CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
(Dollars
in millions, except per share amounts)
|
|
September
30,
|
|
|
December
31,
|
|
Assets
|
|
2007
|
|
|
2006
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
$
|
824.6
|
|
|
$
|
934.2
|
|
Accounts
receivable (less allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts
of $73.2 and $54.9, respectively)
|
|
|
872.6
|
|
|
|
807.3
|
|
Inventories
|
|
|
166.9
|
|
|
|
218.6
|
|
Prepaid
expenses and other
|
|
|
84.1
|
|
|
|
67.7
|
|
Assets
related to discontinued operations
|
|
|
-
|
|
|
|
4.3
|
|
Total
current assets
|
|
|
1,948.2
|
|
|
|
2,032.1
|
|
Investments
|
|
|
188.8
|
|
|
|
368.9
|
|
Goodwill
|
|
|
8,421.1
|
|
|
|
8,447.0
|
|
Other
intangibles
|
|
|
2,001.0
|
|
|
|
2,129.4
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
335.0
|
|
|
|
314.9
|
|
Buildings
and improvements
|
|
|
1,011.5
|
|
|
|
955.1
|
|
Operating
plant and equipment
|
|
|
8,519.1
|
|
|
|
7,933.8
|
|
Information
processing
|
|
|
1,142.8
|
|
|
|
1,048.1
|
|
Furniture
and fixtures
|
|
|
184.8
|
|
|
|
173.8
|
|
Under
construction
|
|
|
358.9
|
|
|
|
496.0
|
|
Total
property, plant and equipment
|
|
|
11,552.1
|
|
|
|
10,921.7
|
|
Less
accumulated depreciation
|
|
|
6,520.7
|
|
|
|
5,690.3
|
|
Net
property, plant and equipment
|
|
|
5,031.4
|
|
|
|
5,231.4
|
|
Other
assets
|
|
|
115.3
|
|
|
|
89.4
|
|
Assets
related to discontinued operations
|
|
|
-
|
|
|
|
45.5
|
|
Total
Assets
|
|
$
|
17,705.8
|
|
|
$
|
18,343.7
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
39.0
|
|
|
$
|
36.3
|
|
Accounts
payable
|
|
|
523.5
|
|
|
|
576.1
|
|
Advance
payments and customer deposits
|
|
|
199.6
|
|
|
|
186.2
|
|
Accrued
taxes
|
|
|
316.5
|
|
|
|
114.1
|
|
Accrued
dividends
|
|
|
43.1
|
|
|
|
46.0
|
|
Accrued
interest
|
|
|
48.7
|
|
|
|
79.3
|
|
Other
current liabilities
|
|
|
188.5
|
|
|
|
156.5
|
|
Liabilities
related to discontinued operations
|
|
|
-
|
|
|
|
2.8
|
|
Total
current liabilities
|
|
|
1,358.9
|
|
|
|
1,197.3
|
|
Long-term
debt
|
|
|
2,665.3
|
|
|
|
2,697.4
|
|
Deferred
income taxes
|
|
|
1,085.4
|
|
|
|
1,109.5
|
|
Other
liabilities
|
|
|
654.4
|
|
|
|
677.6
|
|
Total
liabilities
|
|
|
5,764.0
|
|
|
|
5,681.8
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, Series C, $2.06, no par value, 10,028 and 10,307
|
|
|
|
|
|
|
|
|
shares
issued and outstanding, respectively
|
|
|
0.3
|
|
|
|
0.3
|
|
Common
stock, par value $1 per share, 1.0 billion shares
authorized,
|
|
|
|
|
|
|
|
|
344,485,125
and 364,505,820 shares issued and outstanding,
respectively
|
|
|
344.5
|
|
|
|
364.5
|
|
Additional
paid-in capital
|
|
|
3,050.3
|
|
|
|
4,296.8
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(25.1
|
)
|
|
|
9.5
|
|
Retained
earnings
|
|
|
8,571.8
|
|
|
|
7,990.8
|
|
Total
shareholders’ equity
|
|
|
11,941.8
|
|
|
|
12,661.9
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
17,705.8
|
|
|
$
|
18,343.7
|
|
See
the
accompanying notes to the unaudited interim consolidated financial
statements.
