7

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

2. Accounting Changes, Continued:

					Three Months Ended				Nine Months Ended
					September 30, 2001				September 30, 2001
Effects on basic earnings per share:
Basic earnings per share before cumulative effect of
accounting change as reported						$.71				$2.62
Goodwill amortization						.07				.18
Cellular licenses amortization						.01				.03
PCS licenses amortization						-				-
Franchise rights amortization						-				.01
Basic earnings per share before cumulative effect of
accounting change as adjusted						.79				2.84
Cumulative effect of accounting change						-				.06
Basic earnings per share as adjusted						$.79				$2.90
Effects on diluted earnings per share:
Diluted earnings per share before cumulative effect of
accounting change as reported						$.71				$2.60
Goodwill amortization						.07				.18
Cellular licenses amortization						.01				.03
PCS licenses amortization						-				-
Franchise rights amortization						-				-
Diluted earnings per share before cumulative effect of
accounting change as adjusted						.79				2.81
Cumulative effect of accounting change						-				.06
Diluted earnings per share as adjusted						$.79				$2.87

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

Under the method previously followed by the subsidiary's plan, only unrecognized actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation or market-related value of plan assets were amortized over the average remaining service life of active plan participants. ALLTEL believes the changes in computing the market-related value of plan assets and accelerating the amortization periods are preferable because these changes result in more timely recognition of actuarial gains and losses in computing annual pension cost related to the subsidiary's pension plan, and achieve consistency with the ALLTEL Plan. Effective January 1, 2002, the subsidiary's plan was merged into the ALLTEL Plan. The cumulative effect of retroactively applying these changes to periods prior to 2001 resulted in a one-time non-cash credit of $19.5 million, net of income tax expense of $13.0 million, and is included in net income for the nine months ended September 30, 2001.

8

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

3. Acquisitions:

On August 1, 2002, ALLTEL purchased substantially all of the wireless assets owned by CenturyTel, Inc. ("CenturyTel") for approximately $1.57 billion in cash. In this transaction, ALLTEL added approximately 762,000 wireless customers, minority partnership interests in cellular operations of approximately 1.8 million proportionate POPs, or potential customers, and PCS licenses covering 1.3 million POPs in Wisconsin and Iowa. The accompanying consolidated financial statements include the accounts and results of operations of the acquired wireless properties from the date of acquisition. During the third quarter of 2002, the Company completed the initial purchase price allocation of this acquisition based upon the appraised fair values of the property, plant and equipment and identifiable intangible assets acquired. The Company is also completing a review of the fair values of the other assets acquired and liabilities assumed. Accordingly, the purchase pric e allocation is subject to adjustment based upon completion of this review and the final determination of fair values. The excess of the aggregate purchase price over the fair market value of the tangible net assets acquired of $1.34 billion was assigned to customer list, cellular licenses and goodwill. The customer list recorded in connection with this transaction is being amortized on a straight-line basis over its estimated useful life of six years. The cellular licenses are classified as indefinite-lived intangible assets and are not subject to amortization. Of the total amount assigned to goodwill, approximately $700 million is expected to be deductible for income tax purposes.

On August 1, 2002, ALLTEL also completed the purchase of local telephone properties in the state of Kentucky from Verizon Communications, Inc. ("Verizon") for approximately $1.93 billion in cash. In this transaction, ALLTEL added approximately 589,000 wireline customers. The accompanying consolidated financial statements include the accounts and results of operations of the acquired wireline properties from the date of acquisition. The excess of the aggregate purchase price over the fair market value of the tangible net assets acquired of approximately $1.3 billion has been initially allocated to goodwill. The fair values and useful lives of the assets acquired have been estimated based on a preliminary valuation pending completion of a third party appraisal and other fair value analyses of assets and liabilities.

