057.0 |   | $    | 836.9  |   | $ | 649.1 |   |
| Basic earnings  per share                             |   | $    | 3.66    |   | $      | 6.55    |   | $    | 2.67   |   | $ | 2.12 |   |
| Diluted earnings  per share                           |   | $    | 3.64    |   | $      | 6.49    |   | $    | 2.64   |   | $ | 2.10 |   |
| Net income                                            |   | $    | 1,160.1 |   | $      | 2,020.4 |   | $    | 836.9  |   | $ | 649.1 |   |
| Basic earnings  per share                             |   | $    | 3.72    |   | $      | 6.43    |   | $    | 2.67   |   | $ | 2.12 |   |
| Diluted earnings  per share                           |   | $    | 3.70    |   | $      | 6.37    |   | $    | 2.64   |   | $ | 2.10 |   |

 

C.    Net income for 2001 included pretax gains of $347.8million from the sale of PCS licenses, a pretax gain of $9.5 million from thedissolution of a wireless partnership and a pretax gain of $3.2 million fromthe sale of certain investments.  Netincome also included pretax termination fees of $2.9 million incurred due tothe early retirement of debt.  Thesetransactions increased net income $212.7 million or $.68 per share. (See Note 9to the consolidated financial statements.) Net income also included pretax charges of $61.2 million incurred inconnection with the restructuring of the Company’s regional communications,product distribution and corporate operations. The Company also recorded write-downs in the carrying value of certaincell site equipment totaling $15.1 million. These charges decreased net income $45.3 million or $.14 per share. (SeeNote 8 to the consolidated financial statements.)  Effective January 1, 2001, the Company changed its method ofaccounting for a subsidiary’s pension plan to conform to the Company’s primarypension plan.  The cumulative effect ofthis accounting change resulted in a non-cash credit of $19.5 million, net ofincome tax expense of $13.0 million, or $.06 per share. (See Note 2 to theconsolidated financial statements.)

 

D.    Net income for 2000 included pretax gains of$1,345.5 million from the exchange of wireless properties with Bell AtlanticCorporation and GTE Corporation, pretax gains of $36.0 million from the sale ofcertain PCS assets and pretax gains of $562.0 million from the sale ofinvestments, principally consisting of WorldCom, Inc. (“WorldCom”) commonstock.  Net income also included a pretaxwrite-down of $15.0 million in the Company’s investment in an Internet accessservice provider.  These transactionsincreased net income $1,124.3 million or $3.58 per share.  Net income also included integration costsand other charges of $15.3 million primarily incurred in connection with theacquisition of wireless assets.  TheCompany also incurred a pretax charge of $11.5 million in connection with alitigation settlement.  These chargesdecreased net income $16.1 million or $.05 per share.  Effective January 1, 2000, the Company changed its method ofrecognizing wireless access revenues and certain customer activation fees.  The cumulative effect of this accountingchange resulted in a non-cash charge of $36.6 million, net of income taxbenefit of $23.3 million or $.12 per share.

 

E.     Net income for 1999 included a pretax gain of $43.1million from the sale of WorldCom common stock.  The gain increased net income by $27.2 million or $.08 pershare.  Net income also included apretax charge of $88.2 million in connection with the closing of the Company’smergers with Aliant Communications Inc., Liberty Cellular, Inc. and itsaffiliate KINI L.C. and with certain loss contingencies and other restructuringactivities.  These charges decreased netincome $63.8 million or $.20 per share.

 

F.     Net income for 1998 included pretax gains of $296.2million from the sale of certain investments, principally consisting ofWorldCom common stock.  These gainsincreased net income by $179.7 million or $.59 per share.  Net income also included merger andintegration expenses of $252.0 million related to the closing of the mergerwith 360° Communications Company.  Thesemerger and integration expenses decreased net income $201.0 million or $.66 pershare.  Net income also included apretax charge of $55.0 million resulting from changes in a customer care andbilling contract with a major customer and termination fees of $3.5 millionincurred due to the early retirement of long-term debt.  These charges decreased net income $35.7million or $.12 per share*.*

 

F-35

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**REPORTOF MANAGEMENT**

 

ALLTEL Corporation’s management is responsible for the integrity andobjectivity of all financial information included in this Financial Supplement.  The consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The financialinformation includes amounts that are based on the best estimates and judgmentsof management.  All financialinformation in this Financial Supplement is consistent with that in theconsolidated financial statements.

 

Management maintains a comprehensive system of internal controls overfinancial reporting designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  The Company’s system ofinternal controls over financial reporting includes policies and proceduresthat provide reasonable assurance that ALLTEL’s assets are protected fromimproper use and that transactions are authorized, recorded and reportedproperly.  Key elements in ALLTEL’ssystem of internal controls include selection of qualified managers,appropriate division of responsibilities, and communication of written policiesand procedures.  In addition, ALLTELmaintains an Internal Audit Department that independently assesses theeffectiveness of ALLTEL’s system of internal controls over financial reporting.

 

Management continually monitors, evaluates and where appropriate,modifies the system of internal controls over financial reporting in responseto changes in business conditions and operations and the recommendations madeby ALLTEL’s internal and independent auditors. ALLTEL management believes the system of internal controls overfinancial reporting provides reasonable assurance that ALLTEL’s assets aresafeguarded and that the financial information is reliable.

 

PricewaterhouseCoopers LLP, Independent Public Accountants, haveaudited these consolidated financial statements and have expressed herein theirunqualified opinion.

 

The Audit Committee of the Board of Directors, which oversees ALLTEL’sfinancial reporting process on behalf of the Board of Directors, is composedentirely of independent directors (as defined by the New York StockExchange).  The Audit Committee meetsperiodically with management, the independent accountants, and the internalauditors to review matters relating to the Company’s financial statements andfinancial reporting process, annual financial statement audit, engagement ofindependent accountants, internal audit function, system of internal accountingand financial controls, and legal compliance and ethics programs as establishedby ALLTEL management and the Board of Directors.  The internal auditors and the independent accountantsperiodically meet alone with the Audit Committee and have access to the AuditCommittee at any time.

 

 

Dated February 24, 2004

 

| Scott T. Ford                          | Jeffery R. Gardner                                  |
|----------------------------------------|-----------------------------------------------------|
| President and  Chief Executive Officer | Executive Vice  President-  Chief Financial Officer |

 

F-36

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**REPORTOF INDEPENDENT AUDITORS**

 

 

To the Shareholders of ALLTEL Corporation:

 

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of income, cash flows and of shareholders’equity present fairly, in all material respects, the financial position ofALLTEL Corporation and its subsidiaries (the “Company”)****as of December 31, 2003 and2002, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2003 in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

As described in Note 2 to the financial statements, the Company changedits method of accounting for asset retirement obligations as a result ofadopting Statement of Financial Accounting Standards No. 143 (“SFAS No. 143”),“Accounting for Asset Retirement Obligations” as of January 1, 2003.  As described in Note 1, the Company changedits accounting for goodwill and other intangible assets upon adoption of Statementof Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and OtherIntangible Assets” as of January 1, 2002. Also as discussed in Note 2 to the financial statements, effectiveJanuary 1, 2001, the Company changed its method of accounting for computing andamortizing unrecognized actuarial gains and losses related to a subsidiary’sdefined pension plan.

 

 

| /s/ PricewaterhouseCoopers LLP |   |   |
|--------------------------------|--------|--------|
| Little Rock, AR                |   |
| January 21, 2004               |   |

 

F-37

----

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

For the years ended December 31,

 

| (Millions, except per share amounts)                                                              |   | 2003    |       | 2002    |       | 2001    |       |
|---------------------------------------------------------------------------------------------------|--------|---------|------------|---------|------------|---------|------------|
| **Revenues and sales:**                                                                           |   |    |       |    |       |    |       |
| Service revenues                                                                                  |   | $       | 7,156.1    |    | $          | 6,428.9 |       | $ | 5,900.0 |   |
| Product sales                                                                                     |   | 823.8   |       | 683.5   |       | 715.8   |       |
| Total revenues  and sales                                                                         |   | 7,979.9 |       | 7,112.4 |       | 6,615.8 |       |
| **Costs and expenses:**                                                                           |   |    |       |    |       |    |       |
| Cost of services  (excluding depreciation of $906.3, $791.7 and $689.5 included below)            |   | 2,273.6 |       | 2,039.0 |       | 1,800.5 |       |
| Cost of products  sold                                                                            |   | 1,043.5 |       | 891.3   |       | 907.2   |       |
| Selling,  general, administrative and other                                                       |   | 1,498.1 |       | 1,297.0 |       | 1,201.1 |       |
| Depreciation and  amortization                                                                    |   | 1,247.7 |       | 1,095.5 |       | 1,082.0 |       |
| Integration  expenses and other charges                                                           |   | 19.0    |       | 69.9    |       | 76.3    |       |
| Total costs and  expenses                                                                         |   | 6,081.9 |       | 5,392.7 |       | 5,067.1 |       |
| **Operating income**                                                                              |   | 1,898.0 |       | 1,719.7 |       | 1,548.7 |       |
|                                                                                              |   |    |       |    |       |    |       |
| Equity earnings  in unconsolidated partnerships                                                   |   | 64.4    |       | 65.8    |       | 56.9    |       |
| Minority  interest in consolidated partnerships                                                   |   | (78.6   | )          | (73.4   | )          | (75.2   | )          |
| Other income,  net                                                                                |   | 11.0    |       | 2.3     |       | 4.2     |       |
| Interest expense                                                                                  |   | (378.6  | )          | (355.1  | )          | (261.2  | )          |
| Gain on disposal  of assets, write-down of investments and other                                  |   | 17.9    |       | 1.0     |       | 357.6   |       |
|                                                                                              |   |    |       |    |       |    |       |
| Income from  continuing operations before income taxes                                            |   | 1,534.1 |       | 1,360.3 |       | 1,631.0 |       |
| Income taxes                                                                                      |   | 580.6   |       | 510.2   |       | 653.0   |       |
|                                                                                              |   |    |       |    |       |    |       |
| Income from  continuing operations                                                                |   | 953.5   |       | 850.1   |       | 978.0   |       |
| Discontinued  operations  (net of income taxes of $256.2, $31.0 and $51.3)                        |   | 361.0   |       | 74.2    |       | 69.5    |       |
|                                                                                              |   |    |       |    |       |    |       |
| Income before  cumulative effect of accounting change                                             |   | 1,314.5 |       | 924.3   |       | 1,047.5 |       |
| Cumulative  effect of accounting change  (net of income taxes of $10.3 in 2003 and $13.0 in 2001) |   | 15.6    |       | —  |       | 19.5    |       |
|                                                                                              |   |    |       |    |       |    |       |
| Net income                                                                                        |   | 1,330.1 |       | 924.3   |       | 1,067.0 |       |
| Preferred  dividends                                                                              |   | 0.1     |       | 0.1     |       | 0.1     |       |
| Net income  applicable to common shares                                                           |   | $       | 1,330.0    |    | $          | 924.2   |       | $ | 1,066.9 |   |
| **Earnings per share:**                                                                           |   |    | ** ** |    | ** ** |    | ** ** |
| Basic:                                                                                            |   |    |       |    |       |    |       |
| Income from  continuing operations                                                                |   | $       | 3.06       |    | $          | 2.73    |       | $ | 3.14 |   |
| Income from  discontinued operations                                                              |   | 1.16    |       | .24     |       | .22     |       |
| Cumulative  effect of accounting change                                                           |   | .05     |       | —  |       | .06     |       |
| Net income                                                                                        |   | $       | 4.27       |    | $          | 2.97    |       | $ | 3.42 |   |
| Diluted:                                                                                          |   |    |       |    |       |    |       |
| Income from  continuing operations                                                                |   | $       | 3.05       |    | $          | 2.72    |       | $ | 3.12 |   |
| Income from  discontinued operations                                                              |   | 1.15    |       | .24     |       | .22     |       |
| Cumulative  effect of accounting change                                                           |   | .05     |       | —  |       | .06     |       |
| Net income                                                                                        |   | $       | 4.25       |    | $          | 2.96    |       | $ | 3.40 |   |
| Pro forma  amounts assuming changes in accounting principles were applied retroactively:          |   |    |       |    |       |    |       |
| Net income as  reported:                                                                          |   | $       | 1,330.1    |    | $          | 924.3   |       | $ | 1,067.0 |   |
| Effect of change  in recognition of asset retirement obligations                                  |   | (15.6   | )          | 1.2     |       | 0.4     |       |
| Effect of change  in pension accounting                                                           |   | —  |       | —  |       | (19.5   | )          |
| Net income as  adjusted                                                                           |   | $       | 1,314.5    |    | $          | 925.5   |       | $ | 1,047.9 |   |
| Earnings per  share as adjusted:                                                                  |   |    |       |    |       |    |       |
| Basic                                                                                             |   | $       | 4.22       |    | $          | 2.98    |       | $ | 3.36 |   |
| Diluted                                                                                           |   | $       | 4.20       |    | $          | 2.96    |       | $ | 3.34 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-38

----

 

**CONSOLIDATEDBALANCE SHEETS**

December 31,

(Dollars in millions, except per share amounts)

 

| **Assets**                                                                                                                                              |   | 2003     |       | 2002     |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
| **Current Assets:**                                                                                                                                     |   |     |       |     |       |
| Cash and  short-term investments                                                                                                                        |   | $        | 657.8      |     | $          | 134.6 |   |
| Accounts  receivable (less allowance for doubtful accounts of $46.3 and $68.4,  respectively)                                                           |   | 890.0    |       | 1,018.3  |       |
| Inventories                                                                                                                                             |   | 122.1    |       | 138.5    |       |
| Prepaid expenses  and other                                                                                                                             |   | 59.2     |       | 38.8     |       |
| Assets held for  sale                                                                                                                                   |   | —   |       | 538.3    |       |
| Total current  assets                                                                                                                                   |   | 1,729.1  |       | 1,868.5  |       |
| Investments                                                                                                                                             |   | 722.7    |       | 325.8    |       |
| Goodwill                                                                                                                                                |   | 4,854.2  |       | 4,769.7  |       |
| Other  intangibles                                                                                                                                      |   | 1,337.0  |       | 1,348.1  |       |
| **Property, Plant and Equipment:**                                                                                                                      |   |     | ** ** |     | ** ** |
| Land                                                                                                                                                    |   | 259.2    |       | 275.3    |       |
| Buildings and  improvements                                                                                                                             |   | 1,053.0  |       | 1,074.3  |       |
| Wireline                                                                                                                                                |   | 6,514.7  |       | 6,188.5  |       |
| Wireless                                                                                                                                                |   | 5,255.8  |       | 4,798.3  |       |
| Information  processing                                                                                                                                 |   | 946.7    |       | 1,047.7  |       |
| Other                                                                                                                                                   |   | 482.3    |       | 571.0    |       |
| Under  construction                                                                                                                                     |   | 398.2    |       | 365.0    |       |
| Total property,  plant and equipment                                                                                                                    |   | 14,909.9 |       | 14,320.1 |       |
| Less accumulated  depreciation                                                                                                                          |   | 7,289.1  |       | 6,756.4  |       |
| Net property,  plant and equipment                                                                                                                      |   | 7,620.8  |       | 7,563.7  |       |
| Other assets                                                                                                                                            |   | 397.3    |       | 368.8    |       |
| **Total Assets**                                                                                                                                        |   | $        | 16,661.1   |     | $          | 16,244.6 |   |
|                                                                                                                                                    |   |     |       |     |       |
| **Liabilities and Shareholders’  Equity**                                                                                                          |   |     | ** ** |     | ** ** |
| **Current Liabilities:**                                                                                                                                |   |     | ** ** |     | ** ** |
| Current  maturities of long-term debt                                                                                                                   |   | $        | 277.2      |     | $          | 494.7 |   |
| Accounts payable                                                                                                                                        |   | 479.8    |       | 413.7    |       |
| Advance payments  and customer deposits                                                                                                                 |   | 205.3    |       | 214.3    |       |
| Accrued taxes                                                                                                                                           |   | 114.6    |       | 72.3     |       |
| Accrued  dividends                                                                                                                                      |   | 116.2    |       | 109.6    |       |
| Accrued interest                                                                                                                                        |   | 107.1    |       | 123.8    |       |
| Other current  liabilities                                                                                                                              |   | 192.5    |       | 171.8    |       |
| Liabilities  related to assets held for sale                                                                                                            |   | —   |       | 190.5    |       |
| Total current  liabilities                                                                                                                              |   | 1,492.7  |       | 1,790.7  |       |
| Long-term debt                                                                                                                                          |   | 5,581.2  |       | 6,145.4  |       |
| Deferred income  taxes                                                                                                                                  |   | 1,417.7  |       | 1,115.4  |       |
| Other  liabilities                                                                                                                                      |   | 1,147.3  |       | 1,195.0  |       |
| **Shareholders’ Equity:**                                                                                                                          |   |     | ** ** |     | ** ** |
| Preferred stock,  Series C, $2.06, no par value, 13,928 shares in 2003 and 15,635 shares in  2002 issued and outstanding                                |   | 0.4      |       | 0.4      |       |
| Common stock,  par value $1 per share, 1.0 billion shares authorized, 312,643,922 shares in  2003 and 311,182,950 shares in 2002 issued and outstanding |   | 312.6    |       | 311.2    |       |
| Additional  paid-in capital                                                                                                                             |   | 750.1    |       | 695.7    |       |
| Unrealized  holding gain on investments                                                                                                                 |   | 73.6     |       | —   |       |
| Foreign currency  translation adjustment                                                                                                                |   | 0.6      |       | (6.9     | )          |
| Retained  earnings                                                                                                                                      |   | 5,884.9  |       | 4,997.7  |       |
| Total  shareholders’ equity                                                                                                                        |   | 7,022.2  |       | 5,998.1  |       |
| **Total Liabilities and Shareholders’  Equity**                                                                                                    |   | $        | 16,661.1   |     | $          | 16,244.6 |   |

 

The accompanying notesare an integral part of these consolidated balance sheets.

 

F-39

----

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

For the years ended December 31,

 

| (Millions)                                                                                      |   | 2003     |       | 2002     |       | 2001     |       |
|-------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **Cash Provided from Operations:**                                                              |   |     | ** ** |     | ** ** |     | ** ** |
| Net income                                                                                      |   | $        | 1,330.1    |     | $          | 924.3    |       | $ | 1,067.0 |   |
| Adjustments to  reconcile net income to net cash provided from operations:                      |   |     |       |     |       |     |       |
| Income from  discontinued operations                                                            |   | (361.0   | )          | (74.2    | )          | (69.5    | )          |
| Cumulative  effect of accounting change                                                         |   | (15.6    | )          | —   |       | (19.5    | )          |
| Depreciation and  amortization                                                                  |   | 1,247.7  |       | 1,095.5  |       | 1,082.0  |       |
| Provision for  doubtful accounts                                                                |   | 184.7    |       | 265.9    |       | 142.8    |       |
| Non-cash portion  of integration expenses and charges                                           |   | 13.2     |       | 12.6     |       | 37.7     |       |
| Non-cash portion  of gain on disposal of assets, write-down of investments and other            |   | (25.0    | )          | (1.0     | )          | (357.6   | )          |
| Increase in  deferred income taxes                                                              |   | 225.0    |       | 357.5    |       | 190.4    |       |
| Other, net                                                                                      |   | (11.4    | )          | (25.6    | )          | (8.7     | )          |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  dispositions: |   |     |       |     |       |     |       |
| Accounts  receivable                                                                            |   | (79.7    | )          | (219.3   | )          | (147.4   | )          |
| Inventories                                                                                     |   | 17.1     |       | 28.5     |       | 71.4     |       |
| Accounts payable                                                                                |   | 21.8     |       | 80.1     |       | (158.5   | )          |
| Other current  liabilities                                                                      |   | 30.2     |       | (42.8    | )          | (58.2    | )          |
| Other, net                                                                                      |   | (102.4   | )          | (9.3     | )          | 110.2    |       |
| Net cash  provided from operations                                                              |   | 2,474.7  |       | 2,392.2  |       | 1,882.1  |       |
| **Cash Flows from Investing  Activities:**                                                      |   |     | ** ** |     | ** ** |     | ** ** |
| Additions to  property, plant and equipment                                                     |   | (1,137.7 | )          | (1,154.8 | )          | (1,170.1 | )          |
| Additions to  capitalized software development costs                                            |   | (56.7    | )          | (58.4    | )          | (80.5    | )          |
| Additions to  investments                                                                       |   | (13.5    | )          | (9.4     | )          | (5.3     | )          |
| Purchases of  property, net of cash acquired                                                    |   | (160.6   | )          | (3,365.5 | )          | (214.3   | )          |
| Proceeds from  the lease of cell site towers                                                    |   | —   |       | 7.5      |       | 524.4    |       |
| Proceeds from  the sale of assets                                                               |   | 46.1     |       | 24.1     |       | 411.4    |       |
| Proceeds from  the return on or sale of investments                                             |   | 48.3     |       | 51.9     |       | 57.0     |       |
| Other, net                                                                                      |   | 8.2      |       | 10.0     |       | 50.4     |       |
| Net cash used in  investing activities                                                          |   | (1,265.9 | )          | (4,494.6 | )          | (427.0   | )          |
| **Cash Flows from Financing  Activities:**                                                      |   |     | ** ** |     | ** ** |     | ** ** |
| Dividends on  preferred and common stock                                                        |   | (436.4   | )          | (423.1   | )          | (411.8   | )          |
| Reductions in  long-term debt                                                                   |   | (763.4   | )          | (265.8   | )          | (781.8   | )          |
| Purchases of  common stock                                                                      |   | —   |       | —   |       | (192.3   | )          |
| Preferred stock  redemptions                                                                    |   | —   |       | —   |       | (0.1     | )          |
| Distributions to  minority investors                                                            |   | (67.5    | )          | (57.9    | )          | (117.8   | )          |
| Long-term debt  issued, net of issuance costs                                                   |   | —   |       | 2,809.1  |       | —   |       |
| Common stock  issued                                                                            |   | 49.1     |       | 17.2     |       | 24.3     |       |
| Net cash  provided from (used in) financing activities                                          |   | (1,218.2 | )          | 2,079.5  |       | (1,479.5 | )          |
|                                                                                            |   |     |       |     |       |     |       |
| Net cash  provided from discontinued operations                                                 |   | 531.8    |       | 91.3     |       | 54.7     |       |
|                                                                                            |   |     |       |     |       |     |       |
| Effect of  exchange rate changes on cash and short-term investments                             |   | 0.8      |       | 3.0      |       | (5.4     | )          |
|                                                                                            |   |     |       |     |       |     |       |
| Increase in cash  and short-term investments                                                    |   | 523.2    |       | 71.4     |       | 24.9     |       |
| **Cash and Short-term Investments:**                                                            |   |     | ** ** |     | ** ** |     | ** ** |
| Beginning of the  year                                                                          |   | 134.6    |       | 63.2     |       | 38.3     |       |
| End of the year                                                                                 |   | $        | 657.8      |     | $          | 134.6    |       | $ | 63.2 |   |
|                                                                                            |   |     | ** ** |     | ** ** |     | ** ** |
| **Supplemental Cash Flow Disclosures:**                                                         |   |     | ** ** |     | ** ** |     | ** ** |
| Interest paid,  net of amounts capitalized                                                      |   | $        | 425.7      |     | $          | 294.2    |       | $ | 289.0 |   |
| Income taxes  paid                                                                              |   | $        | 584.8      |     | $          | 268.2    |       | $ | 515.7 |   |
| **Non-Cash Investing and Financing  Activity:**                                                 |   |     | ** ** |     | ** ** |     | ** ** |
| Change in fair  value of interest rate swap agreements                                          |   | $        | (25.5      | )        | $          | 99.2     |       | $ | 6.0 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