2
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
and sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
$
|
2,071.5
|
|
|
$
|
1,795.4
|
|
|
$
|
5,923.2
|
|
|
$
|
5,178.7
|
|
Product
sales
|
|
|
210.0
|
|
|
|
211.9
|
|
|
|
611.9
|
|
|
|
617.1
|
|
Total
revenues and sales
|
|
|
2,281.5
|
|
|
|
2,007.3
|
|
|
|
6,535.1
|
|
|
|
5,795.8
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (excluding depreciation of $225.7, $190.5,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$680.8
and $559.1, respectively, included below)
|
|
|
682.2
|
|
|
|
610.1
|
|
|
|
1,933.4
|
|
|
|
1,726.9
|
|
Cost
of products sold
|
|
|
300.0
|
|
|
|
293.8
|
|
|
|
876.1
|
|
|
|
849.8
|
|
Selling,
general, administrative and other
|
|
|
496.1
|
|
|
|
438.3
|
|
|
|
1,445.5
|
|
|
|
1,298.5
|
|
Depreciation
and amortization
|
|
|
358.2
|
|
|
|
307.1
|
|
|
|
1,060.0
|
|
|
|
916.0
|
|
Integration
expenses, restructuring and other charges
|
|
|
11.0
|
|
|
|
-
|
|
|
|
53.3
|
|
|
|
10.8
|
|
Total
costs and expenses
|
|
|
1,847.5
|
|
|
|
1,649.3
|
|
|
|
5,368.3
|
|
|
|
4,802.0
|
|
Operating
income
|
|
|
434.0
|
|
|
|
358.0
|
|
|
|
1,166.8
|
|
|
|
993.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
earnings in unconsolidated partnerships
|
|
|
17.1
|
|
|
|
17.3
|
|
|
|
48.5
|
|
|
|
45.6
|
|
Minority
interest in consolidated partnerships
|
|
|
(8.8
|
)
|
|
|
(11.7
|
)
|
|
|
(27.4
|
)
|
|
|
(37.1
|
)
|
Other
income, net
|
|
|
5.9
|
|
|
|
37.3
|
|
|
|
19.2
|
|
|
|
69.1
|
|
Interest
expense
|
|
|
(46.2
|
)
|
|
|
(63.8
|
)
|
|
|
(140.3
|
)
|
|
|
(234.9
|
)
|
Gain
(loss) on exchange or disposal of assets and other
|
|
|
-
|
|
|
|
(50.5
|
)
|
|
|
56.5
|
|
|
|
126.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
402.0
|
|
|
|
286.6
|
|
|
|
1,123.3
|
|
|
|
962.6
|
|
Income
taxes
|
|
|
123.3
|
|
|
|
121.3
|
|
|
|
415.8
|
|
|
|
374.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
278.7
|
|
|
|
165.3
|
|
|
|
707.5
|
|
|
|
587.9
|
|
Income
from discontinued operations (net of income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(benefit)
of $(4.2), $7.9, $(2.5) and $222.6, respectively)
|
|
|
3.9
|
|
|
|
21.9
|
|
|
|
0.9
|
|
|
|
325.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
282.6
|
|
|
|
187.2
|
|
|
|
708.4
|
|
|
|
913.5
|
|
Preferred
dividends
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Net
income applicable to common shares
|
|
$
|
282.5
|
|
|
$
|
187.1
|
|
|
$
|
708.3
|
|
|
$
|
913.4
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$.81
|
|
|
|
$.43
|
|
|
|
$2.03
|
|
|
|
$1.52
|
|
Income
from discontinued operations
|
|
|
.01
|
|
|
|
.06
|
|
|
|
-
|
|
|
|
.84
|
|
Net
income
|
|
|
$.82
|
|
|
|
$.49
|
|
|
|
$2.03
|
|
|
|
$2.36
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$.80
|
|
|
|
$.43
|
|
|
|
$2.01
|
|
|
|
$1.51
|
|
Income
from discontinued operations
|
|
|
.01
|
|
|
|
.05
|
|
|
|
-
|
|
|
|
.84
|
|
Net
income
|
|
|
$.81
|
|
|
|
$.48
|
|
|
|
$2.01
|
|
|
|
$2.35
|
|
See
the
accompanying notes to the unaudited interim consolidated financial
statements.