The purchase price paid in each of the transactions discussed above was based on estimates of future cash flows of the properties acquired. The purchase of wireless properties from CenturyTel expanded the Company's wireless footprint into new markets across Arkansas, Louisiana, Michigan, Mississippi, Texas and Wisconsin. Similarly, the wireline properties acquired from Verizon overlap ALLTEL's existing wireless service in northeastern Kentucky. ALLTEL paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired for a number of reasons, including but not limited to the following: First, the scale and scope of ALLTEL's entire communications business was enhanced by the addition of the combined 1,351,000 geographically clustered communications customers. As a result, fixed operations cost will be spread over a larger base and very little incremental overhead will be added. Second, in the wireless propert ies acquired from CenturyTel, ALLTEL should realize over time accelerated customer growth and higher average revenue per customer as a result of the Company's higher revenue national rate plans. Finally, the wireline operations in Kentucky generated a lower operating margin than ALLTEL's wireline business primarily due to cost structure differences. ALLTEL believes, over time, that the Company can improve the margins in the newly acquired Kentucky operations to be more in line with the margins in its existing wireline operations.

During 2002, ALLTEL also purchased a wireline property in Georgia, acquired additional ownership interests in wireless properties in Arkansas, Louisiana and Texas and purchased two privately held companies serving the financial services industry. In connection with these acquisitions, the Company paid $45.4 million in cash and assigned the excess of the aggregate purchase price over the fair market value of the tangible net assets acquired of $40.2 million to goodwill.

9

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

3. Acquisitions, Continued:

The following table summarizes the assets acquired and liabilities assumed for the various business combinations completed during 2002:

(Millions)		Acquired from												Combined
			CenturyTel			Verizon				Other						Totals
Fair value of assets acquired:
	Current assets		$      64.1			$      39.1				$   1.9						$    105.1
	Investments		73.8			-				0.1						73.9
	Property, plant and equipment		192.9			603.4				11.3						807.6
	Other assets		0.4			-				3.0						3.4
	Goodwill		1,040.1			1,338.1				40.2						2,418.4
	Cellular licenses		214.0			-				-						214.0
	Customer lists		89.0			-				-						89.0
	Total assets acquired		1,674.3				1,980.6				56.5					3,711.4
Liabilities assumed:
	Current liabilities		(35.8	)		(44.4		)		(2.0		)				(82.2	)
	Other liabilities		(70.2	)		(9.0		)		-						(79.2	)
	Long-term debt		-			-					(9.1	)				(9.1	)
	Total liabilities assumed		(106.0	)		(53.4		)		(11.1		)				(170.5	)
Net cash paid			$ 1,568.3			$ 1,927.2				$ 45.4						$ 3,540.9

The following unaudited pro forma consolidated results of operations of the Company for the three and nine months ended September 30, 2002 and 2001 assume that the acquisition of wireless properties from CenturyTel and the purchase of wireline properties from Verizon were completed as of January 1, 2001:

		Three Months Ended					Nine Months Ended
(Millions, except per share amounts)		2002			2001		2002			2001
Revenues and sales		$2,151.9			$2,094.2		$6,330.1			$6,255.5
Income before cumulative effect of accounting change		$   262.1			$   241.8		$   745.9			$   870.3
Combined earnings per share before cumulative effect
of accounting change:
Basic earnings per share		$.84			$.78		$2.40			$2.79
Diluted earnings per share		$.84			$.77		$2.39			$2.77
Net income		$   262.1			$   241.8		$   745.9			$   889.8
Combined earnings per share:
Basic earnings per share		$.84			$.78		$2.40			$2.85
Diluted earnings per share		$.84			$.77		$2.39			$2.83

The pro forma amounts represent the historical operating results of the properties acquired from Verizon and CenturyTel with appropriate adjustments that give effect to depreciation and amortization and interest expense. The pro forma amounts for the three and nine months ended September 30, 2002 and 2001 include the effects of non-acquisition-related special charges and unusual items, as more fully discussed in Notes 4 and 5 below. The pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Verizon and CenturyTel properties had been operated by ALLTEL during the periods presented. In addition, the pro forma amounts do not reflect potential cost savings related to full network optimization and the redundant effect of selling and general and administrative expenses.