F-40

----

 

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

(Millions)

 

|                                                                           |   | Preferred  Stock |   | Common  Stock |   | Additional  Paid-In  Capital |   | Unrealized  Holding  Gain  (Loss) On  Investments |   | Foreign  Currency  Translation  Adjustment |   | Retained  Earnings |   | Total   |   |
|--------------------------------------------------------------------------------|--------|------------------|--------|---------------|--------|------------------------------|--------|---------------------------------------------------|--------|--------------------------------------------|--------|--------------------|--------|---------|--------|
| Balance at December 31, 2000                                                   |   | $                | 0.5    |          | $      | 313.0                        |   | $                                                 | 929.0  |                                       | $      | 9.7                |   | $       | (4.5   | ) | $ | 3,847.7 |   | $ | 5,095.4 |   |
| Net income                                                                     |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | 1,067.0            |   | 1,067.0 |   |
| Other comprehensive loss, net of tax: (See Note 12)                            |   |             |   |          |   |                         |   |                                              |   |                                       |   |               |   |    |   |
| Unrealized holding losses on investments, net of reclassification  adjustments |   | —           |   | —        |   | —                       |   | (14.2                                             | )      | —                                     |   | —             |   | (14.2   | )      |
| Foreign currency translation adjustment                                        |   | —           |   | —        |   | —                       |   | —                                            |   | (5.4                                       | )      | —             |   | (5.4    | )      |
| Comprehensive income                                                           |   | —           |   | —        |   | —                       |   | (14.2                                             | )      | (5.4                                       | )      | 1,067.0            |   | 1,047.4 |   |
| Employee plans, net                                                            |   | —           |   | 0.7           |   | 24.5                         |   | —                                            |   | —                                     |   | —             |   | 25.2    |   |
| Tax benefit for non-qualified stock options                                    |   | —           |   | —        |   | 4.5                          |   | —                                            |   | —                                     |   | —             |   | 4.5     |   |
| Conversion of preferred stock                                                  |   | (0.1             | )      | 0.1           |   | 0.2                          |   | —                                            |   | —                                     |   | —             |   | 0.2     |   |
| Repurchase of stock                                                            |   | —           |   | (3.3          | )      | (189.0                       | )      | —                                            |   | —                                     |   | —             |   | (192.3  | )      |
| Dividends:                                                                     |   |             |   |          |   |                         |   |                                              |   |                                       |   |               |   |    |   |
| Common - $1.33 per share                                                       |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | (414.5             | )      | (414.5  | )      |
| Preferred                                                                      |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | (0.1               | )      | (0.1    | )      |
| Balance at December 31, 2001                                                   |   | $                | 0.4    |          | $      | 310.5                        |   | $                                                 | 769.2  |                                       | $      | (4.5               | )      | $       | (9.9   | ) | $ | 4,500.1 |   | $ | 5,565.8 |   |
| Net income                                                                     |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | 924.3              |   | 924.3   |   |
| Other comprehensive income, net of tax: (See Note 12)                          |   |             |   |          |   |                         |   |                                              |   |                                       |   |               |   |    |   |
| Unrealized holding gains on investments, net of reclassification  adjustments  |   | —           |   | —        |   | —                       |   | 4.5                                               |   | —                                     |   | —             |   | 4.5     |   |
| Foreign currency translation adjustment                                        |   | —           |   | —        |   | —                       |   | —                                            |   | 3.0                                        |   | —             |   | 3.0     |   |
| Comprehensive income                                                           |   | —           |   | —        |   | —                       |   | 4.5                                               |   | 3.0                                        |   | 924.3              |   | 931.8   |   |
| Employee plans, net                                                            |   | —           |   | 0.6           |   | 16.7                         |   | —                                            |   | —                                     |   | —             |   | 17.3    |   |
| Tax benefit for non-qualified stock options                                    |   | —           |   | —        |   | 2.7                          |   | —                                            |   | —                                     |   | —             |   | 2.7     |   |
| Conversion of preferred stock                                                  |   | —           |   | 0.1           |   | 0.2                          |   | —                                            |   | —                                     |   | —             |   | 0.3     |   |
| Present value of contract adjustment liability                                 |   | —           |   | —        |   | (93.1                        | )      | —                                            |   | —                                     |   | —             |   | (93.1   | )      |
| Dividends:                                                                     |   |             |   |          |   |                         |   |                                              |   |                                       |   |               |   |    |   |
| Common - $1.37 per share                                                       |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | (426.6             | )      | (426.6  | )      |
| Preferred                                                                      |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | (0.1               | )      | (0.1    | )      |
| Balance at December 31, 2002                                                   |   | $                | 0.4    |          | $      | 311.2                        |   | $                                                 | 695.7  |                                       | $      | —             |   | $       | (6.9   | ) | $ | 4,997.7 |   | $ | 5,998.1 |   |
| Net income                                                                     |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | 1,330.1            |   | 1,330.1 |   |
| Other comprehensive income, net of tax: (See Note 12)                          |   |             |   |          |   |                         |   |                                              |   |                                       |   |               |   |    |   |
| Unrealized holding gains on investments, net of reclassification  adjustments  |   | —           |   | —        |   | —                       |   | 73.6                                              |   | —                                     |   | —             |   | 73.6    |   |
| Foreign currency translation adjustment, net of reclassification  adjustments  |   | —           |   | —        |   | —                       |   | —                                            |   | 7.5                                        |   | —             |   | 7.5     |   |
| Comprehensive income                                                           |   | —           |   | —        |   | —                       |   | 73.6                                              |   | 7.5                                        |   | 1,330.1            |   | 1,411.2 |   |
| Employee plans, net                                                            |   | —           |   | 1.4           |   | 47.7                         |   | —                                            |   | —                                     |   | —             |   | 49.1    |   |
| Tax benefit for non-qualified stock options                                    |   | —           |   | —        |   | 6.7                          |   | —                                            |   | —                                     |   | —             |   | 6.7     |   |
| Dividends:                                                                     |   |             |   |          |   |                         |   |                                              |   |                                       |   |               |   |    |   |
| Common - $1.42 per share                                                       |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | (442.8             | )      | (442.8  | )      |
| Preferred                                                                      |   | —           |   | —        |   | —                       |   | —                                            |   | —                                     |   | (0.1               | )      | (0.1    | )      |
| Balance at December 31, 2003                                                   |   | $                | 0.4    |          | $      | 312.6                        |   | $                                                 | 750.1  |                                       | $      | 73.6               |   | $       | 0.6    |   | $ | 5,884.9 |   | $ | 7,022.2 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-41

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary of Significant****Accounting Policies**:

Description of Business– ALLTEL Corporation (“ALLTEL” or the “Company”), a Delaware corporation, is acustomer-focused communications company. ALLTEL owns subsidiaries that provide wireless and wireline local,long-distance, network access and Internet services.  Telecommunications products are warehoused and sold by theCompany’s distribution subsidiary.  Asubsidiary also publishes telephone directories for affiliates and otherindependent telephone companies.  Inaddition, a subsidiary provides billing, customer care and other dataprocessing and outsourcing services to telecommunications companies. (See Note15 for additional information regarding ALLTEL’s business segments.)

 

Basis of Presentation– ALLTEL prepares its consolidated financial statements in accordance withaccounting principles generally accepted in the United States, which requiremanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses and disclosure of contingentassets and liabilities.  The estimatesand assumptions used in the accompanying consolidated financial statements arebased upon management’s evaluation of the relevant facts and circumstances asof the date of the financial statements. Actual results may differ from the estimates and assumptions used inpreparing the accompanying consolidated financial statements and suchdifferences could be material.  Theconsolidated financial statements include the accounts of ALLTEL, itssubsidiary companies, majority-owned partnerships and controlled businessventures.  Investments in 20 percent to50 percent owned entities and all unconsolidated partnerships are accounted forusing the equity method.  Investments inless than 20 percent owned entities and in which the Company does not exercisesignificant influence over operating and financial policies are accounted forunder the cost method.  All intercompanytransactions, except those with certain affiliates described below, have beeneliminated in the consolidated financial statements.

 

Service revenues consist of wireless access andnetwork usage revenues, local service, network access, Internet access,long-distance and miscellaneous wireline operating revenues andtelecommunications information services processing revenues.  Product sales primarily consist of theproduct distribution and directory publishing operations and sales ofcommunications equipment.

 

Cost of services include the costs related tocompleting calls over the Company’s telecommunications network, includingaccess, interconnection, toll and roaming charges paid to other wirelessproviders, as well as the costs to operate and maintain the network.  Additionally, cost of services includes thecosts to provide telecommunications information services, bad debt expense and businesstaxes.

 

Reclassifications– Certain prior-year amounts have been reclassified to conform with the 2003financial statement presentation, including a change in business segmentreporting.  Effective January 1, 2003,ALLTEL reclassified the operations of the telecom division of its informationservices subsidiary, ALLTEL Information Services, Inc., to be included withinthe Company’s communications support services segment.  This segment also includes ALLTEL’slong-distance and network management services, communications products, anddirectory publishing operations. Previously, the telecom division had been combined with the financialservices division and reported within the Company’s information services segment.  As further discussed in Note 11 to theconsolidated financial statements, on January 28, 2003, ALLTEL signed adefinitive agreement to sell the financial services division of ALLTELInformation Services, Inc. to Fidelity National Financial Inc. (“FidelityNational”).  ALLTEL completed the saletransaction on April 1, 2003. Accordingly, the financial services division has been reported in theaccompanying consolidated financial statements as discontinued operations.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 131 “Disclosures about Segments of anEnterprise and Related Information”, all prior period segment information hasbeen reclassified to conform to this new financial reporting presentation.  These reclassifications did not affectconsolidated net income or earnings per share reported by ALLTEL prior toJanuary 1, 2003.

 

Regulatory Accounting– The Company’s wireline subsidiaries, except for certain operations acquiredin Kentucky in 2002 and Nebraska in 1999, follow the accounting for regulatedenterprises prescribed by SFAS No. 71 “Accounting for the Effects of CertainTypes of Regulation”.  This accountingrecognizes the economic effects of rate regulation by recording costs and areturn on investment as such amounts are recovered through rates authorized byregulatory authorities.  Accordingly,SFAS No. 71 requires the Company’s wireline subsidiaries to depreciate wirelineplant over the useful lives approved by regulators, which could be differentthan the useful lives that would otherwise be determined by management.  SFAS No. 71 also requires deferral ofcertain costs and obligations based upon approvals received from regulators topermit recovery of such amounts in future years.  Criteria that would give rise to the discontinuance of SFAS No.71 include (1) increasing competition restricting the wireline subsidiaries’ability to establish prices to recover specific costs and (2) significantchanges in the manner in which rates are set by regulators from cost-basedregulation to another form of regulation. The Company reviews these criteria on a quarterly basis to determinewhether the continuing application of SFAS No. 71 is appropriate.

 

F-42

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary ofSignificant****Accounting Policies, Continued:**

Transactions with CertainAffiliates – ALLTEL Communications Products, Inc. sellsequipment to wireline subsidiaries of the Company ($123.7 million in 2003,$152.9 million in 2002 and $108.3 million in 2001) as well as to otheraffiliated and non-affiliated communications companies and other companies inrelated industries.  The cost ofequipment sold to the wireline subsidiaries is included, principally, inwireline plant in the consolidated financial statements.  ALLTEL Publishing Corporation (“ALLTELPublishing”) provides directory publishing services to the wirelinesubsidiaries ($86.5 million in 2003, $80.2 million in 2002 and $77.6 million in2001).  Wireline revenues and salesinclude directory royalties received from ALLTEL Publishing ($42.9 million in2003, $52.4 million in 2002 and $50.0 million in 2001) and amounts billed toother affiliates ($92.7 million in 2003, $87.3 million in 2002 and $74.5million in 2001) for interconnection and toll services.  These intercompany transactions have notbeen eliminated because the revenues received from the affiliates and theprices charged by the communications products and directory publishingsubsidiaries are included in the wireline subsidiaries’ (excluding the acquiredoperations in Kentucky and Nebraska) rate base and/or are recovered through theregulatory process.

 

Advertising– Advertising costs are expensed as incurred. Advertising expense totaled $200.3 million in 2003, $148.0 million in2002 and $157.3 million in 2001.

 

Cash and Short-termInvestments – Cash and short-term investments consist ofhighly liquid investments with original maturities of three months or less.

 

Allowance for DoubtfulAccounts – The allowance for doubtful accounts reflects theCompany’s estimate of probable losses related to its trade accountsreceivable.  In establishing theallowance for doubtful accounts, the Company considers a number of factors,including historical collection experience, aging of the accounts receivablebalances, current economic conditions, and a specific customer’s ability tomeet its financial obligations to the Company.

 

Inventories– Inventories are stated at the lower of cost or market value.  Cost is determined using either an averageoriginal cost or specific identification method of valuation.  For wireless equipment, market is determinedusing replacement cost.

 

Goodwill and OtherIntangible Assets – Goodwill represents the excess of costover the fair value of net identifiable tangible and intangible assets acquiredthrough various business combinations. The Company has acquired identifiable intangible assets through itsacquisitions of interests in various wireless and wireline properties.  The cost of acquired entities at the date ofthe acquisition is allocated to identifiable assets and the excess of the totalpurchase price over the amounts assigned to identifiable assets is recorded asgoodwill.

 

Effective January 1, 2002, the Company adopted SFASNo. 142 “Goodwill and Other Intangible Assets”.  This standard changed the accounting for goodwill and otherindefinite-lived intangible assets from an amortization method to animpairment-only approach.  As of January1, 2002, ALLTEL ceased amortization of goodwill recorded in conjunction with pastbusiness combinations.  ALLTEL alsoceased amortization of its indefinite-lived intangible assets as of January 1,2002.  The Company’s indefinite-livedintangible assets consist of its cellular and Personal Communications Services(“PCS”) licenses (the “wireless licenses”) and the wireline franchise rights inKentucky acquired in August 2002 (see Note 3). The Company determined that the wireless licenses and wireline franchiserights met the indefinite life criteria outlined in SFAS No. 142, because theCompany expects both the renewal by the granting authorities and the cash flowsgenerated from these intangible assets to continue indefinitely.  SFAS No. 142 also requires intangible assetswith finite lives to be amortized over their estimated useful lives.  Upon adoption of SFAS No. 142, ALLTELdetermined that, with respect to its intangible assets with finite lives,primarily customer lists, no changes in the remaining useful lives of theseassets were required.

 

In accordance with SFAS No. 142, goodwill is to beassigned to a company’s reporting units and tested for impairment annuallyusing a consistent measurement date, which for the Company is January 1st ofeach year.  The impairment test forgoodwill requires a two-step approach, which is performed at a reporting unitlevel.  Step one of the test identifiespotential impairments by comparing the fair value of a reporting unit to itscarrying amount.  Step two, which isonly performed if the fair value of a reporting unit is less than its carrying value,calculates the impairment loss as the difference between the carrying amount ofthe reporting unit’s goodwill and the implied fair value of that goodwill.  ALLTEL completed step one of the annualimpairment reviews of goodwill for both 2003 and 2002 and determined that nowrite-down in the carrying value of goodwill for any of its reporting units wasrequired.  Fair value of the reportingunits was determined utilizing a combination of the discounted cash flows ofthe reporting units and calculated market values of comparable publiccompanies.  Prior to December 31, 2001,goodwill was amortized on a straight-line basis over its estimated useful life,which ranged from 7 to 40 years. Goodwill amortization amounted to $84.8 million in 2001.

 

F-43

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary of Significant****AccountingPolicies, Continued:**

SFAS No. 142 requires intangible assets withindefinite lives to be tested for impairment on an annual basis, by comparingthe fair value of the assets to their carrying amounts.  The wireless licenses are operated as asingle asset supporting the Company’s wireless business, and accordingly areaggregated for purposes of testing impairment. The fair value of the wireless licenses was determined based on thediscounted cash flows of the wireless business segment, while the fair value ofthe wireline franchise rights was determined based on the discounted cash flowsof the acquired operations in Kentucky. Upon completing  the annualimpairment reviews of its wireless licenses for both 2003 and 2002, and thewireline franchise rights for 2003, the Company determined that no write-downin the carrying value of these assets was required.

 

The changes in the carrying amount of goodwill bybusiness segment were as follows:

 

| (Millions)                    |   | Wireless |    | Wireline |   | Communications  Support  Services |   | Total   |   |
|-------------------------------|--------|----------|---------|----------|--------|-----------------------------------|--------|---------|--------|
| Balance at  December 31, 2001 |   | $        | 2,430.9 |     | $      | 226.8                             |   | $       | 2.3    |   | $ | 2,660.0 |   |
| Acquired during  the period   |   | 1,088.8  |    | 1,020.9  |   | —                            |   | 2,109.7 |   |
| Balance at  December 31, 2002 |   | 3,519.7  |    | 1,247.7  |   | 2.3                               |   | 4,769.7 |   |
| Acquired during  the period   |   | 93.0     |    | —   |   | —                            |   | 93.0    |   |
| Other  adjustments            |   | (8.4     | )       | (0.1     | )      | —                            |   | (8.5    | )      |
| Balance at  December 31, 2003 |   | $        | 3,604.3 |     | $      | 1,247.6                           |   | $       | 2.3    |   | $ | 4,854.2 |   |

 

Other intangible assets primarily consist of the costof PCS licenses, cellular licenses, franchise rights and customer lists.  The carrying value (cost less accumulatedamortization through December 31, 2001) of indefinite-lived intangible assetsother than goodwill no longer subject to amortization after January 1, 2002were as follows at December 31:

 

| (Millions)                        |   | 2003  |    | 2002   |   |
|-----------------------------------|--------|-------|---------|--------|--------|
| Cellular  licenses                |   | $     | 761.6   |   | $      | 720.2 |   |
| PCS licenses                      |   | 78.5  |    | 78.5   |   |
| Franchise rights  – wireline |   | 265.0 |    | 265.0  |   |
|                              |   | $     | 1,105.1 |   | $      | 1,063.7 |   |

 

Prior to December 31, 2001, both the cellular licensesand PCS licenses were amortized on a straight-line basis over their estimateduseful lives, which was 40 years. Amortization of the PCS licenses began upon commencement of the relatedoperations.  Amortization expense forintangible assets no longer subject to amortization after January 1, 2002amounted to $13.6 million in 2001.

 

Intangible assets subject to amortization were asfollows at December 31:

 

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

 

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

 

Intangible assets subject to amortization areamortized on a straight-line basis over their estimated useful lives, which are5 to 10 years for customer lists, 15 years for franchise rights and 6 years fornon-compete agreements.  Amortizationexpense for intangible assets subject to amortization was $60.3 million in2003, $45.4 million in 2002 and $38.3 million in 2001.