3
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
708.4
|
|
|
$
|
913.5
|
|
Adjustments
to reconcile net income to net cash provided from operating
activities:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
(0.9
|
)
|
|
|
(325.6
|
)
|
Depreciation
and amortization expense
|
|
|
1,060.0
|
|
|
|
916.0
|
|
Provision
for doubtful accounts
|
|
|
140.9
|
|
|
|
179.9
|
|
Non-cash
portion of loss (gain) on exchange or disposal of assets
|
|
|
(56.5
|
)
|
|
|
(149.1
|
)
|
Change
in deferred income taxes
|
|
|
30.4
|
|
|
|
6.2
|
|
Adjustment
to income tax liabilities, including contingency reserves
|
|
|
(33.8
|
)
|
|
|
-
|
|
Other,
net
|
|
|
(24.7
|
)
|
|
|
(6.3
|
)
|
Changes
in operating assets and liabilities, net of effects of acquisitions
and
dispositions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(207.5
|
)
|
|
|
(245.9
|
)
|
Inventories
|
|
|
51.8
|
|
|
|
39.6
|
|
Accounts
payable
|
|
|
(54.4
|
)
|
|
|
(35.3
|
)
|
Other
current liabilities
|
|
|
235.6
|
|
|
|
(255.1
|
)
|
Other,
net
|
|
|
(10.5
|
)
|
|
|
(40.9
|
)
|
Net
cash provided from operating activities
|
|
|
1,838.8
|
|
|
|
997.0
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(720.3
|
)
|
|
|
(718.6
|
)
|
Additions
to capitalized software development costs
|
|
|
(24.3
|
)
|
|
|
(24.0
|
)
|
Purchases
of property, net of cash acquired
|
|
|
(6.2
|
)
|
|
|
(676.5
|
)
|
Proceeds
from the sale of investments
|
|
|
188.7
|
|
|
|
200.5
|
|
Proceeds
from the return on investments
|
|
|
40.2
|
|
|
|
36.7
|
|
Other,
net
|
|
|
0.9
|
|
|
|
7.8
|
|
Net
cash used in investing activities
|
|
|
(521.0
|
)
|
|
|
(1,174.1
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Dividends
paid on common and preferred stock
|
|
|
(133.5
|
)
|
|
|
(447.1
|
)
|
Repayments
of long-term debt
|
|
|
(36.9
|
)
|
|
|
(1,012.2
|
)
|
Repurchases
of common stock
|
|
|
(1,360.3
|
)
|
|
|
(709.0
|
)
|
Cash
payments to effect conversion of convertible notes
|
|
|
-
|
|
|
|
(59.8
|
)
|
Distributions
to minority investors
|
|
|
(31.8
|
)
|
|
|
(27.7
|
)
|
Excess
tax benefits from stock option exercises
|
|
|
25.7
|
|
|
|
9.1
|
|
Common
stock issued
|
|
|
59.0
|
|
|
|
191.5
|
|
Net
cash used in financing activities
|
|
|
(1,477.8
|
)
|
|
|
(2,055.2
|
)
|
Cash
Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Cash
provided from operating activities
|
|
|
2.8
|
|
|
|
595.4
|
|
Cash
provided from investing activities
|
|
|
47.6
|
|
|
|
3,746.6
|
|
Cash
used in financing activities
|
|
|
-
|
|
|
|
(0.2
|
)
|
Net
cash provided from discontinued operations
|
|
|
50.4
|
|
|
|
4,341.8
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and short-term
investments
|
|
|
-
|
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and short-term investments
|
|
|
(109.6
|
)
|
|
|
2,103.6
|
|
|
|
|
|
|
|
|
|
|
Cash
and Short-term Investments:
|
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
934.2
|
|
|
|
982.4
|
|
End
of the period
|
|
$
|
824.6
|
|
|
$
|
3,086.0
|
|
See
the
accompanying notes to the unaudited interim consolidated financial
statements.