10

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

4. Integration Expenses and Other Charges:

A summary of the integration expenses and other charges recorded was as follows for the three and nine month periods ended September 30:

		Three Months Ended								Nine Months Ended
(Dollars in millions)		2002				2001				2002				2001
Severance and employee benefit costs		$  3.3				$  5.5				$16.7				$62.0
Lease and contract termination costs		2.2				0.4				14.6				6.1
Computer system conversion and other integration costs		8.6				- -				21.0				- -
Branding and signage costs		7.8				- -				7.8				- -
Write-down of cell site equipment		- -				9.5				7.1				9.5
Write-down of software development costs		- -				- -				4.4				8.9
Equipment removal and other disposal costs		- -				- -				2.2				- -
	Total integration expenses and other charges	$21.9				$15.4				$73.8				$86.5
Number of employees terminated		212				216				1,122				1,633
Number of lease sites terminated		7				2				38				60

During the third quarter of 2002, the Company recorded a restructuring charge of $5.5 million consisting of severance and employee benefit costs related to a planned workforce reduction and lease termination costs primarily related to the closing of seven product distribution centers. The lease termination costs consisted of $1.2 million, primarily representing the estimated minimum contractual commitments over the ensuing one to four years for operating locations that the Company abandoned, net of anticipated sublease income. The lease termination costs also included an additional $1.0 million to reflect the revised estimated costs, net of anticipated sublease income, to terminate leases associated with four operating locations. ALLTEL had previously recorded $9.1 million in lease termination costs related to these four locations ($2.8 million during the first quarter of 2002 and $6.3 million in 1999), as further discussed below. The additional charge reflected a further reduction in expe cted sublease income attributable primarily to softening in the commercial real estate market. The restructuring plan, completed in September 2002, provided for the elimination of 212 employees primarily in the Company's information services and product distribution operations. As of September 30, 2002, the Company had paid $1.7 million in severance and employee-related expenses, and all of the employee reductions had been completed.

In connection with the purchase of wireline properties in Kentucky from Verizon and wireless properties from CenturyTel (see Note 3), the Company incurred branding and signage costs of $7.8 million during the third quarter of 2002. In connection with these acquisitions, the Company also incurred computer system conversion and other integration costs during each of the first three quarters of 2002. These expenses included internal payroll and employee benefit costs, contracted services, and other computer programming costs incurred in connection with expanding ALLTEL's customer service and operations support functions to handle increased customer volumes resulting from the acquisitions and to convert Verizon's customer billing and operations support systems to ALLTEL's internal systems.

In January 2002, ALLTEL announced its plans to exit its CLEC operations in seven states. The Company also consolidated its call center and retail store operations during the first quarter of 2002. In connection with these activities, ALLTEL recorded a restructuring charge consisting of severance and employee benefit costs related to a workforce reduction, costs associated with terminating certain CLEC transport agreements and lease termination fees related to the closing of certain retail and call center locations. In exiting the CLEC operations, the Company also incurred costs to disconnect and remove switching and other transmission equipment from central office facilities and expenses to notify and migrate customers to other service providers. ALLTEL also wrote off certain capitalized software development costs that had no alternative future use or functionality. The restructuring plans, completed in March 2002, provided for the elimination of 910 employees primarily in the Company's sales, custom er service and network operations support functions. As of September 30, 2002, the Company had paid

11

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

4. Integration Expenses and Other Charges, Continued:

$9.9 million in severance and employee-related expenses, and all of the employee reductions had been completed.