 

F-44

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary of Significant****AccountingPolicies, Continued:**

Amortization expense for intangible assets subject toamortization is estimated to be $60.3 million in 2004, $59.6 million in 2005,$41.0 million in 2006, $24.3 million in 2007 and $18.1 million in 2008.  See Note 3 for a discussion of theacquisitions completed during 2003 and 2002 that resulted in the recognition ofgoodwill and other intangible assets.

 

The after-tax income from continuing operations,income before cumulative effect of accounting change, net income and therelated earnings per share effects, assuming that the change in accounting toeliminate the amortization of goodwill and other indefinite-lived intangibleassets was applied retroactively by class of indefinite-lived intangible asset,were as follows for the year ended December 31, 2001:

 

| (Millions,  except per share amounts)                                                                                |   |    |    |
|----------------------------------------------------------------------------------------------------------------------|--------|---------|---------|
| Effects on  income from continuing operations, income before cumulative effect of  accounting change and net income: |   |    |    |
| Income from  continuing operations as reported                                                                       |   | $       | 978.0   |   |
| Goodwill  amortization, net of tax                                                                                   |   | 78.3    |    |
| Cellular  licenses amortization, net of tax                                                                          |   | 12.3    |    |
| PCS licenses  amortization, net of tax                                                                               |   | 0.3     |    |
| Income from  continuing operations as adjusted                                                                       |   | 1,068.9 |    |
|                                                                                                                 |   |    |    |
| Income from  discontinued operations as reported                                                                     |   | 69.5    |    |
| Goodwill  amortization, net of tax                                                                                   |   | 2.2     |    |
| Income from  discontinued operations as adjusted                                                                     |   | 71.7    |    |
|                                                                                                                 |   |    |    |
| Income before  cumulative effect of accounting change as adjusted                                                    |   | 1,140.6 |    |
| Cumulative  effect of accounting change                                                                              |   | 19.5    |    |
| Net income as  adjusted                                                                                              |   | $       | 1,160.1 |   |
|                                                                                                                 |   |    |    |
| Effects on basic  earnings per share:                                                                                |   |    |    |
| Basic earnings  per share from continuing operations as reported                                                     |   | $       | 3.14    |   |
| Goodwill  amortization, net of tax                                                                                   |   | .25     |    |
| Cellular  licenses amortization, net of tax                                                                          |   | .04     |    |
| PCS licenses  amortization, net of tax                                                                               |   | —  |    |
| Basic earnings  per share from continuing operations as adjusted                                                     |   | 3.43    |    |
|                                                                                                                 |   |    |    |
| Basic earnings  per share from discontinued operations as reported                                                   |   | .22     |    |
| Goodwill  amortization, net of tax                                                                                   |   | .01     |    |
| Basic earnings  per share from discontinued operations as adjusted                                                   |   | .23     |    |
|                                                                                                                 |   |    |    |
| Basic earnings  per share before cumulative effect of accounting change as adjusted                                  |   | 3.66    |    |
| Cumulative  effect of accounting change                                                                              |   | .06     |    |
| Basic earnings  per share as adjusted                                                                                |   | $       | 3.72    |   |
|                                                                                                                 |   |    |    |
| Effects on  diluted earnings per share:                                                                              |   |    |    |
| Diluted earnings  per share from continuing operations as reported                                                   |   | $       | 3.12    |   |
| Goodwill  amortization, net of tax                                                                                   |   | .25     |    |
| Cellular  licenses amortization, net of tax                                                                          |   | .04     |    |
| PCS licenses  amortization, net of tax                                                                               |   | —  |    |
| Diluted earnings  per share from continuing operations as adjusted                                                   |   | 3.41    |    |
|                                                                                                                 |   |    |    |
| Diluted earnings  per share from discontinued operations as reported                                                 |   | .22     |    |
| Goodwill  amortization, net of tax                                                                                   |   | .01     |    |
| Diluted earnings  per share from discontinued operations as adjusted                                                 |   | .23     |    |
|                                                                                                                 |   |    |    |
| Diluted earnings  per share before cumulative effect of accounting change as adjusted                                |   | 3.64    |    |
| Cumulative  effect of accounting change                                                                              |   | .06     |    |
| Diluted earnings  per share as adjusted                                                                              |   | $       | 3.70    |   |

 

Investments–  Investments in unconsolidatedpartnerships are accounted for using the equity method.  Investments in equity securities areclassified as available for sale and are recorded at fair value in accordancewith SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities”.  All other investments areaccounted for using the cost method. 

 

F-45

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary of Significant****AccountingPolicies, Continued:**

Investments are periodically reviewed forimpairment.  If the carrying value ofthe investment exceeds its fair value and the decline in value is determined tobe other-than-temporary, an impairment loss would be recognized for thedifference.

 

Investments were as follows at December 31:

 

| (Millions)                                  |   | 2003  |   | 2002   |   |
|---------------------------------------------|--------|-------|--------|--------|--------|
| Investments in  unconsolidated partnerships |   | $     | 281.9  |   | $      | 273.5 |   |
| Equity  securities                          |   | 395.8 |   | 0.2    |   |
| Other cost  investments                     |   | 45.0  |   | 52.1   |   |
|                                        |   | $     | 722.7  |   | $      | 325.8 |   |

 

Investments in unconsolidated partnerships include therelated excess of the purchase price paid over the underlying net book value ofthe wireless partnerships.  Prior to theadoption of SFAS No. 142, effective January 1, 2002, the excess cost wasamortized on a straight-line basis over periods up to 40 years.  The carrying value (cost less accumulatedamortization through December 31, 2001) of excess cost included in investmentswas $21.3 million at both December 31, 2003 and 2002.  Amortization expense was $0.5 million in 2001 and was included inequity earnings in unconsolidated partnerships in the accompanying consolidatedstatements of income.

 

Property, Plant andEquipment – Property, plant and equipment are stated atoriginal cost.  Wireless plant consistsof cell site towers, switching, controllers and other radio frequencyequipment.  Wireline plant consists ofaerial and underground cable, conduit, poles, switches and other central officeand transmission-related equipment. Information processing plant consists of data processing equipment,purchased software and internal use capitalized software development costs.  Other plant consists of furniture, fixtures,vehicles, machinery and equipment.  Thecosts of additions, replacements and substantial improvements, includingrelated labor costs are capitalized, while the costs of maintenance and repairsare expensed as incurred.  For ALLTEL’snon-regulated operations, when depreciable plant is retired or otherwisedisposed of, the related cost and accumulated depreciation are deducted fromthe plant accounts, with the corresponding gain or loss reflected in operatingresults.  The Company’s wirelinesubsidiaries utilize group composite depreciation.  Under this method, when plant is retired, the original cost, netof salvage value is charged against accumulated depreciation, and no gain orloss is recognized on the disposition of the plant.  Depreciation expense amounted to $1,187.4 million in 2003,$1,050.1 million in 2002 and $945.3 million in 2001.  Depreciation for financial reporting purposes is computed usingthe straight-line method over the following estimated useful lives:

 

|                       |   | Depreciable Lives |   |
|----------------------------|--------|-------------------|--------|
| Buildings and improvements |   | 5-50 years        |   |
| Wireline                   |   | 6-58 years        |   |
| Wireless                   |   | 5-20 years        |   |
| Information processing     |   | 3-15 years        |   |
| Other                      |   | 3-25 years        |   |

 

The Company capitalizes interest in connection withthe acquisition or construction of plant assets.  Capitalized interest is included in the cost of the asset with acorresponding reduction in interest expense. Capitalized interest amounted to $15.2 million in 2003, $15.9 million in2002 and $20.4 million in 2001.

 

Capitalized SoftwareDevelopment Costs – Software development costs incurred in the application development stageof internal use software are capitalized and recorded in information processingplant in the accompanying consolidated balance sheets.  Modifications and upgrades to internal usesoftware are capitalized to the extent such enhancements provide additionalfunctionality.  Software maintenance andtraining costs are expensed as incurred. Internal use software is amortized over periods ranging from three toten years.

 

Impairment of Long-LivedAssets – Long-lived assets and intangible assets subject toamortization are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of the asset may not berecoverable from future, undiscounted net cash flows expected to be generatedby the asset.  If the asset is not fullyrecoverable, an impairment loss would be recognized for the difference betweenthe carrying value of the asset and its estimated fair value based ondiscounted net future cash flows or quoted market prices.  Assets to be disposed of that are notclassified as discontinued operations are reported at the lower of theircarrying amount or fair value less cost to sell.

 

F-46

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary of Significant****AccountingPolicies, Continued:**

Derivative Instruments– The Company uses derivative instruments to obtain a targeted mixture ofvariable and fixed-interest-rate long-term debt, such that the portion of debtsubject to variable rates does not exceed 30 percent of the Company’s totallong-term debt outstanding.  The Companyhas established policies and procedures for risk assessment and the approval,reporting and monitoring of derivative instrument activities.  Derivative instruments are entered into forperiods consistent with the related underlying exposure and are not enteredinto for trading or speculative purposes. The Company has entered into interest rate swap agreements and designatedthese derivatives as fair value hedges. In accordance with SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”, the interest rate swaps are recorded as assets orliabilities in the consolidated balance sheets at fair value, with changes inthe fair value of the derivative and of the underlying hedged item attributableto the hedged risk recognized in earnings. Settlements of the interest rate swap agreements are recorded asadjustments to interest expense in the consolidated statements of income whenpaid or received.  In the event adesignated hedged item is sold, extinguished or matures prior to thetermination of the related derivative instrument, the derivative instrumentwould be closed and the resulting gain or loss would be recognized in income.

 

Preferred Stock– Cumulative preferred stock is issuable in series.  The Board of Directors is authorized to designate the number ofshares and fix the terms.  There are50.0 million shares of no par value cumulative non-voting preferred stock and50.0 million shares of $25 par value voting cumulative preferred stockauthorized.  Two series of no par valuepreferred stock, Series C and Series D, were outstanding at December 31, 2003and 2002.  There were no shares of $25par value preferred stock outstanding at December 31, 2003 and 2002.  The Series C non-redeemable preferred sharesare convertible at any time into 5.963 shares of ALLTEL common stock.  The Series D redeemable preferred shares areconvertible at any time prior to redemption into 5.486 shares of ALLTEL commonstock.  The Series D shares may beredeemed at the option of the Company or the holder at the $28 per share statedvalue.  There were 35,558 shares and36,221 shares of Series D stock outstanding at December 31, 2003 and 2002,respectively.  The outstanding Series Dstock of $1.0 million at both December 31, 2003 and 2002 is included in otherliabilities in the accompanying consolidated balance sheets.  During 2003, $19,000 of Series D stock wasconverted into ALLTEL common stock compared to $243,000 in 2002 and $150,000 in2001.

 

Unrealized Holding Gain(Loss) on Investments – Equity securities of certain publiclytraded companies owned by ALLTEL have been classified as available-for-sale andare reported at fair value, with cumulative unrealized gains and lossesreported, net of tax, as a separate component of shareholders’ equity.  The unrealized gains (losses), including therelated tax impact, are non-cash items, and accordingly, have been excludedfrom the accompanying consolidated statements of cash flows.

 

Foreign CurrencyTranslation Adjustment – For the Company’s foreignoperations, assets and liabilities are translated from the applicable localcurrency to U.S. dollars using the current exchange rate as of the balancesheet date.  Revenue and expenseaccounts are translated using the weighted average exchange rate in effectduring the period.  The resultingtranslation gains or losses are recorded as a separate component ofshareholders’ equity.

 

Revenue Recognition– Communications revenues are primarily derived from usage of the Company’snetworks and facilities.  Wirelessaccess and wireline local access revenues are recognized over the period thatthe corresponding services are rendered to customers.  Revenues derived from other telecommunications services,including interconnection, long-distance and custom calling feature revenuesare recognized monthly as services are provided.  Sales of communications products including wireless handsets andaccessories represent a separate earnings process and are recognized whenproducts are delivered and accepted by customers.

 

Effective January 1, 2003, the Company adoptedEmerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables”, for all new arrangements entered intoon or after that date.  Prior to theadoption of EITF 00-21, for transactions involving both the activation ofservice and the sale of equipment, the Company recognized revenues as follows:  Fees assessed to communications customers toactivate service were deferred and recognized over the expected life of thecustomer relationship, which was generally three years.  Direct incremental customer acquisitioncosts incurred in the activation of service were deferred up to the amount of therelated revenues.  Costs in excess ofthe deferred activation revenues were expensed as incurred.  Upon adoption of EITF Issue No. 00-21, theCompany ceased deferral of fees assessed to wireless communications customersto activate service and direct incremental customer acquisition costs incurredin the activation of service and instead began recognizing both at the point ofsale.  Wireless activation fees andrelated direct incremental customer acquisition costs deferred prior to theadoption of EITF Issue No. 00-21 continue to be recognized over the remainingexpected life of the customer relationship.

 

F-47

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary of Significant****AccountingPolicies, Continued:**

Telecommunications information services revenues arerecognized in accordance with the American Institute of Certified PublicAccountants’ Statement of Position (“SOP”) 97-2 “Software Revenue Recognition”and SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions”.  Dataprocessing revenues are recognized as services are performed.  When the arrangement with the customerincludes significant production, modification or customization of the software,the Company uses contract accounting, as required by SOP 97-2.  For those arrangements accounted for underSOP 81-1 “Accounting for Performance of Construction-Type and CertainProduction-Type Contracts”, the Company uses the percentage-of-completionmethod.  Under this method, revenue andprofit are recognized throughout the term of the contract, based upon estimatesof the total costs to be incurred and revenues to be generated throughout theterm of the contract.  Changes inestimates for revenues, costs and profits are recognized in the period in whichthey are determinable.  When suchestimates indicate that costs will exceed future revenues and a loss on thecontract exists, a provision for the entire loss is then recognized.

 

ALLTEL Publishing recognizes directory publishing andadvertising revenues and related directory costs when the directories arepublished and delivered.  For directorycontracts with a secondary delivery obligation, ALLTEL Publishing defers aportion of its revenues and related directory costs until secondary deliveryoccurs.  The royalties paid by ALLTELPublishing to the Company’s wireline subsidiaries are recognized as revenueover the life of the corresponding contract, which is generally twelvemonths.  For all other operations,revenue is recognized when products are delivered and accepted by customers orwhen services are rendered to customers in accordance with contractual terms.

 

Included in accounts receivable are unbilledreceivables of $169.4 million and $175.4 million at December 31, 2003 and 2002,respectively.  Included in theseunbilled receivables are amounts totaling $6.5 million and $21.2 million atDecember 31, 2003 and 2002, respectively, which represent costs and estimatedearnings in excess of billings related to telecommunications informationservices contracts accounted for under the percentage-of-completion method, asdiscussed above.

 

Income Taxes– Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases.  Deferred tax balances are adjusted to reflect tax rates, based oncurrently enacted tax laws, which will be in effect in the years in which thetemporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in the results of operations in the period that includesthe enactment date.  For the Company’sregulated operations, the adjustment in deferred tax balances for the change intax rates is reflected as regulatory assets or liabilities.  These regulatory assets and liabilities areamortized over the lives of the related depreciable asset or liabilityconcurrent with recovery in rates.  Avaluation allowance is recorded to reduce the carrying amounts of deferred taxassets unless it is more likely than not that such assets will be realized.

 

Stock-Based Compensation– The Company’s stock-based compensation plans are more fully discussed in Note6.  The Company accounts for these plansunder the recognition and measurement principles of Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and relatedInterpretations.  For fixed stockoptions granted under these plans, the exercise price of the option equals themarket value of ALLTEL’s common stock on the date of grant.  Accordingly, ALLTEL does not recordcompensation expense for any of the fixed stock options granted.  For performance-based options, compensationexpense was recognized over the expected vesting period of the options and wasadjusted for changes in the number of options expected to vest and the marketvalue of ALLTEL’s common stock. Compensation expense (credit) for the performance-based options amountedto $(2.3) million in 2001.

 

The following table illustrates the effects on netincome and earnings per share had the Company applied the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation”, to its stock-based employee compensation plans for the yearsended December 31:

 

| (Millions, except per  share amounts)                                                                                            |        | 2003   |    | 2002   |   | 2001  |   |
|----------------------------------------------------------------------------------------------------------------------------------|-------------|--------|---------|--------|--------|-------|--------|
| Net income as reported                                                                                                           |        | $      | 1,330.1 |   | $      | 924.3 |   | $ | 1,067.0 |   |
| Deduct stock-based  employee compensation expense determined under fair value method for all  awards, net of related tax effects |        | (24.6  | )       | (31.1  | )      | (26.8 | )      |
| Pro forma net  income                                                                                                            |        | $      | 1,305.5 |   | $      | 893.2 |   | $ | 1,040.2 |   |
| Basic earnings  per share:                                                                                                       | As reported |   | $       | 4.27   |   | $     | 2.97   |   | $ | 3.42 |   |
|                                                                                                                             | Pro forma   |   | $       | 4.19   |   | $     | 2.87   |   | $ | 3.34 |   |
| Diluted earnings  per share:                                                                                                     | As reported |   | $       | 4.25   |   | $     | 2.96   |   | $ | 3.40 |   |
|                                                                                                                             | Pro forma   |   | $       | 4.17   |   | $     | 2.86   |   | $ | 3.32 |   |

 

F-48

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**1.**     **Summary of Significant****AccountingPolicies, Continued:**

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

 

Earnings Per Share– Basic earnings per share of common stock was computed by dividing net incomeapplicable to common shares by the weighted average number of common sharesoutstanding during each year.  Dilutedearnings per share reflects the potential dilution that could occur assumingconversion or exercise of all unexercised stock options and outstandingpreferred stock.  Options to purchaseapproximately 12.2 million, 13.8 million and 9.6 million shares of common stockat December 31, 2003, 2002 and 2001, respectively, were excluded from thecomputation of diluted earnings per share because the effect of including themwas anti-dilutive.  A reconciliation ofthe net income and numbers of shares used in computing basic and dilutedearnings per share was as follows for the years ended December 31:

 

| (Millions, except per  share amounts)                                          |   | 2003   |    | 2002   |   | 2001   |   |
|--------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|
| Basic earnings per  share:                                                     |   |   |    |   |   |   |   |
| Income from  continuing operations                                             |   | $      | 953.5   |   | $      | 850.1  |   | $ | 978.0 |   |
| Income from  discontinued operations                                           |   | 361.0  |    | 74.2   |   | 69.5   |   |
| Cumulative  effect of accounting change                                        |   | 15.6   |    | — |   | 19.5   |   |
| Less:  preferred dividends                                                     |   | (0.1   | )       | (0.1   | )      | (0.1   | )      |
| Net income  applicable to common shares                                        |   | $      | 1,330.0 |   | $      | 924.2  |   | $ | 1,066.9 |   |
| Weighted average  common shares outstanding for the year                       |   | 311.8  |    | 311.0  |   | 311.4  |   |
| Basic earnings  per share:                                                     |   |   |    |   |   |   |   |
| Income from  continuing operations                                             |   | $      | 3.06    |   | $      | 2.73   |   | $ | 3.14 |   |
| Income from  discontinued operations                                           |   | 1.16   |    | .24    |   | .22    |   |
| Cumulative  effect of accounting change                                        |   | .05    |    | — |   | .06    |   |
| Net income                                                                     |   | $      | 4.27    |   | $      | 2.97   |   | $ | 3.42 |   |
| Diluted earnings  per share:                                                   |   |   |    |   |   |   |   |
| Net income  applicable to common shares                                        |   | $      | 1,330.0 |   | $      | 924.2  |   | $ | 1,066.9 |   |
| Adjustment for  convertible preferred stock dividends                          |   | 0.1    |    | 0.1    |   | 0.1    |   |
| Net income  applicable to common shares assuming conversion of preferred stock |   | $      | 1,330.1 |   | $      | 924.3  |   | $ | 1,067.0 |   |
| Weighted average  common shares outstanding for the year                       |   | 311.8  |    | 311.0  |   | 311.4  |   |
| Increase in  shares, which would result from the assumed:                      |   |   |    |   |   |   |   |
| Exercise of  stock options                                                     |   | 0.7    |    | 1.0    |   | 1.8    |   |
| Conversion of  convertible preferred stock                                     |   | 0.3    |    | 0.3    |   | 0.3    |   |
| Weighted average  common shares, assuming conversion of the above securities   |   | 312.8  |    | 312.3  |   | 313.5  |   |
| Diluted earnings  per share:                                                   |   |   |    |   |   |   |   |
| Income from  continuing operations                                             |   | $      | 3.05    |   | $      | 2.72   |   | $ | 3.12 |   |
| Income from  discontinued operations                                           |   | 1.15   |    | .24    |   | .22    |   |
| Cumulative  effect of accounting change                                        |   | .05    |    | — |   | .06    |   |
| Net Income                                                                     |   | $      | 4.25    |   | $      | 2.96   |   | $ | 3.40 |   |

 

As more fully discussed in Note 4, the Company issuedequity units in 2002, which obligates the holder to purchase ALLTEL commonstock on May 17, 2005.  Prior to theissuance of shares of ALLTEL common stock upon settlement of the purchasecontracts, the equity units will be reflected in the diluted earnings per sharecalculations using the treasury stock method. Under this method, the number of shares of common stock used in calculatingdiluted earnings per share is increased by the excess, if any, of the number ofshares issuable upon settlement of the purchase contracts over the number ofshares that could be purchased by ALLTEL in the market, at the average marketprice during the period, using the proceeds received upon settlement.  The Company anticipates that there will beno dilutive effect on its earnings per share related to the equity units,except during periods when the average market price of a share of ALLTEL commonstock is above the threshold appreciation price of $60.39.  Because the average market price of ALLTEL’scommon stock during the years ended December 31, 2003 and 2002 was below thisthreshold appreciation price, the shares issuable under the purchase contractcomponent of the equity units were excluded from the diluted earnings per sharecalculation in both 2003 and 2002.