4
CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
$
|
0.3
|
|
|
$
|
364.5
|
|
|
$
|
4,296.8
|
|
|
$
|
9.5
|
|
|
$
|
7,990.8
|
|
|
$
|
12,661.9
|
|
Cumulative
effect adjustment to adopt recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
measurement provisions of FASB Interpretation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
48 (See Note 2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.2
|
|
|
|
3.2
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
708.4
|
|
|
|
708.4
|
|
Other
comprehensive loss, net of tax (See Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses on investments,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of reclassification adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(37.5
|
)
|
|
|
-
|
|
|
|
(37.5
|
)
|
Defined
benefit pension plans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.7
|
|
|
|
-
|
|
|
|
2.7
|
|
Other
postretirement benefit plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.2
|
|
|
|
-
|
|
|
|
0.2
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34.6
|
)
|
|
|
708.4
|
|
|
|
673.8
|
|
Employee
plans, net
|
|
|
-
|
|
|
|
1.8
|
|
|
|
38.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40.2
|
|
Issuance
of restricted stock
|
|
|
-
|
|
|
|
0.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.2
|
|
Amortization
of stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
24.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24.5
|
|
Tax
benefit for non-qualified stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
27.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27.0
|
|
Repurchases
of stock
|
|
|
-
|
|
|
|
(22.0
|
)
|
|
|
(1,338.3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,360.3
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
1.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.9
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
- $.375 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(130.5
|
)
|
|
|
(130.5
|
)
|
Preferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Balance
at September 30, 2007
|
|
$
|
0.3
|
|
|
$
|
344.5
|
|
|
$
|
3,050.3
|
|
|
$
|
(25.1
|
)
|
|
$
|
8,571.8
|
|
|
$
|
11,941.8
|
|
See
the
accompanying notes to the unaudited interim consolidated financial
statements.
5
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Basis
of Presentation
– The consolidated financial statements as of September 30,
2007 and December 31, 2006 and for the three and nine month periods ended
September 30, 2007 and 2006 of ALLTEL Corporation (“Alltel” or the “Company”)
are unaudited. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission (“SEC”) rules and
regulations. Certain information and footnote disclosures have been
condensed or omitted in accordance with those rules and
regulations. The consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods presented.
Classification
of Operations Following the Spin-off of the Wireline Telecommunications
Business
– On July 17, 2006, Alltel completed the spin-off of its wireline
telecommunications business to its stockholders and the merger of that wireline
business with Valor Communications Group, Inc. (“Valor”). The
spin-off included the majority of Alltel’s communications support services,
including directory publishing, information technology outsourcing services,
retail long-distance and the wireline sales portion of communications
products. The new wireline company formed in the merger of Alltel’s
wireline operations and Valor is named Windstream Corporation
(“Windstream”). In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the results of operations, assets, liabilities, and cash
flows of the wireline telecommunications business have been presented as
discontinued operations for all periods presented. See Note 10 for a
further discussion of the spin-off of the wireline telecommunications
business.
Following
the spin-off, Alltel provides wireless voice and data communications services
to
more than 12 million customers in 35 states. Through roaming
arrangements with other carriers, Alltel is able to offer its customers wireless
services covering more than 95 percent of the U.S. population. Alltel
manages its wireless business and retained portion of communications support
services as a single operating segment, and accordingly, Alltel’s continuing
operations consist of a single reportable business segment, wireless
communications services. Unless otherwise noted, the footnote
disclosures accompanying these unaudited interim consolidated financial
statements exclude information related to the spun-off wireline
telecommunications business.
Changes
in Accounting Principle
– In June 2006, the Financial Accounting Standards
Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which
clarified the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes”. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
Effective
January 1, 2007, Alltel adopted the provisions of FIN 48. As a result
of the implementation of FIN 48, the Company recognized an approximate $3.2
million decrease in its reserves for uncertain tax positions, the offsetting
effects of which resulted in a corresponding increase to the January 1, 2007
balance of retained earnings. The Company’s gross unrecognized tax
benefits totaled $93.7 million at January 1, 2007. Approximately
$37.4 million of the total amount of unrecognized tax benefits (net of federal
tax benefits on state issues) relates to tax positions that would, if
recognized, affect Alltel’s effective tax rate in future periods. As
of January 1, 2007, Alltel believed that it was reasonably possible that
approximately $50.0 to $60.0 million of gross unrecognized tax benefits for
uncertain tax positions, related to both income inclusion and tax deductibility
issues, would reverse in the following twelve months. Of that amount,
approximately $2.0 million relates to payments to be made to taxing authorities,
$14.6 million relates to an Internal Revenue Service (“IRS”) initiative
described below and the balance relates to the lapsing of various statutes
of
limitations. As discussed below, during the third quarter of 2007,
Alltel recorded a reduction in its gross unrecognized tax benefits for uncertain
tax positions primarily due to the expiration of certain state statutes of
limitations.