The $12.4 million in lease and contract termination costs recorded in the first quarter of 2002 consisted of $5.0 million, representing the estimated minimum contractual commitments over the next one to five years for 31 operating locations that the Company abandoned, net of anticipated sublease income. The lease and contract termination costs also included $3.6 million of costs to terminate transport agreements with six interexchange carriers. The Company also recorded an additional $2.8 million to reflect the revised estimated costs, net of anticipated sublease income, to terminate leases associated with four operating locations. As previously discussed, ALLTEL had initially recorded $6.3 million in lease termination costs related to these four locations in 1999. The additional charge reflected a reduction in expected sublease income primarily attributable to softening in the commercial real estate marke t and bankruptcy filings by two sublessees. Finally, the lease termination costs also included $1.0 million of unamortized leasehold improvement costs related to the abandoned locations.

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

During 2001, the Company restructured its regional communications, information services, product distribution and corporate operations. In connection with these restructuring efforts, the Company recorded restructuring charges during each of the first three quarters of 2001. The total charge recorded by the Company during the first nine months of  2001 was $77.0 million and consisted of $62.0 million in severance and employee benefit costs related to a planned workforce reduction, $6.1 million in lease termination costs associated with the closing of certain retail and other operating locations and a $8.9 million write-down in the carrying value of certain software development costs. Included in the severance and employee benefit component of the restructuring charges are non-cash charges of $22.6 million. These non-cash charges consisted of $21.5 million in additional pension and postretirement benefit costs related to a special early retirement program offered by the Company to employees meeting certain age and service requirements and $1.1 million in compensation expense related to the accelerated vesting of certain stock options. Eligible employees who elected the early retirement incentive received five years of additional vested service for purposes of calculating their retirement benefits available under the Company's pension and postretirement benefit plans. During the first quarter of 2001, 230 employees accepted the retirement incentive offer. The restructuring plans we re completed in December 2001 and resulted in the elimination of 1,633 employees, including the employees who accepted the early retirement incentive. The work force reductions primarily occurred in operations management, engineering, sales and the corporate support functions. As of September 30, 2002, the Company had paid $33.9 million in severance and employee-related expenses, and all of the employee reductions had been completed.

The lease termination costs recorded during the first nine months of 2001 consisted of $5.0 million, representing the estimated minimum contractual commitments over the next one to five years for 60 operating locations that the Company abandoned, net of anticipated sublease income. The lease termination costs also included $1.1 million of unamortized leasehold improvement costs related to the abandoned locations. The write-down in the carrying value of certain software development costs resulted from the Company's formation of a joint venture with IBM announced in March 2001. The joint venture, which operates as ALLTEL Corebanking Solutions, a consolidated subsidiary of ALLTEL, develops and markets Corebank, a real-time banking system, to financial service organizations in Europe. Prior to forming the joint venture, ALLTEL had been developing its own real-time processing software. Following the signing of the joint venture agreement, the Company ceased further development of its software product and wrote off the portion of the capitalized software development costs that had no alternative future use or functionality.

12

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

4. Integration Expenses and Other Charges, Continued:

The following is a summary of activity related to the liabilities associated with the Company's integration expenses and other charges for the nine months ended September 30:

(Millions)			2002
Balance, beginning of period			$ 17.1
Integration expenses and other charges			73.8
Non-cash write-down of assets			(12.6	)
Cash outlays			(57.2	)
Balance, end of period			$ 21.1

At September 30, 2002, the remaining unpaid liability related to the Company's integration and restructuring activities consisted of severance and employee-related expenses of $7.1 million and lease cancellation and contract termination costs of $14.0 million and is included in other current liabilities in the accompanying consolidated balance sheets.

5. Gain (Loss) on Disposal of Assets, Write-Down of Investments and Other:

In the third quarter of 2002, the Company recorded a pretax adjustment of $4.8 million to reduce the gain recognized from the dissolution of a wireless partnership with BellSouth Mobility, Inc. ("BellSouth"). As discussed below, this gain was initially recorded in the first quarter of 2001 and subsequently revised in the second quarter of 2001. This additional adjustment reflected a true-up for cash distributions payable to BellSouth in conjunction with the dissolution of the partnership.