 

F-49

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

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

In May 2003, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”.  SFAS No. 150, with an effective date of July 1, 2003, requiresall financial instruments included within its scope to be initially recorded atfair value or settlement value, depending upon the nature of the financialinstrument, and subsequently remeasured at each balance sheet date.  Certain of the Company’s consolidatednon-wholly owned wireless partnerships have finite lives specified in theirpartnership agreements, and, accordingly, must be legally dissolved andterminated, at a specified future date, usually 50 or 99 years after formation,and the proceeds distributed to the partners. Under the provisions of SFAS No. 150, the minority interests associatedwith these partnerships are considered mandatorily redeemable financialinstruments, and as such, would be required to be reported as liabilities inALLTEL’s consolidated financial statements, initially measured at settlementvalue, and subsequently remeasured at each balance sheet date with changes insettlement values reported as a component of interest expense.

 

On November 7, 2003, the FASB issued Staff PositionNo. 150-3, “Effective Date, Disclosures, and Transition for MandatorilyRedeemable Financial Instruments of Certain Nonpublic Entities and CertainMandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150”(“FSP No. 150-3”).  FSP No. 150-3 deferredindefinitely the recognition and measurement provisions of SFAS No. 150applicable to mandatorily redeemable noncontrolling interests, including theminority interests associated with the Company’s consolidated non-wholly ownedpartnerships with finite lives. Accordingly, the adoption of SFAS No. 150 didnot affect the Company’s consolidated results of operations, financialposition, or cash flows as of and for the year ended December 31, 2003.  In accordance with FSP No. 150-3, theminority interests associated with the Company’s finite-lived partnershipscontinue to be reported at book value. At December 31, 2003, the estimated settlement value of these minorityinterests was $46.6 million of which $20.1 million is reflected in otherliabilities in the accompanying consolidated balance sheet.

 

Except for certain wireline subsidiaries as furtherdiscussed below, the Company adopted SFAS No. 143, “Accounting for AssetRetirement Obligations”, effective January 1, 2003.  SFAS No. 143 addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. This standard applies to legal obligations associated with theretirement of long-lived assets that result from the acquisition, construction,development, or normal use of the assets. SFAS No. 143 requires that a liability for an asset retirementobligation be recognized when incurred and reasonably estimable, recorded atfair value, and classified as a liability in the balance sheet.  When the liability is initially recorded,the entity capitalizes the cost and increases the carrying value of the relatedlong-lived asset.  The liability is thenaccreted to its present value each period, and the capitalized cost isdepreciated over the estimated useful life of the related asset.  At the settlement date, the entity willsettle the obligation for its recorded amount and recognize a gain or loss uponsettlement.  The Company has evaluatedthe effects of SFAS No. 143 on its operations and has determined that, fortelecommunications and other operating facilities in which the Company owns theunderlying land, ALLTEL has no contractual or legal obligation to remediate theproperty if the Company were to abandon, sell or otherwise dispose of theproperty.  Certain of the Company’s cellsite and switch site operating lease agreements contain clauses requiringrestoration of the leased site at the end of the lease term.  Similarly, certain of the Company’s leaseagreements for office and retail locations require restoration of the leasedsite upon expiration of the lease term. Accordingly, ALLTEL is subject to asset retirement obligationsassociated with these leased facilities under the provisions of SFAS No. 143.  The application of SFAS No. 143 to theCompany’s cell site and switch site leases and leased office and retaillocations did not have a material impact on ALLTEL’s consolidated results ofoperations, financial position, or cash flows as of and for the year endedDecember 31, 2003.

 

In accordance with federal and state regulations,depreciation expense for ALLTEL’s wireline operations has historically includedan additional provision for cost of removal. The additional cost of removal provision does not meet the recognitionand measurement principles of an asset retirement obligation under SFAS No.143.  In December 2002, the FederalCommunications Commission (“FCC”) notified wireline carriers that they shouldnot adopt the provisions of SFAS No. 143 unless specifically required by theFCC in the future.  As a result of theFCC ruling, ALLTEL continues to record a regulatory liability for cost ofremoval for its wireline subsidiaries that follow the accounting prescribed bySFAS No. 71.  The regulatory liabilityfor cost of removal included in accumulated depreciation amounted to $160.6million and $161.9 million at December 31, 2003 and 2002, respectively.  For the acquired Kentucky and Nebraskawireline operations not subject to SFAS No. 71, effective January 1, 2003, theCompany ceased recognition of the cost of removal provision in depreciationexpense and eliminated the cumulative cost of removal included in accumulateddepreciation.  The effect of thesechanges in 2003 was to decrease depreciation expense by $6.4 million andincrease income before cumulative effect of accounting change by $4.0million.  The cumulative effect ofretroactively applying these changes to periods prior to January 1, 2003,resulted in a non-cash credit of $15.6 million, net of income tax expense of$10.3 million, and was included in net income for the year ended December 31,2003.

 

F-50

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

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

In 2001, the Company changed its method of accountingfor the defined benefit pension plan of a subsidiary acquired in 1999 toconform with the accounting principles followed by the ALLTEL Pension Plan (the“ALLTEL Plan”), a defined benefit pension plan covering substantially allemployees working in the Company’s communications and corporateoperations.  The change in accountingwas completed in conjunction with the Company’s decision to conform futurebenefits earned under the subsidiary’s plan with the ALLTEL Plan, effectiveJune 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 calculating annualpension cost related to the subsidiary’s pension plan.  The change included modifying the method bywhich the market-related value of plan assets was determined from a calculatedfive-year average to actual fair value. In addition, unrecognized actuarial gains or losses that exceed 17.5percent of the greater of the projected benefit obligation or market-relatedvalue of plan assets are amortized on a straight-line basis over fiveyears.  Unrecognized actuarial gains andlosses below the 17.5 percent corridor are amortized over the average remainingservice life of active plan participants (approximately 13 years).

 

Under the method previously followed by thesubsidiary’s plan, only unrecognized actuarial gains and losses in excess of 10percent of the greater of the projected benefit obligation or market-relatedvalue of plan assets were amortized over the average remaining service life ofactive plan participants.  ALLTELbelieves the changes in computing the market-related value of plan assets andaccelerating the amortization periods are preferable because these changesresult in more timely recognition of actuarial gains and losses in computingannual pension cost related to the subsidiary’s pension plan, and achieveconsistency with the ALLTEL Plan. Effective January 1, 2002, the subsidiary’s plan was merged into theALLTEL Plan.  The effect of thesechanges in 2001 was to increase pension income by $1.7 million and incomebefore cumulative effect of accounting change by $1.0 million.  The cumulative effect of retroactivelyapplying these changes to periods prior to 2001 resulted in a one-time non-cashcredit of $19.5 million, net of income tax expense of $13.0 million, and isincluded in net income for the year ended December 31, 2001.

 

**3.****     Acquisitions:**

On August 29, 2003, the Company purchased for $22.8million in cash a wireless property with a potential service area coveringapproximately 205,000 potential customers (“POPs”) in an Arizona Rural ServiceArea (“RSA”).  During the third quarterof 2003, the Company also purchased for $5.7 million in cash additionalownership interests in wireless properties in Mississippi, New Mexico andVirginia in which the Company owned a majority interest.  The Company completed the purchase priceallocation for these acquisitions based upon a fair value analysis of the tangibleand identifiable intangible assets acquired. The excess of the aggregate purchase price over the fair market value ofthe tangible net assets acquired of $25.4 million was assigned to cellularlicenses and goodwill.

 

On April 1, 2003, the Company paid $7.5 million incash to increase its ownership interest from 43 percent to approximately 86percent in a wireless property with a potential service area coveringapproximately 145,000 POPs in a Wisconsin RSA. During the second quarter of 2003, ALLTEL completed the purchase priceallocation of this acquisition based upon a fair value analysis of the tangibleand identifiable intangible assets acquired. The excess of the aggregate purchase price over the fair market value ofthe tangible net assets acquired of $3.0 million was assigned to customer list,cellular licenses and goodwill.

 

On February 28, 2003, ALLTEL purchased for $72.0million in cash wireless properties with a potential service area coveringapproximately 370,000 POPs in southern Mississippi, from Cellular XL Associates(“Cellular XL”), a privately held company. Of the total purchase price, ALLTEL paid $64.6 million to Cellular XL atthe date of purchase with the remaining cash payment, subject to adjustments asspecified in the purchase agreement, payable with interest, 12 months after theclosing date.  ALLTEL completed thepurchase price allocation of this acquisition based upon a fair value analysisof the tangible and identifiable intangible assets acquired.  The excess of the aggregate purchase priceover the fair market value of the tangible net assets acquired of $67.0 millionwas assigned to customer list, cellular licenses and goodwill.  On February 28, 2003, the Company alsopurchased for $60.0 million in cash the remaining ownership interest inwireless properties with a potential service area covering approximately355,000 POPs in two Michigan RSAs. Prior to this acquisition, ALLTEL owned approximately 49 percent of theMichigan properties.  The Companycompleted the purchase price allocation of this acquisition based upon a fairvalue analysis of the tangible and identifiable intangible assetsacquired.  The excess of the aggregatepurchase price over the fair market value of the tangible net assets acquiredof $46.8 million was assigned to customer list, cellular licenses and goodwill.

 

The accompanying consolidated financial statementsinclude the accounts and results of operations of the acquired wirelessproperties from the dates of acquisition. The customer lists recorded in connection with these transactions are beingamortized on a straight-line basis over their estimated useful lives of sixyears.  The cellular licenses areclassified as indefinite-lived intangible assets and are not subject toamortization.

 

F-51

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**3.****     Acquisitions,Continued:**

Substantially all of the goodwill recorded inconnection with the 2003 acquisitions is expected to be deductible for incometax purposes.

 

The following table summarizes the fair value of theassets acquired and liabilities assumed for the various business combinationscompleted during 2003:

 

| (Millions)                                        |   |         | Acquired from |                         |   |   |
|---------------------------------------------------|--------|--------------|---------------|------------------------------|--------|--------|
|                                              |   | Cellular  XL |          | Michigan  Minority  Partners |   | Other  |   | Combined  Totals |   |
| Assets acquired:                                  |   |         |          |                         |   |   |   |   |   |
| Current assets                                    |   | $            | 0.4           |                         | $      | 4.9    |   | $ | 4.2 |   | $ | 9.5 |   |
| Property, plant  and equipment                    |   | 5.4          |          | 22.5                         |   | 8.2    |   | 36.1 |   |
| Goodwill                                          |   | 53.4         |          | 35.4                         |   | 4.2    |   | 93.0 |   |
| Cellular  licenses                                |   | 9.6          |          | 8.0                          |   | 23.8   |   | 41.4 |   |
| Customer list                                     |   | 4.0          |          | 3.4                          |   | 0.4    |   | 7.8 |   |
| Less:  investments in unconsolidated partnerships |   | —       |          | (12.5                        | )      | (4.5   | ) | (17.0 | ) |
| Total assets  acquired                            |   | 72.8         |          | 61.7                         |   | 36.3   |   | 170.8 |   |
| Liabilities  assumed:                             |   |         |          |                         |   |   |   |   |   |
| Current  liabilities                              |   | (8.2         | )             | (1.7                         | )      | (1.9   | ) | (11.8 | ) |
| Less: minority  interest liability acquired       |   | —       |          | —                       |   | 1.6    |   | 1.6 |   |
| Total liabilities  assumed                        |   | (8.2         | )             | (1.7                         | )      | (0.3   | ) | (10.2 | ) |
| Net cash paid                                     |   | $            | 64.6          |                         | $      | 60.0   |   | $ | 36.0 |   | $ | 160.6 |   |

 

On August 1, 2002, ALLTEL purchased substantially allof the wireless assets owned by CenturyTel, Inc. (“CenturyTel”) forapproximately $1.59 billion in cash.  Inthis transaction, ALLTEL added properties representing approximately 8.3million POPs, and acquired approximately 762,000 wireless customers, minoritypartnership interests in cellular operations representing approximately 1.8million proportionate POPs and PCS licenses covering 1.3 million POPs inWisconsin and Iowa.  The accompanyingconsolidated financial statements include the accounts and results ofoperations of the acquired wireless properties from the date ofacquisition.  During the third quarterof 2002, the Company completed the purchase price allocation of thisacquisition based upon the appraised fair values of the property, plant andequipment and identifiable intangible assets acquired.  The excess of the aggregate purchase price overthe fair market value of the tangible net assets acquired of $1.38 billion wasassigned to customer list, cellular licenses and goodwill.  The customer list recorded in connectionwith this transaction is being amortized on a straight-line basis over itsestimated useful life of six years.  Thecellular licenses are classified as indefinite-lived intangible assets and arenot subject to amortization.  Of thetotal amount assigned to goodwill, approximately $481.0 million is expected tobe deductible for income tax purposes.

 

On August 1, 2002, ALLTEL also completed the purchaseof local telephone properties serving approximately 589,000 wireline customersin Kentucky from Verizon Communications, Inc. (“Verizon”) for approximately$1.93 billion in cash.  Upon signing ofthe purchase agreement in October 2001, ALLTEL paid Verizon a deposit equal to10 percent of the total purchase price, or $190.7 million, with the balance ofthe cash payment (net of accrued interest on the deposit) due at the time thetransaction was completed.  Theaccompanying consolidated financial statements include the accounts and resultsof operations of the acquired wireline properties from the date of acquisition.  During the fourth quarter of 2002, theCompany completed the purchase price allocation of this acquisition based uponthe appraised fair values of the property, plant and equipment and identifiableintangible assets acquired.  The excessof the aggregate purchase price over the fair market value of the tangible netassets acquired of $1.34 billion was assigned to customer list, franchiserights and goodwill.  The customer listrecorded in connection with this transaction is being amortized on astraight-line basis over its estimated useful life of ten years.  The franchise rights are classified asindefinite-lived intangible assets and are not subject to amortization.  Of the total amount assigned to goodwill,approximately $1.0 billion is expected to be deductible for income tax purposes.

 

During 2002, ALLTEL also purchased a wireline propertyin Georgia and acquired additional ownership interests in wireless propertiesin Arkansas, Louisiana and Texas.  Inconnection with these acquisitions, the Company paid $35.0 million in cash andassigned the excess of the aggregate purchase price over the fair market valueof the tangible net assets acquired of $31.0 million to goodwill.  In connection with the CenturyTel andVerizon acquisitions discussed above, the Company recorded integration expensesand other charges in 2002.  (See Note8.)

 

F-52

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**3.****     Acquisitions,Continued:**

The following table summarizes the fair value of theassets acquired and liabilities assumed for the various business combinationscompleted during 2002:

 

| (Millions)                     |   |    | Acquired from |    |    |    |
|--------------------------------|--------|---------|---------------|---------|---------|---------|
|                           |   |    | Century  Tel  |    | Verizon |    | Other |   | Combined  Totals |   |
| Assets acquired:               |   |    |          |    |    |    |   |   |   |
| Current assets                 |   | $       | 57.2          |    | $       | 38.0    |   | $ | 1.2 |   | $ | 96.4 |   |
| Investments                    |   | 77.9    |          | —  |    | —  |   | 77.9 |   |
| Property, plant  and equipment |   | 192.9   |          | 608.6   |    | 10.7    |   | 812.2 |   |
| Goodwill                       |   | 1,075.5 |          | 1,003.1 |    | 31.0    |   | 2,109.6 |   |
| Cellular  licenses             |   | 214.0   |          | —  |    | —  |   | 214.0 |   |
| PCS licenses                   |   | 1.6     |          | —  |    | —  |   | 1.6 |   |
| Franchise rights               |   | —  |          | 265.0   |    | —  |   | 265.0 |   |
| Customer list                  |   | 89.0    |          | 67.6    |    | —  |   | 156.6 |   |
| Other assets                   |   | 0.4     |          | —  |    | 2.9     |   | 3.3 |   |
| Total assets  acquired         |   | 1,708.5 |          | 1,982.3 |    | 45.8    |   | 3,736.6 |   |
| Liabilities  assumed:          |   |    |          |    |    |    |   |   |   |
| Current  liabilities           |   | (55.6   | )             | (44.6   | )       | (1.7    | ) | (101.9 | ) |
| Long-term debt                 |   | —  |          | —  |    | (9.1    | ) | (9.1 | ) |
| Other  liabilities             |   | (57.6   | )             | (9.0    | )       | —  |   | (66.6 | ) |
| Total  liabilities assumed     |   | (113.2  | )             | (53.6   | )       | (10.8   | ) | (177.6 | ) |
| Net cash paid                  |   | $       | 1,595.3       |    | $       | 1,928.7 |   | $ | 35.0 |   | $ | 3,559.0 |   |
|                                |        |         |               |         |         |         |  |  |  |  |  |  |  |  |  |

 

The purchase prices paid for each of the transactionsdiscussed above were based on estimates of future cash flows of the propertiesacquired.  ALLTEL paid a premium (i.e.,goodwill) over the fair value of the net tangible and identified intangibleassets acquired for a number of reasons, including but not limited to thefollowing:  the 2003 acquisitions expandedthe Company’s wireless footprint into new markets across Arizona, Michigan,Mississippi and Wisconsin and added a combined 147,000 new wireless customersto ALLTEL’s communications customer base. The 2002 purchase of wireless properties from CenturyTel expanded theCompany’s wireless footprint into new markets across Arkansas, Louisiana,Michigan, Mississippi, Texas and Wisconsin. Similarly, the wireline properties acquired from Verizon overlapALLTEL’s existing wireless service in northeastern Kentucky.  The scale and scope of ALLTEL’s entirecommunications business was enhanced by the CenturyTel and Verizon acquisitionsthrough the combined addition of 1,351,000 geographically clusteredcommunications customers.  As a result,fixed operations cost will be spread over a larger base and very littleincremental overhead will be added. Additionally, in the wireless properties acquired in 2003 and 2002,ALLTEL should realize, over time, accelerated customer growth and higheraverage revenue per customer as a result of the Company’s higher revenuenational rate plans.  Finally, thewireline operations in Kentucky generated a lower operating margin thanALLTEL’s wireline business primarily due to cost structure differences.  ALLTEL believes, over time, that the Companycan improve the margins in the newly acquired Kentucky operations to be more inline with the margins in its existing wireline operations.

 

The following unaudited pro forma consolidated resultsof operations of the Company for the years ended December 31, 2002 and 2001assume that the acquisition of wireless properties from CenturyTel and theacquisition of wireline properties from Verizon were completed as of January 1,2001:

 

| (Millions, except per  share amounts)                              |   | 2002   |    | 2001   |   |
|--------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Revenues and sales                                                 |   | $      | 7,602.7 |   | $      | 7,387.7 |   |
| Income from  continuing operations                                 |   | $      | 923.5   |   | $      | 1,021.5 |   |
| Earnings per  share from continuing operations:                    |   |   |    |   |   |
| Basic                                                              |   | $      | 2.97    |   | $      | 3.28 |   |
| Diluted                                                            |   | $      | 2.96    |   | $      | 3.26 |   |
| Income before  cumulative effect of accounting change              |   | $      | 997.7   |   | $      | 1,091.0 |   |
| Earnings per  share before cumulative effect of accounting change: |   |   |    |   |   |
| Basic                                                              |   | $      | 3.21    |   | $      | 3.50 |   |
| Diluted                                                            |   | $      | 3.19    |   | $      | 3.48 |   |

 

F-53

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

_____

 

**3.****     Acquisitions,Continued:**

| (Millions, except per  share amounts) |   | 2002   |   | 2001   |   |
|---------------------------------------|--------|--------|--------|--------|--------|
| Net income                            |   | $      | 997.7  |   | $      | 1,110.5 |   |
| Earnings per  share:                  |   |   |   |   |   |
| Basic                                 |   | $      | 3.21   |   | $      | 3.57 |   |
| Diluted                               |   | $      | 3.19   |   | $      | 3.54 |   |

 

The pro forma amounts represent the historicaloperating results of the properties acquired from CenturyTel and Verizon withappropriate adjustments that give effect to depreciation and amortization andinterest expense.  The effects of theother non-acquisition related items discussed in Notes 8 and 9 are included inthe pro forma amounts presented above. The pro forma amounts are not necessarily indicative of the operatingresults that would have occurred if the acquired properties had been operatedby ALLTEL during the periods presented. In addition, the pro forma amounts do not reflect potential cost savingsrelated to full network optimization and the redundant effect of selling,general and administrative expenses.