During
the fourth quarter of 2006, Alltel entered into a final settlement with the
IRS
with respect to its federal income tax returns for the tax years 1997 through
2003. During the second and third quarters of 2007, the statutes of
limitations applicable to those tax years lapsed. The audits and
related statutes of limitations applicable to Alltel’s federal income tax
returns for the tax years 2004 through 2006 remain open. The IRS
recently began its audits of the Company’s 2004 and 2005 federal income tax
returns. Alltel’s open tax years for state income tax jurisdictions
range from 1999 to 2006.
6
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
2.
|
Accounting
Changes, Continued:
|
Alltel’s
only significant tax jurisdiction is the U.S. federal tax
jurisdiction. In 2006, Alltel elected to participate in an IRS
initiative undertaken to address certain implications of FIN 48. In
connection with that initiative, on January 30, 2007, Alltel entered into a
Memorandum of Understanding with the IRS to settle two issues. As a
result of this action, in the first quarter of 2007, Alltel reduced its gross
unrecognized tax benefits by $14.6 million and its gross deferred tax assets
by
$0.8 million. The corresponding effects of the reduction in unrecognized tax
benefits (including interest and any related tax benefits) of $13.8 million
resulted in an increase to additional paid-in capital of $7.7 million, a
decrease in goodwill of $4.0 million and an increase to current income taxes
payable of $2.1 million.
During
the third quarter of 2007, Alltel reduced its gross unrecognized tax benefits
by
$30.4 million and the corresponding deferred tax assets by $10.6 million,
primarily as a result of the expiration of certain state statutes of
limitation. The corresponding effects of the reduction in
unrecognized tax benefits (including interest and any related tax benefits)
resulted in a reduction in income tax expense associated with continuing
operations of $33.8 million.
Including
the effects of adjustments recorded during the first and third quarters of
2007
discussed above, Alltel’s gross unrecognized tax benefits totaled $54.5 million
at September 30, 2007. Approximately $15.5 million of the total
amount of unrecognized tax benefits (net of federal tax benefits on state
issues) relates to tax positions that would, if recognized, affect Alltel’s
effective tax rate in future periods. As of September 30, 2007,
Alltel believed that it was reasonably possible that approximately $25.0 to
$30.0 million of gross unrecognized tax benefits for uncertain tax positions,
related to both income inclusion and tax deductibility issues, would reverse
in
the following twelve months. Of that amount, $18.8 million relates to
expected audit adjustments in connection with the Company’s 2004 and 2005 IRS
audits, $3.8 million relates to expected state tax payments and the balance
relates to the lapsing of various statutes of limitations. Under a
tax sharing agreement signed in connection with the wireline spin-off,
Windstream would be responsible for payment of approximately $17.0 million
of
the total liabilities recorded related to Alltel’s 2004 and 2005 IRS
audits.
Consistent
with Alltel’s past practices, interest charges on potential assessments and any
penalties assessed by taxing authorities are classified as income tax expense
within the Company’s consolidated statements of income. The Company
has accrued $28.7 million for the payment of interest and $0.6 million for
the
payment of penalties related to its gross unrecognized tax benefits as of
January 1, 2007. Including the effects of adjustments recorded during
the first and third quarters of 2007 discussed above, Alltel has accrued $10.2
million for the payment of interest and $0.6 million for the payment of
penalties related to its gross unrecognized tax benefits as of September 30,
2007.
In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which is
a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and
supercedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees” and related Interpretations. On March 25,
2005, the SEC staff issued Staff Accounting Bulletin (“SAB”) 107, which
summarized the staff’s views regarding the interaction between SFAS No. 123(R)
and certain SEC rules and regulations and provided additional guidance regarding
the valuation of share-based payment arrangements for public
companies. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the employee’s requisite
service period.
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) using
the
modified prospective application method and applied the provisions of SAB 107
in
its adoption of SFAS No. 123(R). Operating results for prior periods
were not restated. Under the modified prospective transition method,
Alltel is required to recognize compensation cost for all stock option awards
granted after January 1, 2006 and for all existing awards for which the
requisite service had not been rendered as of the date of
adoption. Compensation expense for the unvested awards outstanding as
of January 1, 2006 is recognized over the remaining requisite service period
based on the fair value of the awards on the date of grant, as previously
calculated by Alltel in developing its pro forma disclosures in accordance
with
the provisions of SFAS No. 123.