In the second quarter of 2002, ALLTEL recorded a pretax write-down of $12.5 million on its investment in Hughes Tele.com Limited ("HTCL"), a public company and provider of communications services in India. The write-down was recorded in connection with HTCL's agreement to merge with a major Indian telecommunications company and an other-than-temporary decline in the fair value of HTCL's common stock. In addition, the Company also recorded a pretax write-down of $1.2 million related to an other-than-temporary decline in ALLTEL's investment in Airspan Networks, Inc., a provider of wireless telecommunications equipment.

In the second quarter of 2001, the Company recorded a pretax adjustment of $4.4 million to reduce the gain recognized from the dissolution of a wireless partnership with BellSouth initially recorded in the first quarter of 2001. The Company also recorded a pretax adjustment of $2.4 million to increase the gain recognized from the sale of PCS licenses to Verizon Wireless also completed during the first quarter of 2001. These adjustments primarily reflected differences between the actual and estimated book values of the properties transferred. In addition, during the second quarter of 2001, the Company prepaid $73.5 million of long-term debt prior to its stated maturity date and incurred pretax termination fees of $2.9 million in connection with the early retirement of that debt.

In the first quarter of 2001, ALLTEL recorded a pretax gain of $345.4 million from the sale of 20 PCS licenses to Verizon Wireless. In addition, the Company recorded a pretax gain of $13.9 million upon the dissolution of a wireless partnership with BellSouth involving properties in four states. Upon dissolution, the partnership assets were distributed to the partners at fair value resulting in a gain for financial reporting purposes. Also in the first quarter of 2001, the Company recorded pretax gains of $3.2 million from the sale of certain investments.

13

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

6. Comprehensive Income:

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

				Three Months Ended						Nine Months Ended
(Millions)				2002			2001			2002			2001
Net income				$237.7			$221.4			$667.7			$835.6
Other comprehensive income (loss):
	Unrealized holding losses on investments
			arising in the period	(0.1	)		(1.1	)		(6.2	)		(12.0	)
	Income tax expense (benefit)			-			(0.4	)		(2.3	)		(3.9	)
				(0.1	)		(0.7	)		(3.9	)		(8.1	)
	Less: reclassification adjustments
		for (gains) losses included in net income		-			-			13.7			(2.4	)
	Income tax expense (benefit)			-			-			(5.3	)		1.0
				-			-			8.4			(1.4	)
	Net unrealized gains (losses)			(0.1	)		(1.1	)		7.5			(14.4	)
	Income tax expense (benefit)			-			(0.4	)		3.0			(4.9	)
				(0.1	)		(0.7	)		4.5			(9.5	)
	Foreign currency translation adjustment			-			(0.3	)		2.6			(4.6	)
	Other comprehensive income (loss) before tax			(0.1	)		(1.4	)		10.1			(19.0	)
	Income tax expense (benefit)			-			(0.4	)		3.0			(4.9	)
	Other comprehensive income (loss)			(0.1	)		(1.0	)		7.1			(14.1	)
Comprehensive income				$237.6			$220.4			$674.8			$821.5

7. Earnings per Share:

A reconciliation of the net income and number of shares used in computing basic and diluted earnings per share was as follows for the three and nine month periods ended September 30:

		Three Months Ended								Nine Months Ended
(Millions, except per share amounts)		2002				2001				2002				2001
Basic earnings per share:
Income before cumulative effect of accounting change		$237.7				$221.4				$667.7				$816.1
Preferred dividends		-				-				0.1				0.1
Net income applicable to common shares before
	cumulative effect of accounting change	$237.7				$221.4				$667.6				$816.0
Weighted average common shares outstanding
	for the period	311.0				310.4				310.9				311.7
Basic earnings per share		$.76				$.71				$2.15				$2.62