 

**4.****     Debt:**

Long-term debt was as follows at December 31:

 

| (Millions)                                              |   | 2003     |    | 2002     |   |
|---------------------------------------------------------|--------|----------|---------|----------|--------|
| Debentures and notes,  without collateral,              |   |     |    |     |   |
| Weighted rate  7.4% in 2003 and 2002                    |   |     |    |     |   |
| Weighted  maturity 11 years in 2003 and 2002            |   | $        | 4,383.5 |     | $      | 4,852.8 |   |
| Equity unit  notes,                                     |   |     |    |     |   |
| Weighted rate  6.3% in 2003 and 2002                    |   |     |    |     |   |
| Weighted  maturity 3 years in 2003 and 4 years in 2002  |   | 1,385.0  |    | 1,385.0  |   |
| Commercial paper  borrowings,                           |   |     |    |     |   |
| Weighted rate  1.4% in 2002                             |   |     |    |     |   |
| Weighted  maturity 3 years in 2002                      |   | —   |    | 25.0     |   |
| Rural Telephone  Bank and Federal Financing Bank notes, |   |     |    |     |   |
| Weighted rate  6.7% in 2002                             |   |     |    |     |   |
| Weighted  maturity 13 years in 2002                     |   | —   |    | 198.7    |   |
| Rural Utilities  Service notes,                         |   |     |    |     |   |
| Weighted rate  4.9% in 2002                             |   |     |    |     |   |
| Weighted  maturity 13 years in 2002                     |   | —   |    | 54.6     |   |
| First mortgage  bonds and collateralized notes,         |   |     |    |     |   |
| Weighted rate  6.3% in 2003 and 6.8% in 2002            |   |     |    |     |   |
| Weighted  maturity 2 years in 2003 and 2002             |   | 7.0      |    | 14.9     |   |
| Industrial  revenue bonds,                              |   |     |    |     |   |
| Weighted rate  3.0% in 2003 and 2002                    |   |     |    |     |   |
| Weighted  maturity 4 years in 2003 and 5 years in 2002  |   | 3.2      |    | 3.9      |   |
| Other-market  value of interest rate swaps              |   | 79.7     |    | 105.2    |   |
|                                                    |   | 5,858.4  |    | 6,640.1  |   |
| Less current  maturities                                |   | (277.2   | )       | (494.7   | )      |
| Total long-term  debt                                   |   | $        | 5,581.2 |     | $      | 6,145.4 |   |
| Weighted rate                                           |   | 7.1      | %       | 7.1      | %      |
| Weighted  maturity                                      |   | 10 years |    | 10 years |   |

 

Commercial Paper– The Company has established a commercial paper program with a maximumborrowing capacity of $1.5 billion. Commercial paper borrowings consist of discounted notes that are exemptfrom registration under the Securities Act of 1933.  Commercial paper borrowings are classified as long-term debt,because borrowings under this program are intended to be maintained on along-term basis and are supported by the revolving credit agreements.

 

Revolving CreditAgreements – The Company has a $1.0 billion unsecured line ofcredit under a revolving credit agreement. This agreement was amended on August 29, 2003 such that the expirationdate of the entire $1.0 billion line of credit is now October 1, 2005.  The Company intends to continue to renewthis agreement.  On July 30, 2003, theCompany entered into an additional $500.0 million, 364-day revolving creditagreement which will expire on July 28, 2004, and allows the Company to convertany outstanding borrowings under this agreement into term loans maturing in2005.  Commercial paper borrowings arededucted in determining the total amount available for borrowing under therevolving credit agreements. Accordingly, the total amount outstanding under the commercial paperprogram and the indebtedness incurred under the revolving credit 

 

F-54

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**4.****     Debt,Continued:**

agreements may not exceed $1.5 billion.  At December 31, 2003, the amount availablefor borrowing under the revolving credit agreements was $1.5 billion.  The revolving credit agreements containvarious covenants and restrictions including a requirement that, at the end ofeach calendar quarter, ALLTEL maintain a total debt-to-capitalization ratio ofless than 65 percent.  For purposes ofcalculating this ratio under the agreement, total debt would include amountsclassified as long-term debt (excluding mark-to-market adjustments for interestrate swaps), current maturities of long-term debt outstanding, short-term debtand any letters of credit or other guarantee obligations.  As of December 31, 2003, the Company’slong-term debt to capitalization ratio was 45.3 percent.  In addition, the indentures and borrowingagreements, as amended, provide, among other things, for various restrictionson the payment of dividends by the Company. Retained earnings unrestricted as to the payment of dividends by theCompany amounted to $5,553.2 million at December 31, 2003.

 

Equity Units– During 2002, the Company issued and sold 27.7 million equity units in anunderwritten public offering and received net proceeds of $1.34 billion.  Each equity unit consists of a corporateunit, with a $50 stated amount, comprised of a purchase contract and $50principal amount of senior notes.  Thecorporate unit may be converted by the holder into a treasury unit consistingof the purchase contract and a treasury portfolio of zero-coupon U.S.Government treasury securities by substituting the treasury securities for thesenior notes.  The holder of an equityunit owns the underlying senior notes or treasury portfolio but has pledged thesenior notes or treasury portfolio to ALLTEL to secure the holder’s obligationsunder the purchase contract.  Thepurchase contract obligates the holder to purchase, and obligates ALLTEL tosell, on May 17, 2005, for $50, a variable number of newly issued common sharesof ALLTEL.  The number of ALLTEL sharesissued will be determined at the time the purchase contracts are settled basedupon the then current price of ALLTEL’s common stock.  If the price of ALLTEL’s common stock is equal to or less than$49.50, then ALLTEL will deliver 1.0101 shares to the holder of the equityunit.  If the price of ALLTEL’s commonstock is greater than $49.50 but less than $60.39, then ALLTEL will deliver a fractionof shares equal to $50 divided by the then current price of ALLTEL’s commonstock.  Finally, if the price ofALLTEL’s common stock is equal to or greater than $60.39, then ALLTEL willdeliver 0.8280 shares to the holder. Accordingly, upon settlement of the purchase contracts on May 17, 2005,ALLTEL will receive proceeds of approximately $1,385.0 million and will deliverbetween 22.9 million and 28.0 million common shares in the aggregate.  The proceeds will be credited toshareholders’ equity and allocated between the common stock and additionalpaid-in-capital accounts.  ALLTEL willmake quarterly contract adjustment payments to the equity unit holders at arate of 1.50 percent of the stated amount per year until the purchase contractis settled, although the Company has the right to defer these payments until nolater than May 17, 2005.

 

Each corporate unit also included $50 principal amountof senior notes that will mature on May 17, 2007.  The notes are pledged by the holders to secure their obligationsunder the purchase contracts.  ALLTELwill make quarterly interest payments to the holders of the notes initially atan annual rate of 6.25 percent.  On orafter February 17, 2005, the notes will be remarketed.  At that time, ALLTEL’s remarketing agentwill be entitled to reset the interest rate on the notes in order to generatesufficient remarketing proceeds to satisfy the holder’s obligation under thepurchase contract.  In the event of anunsuccessful remarketing, the Company will exercise its rights as a securedparty to obtain and extinguish the notes. The total distributions payable on the equity units are at an annualrate of 7.75 percent, consisting of interest (6.25 percent) and contractadjustment payments (1.50 percent).  Thecorporate units are listed on the New York Stock Exchange under the symbol“AYZ”.

 

The present value of the contract adjustment paymentsof $57.1 million was accrued upon the issuance of the equity units as a chargeto additional paid-in capital with the related liability included in otherliabilities in the accompanying consolidated balance sheets.  Subsequent contract adjustment payments areallocated between this liability account and interest expense based on aconstant rate calculation over the life of the transaction.  Additional paid-in capital for 2002 alsoincluded a charge of $36.0 million representing a portion of the equity unitissuance costs that were allocated to the purchase contracts.

 

Interest expense was as follows for the years endedDecember 31:

 

| (Millions)                                  |   | 2003  |   | 2002   |   | 2001  |   |
|---------------------------------------------|--------|-------|--------|--------|--------|-------|--------|
| Interest expense  related to long-term debt |   | $     | 392.1  |   | $      | 369.2 |   | $ | 278.4 |   |
| Other interest                              |   | 1.7   |   | 1.8    |   | 3.2   |   |
| Less:  capitalized interest                 |   | (15.2 | )      | (15.9  | )      | (20.4 | )      |
|                                        |   | $     | 378.6  |   | $      | 355.1 |   | $ | 261.2 |   |

 

Maturities and sinking fund requirements for the fouryears after 2004 for long-term debt outstanding, excluding commercial paperborrowings, as of December 31, 2003, were $222.8 million, $639.5 million,$1,407.8 million and $124.2 million for the years 2005 through 2008,respectively.

 

F-55

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**5.**     **Financial Instruments and Investments**:

The carrying amount of cash and short-term investmentsapproximates fair value due to the short term nature of the instruments.  The fair values of the Company’sinvestments, long-term debt, redeemable preferred stock and interest rate swapswere as follows at December 31:

 

| (Millions)                                    |   |   | 2003        |   | 2002             |
|-----------------------------------------------|--------|--------|-------------|--------|------------------|
|                                          |   |   | Fair  Value |   | Carrying  Amount |   | Fair  Value |   | Carrying  Amount |   |
| Investments                                   |   | $      | 722.7       |   | $                | 722.7 |   | $ | 325.8 |   | $ | 325.8 |   |
| Long-term debt,  including current maturities |   | $      | 6,650.9     |   | $                | 5,858.4 |   | $ | 7,378.5 |   | $ | 6,640.1 |   |
| Redeemable  preferred stock                   |   | $      | 9.1         |   | $                | 1.0 |   | $ | 10.1 |   | $ | 1.0 |   |
| Interest rate  swaps                          |   | $      | 79.7        |   | $                | 79.7 |   | $ | 105.2 |   | $ | 105.2 |   |

 

The fair value of investments was based on quotedmarket prices and the carrying value of investments for which there were noquoted market prices.  The fair value oflong-term debt, including current maturities, was estimated based on the overallweighted rates and maturities of the Company’s long-term debt compared to ratesand terms currently available in the long-term financing markets.  The fair value of the redeemable preferredstock was estimated based on the conversion of the Series D convertibleredeemable preferred stock to common stock of the Company.  Fair values of the interest rate swaps werebased on quoted market prices.  Therewas no material impact to earnings due to hedge ineffectiveness for theinterest rate swaps designated as fair value hedges.  The fair value of all other financial instruments was estimatedby management to approximate carrying value.

 

**6.**     **Stock-Based****CompensationPlans:**

Under the Company’s stock-based compensation plans,ALLTEL may grant fixed and performance-based incentive and non-qualified stockoptions and other equity securities to officers and other key employees.  The maximum number of shares of theCompany’s common stock that may be issued to officers and other key employeesunder all stock option plans in effect at December 31, 2003 was 32.5 millionshares.  Fixed options granted under thestock option plans generally become exercisable over a period of one to fiveyears after the date of grant.  Certainfixed options granted in 2000 become exercisable in increments of 50%, 25% and25% over a five-year period beginning three years after the date of grant.  Certain fixed options granted in 1997 becomeexercisable in equal increments over a six-year period beginning three yearsafter the date of grant.  In 1997,performance-based options were granted that became exercisable one year afterthe date in which certain performance goals related to operating income growthand return on invested capital were achieved for the four most recentconsecutive calendar quarters.  Fourseparate levels of performance goal targets were established, each specifyingdifferent minimum growth and rates of return. Depending upon which of the four performance goal target levels wereattained, 25%, 50%, 75% or 100% of the option award would vest and becomeexercisable.  Only options related tothe 25% performance goal target vested. During 2001, all remaining unvested performance-based options werecancelled, as the remaining performance targets were not achieved.

 

Under the Company’s stock option plan for non-employeedirectors (the “Directors’ Plan”), the Company grants fixed, non-qualifiedstock options to directors for up to 1.0 million shares of common stock.  Under the Directors’ Plan, directors receivea one-time option grant to purchase 10,000 shares of common stock when theyjoin the Board.  Directors are alsogranted each year, on the date of the annual meeting of stockholders, an optionto purchase a specified number of shares of common stock (currently 6,500shares).  Options granted under theDirectors’ Plan become exercisable the day immediately preceding the date ofthe first annual meeting of stockholders following the date of grant.

 

For all plans, the exercise price of the option equalsthe market value of ALLTEL’s common stock on the date of grant.  For fixed stock options, the maximum termfor each option granted is 10 years. The fair value of each stock option granted as identified below wascalculated using the Black-Scholes option-pricing model and the followingweighted average assumptions:

 

|                     |   | 2003      |   | 2002      |   | 2001      |   |
|--------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| Expected life            |   | 4.9 years |   | 5.0 years |   | 5.0 years |   |
| Expected  volatility     |   | 32.4      | %      | 29.7      | %      | 29.4      | %      |
| Dividend yield           |   | 2.9       | %      | 2.5       | %      | 2.2       | %      |
| Risk-free  interest rate |   | 3.0       | %      | 4.6       | %      | 5.0       | %      |

 

F-56

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**6.**     **Stock-Based****CompensationPlans, Continued:**

Set forth below is certain information related tostock options outstanding under ALLTEL’s stock-based compensation plans:

 

|                                                                  |   | (Thousands)Shares |   | Weighted Average PricePer Share |   |
|-----------------------------------------------------------------------|--------|-------------------|--------|---------------------------------|--------|
|                                                                  |   | 2003              |   | 2002                            |   | 2001 |   | 2003 |   | 2002 |   | 2001 |   |
| Outstanding at  beginning of period                                   |   | 18,317.5          |   | 16,254.5                        |   | 14,859.7 |   |   | $55.24 |   |   | $54.45 |   |   | $51.81 |   |
| Granted                                                               |   | 2,097.2           |   | 3,146.3                         |   | 3,283.0 |   | 48.87 |   | 54.72 |   | 61.27 |   |
| Exercised                                                             |   | (1,462.8          | )      | (610.6                          | )      | (946.9 | ) | 34.09 |   | 28.03 |   | 32.91 |   |
| Forfeited                                                             |   | (3,039.6          | )      | (472.7                          | )      | (814.0 | ) | 60.56 |   | 59.76 |   | 62.57 |   |
| Expired                                                               |   | —            |   | —                          |   | (127.3 | ) | — |   | — |   | 31.30 |   |
| Outstanding at  end of period                                         |   | 15,912.3          |   | 18,317.5                        |   | 16,254.5 |   |   | $55.32 |   |   | $55.24 |   |   | $54.45 |   |
|                                                                  |   |              |   |                            |   |   |   |   |   |   |   |   |   |
| Exercisable at  end of period                                         |   | 8,267.1           |   | 7,180.7                         |   | 5,409.0 |   |   | $53.04 |   |   | $48.02 |   |   | $43.08 |   |
| Non-vested at  end of period                                          |   | 7,645.2           |   | 11,136.8                        |   | 10,845.5 |   |   |   |   |   |   |   |
| Weighted average  fair value of stock options granted during the year |   |              | $13.72 |                            |   | $14.19 |   |   | $16.98 |   |   |   |   |   |   |   |
|                                                                       |        |                   |        |                                 |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following is a summary of stock optionsoutstanding as of December 31, 2003:

 

|                   |   | Options Outstanding                  |   | Options Exercisable                          |   |
|------------------------|--------|--------------------------------------|--------|----------------------------------------------|--------|
| Range ofExercise Price |   | Number ofShares                      |   | Weighted  Average  RemainingContractual Life |   | Weighted  Average  Exercise PricePer Share |   | Number ofShares |   | Weighted  Average  Exercise PricePer Share |   |
| $20.24 - $26.95        |   |       166.0 |   | 2.3 years                                    |   | $25.98 |   |    166.0 |   | $25.98 |   |
| $29.47 - $37.75        |   |     2,360.8                |   | 3.4 years                                    |   |   33.38 |   | 2,358.0 |   |   33.38 |   |
| $39.19 - $47.30        |   |   1,217.4                       |   | 7.1 years                                    |   |   45.01 |   |    517.1 |   |   43.24 |   |
| $50.22 - $58.46        |   |   4,665.5                       |   | 5.7 years                                    |   |   53.31 |   |    914.9 |   |    54.14 |   |
| $61.77 - $68.25        |   |   7,341.6                       |   | 6.3 years                                    |   |   65.66 |   | 4,171.3 |   |   65.57 |   |
| $70.75 - $73.13        |   |      161.0       |   | 5.6 years                                    |   |   72.23 |   |    139.8 |   |   72.12 |   |
|                   |   | 15,912.3                             |   | 5.7 years                                    |   | $55.32 |   | 8,267.1 |   | $53.04 |   |
|                        |        |                                      |        |                                              |        |  |  |  |  |  |  |  |

** **

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

The Company maintains a qualified defined benefitpension plan, which covers substantially all employees other than employees ofALLTEL’s directory publishing subsidiary. The Company also maintains a supplemental executive retirement plan thatprovides unfunded, non-qualified supplemental retirement benefits to a selectgroup of management employees.  Inaddition, the Company has entered into individual retirement agreements withcertain retired executives providing for unfunded supplemental pensionbenefits.  The Company providespostretirement healthcare and life insurance benefits for eligible employees.  Employees share in the cost of thesebenefits.  The Company funds the accruedcosts of these plans as benefits are paid. During 2001, the Company incurred special termination benefits relatedto an early retirement program offered to employees meeting certain age andservice requirements.  (See Note 8 for afurther discussion of these special termination benefits incurred by ALLTEL in2001.)  The components of pensionexpense, including provision for executive retirement agreements, andpostretirement expense were as follows for the years ended December 31:

 

|                                           |   | Pension Benefits |   | Postretirement Benefits |   |
|------------------------------------------------|--------|------------------|--------|-------------------------|--------|
| (Millions)                                     |   | 2003             |   | 2002                    |   | 2001 |   | 2003 |   | 2002 |   | 2001 |   |
| Benefits earned  during the year               |   | $                | 26.6   |                    | $      | 27.1 |   | $ | 25.1 |   | $ | 0.6 |   | $ | 0.6 |   | $ | 0.7 |   |
| Interest cost on  benefit obligation           |   | 52.2             |   | 48.2                    |   | 45.7 |   | 14.8 |   | 13.3 |   | 9.1 |   |
| Amortization of  transition (asset) obligation |   | (1.2             | )      | (2.2                    | )      | (2.6 | ) | 0.8 |   | 0.8 |   | 1.0 |   |
| Amortization of  prior service (credit) cost   |   | (0.1             | )      | (3.7                    | )      | (8.5 | ) | 1.5 |   | 1.6 |   | 0.2 |   |
| Recognized net  actuarial (gain) loss          |   | 20.7             |   | 0.2                     |   | (4.1 | ) | 7.3 |   | 5.2 |   | 1.3 |   |
| Expected return  on plan assets                |   | (57.2            | )      | (60.8                   | )      | (63.7 | ) | — |   | — |   | — |   |
| Net periodic  benefit (income) expense         |   | 41.0             |   | 8.8                     |   | (8.1 | ) | 25.0 |   | 21.5 |   | 12.3 |   |
| Special  termination benefits and curtailment  |   | —           |   | —                  |   | 16.9 |   | — |   | — |   | 4.6 |   |
| Total net  periodic benefit expense            |   | $                | 41.0   |                    | $      | 8.8 |   | $ | 8.8 |   | $ | 25.0 |   | $ | 21.5 |   | $ | 16.9 |   |

 

F-57

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**7.****     EmployeeBenefit Plans and Postretirement Benefits Other Than Pensions, Continued:**

As a component of determining its annual pension cost,ALLTEL amortizes unrecognized gains or losses that exceed 17.5 percent of thegreater of the projected benefit obligation or market-related value of planassets on a straight-line basis over five years.  Unrecognized actuarial gains and losses below the 17.5 percentcorridor are amortized over the average remaining service life of activeemployees (approximately 14 years). ALLTEL believes the accelerated amortization method is preferable as itresults in more timely recognition of significant actuarial gains and losses incomputing the Company’s annual pension cost.  (See Note 2 for a discussion of a change in accounting for a subsidiary’spension plan completed in 2001.)