The
effect of adopting SFAS No. 123(R) consisted of compensation expense for stock
options issued by Alltel and resulted in pretax charges of $4.5 million and
$14.7 million, which decreased net income $3.2 million and $10.9 million, or
$.01 per share and $.03 per share, for the three and nine months ended September
30, 2006, respectively. (See Note 5 for a further discussion of the
Company’s stock-based compensation plans.)
7
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
On
October 3, 2006, Alltel completed the purchase of Midwest Wireless Holdings
of
Mankato, Minnesota (“Midwest Wireless”) for $1,083.5 million in
cash. The final purchase price included $8.3 million of working
capital adjustments. In this transaction, Alltel acquired wireless
properties, including 850 MHz licenses and Personal Communications Services
(“PCS”) spectrum covering approximately 2.0 million potential customers
(“POPs”), network assets and approximately 433,000 customers in select markets
in Minnesota, Iowa and Wisconsin. Given the close proximity to
year-end that this acquisition was completed, the value of certain assets and
liabilities were based on preliminary valuations and subject to adjustment
as
additional information was obtained. During 2007, Alltel recorded
employee termination benefits of $6.9 million, including involuntary severance
and related benefits to be provided to 123 former Midwest Wireless
employees. Alltel also recorded contract termination costs of $2.2
million primarily related to the cancellation of a third party billing services
agreement. The employee benefit and contract termination costs were
recognized in accordance with Emerging Issues Task Force Issue No. 95-3,
“Recognition of Liabilities in Connection with a Purchase Business Combination”
(“EITF 95-3”), as liabilities assumed in the business combination. As
of September 30, 2007, Alltel had paid $5.8 million in employee termination
benefits, and 68 of the scheduled employee terminations had been
completed.
During
the second quarter of 2006, Alltel purchased for $217.6 million in cash wireless
properties covering approximately 727,000 POPs in Illinois, Texas and
Virginia. On March 16, 2006, Alltel purchased from Palmetto
MobileNet, L.P. for $456.3 million in cash the remaining ownership interests
in
ten wireless partnerships that cover approximately 2.3 million POPs in North
and
South Carolina. Prior to this transaction, Alltel owned a 50 percent
interest in each of the ten wireless partnerships. During the first
quarter of 2006, Alltel also acquired for $2.6 million in cash the remaining
ownership interest in a wireless property in Wisconsin in which the Company
owned a majority interest.
During
2007, Alltel adjusted the purchase price allocations related to its 2006
acquisitions primarily for the recognition of employee benefit and contract
termination costs associated with the Midwest Wireless acquisition discussed
above. These adjustments to the purchase price allocation resulted in
a reduction to the preliminary values assigned to acquired net assets of $7.5
million with an offsetting increase to goodwill compared to the corresponding
values that had been previously recorded in the Company’s consolidated balance
sheet as of December 31, 2006.
Unaudited
pro forma financial information related to the 2006 acquisitions has not been
presented because the acquisitions, individually or in the aggregate, were
not
material to Alltel’s consolidated results of operations for all periods
presented. During the first nine months of 2007, the Company incurred
integration expenses related to its 2006 acquisitions, principally consisting
of
costs for branding, signage and computer system conversions. (See
Note 7 for a further discussion of the integration expenses recorded by Alltel
during the three and nine month periods ended September 30, 2007.)
On
August
1, 2005, Alltel and Western Wireless Corporation (“Western Wireless”) completed
the merger of Western Wireless into a wholly-owned subsidiary of
Alltel. As a result of the merger, Alltel added approximately 1.3
million domestic wireless customers, adding operations in nine new states,
including California, Idaho, Minnesota, Montana, Nevada, North Dakota, South
Dakota, Utah and Wyoming, and expanding its wireless operations in Arizona,
Colorado, New Mexico and Texas. Alltel also acquired approximately
1.6 million international customers in eight countries. As further
discussed in Note 10, Alltel divested all of the acquired international
operations during 2005 and 2006. In the merger, each share of Western
Wireless common stock was exchanged for 0.535 shares of Alltel common stock
and
$9.25 in cash unless the shareholder made an all-cash election, in which case
the shareholder received $40 in cash. Western Wireless shareholders
making an all-stock election were subject to proration and received
approximately 0.539 shares of Alltel common stock and $9.18 in
cash. In the aggregate, Alltel issued approximately 54.3 million
shares of stock valued at $3,430.4 million and paid approximately $933.4 million
in cash. Through its wholly-owned subsidiary that merged with Western
Wireless, Alltel also assumed debt of approximately $2.1 billion. On
the date of closing, Alltel repaid approximately $1.3 billion of term loans
representing all borrowings outstanding under Western Wireless’ credit
facility. During 2005, Alltel repurchased all of the issued and
outstanding 9.25 percent senior notes due July 15, 2013 of Western Wireless,
representing an aggregate principal amount of $600.0 million. Alltel
also assumed $115.0 million of 4.625 percent convertible subordinated notes
due
2023 that were issued by Western Wireless in June 2003 (the “Western Wireless
notes”). Upon closing of the merger, each $1,000 principal amount of
Western Wireless notes became convertible into shares of Alltel common stock
and
cash based on the mixed-election exchange ratio. During 2006, an
aggregate principal amount of $113.0 million of the Western Wireless notes
were
converted.