 

The Company uses a December 31 measurement date forits employee benefit plans.  Actuarialassumptions used to calculate the pension and postretirement expense were asfollows for the years ended December 31:

 

|                            |   | Pension Benefits |   | Postretirement Benefits |   |
|---------------------------------|--------|------------------|--------|-------------------------|--------|
|                            |   | 2003             |   | 2002                    |   | 2001 |   | 2003 |   | 2002 |   | 2001 |   |
| Discount rate                   |   | 6.85             | %      | 7.25                    | %      | 7.75 | % | 6.85 | % | 7.25 | % | 7.75 | % |
| Expected return  on plan assets |   | 8.50             | %      | 8.50                    | %      | 8.50 | % | — |   | — |   | — |   |
| Rate of  compensation increase  |   | 3.50             | %      | 4.50                    | %      | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |

 

A summary of plan assets, projected benefit obligationand funded status of the plans were as follows at December 31:

 

|                                                   |   | Pension Benefits |   | Postretirement Benefits |   |
|--------------------------------------------------------|--------|------------------|--------|-------------------------|--------|
| (Millions)                                             |   |             | 2003   |                    | 2002   |   | 2003 |   | 2002 |   |
| Fair value of  plan assets at beginning of year        |   | $                | 692.9  |                    | $      | 711.4 |   | $ | — |   | $ | — |   |
| Employer  contributions                                |   | 104.9            |   | 53.8                    |   | 14.1 |   | 11.1 |   |
| Transfer from  other plan for acquisitions             |   | —           |   | 49.0                    |   | — |   | — |   |
| Participant  contributions                             |   | —           |   | —                  |   | 4.4 |   | 4.2 |   |
| Actual return on  plan assets                          |   | 136.8            |   | (74.9                   | )      | — |   | — |   |
| Benefits paid                                          |   | (71.8            | )      | (46.4                   | )      | (18.5 | ) | (15.3 | ) |
| Fair value of  plan assets at end of year              |   | 862.8            |   | 692.9                   |   | — |   | — |   |
| Projected  benefit obligation at beginning of year     |   | 802.5            |   | 678.4                   |   | 202.2 |   | 185.9 |   |
| Benefits earned                                        |   | 26.6             |   | 27.1                    |   | 0.6 |   | 0.6 |   |
| Interest cost on  projected benefit obligation         |   | 52.2             |   | 48.2                    |   | 14.8 |   | 13.3 |   |
| Participant  contributions                             |   | —           |   | —                  |   | 4.4 |   | 4.2 |   |
| Plan amendments                                        |   | 7.9              |   | —                  |   | — |   | — |   |
| Effect of  acquisitions                                |   | —           |   | 49.7                    |   | — |   | 7.3 |   |
| Actuarial loss                                         |   | 72.1             |   | 45.5                    |   | 51.1 |   | 6.2 |   |
| Benefits paid                                          |   | (71.8            | )      | (46.4                   | )      | (18.5 | ) | (15.3 | ) |
| Projected  benefit obligation at end of year           |   | 889.5            |   | 802.5                   |   | 254.6 |   | 202.2 |   |
| Plan assets less  than projected benefit obligation    |   | (26.7            | )      | (109.6                  | )      | (254.6 | ) | (202.2 | ) |
| Unrecognized  actuarial loss                           |   | 181.7            |   | 209.6                   |   | 114.8 |   | 71.0 |   |
| Unrecognized  prior service cost (credit)              |   | 7.5              |   | (0.5                    | )      | 14.7 |   | 16.2 |   |
| Unrecognized net  transition (asset) obligation        |   | —           |   | (1.2                    | )      | 7.5 |   | 8.3 |   |
| Net amount  recognized                                 |   | $                | 162.5  |                    | $      | 98.3 |   | $ | (117.6 | ) | $ | (106.7 | ) |
| Amounts  recognized in the consolidated balance sheet: |   |             |   |                    |   |   |   |   |   |
| Prepaid benefit  cost                                  |   | $                | 210.6  |                    | $      | 145.3 |   | $ | — |   | $ | — |   |
| Accrued benefit  cost liability                        |   | (48.1            | )      | (47.0                   | )      | (117.6 | ) | (106.7 | ) |
| Net amount  recognized                                 |   | $                | 162.5  |                    | $      | 98.3 |   | $ | (117.6 | ) | $ | (106.7 | ) |
|                                                        |        |                  |        |                         |        |  |  |  |  |  |  |  |  |  |

 

Employer contributions and benefits paid in the abovetable included amounts contributed directly to or paid directly from both theretirement plans and from Company assets.

 

The accumulated benefit obligation for all definedbenefit pension plans was $802.0 million and $732.4 million at December 31,2003 and 2002, respectively.  For thesupplemental retirement pension plans with accumulated benefit obligations inexcess of plan assets, the projected benefit obligation and accumulated benefitobligation were $63.5 million and $57.0 million at December 31, 2003,respectively, and $50.5 million and $45.4 million at December 31, 2002,respectively.  There are no assets heldin these supplemental retirement pension plans, as the Company funds theaccrued costs of the plans as benefits are paid.

 

F-58

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**7.**     **Employee Benefit Plans andPostretirement Benefits Other Than Pensions, Continued:**

Actuarial assumptions used to calculate the projectedbenefit obligations were as follows for the years ended December 31:

 

|                            |   | Pension Benefits |   | Postretirement Benefits |   |
|---------------------------------|--------|------------------|--------|-------------------------|--------|
|                            |   | 2003             |   | 2002                    |   | 2003 |   | 2002 |   |
| Discount rate                   |   | 6.40             | %      | 6.85                    | %      | 6.40 | % | 6.85 | % |
| Expected return  on plan assets |   | 8.50             | %      | 8.50                    | %      | — |   | — |   |
| Rate of  compensation increase  |   | 3.50             | %      | 3.50                    | %      | — |   | — |   |

 

In developing the expected long-term rate of returnassumption, ALLTEL evaluated historical investment performance and input fromits investment advisors.  Projectedreturns by such advisors were based on broad equity and bond indices.  The Company also considered the pensionplan’s historical returns since 1975 of 11.1 percent.  The expected long-term rate of return on qualified pension planassets is based on a targeted asset allocation of 70 percent to equities, withan expected long-term rate of return of 10 percent, and 30 percent to fixedincome assets, with an expected long-term rate of return of 5 percent.

 

Information regarding the healthcare cost trend ratewas as follows for the years ended December 31:

 

|                                                            |   | 2003  |   | 2002 |   |
|-----------------------------------------------------------------|--------|-------|--------|------|--------|
| Healthcare cost  trend rate assumed for next year               |   | 11.00 | %      | 9.00 | %      |
| Rate that the  cost trend rate ultimately declines to           |   | 5.00  | %      | 5.00 | %      |
| Year that the  rate reaches the rate it is assumed to remain at |   | 2010  |   | 2006 |   |

 

For the year ended December 31, 2003, a one percentincrease in the assumed healthcare cost trend rate would increase thepostretirement benefit cost by approximately $1.4 million, while a one percentdecrease in the rate would reduce the postretirement benefit cost byapproximately $1.2 million.  As ofDecember 31, 2003, a one percent increase in the assumed healthcare cost trendrate would increase the postretirement benefit obligation by approximately$25.2 million, while a one percent decrease in the rate would reduce thepostretirement benefit obligation by approximately $21.3 million.

 

The asset allocation at December 31, 2003 and 2002 andtarget allocation for 2004 for the Company’s qualified defined benefit pensionplan by asset category were as follows:

 

| Asset Category                                                 |   | Target  Allocation  2004    |   | Percentage of Plan  Assets  At December 31: |   |
|----------------------------------------------------------------|--------|-----------------------------|--------|---------------------------------------------|--------|
|                                                           |   | 2003                        |   | 2002                                        |   |
| Equity  securities                                             |   | 62.5% – 77.5           | %      | 66.1                                        | %      | 58.3 | % |
| Fixed income  securities                                       |   | 15.0% – 35.0           | %      | 19.9                                        | %      | 25.4 | % |
| Money market and  other short-term interest bearing securities |   | 0.0% –   7.5 | %      | 14.0                                        | %      | 16.3 | % |
|                                                           |   |                        |   | 100.0                                       | %      | 100.0 | % |

 

Primarily due to cash contributions funded to thequalified pension plan by ALLTEL in late December of each year that had not yetbeen reinvested, the actual asset allocations at December 31, 2003 and 2002differed from the plan’s target allocation. Equity securities include ALLTEL common stock in the amounts of $33.2million, or 4 percent of total plan assets, and $35.2 million, or 5 percent oftotal plan assets, at December 31, 2003 and 2002, respectively.  The Company’s investment strategy is to maintaina diversified asset portfolio expected to provide long-term asset growth.  Investments are generally restricted tomarketable securities, with investments in real estate, venture capital,leveraged or other high-risk derivatives not permitted.  Equity securities include stocks of bothlarge and small capitalization domestic and international companies.  Fixed income securities include securitiesissued by the U.S. Government and other governmental agencies, asset-backedsecurities and debt securities issued by domestic and internationalcompanies.  Investments in money marketand other short-term interest bearing securities are maintained to provideliquidity for benefit payments with protection of principal being the primaryobjective.

 

F-59

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**7.**     **Employee Benefit Plans andPostretirement Benefits Other Than Pensions, Continued:**

Estimated future employer contributions and benefitpayments were as follows as of December 31, 2003:

 

| (Millions)                                |   |   | Pension  Benefits |   | Postretirement  Benefits |   |
|-------------------------------------------|--------|--------|-------------------|--------|--------------------------|--------|
| Expected  employer contributions for 2004 |   | $      | 5.0               |   | $                        | 16.1   |   |
| Expected benefit  payments:               |   |   |              |   |                     |
| 2004                                      |   | $      | 45.2              |   | $                        | 16.1   |   |
| 2005                                      |   | 45.4   |              | 17.5   |                     |
| 2006                                      |   | 45.9   |              | 17.3   |                     |
| 2007                                      |   | 47.1   |              | 18.3   |                     |
| 2008                                      |   | 49.0   |              | 19.1   |                     |
| 2009 – 2013                          |   | 291.6  |              | 100.9  |                     |

 

The expected employer contribution for pensionbenefits consists solely of amounts necessary to fund the expected benefitpayments related to the unfunded supplemental retirement pension plans.  ALLTEL does not expect that any contributionto the qualified defined pension plan calculated in accordance with the minimumfunding requirements of the Employee Retirement Income Security Act of 1974will be required in 2004.  Futurediscretionary contributions to the plan will depend on various factors,including future investment performance, changes in future discount rates andchanges in the demographics of the population participating in the Company’squalified pension plan.  Expectedbenefit payments include amounts to be paid from the plans or directly fromCompany assets, and exclude amounts that will be funded by participantcontributions to the plans.

 

On December 8, 2003, the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (the “Act”) became law.  Beginning in 2006, the Act will provide fora prescription drug benefit under Medicare Part D, as well as a federal subsidyto plan sponsors of retiree healthcare plans that provide a prescription drugbenefit to participants that is at least actuarially equivalent to the benefitthat will be available under Medicare. The amount of the federal subsidy will be based on 28 percent of anindividual beneficiary’s annual eligible prescription drug costs rangingbetween $250 and $5,000.  ALLTEL has notfully quantified the effects, if any, that the Act will have on its futurebenefit costs or accumulated postretirement benefit obligation, andaccordingly, the effects of the Act have not been reflected in the accompanyingconsolidated financial statements.  Theauthoritative guidance addressing the accounting for the federal subsidy isunder consideration by the FASB, and once issued, could require the Company torestate previously reported amounts related to its postretirement healthcare plan.

 

ALLTEL has a non-contributory defined contributionplan in the form of profit-sharing arrangements for eligible employees.  The amount of profit-sharing contributionsto the plan is determined annually by ALLTEL’s Board of Directors.  Profit-sharing expense amounted to $21.9million in 2003, $32.3 million in 2002 and $26.1 million in 2001.  The Company also sponsors employee savingsplans under section 401(k) of the Internal Revenue Code, which cover substantiallyall full-time employees, except bargaining unit employees.  Employees may elect to contribute to theplans a portion of their eligible pretax compensation up to certain limits asspecified by the plans.  ALLTEL alsomakes annual contributions to the plans. Expense recorded by ALLTEL related to these plans amounted to $7.3million in 2003, $10.9 million in 2002 and $16.9 million in 2001.

 

**8.**     **Integration Expenses and Other Charges:**

A summary of the integration and other chargesrecorded in the second quarter of 2003 was as follows:

 

| (Millions)                                    |   | Total |   |
|-----------------------------------------------|--------|-------|--------|
| Severance and  employee benefit costs         |   | $     | 6.3    |   |
| Lease and  contract termination costs         |   | (0.5  | )      |
| Write-down of  software development costs     |   | 13.2  |   |
| Total  integration expenses and other charges |   | $     | 19.0   |   |

 

The Company recorded a restructuring charge of $8.5million consisting of severance and employee benefit costs related to a plannedworkforce reduction, primarily resulting from the closing of certain callcenter locations.  As of December 31,2003, the Company had paid $8.3 million in severance and employee-relatedexpenses, and all of the employee reductions had been completed.  The Company also recorded a $2.7 millionreduction in the liabilities associated with various restructuring activitiesinitiated prior to 2003, consisting of $2.2 million in severance and employeebenefit costs and $0.5 million in lease termination costs.  The reduction primarily reflecteddifferences between estimated and actual costs paid in completing the previousplanned workforce reductions and lease terminations.  During the second quarter of 2003, ALLTEL also wrote off certaincapitalized software development costs that had no alternative future use orfunctionality.

 

F-60

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

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

A summary of the integration and other chargesrecorded in 2002 by quarter was as follows:

 

| (Millions)                                              |   | 1st  Quarter |   | 2nd  Quarter |   | 3rd  Quarter |   | 4th  Quarter |   | Total  |   |
|---------------------------------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------|--------|
| Severance and  employee benefit costs                   |   | $            | 13.4   |         | $      | —       |   | $            | 1.9    |   | $      | (0.5 | ) | $ | 14.8 |   |
| Lease and  contract termination costs                   |   | 12.4         |   | —       |   | 2.2          |   | (2.0         | )      | 12.6   |   |
| Computer system  conversion and other integration costs |   | 3.4          |   | 9.0          |   | 8.6          |   | —       |   | 21.0   |   |
| Write-down of  cell site equipment                      |   | 7.1          |   | —       |   | —       |   | —       |   | 7.1    |   |
| Write-down of  software development costs               |   | 4.4          |   | —       |   | —       |   | —       |   | 4.4    |   |
| Branding and  signage costs                             |   | —       |   | —       |   | 7.8          |   | —       |   | 7.8    |   |
| Equipment  removal and other disposal costs             |   | 2.2          |   | —       |   | —       |   | —       |   | 2.2    |   |
| Total  integration expenses and other charges           |   | $            | 42.9   |         | $      | 9.0          |   | $            | 20.5   |   | $      | (2.5 | ) | $ | 69.9 |   |
| Number of  employees terminated                         |   | 910          |   | —       |   | 130          |   | —       |   | 1,040  |   |
| Number of lease  sites terminated                       |   | 31           |   | —       |   | 7            |   | —       |   | 38     |   |

 

In the fourth quarter of 2002, the Company recorded a$2.5 million reduction in the liabilities associated with the restructuring ofits Competitive Local Exchange Carrier (“CLEC”) operations initiated during thefirst quarter of 2002, as discussed below. The reduction primarily reflected differences between estimated and actualcosts to exit certain CLEC markets.

 

During the third quarter of 2002, the Company recordeda restructuring charge of $4.1 million consisting of severance and employeebenefit costs related to a planned workforce reduction and lease terminationcosts primarily related to the closing of seven product distributioncenters.  The lease termination costsconsisted of $1.2 million, primarily representing the estimated minimumcontractual commitments over the ensuing one to four years for operatinglocations that the Company abandoned, net of anticipated sublease income.  The lease termination costs also included anadditional $1.0 million to reflect the revised estimated costs, net ofanticipated sublease income, to terminate leases associated with four operatinglocations.  ALLTEL had previously recorded$9.1 million in lease termination costs related to these four locations ($2.8million during the first quarter of 2002 and $6.3 million in 1999), as furtherdiscussed below.  The additional chargereflected a further reduction in expected sublease income attributableprimarily to softening demand in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 130 employees primarily in theCompany’s product distribution operations. As of December 31, 2003, the Company had paid $1.9 million in severanceand employee-related expenses, and all of the employee reductions had beencompleted.

 

In connection with the purchase of wireline propertiesin Kentucky from Verizon and wireless properties from CenturyTel (see Note 3),the Company incurred branding and signage costs of $7.8 million during thethird quarter of 2002.  In connectionwith these acquisitions, the Company also incurred computer system conversionand other integration costs during each of the first three quarters of2002.  These expenses included internalpayroll and employee benefit costs, contracted services, and other computerprogramming costs incurred in connection with expanding ALLTEL’s customerservice and operations support functions to handle increased customer volumesresulting from the acquisitions and to convert Verizon’s customer billing andoperations support systems to ALLTEL’s internal systems.

 

In January 2002, ALLTEL announced its plans to exitits CLEC operations in seven states. The Company also consolidated its call center and retail storeoperations during the first quarter of 2002. In connection with these activities, ALLTEL recorded a restructuringcharge consisting of severance and employee benefit costs related to a plannedworkforce reduction, costs associated with terminating certain CLEC transportagreements and lease termination fees related to the closing of certain retailand call center locations.  In exiting theCLEC operations, the Company also incurred costs to disconnect and removeswitching and other transmission equipment from central office facilities andexpenses to notify and migrate customers to other service providers.  ALLTEL also wrote off certain capitalizedsoftware development costs that had no alternative future use orfunctionality.  The restructuring plans,completed in March 2002, provided for the elimination of 910 employeesprimarily in the Company’s sales, customer service and network operationssupport functions.  As previously discussed,in the fourth quarter of 2002, ALLTEL reduced the liabilities associated withthese restructuring plans by $2.5 million. As of December 31, 2003, the Company had paid $12.3 million in severanceand employee-related expenses, and all of the employee reductions had beencompleted.

 

The $12.4 million in lease and contract terminationcosts recorded in the first quarter of 2002 consisted of $5.0 million,representing the estimated minimum contractual commitments over the next one tofive years for 31 operating locations that the Company abandoned, net ofanticipated sublease income.  The leaseand contract termination costs also included $3.6 million

 

F-61

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

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

of costs to terminate transport agreements with sixinterexchange carriers.  The Companyalso recorded an additional $2.8 million to reflect the revised estimatedcosts, net of anticipated sublease income, to terminate leases associated withfour operating locations.  As previouslydiscussed, ALLTEL had initially recorded $6.3 million in lease terminationcosts related to these four locations in 1999. The additional charge reflected a reduction in expected sublease incomeprimarily attributable to softening demand in the commercial real estate marketand bankruptcy filings by two sublessees. Finally, the lease termination costs also included $1.0 million of unamortizedleasehold improvement costs related to the abandoned locations.

 

In conjunction with a product replacement programinitiated by a vendor in 2001, the Company exchanged certain used cell siteequipment for new equipment.  Theexchange of cell site equipment began during the third quarter of 2001 andcontinued through the first quarter of 2002. As the equipment exchanges were completed, the Company recordedwrite-downs in the carrying value of the used cell site equipment to fairvalue.

 

During 2001, the Company restructured its regionalcommunications, product distribution and corporate operations and recordedwrite-downs in the carrying value of certain cell site equipment to fair valuein connection with the product replacement program discussed above.  A summary of the restructuring and othercharges recorded in 2001 was as follows:

 

| (Millions)                             |   | Total |   |
|----------------------------------------|--------|-------|--------|
| Severance and  employee benefit costs  |   | $     | 56.5   |   |
| Lease and  contract termination costs  |   | 4.7   |   |
| Write-down of  cell site equipment     |   | 15.1  |   |
| Total  restructuring and other charges |   | $     | 76.3   |   |

 

As indicated in the table above, the restructuring andother charges consisted of $56.5 million in severance and employee benefitcosts related to planned workforce reductions, $4.7 million in leasetermination costs associated with the closing of certain retail and otheroperating locations, and the write-down in the carrying value of certain cellsite equipment.  Included in theseverance and employee benefit component of the restructuring charge werenon-cash charges of $22.6 million. These non-cash charges consisted of $21.5 million in additional pensionand postretirement benefit costs related to a special early retirement programoffered by the Company to employees meeting certain age and servicerequirements and $1.1 million in compensation expense related to theaccelerated vesting of certain stock options. Eligible employees who elected the early retirement incentive receivedfive years of additional vested service for purposes of calculating theirretirement benefits available under the Company’s pension and postretirementbenefit plans and 230 employees accepted the retirement incentive offer.  The restructuring plan was completed inDecember 2001 and resulted in the elimination of 1,493 employees, including theemployees who accepted the early retirement incentive.  The work force reductions occurred primarilyin operations management, engineering, sales and the corporate supportfunctions.  As of December 31, 2003, theCompany had paid $33.9 million in severance and employee-related expenses andall of the employee reductions had been completed.  The lease termination costs consisted of $3.6 millionrepresenting the estimated minimum contractual commitments over the next one tofive years for 62 operating locations that the Company abandoned, net ofanticipated sublease income.  The leasetermination costs also included $1.1 million of unamortized leaseholdimprovement costs related to the abandoned locations.

 

As of December 31, 2003, the remaining unpaidliability relating to ALLTEL’s merger and integration activities initiatedprior to 2001 was $0.4 million and consisted of unpaid severance andemployee-related expenses.  Thefollowing is a summary of activity related to the liabilities associated with theCompany’s integration expenses and other charges at December 31:

 

| (Millions)                              |   | 2003  |   | 2002   |   |
|-----------------------------------------|--------|-------|--------|--------|--------|
| Balance,  beginning of year             |   | $     | 13.1   |   | $      | 13.8 |   |
| Integration  expenses and other charges |   | 21.7  |   | 72.4   |   |
| Reversal of  accrued liabilities        |   | (2.7  | )      | (2.5   | )      |
| Non-cash  write-down of assets          |   | (15.2 | )      | (12.6  | )      |
| Cash outlays                            |   | (13.1 | )      | (58.0  | )      |
| Balance, end of  year                   |   | $     | 3.8    |   | $      | 13.1 |   |

 

As of December 31, 2003, the remaining unpaidliability related to the Company’s integration and restructuring activitiesconsisted of lease cancellation and contract termination costs of $3.1 millionand severance and employee-related expenses of $0.7 million and is included inother current liabilities in the accompanying consolidated balance sheets.  The integration expenses and other chargesdecreased net income $11.5 million, $42.3 million and $45.3 million for theyears ended December 31, 2003, 2002 and 2001, respectively.

 

F-62

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**9.**     **Gain on Disposal of Assets, Write-Downof Investments and Other:**

In December 2003, the Company sold to ConvergysInformation Management Group, Inc. (“Convergys”) certain assets and relatedliabilities, including selected customer contracts and capitalized softwaredevelopment costs, associated with the Company’s telecommunications informationservices operations.  In connection withthis sale, the Company recorded a pretax gain of $31.0 million.  In the second quarter of 2003, ALLTEL recordedpretax write-downs totaling $6.0 million to reflect other-than-temporarydeclines in the fair value of certain investments in unconsolidated limitedpartnerships.  In addition, during thesecond quarter of 2003, the Company retired, prior to stated maturity dates,$249.1 million of long-term debt, representing all of the long-term debtoutstanding under the Rural Utilities Services, Rural Telephone Bank andFederal Financing Bank programs.  Inconnection with the early retirement of the debt, the Company incurred pretaxtermination fees of $7.1 million.  Thesetransactions increased net income $10.7 million.

 

In the fourth quarter of 2002, ALLTEL recorded apretax gain of $22.1 million from the sale of a wireless property inPennsylvania to Verizon Wireless.  Inaddition, the Company also recorded a pretax write-down of $2.6 million relatedto its investment in Hughes Tele.com Limited (“HTCL”) a public company andprovider of communications services in India. In December 2002, ALLTEL exchanged its shares of HTCL for non-voting,mandatorily redeemable convertible preferred shares of Tata TeleservicesLimited (“Tata”), a privately held Indian company.  Subsequently, ALLTEL decided to liquidate this investment byselling the Tata preferred shares.  The write-downreflected the difference between the carrying value of the Tata preferredshares and the estimated sales proceeds to be realized by ALLTEL uponcompletion of the sale, which occurred in February 2003.  In the third quarter of 2002, the Companyrecorded a pretax adjustment of $4.8 million to reduce the gain recognized fromthe dissolution of a wireless partnership with BellSouth Mobility, Inc.(“BellSouth”) initially recorded in 2001, as further discussed below.  The adjustment reflected a true up for cashdistributions payable to BellSouth in conjunction with the dissolution of thepartnership.  In the second quarter of2002, ALLTEL recorded a pretax write-down of $12.5 million on its investment inHTCL.  The write-down was recorded inconnection with HTCL’s agreement to merge with a major Indiantelecommunications company and an other-than-temporary decline in the fairvalue of HTCL’s common stock.  Inaddition, the Company also recorded a pretax write-down of $1.2 million relatedto an other-than-temporary decline in ALLTEL’s investment in Airspan Networks,Inc., a provider of wireless telecommunications equipment.  These transactions increased net income $0.6million.

 

In 2001, the Company recorded a pretax gain of $347.8million from the sale of 20 PCS licenses to Verizon Wireless and recorded apretax gain of $9.5 million upon the dissolution of a wireless partnership withBellSouth involving properties in four states. Upon dissolution, the partnership assets were distributed to thepartners at fair value resulting in a gain for financial reportingpurposes.  The Company also recordedpretax gains of $3.2 million from the sale of certain investments.  During 2001, the Company prepaid $73.5million of long-term debt prior to its stated maturity date and incurred pretaxtermination fees of $2.9 million in connection with the early retirement ofthat debt.  These transactions increasednet income $212.7 million.

 

**10.****  IncomeTaxes:**

Income tax expense was as follows for the years endedDecember 31:

 

| (Millions)                       |   | 2003   |   | 2002   |   | 2001   |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Current:                         |   |   |   |   |   |   |   |
| Federal                          |   | $      | 251.2  |   | $      | 169.4  |   | $ | 481.4 |   |
| State and other                  |   | 37.1   |   | (2.4   | )      | 58.4   |   |
|                             |   | 288.3  |   | 167.0  |   | 539.8  |   |
| Deferred:                        |   |   |   |   |   |   |   |
| Federal                          |   | 244.3  |   | 288.5  |   | 95.7   |   |
| State and other                  |   | 48.0   |   | 54.7   |   | 17.9   |   |
|                             |   | 292.3  |   | 343.2  |   | 113.6  |   |
| Investment tax  credit amortized |   | — |   | — |   | (0.4   | )      |
|                             |   | $      | 580.6  |   | $      | 510.2  |   | $ | 653.0 |   |

 

Deferred income tax expense for all three yearsprimarily resulted from temporary differences between depreciation expense forincome tax purposes and depreciation expense recorded in the financialstatements.  Deferred income tax expensefor 2003 and 2002 also included the effects of no longer amortizingindefinite-lived intangible assets for financial statement purposes inaccordance with SFAS No. 142, as previously discussed.  These intangible assets continue to beamortized for income tax purposes.

 

F-63

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**10.****  IncomeTaxes, Continued:**

Differences between the federal income tax statutoryrates and effective income tax rates, which include both federal and stateincome taxes, were as follows for the years ended December 31:

 

|                                        |   | 2003   |   | 2002   |   | 2001   |   |
|---------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Statutory  federal income tax rates         |   | 35.0   | %      | 35.0   | %      | 35.0   | %      |
| Increase  (decrease):                       |   |   |   |   |   |   |   |
| State income  taxes, net of federal benefit |   | 3.6    |   | 2.6    |   | 3.4    |   |
| Amortization of  intangibles                |   | — |   | — |   | 1.7    |   |
| Other items, net                            |   | (0.8   | )      | (0.1   | )      | (0.1   | )      |
| Effective income  tax rates                 |   | 37.8   | %      | 37.5   | %      | 40.0   | %      |

 

The significant components of the net deferred incometax liability were as follows at December 31:

 

| (Millions)                              |   | 2003    |    | 2002    |   |
|-----------------------------------------|--------|---------|---------|---------|--------|
| Property, plant  and equipment          |   | $       | 1,006.0 |    | $      | 887.6 |   |
| Goodwill and  other intangibles         |   | 519.3   |    | 513.8   |   |
| Capitalized  software development costs |   | 34.4    |    | 47.1    |   |
| Pension and  other employee benefits    |   | 59.6    |    | 31.3    |   |
| Unrealized  holding gain on investments |   | 46.9    |    | —  |   |
| Partnership  investments                |   | (218.5  | )       | (341.3  | )      |
| Deferred  compensation                  |   | (37.1   | )       | (34.1   | )      |
| Operating loss  carryforwards           |   | (18.7   | )       | (7.0    | )      |
| Other, net                              |   | 12.3    |    | 12.0    |   |
|                                    |   | 1,404.2 |    | 1,109.4 |   |
| Valuation  allowance                    |   | 13.5    |    | 6.0     |   |
| Deferred income  taxes                  |   | $       | 1,417.7 |    | $      | 1,115.4 |   |

 

At December 31, 2003 and 2002, total deferred taxassets were $381.3 million and $448.9 million, respectively, and total deferredtax liabilities were $1,799.0 million and $1,564.3 million, respectively.  As of December 31, 2003 and 2002, theCompany had available tax benefits associated with state operating losscarryforwards of $18.7 million and $7.0 million, respectively, which expireannually in varying amounts to 2022. The valuation allowance primarily represents tax benefits of certainstate operating loss carryforwards and other deferred tax assets, which mayexpire and not be utilized.

 

The Company is subject to ongoing tax examinations andassessments in various jurisdictions. Accordingly, ALLTEL provides for additional tax expense for taxcontingencies.  The Company does notbelieve that the outcome of these examinations will have a material adverseeffect on its consolidated results of operations, cash flows or financialposition.

 

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

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

 

As a result of this transaction, the financialservices division has been reflected as discontinued operations in theCompany’s consolidated statements of income and cash flows for the years endedDecember 31, 2003, 2002 and 2001. Assets and liabilities related to the financial services division havebeen reflected as held for sale in the accompanying consolidated balance sheetas of December 31, 2002.  Thedepreciation of long-lived assets related to the financial services divisionceased as of January 28, 2003, the date of the agreement to sell suchoperations.

 

In January 2003, ALLTEL also completed the terminationof its business venture with Bradford & Bingley Group.  The business venture, ALLTEL MortgageSolutions, Ltd., a majority-owned consolidated subsidiary of ALLTEL, wascreated in

 

F-64

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

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

2000 to provide mortgage administration andinformation technology products in the United Kingdom.  Unfortunately, the business climate in theUnited Kingdom limited the venture’s ability to leverage the business across a broadbase of customers.  As a result, theoperations of ALLTEL Mortgage Solutions, Ltd. have also been reflected asdiscontinued operations and as assets held for sale in the Company’sconsolidated financial statements for all periods presented.

 

The following table includes certain summary incomestatement information related to the financial services operations reflected asdiscontinued operations for the years ended December 31:

 

| (Millions)                                      |   | 2003   |   | 2002   |   | 2001   |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Revenues and  sales                             |   | $      | 210.3  |   | $      | 871.0  |   | $ | 889.8 |   |
| Operating  expenses (a)                         |   | 148.1  |   | 775.1  |   | 773.8  |   |
| Operating income                                |   | 62.2   |   | 95.9   |   | 116.0  |   |
| Minority  interest in consolidated partnerships |   | — |   | 3.5    |   | 3.4    |   |
| Other income  (expense), net (b)                |   | (0.1   | )      | 5.8    |   | 1.4    |   |
| Gain on sale of  discontinued operations        |   | 555.1  |   | — |   | — |   |
| Pretax income  from discontinued operations     |   | 617.2  |   | 105.2  |   | 120.8  |   |
| Income tax  expense                             |   | 256.2  |   | 31.0   |   | 51.3   |   |
| Income from  discontinued operations            |   | $      | 361.0  |   | $      | 74.2   |   | $ | 69.5 |   |

Notes:

(a)   Includedin operating expenses for 2002 was a $42.3 million charge associated with discontinuingthe Company’s business venture with Bradford & Bingley Group.  The charge primarily consisted of thewrite-off of capitalized software development costs that had no alternative useor functionality.  The charge alsoincluded the write-off of unamortized leasehold improvements and other costs tounwind the business venture.

 

(b)   TheCompany had no outstanding indebtedness directly related to the financialservices operations, and accordingly, no interest expense was allocated todiscontinued operations.

 

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

 

| (Millions)                                           |   | 2003  |            | 2002   |   | 2001   |   |
|------------------------------------------------------|--------|-------|-----------------|--------|--------|--------|--------|
| Net cash  provided by (used in) operating activities |   | $     | (231.5          | ) (a)  | $      | 203.9  |   | $ | 195.2 |   |
| Net cash  provided by (used in) investing activities |   | 763.4 |   (b) | (112.0 | )      | (143.3 | )      |
| Net cash  provided by (used in) financing activities |   | (0.1  | )               | (0.6   | )      | 2.8    |   |
| Net cash  provided by discontinued operations        |   | $     | 531.8           |   | $      | 91.3   |   | $ | 54.7 |   |

Notes:

(a)   Included$260.9 million in estimated tax payments related to sale of the financialservices operations.

 

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

 

The following table summarizes the net assets of thediscontinued financial services operations that were classified as held forsale in the accompanying consolidated balance sheet as of December 31, 2002:

 

| (Millions)                                   |   |   |   |
|----------------------------------------------|--------|--------|--------|
| Current assets                               |   | $      | 171.2  |   |
| Property, plant  and equipment               |   | 145.0  |   |
| Goodwill                                     |   | 25.8   |   |
| Other assets                                 |   | 196.3  |   |
| Assets held for  sale                        |   | $      | 538.3  |   |
|                                         |   |   |   |
| Current  liabilities                         |   | $      | 109.9  |   |
| Deferred income  taxes                       |   | 43.0   |   |
| Other  liabilities                           |   | 37.6   |   |
| Liabilities  related to assets held for sale |   | $      | 190.5  |   |

 

F-65

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**12.**  **Other Comprehensive Income (Loss):**

Other comprehensive income (loss) consists ofunrealized holding gains (losses) on investments in equity securities andforeign currency translation adjustments. Other comprehensive income (loss) was as follows for the years endedDecember 31:

 

| (Millions)                                                                             |   | 2003   |   | 2002   |   | 2001   |   |
|----------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Unrealized  holding gains (losses) on investments:                                     |   |   |   |   |   |   |   |
| Unrealized  holding gains (losses) arising in the period                               |   | $      | 120.5  |   | $      | (6.2   | )      | $ | (19.3 | ) |
| Income tax  expense (benefit)                                                          |   | 46.9   |   | (2.3   | )      | (6.5   | )      |
|                                                                                   |   | 73.6   |   | (3.9   | )      | (12.8  | )      |
| Reclassification  adjustments for (gains) losses included in net income for the period |   | — |   | 13.7   |   | (2.4   | )      |
| Income tax  expense (benefit)                                                          |   | — |   | (5.3   | )      | 1.0    |   |
|                                                                                   |   | — |   | 8.4    |   | (1.4   | )      |
| Net unrealized  gains (losses) in the period                                           |   | 120.5  |   | 7.5    |   | (21.7  | )      |
| Income tax  expense (benefit)                                                          |   | 46.9   |   | 3.0    |   | (7.5   | )      |
|                                                                                   |   | 73.6   |   | 4.5    |   | (14.2  | )      |
| Foreign currency  translation adjustment:                                              |   |   |   |   |   |   |   |
| Translation  adjustment for the period                                                 |   | 0.8    |   | 3.0    |   | (5.4   | )      |
| Reclassification  adjustments for losses included in net income for the period         |   | 6.7    |   | — |   | — |   |
|                                                                                   |   | 7.5    |   | 3.0    |   | (5.4   | )      |
| Other  comprehensive income (loss) before tax                                          |   | 128.0  |   | 10.5   |   | (27.1  | )      |
| Income tax  expense (benefit)                                                          |   | 46.9   |   | 3.0    |   | (7.5   | )      |
| Other  comprehensive income (loss)                                                     |   | $      | 81.1   |   | $      | 7.5    |   | $ | (19.6 | ) |

 

**13.****  Commitmentsand Contingencies:**

Litigation– The Company is party to various legal proceedings arising from the ordinarycourse of business.  Although theultimate resolution of these various proceedings cannot be determined at thistime, management of the Company does not believe that such proceedings,individually or in the aggregate, will have a material adverse effect on thefuture consolidated results of operations, cash flows or financial condition ofthe Company.

 

Guarantees– Effective January 1, 2003, ALLTEL adopted the recognition and measurementprovisions of FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others,” for all arrangements entered into on or after thatdate.  The Company currently has outstandingvarious indemnifications related either to the sale of the financial servicesdivision to Fidelity National or the sale of certain assets and relatedliabilities of the telecommunications information services operations toConvergys (See Notes 9 and 11.)

 

In conjunction with the sale of the financial servicesdivision, ALLTEL agreed to indemnify Fidelity National for any damagesresulting from ALLTEL’s breach of warranty or non-fulfillment of certaincovenants under the sales agreement, that exceed 1.5 percent of the purchaseprice, or $15.75 million, up to a maximum of 15 percent of the purchase price,or $157.5 million.  The Companybelieves, because of the low probability of being required to pay any amount underthis indemnification, the fair value of this obligation is immaterial to theconsolidated results of operations, cash flows and financial condition of theCompany.  Accordingly, the Company hasnot recorded a liability related to it. ALLTEL also agreed to indemnify Fidelity National from any future taxliability imposed on the financial services division related to periods priorto the date of sale.  ALLTEL’sobligation to Fidelity National under this indemnification is not subject to amaximum amount.  The Company hasrecorded a liability for tax contingencies of approximately $34.0 millionrelated to the operations of the financial services division for periods priorto the date of sale that management has assessed as probable and estimable,which should adequately cover any obligation under this indemnification.

 

In connection with the sale of assets to Convergys,ALLTEL agreed to indemnify Convergys for any damages resulting from ALLTEL’sbreach of warranty under the sales agreement that exceed $500,000, up to amaximum of $10.0 million.  In addition,the Company agreed to indemnify Convergys for any damages resulting fromnon-fulfillment of certain covenants or liabilities arising from the ownership,operation or use of the assets included in the sale.  This indemnification is not subject to a maximum obligation.  The Company believes because of the lowprobability of being required to pay any amount under these indemnifications,the fair value of these obligations is immaterial to the consolidated resultsof operations, cash flows and financial condition of the Company.  Accordingly, the Company has not recorded aliability related to these indemnifications.

 

F-66

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**13.****  Commitmentsand Contingencies, Continued:**

Lease Commitments– Minimum rental commitments for all non-cancelable operating leases,consisting principally of leases for cell site tower space, network facilities,real estate, office space, and office equipment were as follows as of December31, 2003:

 

| Year       |   | (Millions) |   |
|------------|--------|------------|--------|
| 2004       |   | $          | 97.6   |   |
| 2005       |   | 78.8       |   |
| 2006       |   | 58.8       |   |
| 2007       |   | 41.2       |   |
| 2008       |   | 27.4       |   |
| Thereafter |   | 81.4       |   |
| Total      |   | $          | 385.2  |   |

 

Rental expense totaled $139.3 million in 2003, $115.7million in 2002 and $98.3 million in 2001.

 

**14.**  **Agreement to Lease Cell Site Towers:**

In December 2000, ALLTEL signed a definitive agreementwith American Tower Corporation (“American Tower”) to lease to American Towercertain of the Company’s cell site towers in exchange for cash paid inadvance.  Under terms of thefifteen-year lease agreement, American Tower will manage, maintain and remarketthe remaining space on the towers, while ALLTEL will continue to own the cellsite facilities.  ALLTEL is obligated topay American Tower a monthly fee for management and maintenance services forthe duration of the agreement amounting to $1,200 per tower per month, subjectto escalation not to exceed five percent annually.  American Tower has the option to purchase the towers foradditional consideration at the end of the lease term.  Upon completion of this transaction, theCompany had leased 1,773 cell site towers to American Tower and receivedproceeds of $531.9 million.  Proceeds fromthis leasing transaction were recorded by ALLTEL as deferred rental income andare recognized as service revenues on a straight-line basis over thefifteen-year lease term.  Deferredrental income was as follows at December 31:

 

| (Millions)                                                                     |   | 2003  |   | 2002   |   |
|--------------------------------------------------------------------------------|--------|-------|--------|--------|--------|
| Deferred rental  income – current (included in other current liabilities) |   | $     | 35.3   |   | $      | 35.3 |   |
| Deferred rental  income – long-term (included in other liabilities)       |   | 411.2 |   | 446.6  |   |
| Total deferred  rental income                                                  |   | $     | 446.5  |   | $      | 481.9 |   |

 

**15.**  **Business Segments:**

ALLTEL disaggregates its business operations basedupon differences in products and services. Wireless operations include cellular, PCS and paging services and areprovided in 23 states.  The Company’swireline subsidiaries provide local service and network access in 15states.  Wireline operations alsoinclude ALLTEL’s local competitive access and Internet access operations.  Local competitive access services arecurrently provided in select markets. Communications support services consist of the Company’s long-distance,network management, product distribution, telecommunications informationservices and directory publishing operations. Long-distance and Internet access services are currently marketed in 24and 17 states, respectively. Telecommunications information services provide application software,data processing and outsourcing services to telecommunications companies in theUnited States and select international markets.  Corporate items include general corporate expenses, headquartersfacilities and equipment, investments, and other items not allocated to thesegments.

 

The accounting policies used in measuring segmentassets and operating results are the same as those described in Note 1. TheCompany accounts for intercompany sales at current market prices or inaccordance with regulatory requirements. The Company evaluates performance of the segments based on segmentincome, which is computed as revenues and sales less operating expenses,excluding the effects of the integration expenses and other charges discussedin Note 8.  These items are notallocated to the segments and are included in corporate operations.  In addition, none of the non-operating itemssuch as equity earnings in unconsolidated partnerships, minority interestexpense, other income (expense), net, gain on disposal of assets, write-down ofinvestments, debt prepayment penalties, interest expense and income taxes havebeen allocated to the segments.

 

F-67

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**15.****  BusinessSegments, Continued:**

(Millions)

|                                             |   | For the year ended  December 31, 2003 |          |
|--------------------------------------------------|--------|---------------------------------------|---------------|
|                                             |   | Wireless                              |          | Wireline |   | Communications  Support  Services |   | Total  Segments |   |
| Revenues and  sales from unaffiliated customers: |   |                                  |          |   |   |   |   |   |   |
| Domestic                                         |   | $                                     |  4,728.4 |   | $ |  2,286.9 |   | $ |  614.4 |   | 7,629.7 |   |
| International                                    |   | —                                |          | — |   | 4.4 |   | 4.4 |   |
|                                             |   | 4,728.4                               |          | 2,286.9 |   | 618.8 |   | 7,634.1 |   |
| Intercompany  revenues and sales                 |   | —                                |          | 149.2 |   | 340.2 |   | 489.4 |   |
| Total revenues  and sales                        |   | 4,728.4                               |          | 2,436.1 |   | 959.0 |   | 8,123.5 |   |
| Operating  expenses                              |   | 3,059.4                               |          | 1,025.7 |   | 846.4 |   | 4,931.5 |   |
| Depreciation and  amortization                   |   | 671.0                                 |          | 526.5 |   | 36.2 |   | 1,233.7 |   |
| Total costs and  expenses                        |   | 3,730.4                               |          | 1,552.2 |   | 882.6 |   | 6,165.2 |   |
| Segment income                                   |   | $                                     |  998.0   |   | $ |  883.9 |   | $ |  76.4 |   | $ |  1,958.3 |   |
| Assets                                           |   | $                                     |  9,673.9 |   | $ |  5,212.9 |   | $ |  518.6 |   | $ |  15,405.4 |   |
| Investments in  unconsolidated partnerships      |   | $                                     |  281.9   |   | $ |  — |   | $ |  — |   | $ |  281.9 |   |
| Capital  expenditures                            |   | $                                     |  739.4   |   | $ |  378.6 |   | $ |  19.0 |   | $ |  1,137.0 |   |

 

|                                             |   | For the year ended  December 31, 2002 |          |
|--------------------------------------------------|--------|---------------------------------------|---------------|
|                                             |   | Wireless                              |          | Wireline |   | Communications  Support  Services |   | Total  Segments |   |
| Revenues and  sales from unaffiliated customers: |   |                                  |          |   |   |   |   |   |   |
| Domestic                                         |   | $                                     |  4,160.2 |   | $ |  2,027.2 |   | $ | 548.4 |   | $ |  6,735.8 |   |
| International                                    |   | —                                |          | — |   | 3.8 |   | 3.8 |   |
|                                             |   | 4,160.2                               |          | 2,027.2 |   | 552.2 |   | 6,739.6 |   |
| Intercompany  revenues and sales                 |   | —                                |          | 152.5 |   | 373.5 |   | 526.0 |   |
| Total revenues  and sales                        |   | 4,160.2                               |          | 2,179.7 |   | 925.7 |   | 7,265.6 |   |
| Operating  expenses                              |   | 2,634.7                               |          | 921.1 |   | 803.7 |   | 4,359.5 |   |
| Depreciation and  amortization                   |   | 577.6                                 |          | 465.6 |   | 37.8 |   | 1,081.0 |   |
| Total costs and  expenses                        |   | 3,212.3                               |          | 1,386.7 |   | 841.5 |   | 5,440.5 |   |
| Segment income                                   |   | $                                     |  947.9   |   | $ |  793.0 |   | $ | 84.2 |   | $ |  1,825.1 |   |
| Assets                                           |   | $                                     |  9,418.7 |   | $ |  5,340.4 |   | $ | 535.6 |   | $ |  15,294.7 |   |
| Investments in  unconsolidated partnerships      |   | $                                     |  273.5   |   | $ |  — |   | $ | — |   | $ |  273.5 |   |
| Capital  expenditures                            |   | $                                     |  717.1   |   | $ |  399.6 |   | $ | 32.9 |   | $ |  1,149.6 |   |

 

|                                             |   | For the year ended  December 31, 2001 |          |
|--------------------------------------------------|--------|---------------------------------------|---------------|
|                                             |   | Wireless                              |          | Wireline |   | Communications  Support  Services |   | Total  Segments |   |
| Revenues and  sales from unaffiliated customers: |   |                                  |          |   |   |   |   |   |   |
| Domestic                                         |   | $                                     |  3,832.0 |   | $ |  1,824.9 |   | $ | 642.5 |   | $ |  6,299.4 |   |
| International                                    |   | —                                |          | — |   | 6.0 |   | 6.0 |   |
|                                             |   | 3,832.0                               |          | 1,824.9 |   | 648.5 |   | 6,305.4 |   |
| Intercompany  revenues and sales                 |   | —                                |          | 140.0 |   | 320.7 |   | 460.7 |   |
| Total revenues  and sales                        |   | 3,832.0                               |          | 1,964.9 |   | 969.2 |   | 6,766.1 |   |
| Operating  expenses                              |   | 2,385.3                               |          | 820.2 |   | 833.3 |   | 4,038.8 |   |
| Depreciation and  amortization                   |   | 619.0                                 |          | 412.0 |   | 30.8 |   | 1,061.8 |   |
| Total costs and  expenses                        |   | 3,004.3                               |          | 1,232.2 |   | 864.1 |   | 5,100.6 |   |
| Segment income                                   |   | $                                     |   827.7  |   | $ |  732.7 |   | $ | 105.1 |   | $ |  1,665.5 |   |
| Assets                                           |   | $                                     |  7,335.7 |   | $ |  3,367.6 |   | $ | 826.2 |   | $ |  11,529.5 |   |
| Investments in  unconsolidated partnerships      |   | $                                     |  173.3   |   | $ |  — |   | $ | — |   | $ |  173.3 |   |
| Capital  expenditures                            |   | $                                     |  721.4   |   | $ |  390.3 |   | $ | 37.1 |   | $ |  1,148.8 |   |

 

F-68

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**15.****  Business Segments, Continued:**

A reconciliation of the total business segments to theapplicable amounts in the Company’s consolidated financial statements was asfollows as of and for the years ended December 31:

 

| (Millions)                                                       |   | 2003    |     | 2002   |   | 2001     |   |
|------------------------------------------------------------------|--------|---------|----------|--------|--------|----------|--------|
| Revenues and  sales:                                             |   |    |     |   |   |     |   |
| Total business  segments                                         |   | $       | 8,123.5  |   | $      | 7,265.6  |   | $ | 6,766.1 |   |
| Less:  intercompany eliminations (1)                             |   | (143.6  | )        | (153.2 | )      | (150.3   | )      |
| Total revenues  and sales                                        |   | $       | 7,979.9  |   | $      | 7,112.4  |   | $ | 6,615.8 |   |
|                                                             |   |    |     |   |   |     |   |
| Income from  continuing operations before income taxes:          |   |    |     |   |   |     |   |
| Total business  segment income                                   |   | $       | 1,958.3  |   | $      | 1,825.1  |   | $ | 1,665.5 |   |
| Corporate  operations                                            |   | (41.3   | )        | (35.5  | )      | (40.5    | )      |
| Integration  expenses and other charges                          |   | (19.0   | )        | (69.9  | )      | (76.3    | )      |
| Equity earnings  in unconsolidated partnerships                  |   | 64.4    |     | 65.8   |   | 56.9     |   |
| Minority  interest expense in consolidated partnerships          |   | (78.6   | )        | (73.4  | )      | (75.2    | )      |
| Other income,  net                                               |   | 11.0    |     | 2.3    |   | 4.2      |   |
| Interest expense                                                 |   | (378.6  | )        | (355.1 | )      | (261.2   | )      |
| Gain on disposal  of assets, write-down of investments and other |   | 17.9    |     | 1.0    |   | 357.6    |   |
| Total income  from continuing operations before income taxes     |   | $       | 1,534.1  |   | $      | 1,360.3  |   | $ | 1,631.0 |   |
|                                                             |   |    |     |   |   |     |   |
| Depreciation and  amortization expense:                          |   |    |     |   |   |     |   |
| Total business  segments                                         |   | $       | 1,233.7  |   | $      | 1,081.0  |   | $ | 1,061.8 |   |
| Corporate  operations                                            |   | 14.0    |     | 14.5   |   | 20.2     |   |
| Total  depreciation and amortization expense                     |   | $       | 1,247.7  |   | $      | 1,095.5  |   | $ | 1,082.0 |   |
|                                                             |   |    |     |   |   |     |   |
| Assets:                                                          |   |    |     |   |   |     |   |
| Total business  segments                                         |   | $       | 15,405.4 |   | $      | 15,294.7 |   | $ | 11,529.5 |   |
| Corporate assets  (2)                                            |   | 1,319.3 |     | 458.2  |   | 463.2    |   |
| Assets held for  sale                                            |   | —  |     | 538.3  |   | 565.2    |   |
| Less:  elimination of intercompany receivables                   |   | (63.6   | )        | (46.6  | )      | (57.2    | )      |
| Total assets                                                     |   | $       | 16,661.1 |   | $      | 16,244.6 |   | $ | 12,500.7 |   |
|                                                             |   |    |     |   |   |     |   |
| Capital  expenditures:                                           |   |    |     |   |   |     |   |
| Total business  segments                                         |   | $       | 1,137.0  |   | $      | 1,149.6  |   | $ | 1,148.8 |   |
| Corporate  operations                                            |   | 0.7     |     | 5.2    |   | 21.3     |   |
| Total capital  expenditures                                      |   | $       | 1,137.7  |   | $      | 1,154.8  |   | $ | 1,170.1 |   |

 

Notes:

(1)   See “Transactions with CertainAffiliates” in Note 1 for a discussion of intercompany revenues and sales noteliminated in preparing the consolidated financial statements.

 

(2)   Corporate assets consist ofcash and short-term investments, fixed assets, investments in equity securitiesand other assets not allocated to the segments.

 

F-69

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**15.****  Business Segments, Continued:**

Supplemental information pertaining to theCommunications Support Services segment was as follows for the years endedDecember 31:

 

| (Millions)                                                |   | 2003   |   | 2002   |   | 2001   |   |
|-----------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Revenues and  sales from unaffiliated customers:          |   |   |   |   |   |   |   |
| Product  distribution                                     |   | $      | 275.1  |   | $      | 215.2  |   | $ | 224.1 |   |
| Long-distance  and network management services            |   | 198.7  |   | 179.0  |   | 210.4  |   |
| Directory  publishing                                     |   | 36.1   |   | 38.9   |   | 68.6   |   |
| Telecommunications  information services                  |   | 108.9  |   | 119.1  |   | 145.4  |   |
|                                                      |   | $      | 618.8  |   | $      | 552.2  |   | $ | 648.5 |   |
| Intercompany  revenues and sales:                         |   |   |   |   |   |   |   |
| Product  distribution                                     |   | $      | 132.3  |   | $      | 156.1  |   | $ | 143.6 |   |
| Long-distance  and network management services            |   | 121.4  |   | 137.2  |   | 99.5   |   |
| Directory  publishing                                     |   | 86.5   |   | 80.2   |   | 77.6   |   |
| Telecommunications  information services                  |   | — |   | — |   | — |   |
|                                                      |   | $      | 340.2  |   | $      | 373.5  |   | $ | 320.7 |   |
| Total revenues  and sales:                                |   |   |   |   |   |   |   |
| Product  distribution                                     |   | $      | 407.4  |   | $      | 371.3  |   | $ | 367.7 |   |
| Long-distance  and network management services            |   | 320.1  |   | 316.2  |   | 309.9  |   |
| Directory  publishing                                     |   | 122.6  |   | 119.1  |   | 146.2  |   |
| Telecommunications  information services                  |   | 108.9  |   | 119.1  |   | 145.4  |   |
| Total  communications support services revenues and sales |   | $      | 959.0  |   | $      | 925.7  |   | $ | 969.2 |   |

 

**16.****  Quarterly Financial Information- (Unaudited):**

 

|                                                  |   | For the year ended  December 31, 2003 |    |
|-------------------------------------------------------|--------|---------------------------------------|---------|
| (Millions,  except per share amounts)                 |   | Total                                 |    | 4th |   | 3rd |   | 2nd |   | 1st |   |
| Revenues and  sales                                   |   | $                                     | 7,979.9 |   | $ | 2,013.7 |   | $ | 2,050.2 |   | $ | 2,010.2 |   | $ | 1,905.8 |   |
| Operating income                                      |   | $                                     | 1,898.0 |   | $ | 474.1 |   | $ | 486.7 |   | $ | 471.1 |   | $ | 466.1 |   |
| Income from  continuing operations                    |   | $                                     | 953.5   |   | $ | 258.9 |   | $ | 242.8 |   | $ | 224.2 |   | $ | 227.6 |   |
| Discontinued  operations                              |   | 361.0                                 |    | — |   | — |   | 323.9 |   | 37.1 |   |
| Income before  cumulative effect of accounting change |   | $                                     | 1,314.5 |   | $ | 258.9 |   | $ | 242.8 |   | $ | 548.1 |   | $ | 264.7 |   |
| Cumulative  effect of accounting change               |   | 15.6                                  |    | — |   | — |   | — |   | 15.6 |   |
| Net income                                            |   | $                                     | 1,330.1 |   | $ | 258.9 |   | $ | 242.8 |   | $ | 548.1 |   | $ | 280.3 |   |
| Preferred  dividends                                  |   | 0.1                                   |    | — |   | — |   | 0.1 |   | — |   |
| Net income  applicable to common shares               |   | $                                     | 1,330.0 |   | $ | 258.9 |   | $ | 242.8 |   | $ | 548.0 |   | $ | 280.3 |   |
| Basic earnings  per share:                            |   |                                  |    |   |   |   |   |   |   |   |   |
| Income from  continuing operations                    |   | $                                     | 3.06    |   | $ | .83 |   | $ | .78 |   | $ | .72 |   | $ | .73 |   |
| Income from  discontinued operations                  |   | 1.16                                  |    | — |   | — |   | 1.04 |   | .12 |   |
| Cumulative  effect of accounting change               |   | .05                                   |    | — |   | — |   | — |   | .05 |   |
| Net income                                            |   | $                                     | 4.27    |   | $ | .83 |   | $ | .78 |   | $ | 1.76 |   | $ | .90 |   |
| Diluted earnings  per share:                          |   |                                  |    |   |   |   |   |   |   |   |   |
| Income from  continuing operations                    |   | $                                     | 3.05    |   | $ | .83 |   | $ | .78 |   | $ | .72 |   | $ | .73 |   |
| Income from  discontinued operations                  |   | 1.15                                  |    | — |   | — |   | 1.03 |   | .12 |   |
| Cumulative  effect of accounting change               |   | .05                                   |    | — |   | — |   | — |   | .05 |   |
| Net income                                            |   | $                                     | 4.25    |   | $ | .83 |   | $ | .78 |   | $ | 1.75 |   | $ | .90 |   |

 

F-70

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**16.****  Quarterly Financial Information- (Unaudited), Continued:**

 

|                                                  |   | For the year ended  December 31, 2002 |    |
|-------------------------------------------------------|--------|---------------------------------------|---------|
| (Millions,  except per share amounts)                 |   | Total                                 |    | 4th |   | 3rd |   | 2nd |   | 1st |   |
| Revenues and  sales                                   |   | $                                     | 7,112.4 |   | $ | 1,922.8 |   | $ | 1,867.7 |   | $ | 1,699.0 |   | $ | 1,622.9 |   |
| Operating income                                      |   | $                                     | 1,719.7 |   | $ | 484.9 |   | $ | 458.9 |   | $ | 398.0 |   | $ | 377.9 |   |
| Income from  continuing operations                    |   | $                                     | 850.1   |   | $ | 245.4 |   | $ | 217.8 |   | $ | 192.0 |   | $ | 194.9 |   |
| Discontinued  operations                              |   | 74.2                                  |    | 11.2 |   | 19.9 |   | 24.2 |   | 18.9 |   |
| Income before  cumulative effect of accounting change |   | $                                     | 924.3   |   | $ | 256.6 |   | $ | 237.7 |   | $ | 216.2 |   | $ | 213.8 |   |
| Cumulative  effect of accounting change               |   | —                                |    | — |   | — |   | — |   | — |   |
| Net income                                            |   | $                                     | 924.3   |   | $ | 256.6 |   | $ | 237.7 |   | $ | 216.2 |   | $ | 213.8 |   |
| Preferred  dividends                                  |   | 0.1                                   |    | — |   | — |   | 0.1 |   | — |   |
| Net income  applicable to common shares               |   | $                                     | 924.2   |   | $ | 256.6 |   | $ | 237.7 |   | $ | 216.1 |   | $ | 213.8 |   |
| Basic earnings  per share:                            |   |                                  |    |   |   |   |   |   |   |   |   |
| Income from  continuing operations                    |   | $                                     | 2.73    |   | $ | .79 |   | $ | .70 |   | $ | .62 |   | $ | .63 |   |
| Income from  discontinued operations                  |   | .24                                   |    | .03 |   | .06 |   | .08 |   | .06 |   |
| Cumulative  effect of accounting change               |   | —                                |    | — |   | — |   | — |   | — |   |
| Net income                                            |   | $                                     | 2.97    |   | $ | .82 |   | $ | .76 |   | $ | .70 |   | $ | .69 |   |
| Diluted earnings  per share:                          |   |                                  |    |   |   |   |   |   |   |   |   |
| Income from  continuing operations                    |   | $                                     | 2.72    |   | $ | .79 |   | $ | .70 |   | $ | .61 |   | $ | .62 |   |
| Income from  discontinued operations                  |   | .24                                   |    | .03 |   | .06 |   | .08 |   | .06 |   |
| Cumulative  effect of accounting change               |   | —                                |    | — |   | — |   | — |   | — |   |
| Net income                                            |   | $                                     | 2.96    |   | $ | .82 |   | $ | .76 |   | $ | .69 |   | $ | .68 |   |

 

Notes to QuarterlyFinancial Information:

A.    In the fourth quarter of 2003,the Company recorded a pretax gain of $31.0 million from the sale of certainassets and related liabilities, including customer contracts and capitalizedsoftware development costs, associated with the Company’s telecommunicationsinformation services operations.  Thistransaction increased net income $18.9 million or $.06 per share. (See Note 9.)

 

B.    In the second quarter of 2003,the Company recorded a restructuring charge of $8.5 million related to aplanned workforce reduction, primarily resulting from the closing of certaincall center locations, and recorded a $2.7 million reduction in the liabilitiesassociated with various restructuring activities initiated prior to 2003.  The Company also wrote off $13.2 million ofcertain capitalized software development costs that had no alternative futureuse or functionality.  (See Note8.)  In the second quarter of 2003,ALLTEL also recorded pretax write-downs totaling $6.0 million to reflectother-than-temporary declines in the fair value of certain investments inunconsolidated limited partnerships.  Inaddition, the Company incurred pretax termination fees of $7.1 million relatedto the early retirement of long-term debt. These transactions decreased net income $19.8 million or $.06 per share.(See Note 9.)

 

C.    Effective January 1, 2003,ALLTEL adopted the measurement and recognition provisions of SFAS No. 143 inaccounting for asset retirement obligations. The cumulative effect of this accounting change resulted in a one-timenon-cash credit of $15.6 million, net of income tax expense of $10.3 million,or $.05 per share. (See Note 2.)

 

D.    In the fourth quarter of 2002,ALLTEL recorded a $2.5 million reduction in the liabilities associated with therestructuring of its CLEC operations initiated during the first quarter of2002, as discussed below. (See Note 8.) ALLTEL also recorded a pretax gain of $22.1 million realized from thesale of a wireless property, partially offset by a $2.6 million write-down inthe carrying value of an investment. (See Note 9.)  These transactions increased net income $13.5 million or $.04 pershare.

 

E.     In the third quarter of 2002,the Company incurred pretax charges of $16.4 million related to itsacquisitions of wireline properties in Kentucky from Verizon and wirelessproperties from CenturyTel.  The Companyalso recorded a restructuring charge of $4.1 million related to a plannedworkforce reduction and the closing of seven product distribution centers.  These charges decreased net income $12.4million or $.04 per share. (See Note 8.) ALLTEL also recorded a pretax adjustment of $4.8 million to reduce thegain recognized from the dissolution of a wireless partnership withBellSouth.  This gain was initiallyrecorded in 2001.  This adjustmentdecreased net income $2.9 million or $.01 per share. (See Note 9.)

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

_____

 

**16.****  Quarterly Financial Information- (Unaudited), Continued:**

 

Notes to QuarterlyFinancial Information**,**Continued:

 

F.     In the second quarter of2002, the Company incurred pretax charges of $9.0 million related to itspending acquisitions of wireline properties in Kentucky from Verizon andwireless properties from CenturyTel. These charges decreased net income $5.4 million or $.02 per share. (SeeNote 8.)  ALLTEL also recorded pretax write-downsof $13.7 million to reflect other-than-temporary declines in the fair values oftwo equity security investments.  Thewrite-downs decreased net income $8.4 million or $.03 per share. (See Note 9.)

 

G.    In the first quarter of 2002,the Company recorded pretax charges of $32.4 million in connection with therestructuring of its CLEC, call center and retail store operations.  The Company also recorded pretax write-downsof $7.1 million in the carrying value of certain cell site equipment to fairvalue as part of a product replacement program initiated by a vendor in2001.  In addition, the Company incurredpretax charges of $3.4 million related to its pending acquisition of wirelineproperties in Kentucky from Verizon. These charges decreased net income $26.1 million or $.08 per share. (SeeNote 8.)

 

H.    In the opinion of management,all adjustments necessary for a fair presentation of results for each periodhave been included.

 

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