8
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
3.
|
Acquisitions,
Continued:
|
During
the first quarter of 2007, Alltel adjusted the purchase price allocation related
to the Western Wireless acquisition to adjust certain income tax liabilities
primarily related to the international operations. The effects of
these adjustments resulted in a reduction in goodwill of $31.2
million. During the first quarter of 2006, Alltel completed the
integration of the domestic operations acquired from Western
Wireless. In connection with this integration, the Company incurred
integration expenses, principally consisting of costs for branding, signage,
retail store redesigns and computer system conversions. (See Note 7
for a discussion of integration expenses recorded by Alltel during the first
quarter of 2006). Employee termination benefits of $23.8 million,
including involuntary severance and related benefits to be provided to 337
former Western Wireless employees, and employee retention bonuses of $7.4
million payable to approximately 1,150 former Western Wireless employees were
recorded during 2005. These employee benefit costs were recognized in
accordance with EITF 95-3 as liabilities assumed in the business
combination. As of September 30, 2007, Alltel had paid $31.2 million
in employee termination and retention benefits, and all of the scheduled
employee terminations had been completed.
|
4.
|
Goodwill
and Other Intangible
Assets:
|
Goodwill
represents the excess of cost over the fair value of net identifiable tangible
and intangible assets acquired through various business
combinations. The cost of acquired entities at the date of the
acquisition is allocated to identifiable assets, and the excess of the total
purchase price over the amounts assigned to identifiable tangible and intangible
assets is recorded as goodwill. As of January 1, 2007, Alltel
completed the annual impairment reviews of its goodwill and other
indefinite-lived intangible assets and determined that no write-down in the
carrying value of these assets was required. The changes in the
carrying amount of goodwill for the nine months ended September 30, 2007 were
as
follows:
|
|
|
|
(Millions)
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
8,447.0
|
|
Acquired
during the period
|
|
|
1.8
|
|
Other
adjustments
|
|
|
(27.7
|
)
|
Balance
at September 30, 2007
|
|
$
|
8,421.1
|
|
The
carrying values of indefinite-lived intangible assets other than goodwill were
as follows:
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Cellular
and Personal Communications Services licenses
|
|
$
|
1,661.5
|
|
|
$
|
1,657.8
|
|
Intangible
assets subject to amortization were as follows:
|
|
|
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
(Millions)
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Customer
lists
|
|
$
|
946.6
|
|
|
$
|
(609.5
|
)
|
|
$
|
337.1
|
|
Roaming
agreement
|
|
|
6.1
|
|
|
|
(3.8
|
)
|
|
|
2.3
|
|
Non-compete
agreement
|
|
|
0.3
|
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
$
|
953.0
|
|
|
$
|
(613.5
|
)
|
|
$
|
339.5
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
(Millions)
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Customer
lists
|
|
$
|
946.6
|
|
|
$
|
(478.6
|
)
|
|
$
|
468.0
|
|
Roaming
agreement
|
|
|
6.1
|
|
|
|
(2.5
|
)
|
|
|
3.6
|
|
|
|
$
|
952.7
|
|
|
$
|
(481.1
|
)
|
|
$
|
471.6
|
|
Amortization
expense for intangible assets subject to amortization was $41.3 million and
$132.4 million, respectively, for the three and nine month periods ended
September 30, 2007, compared to $39.2 million and $131.6 million for the same
periods of 2006. Amortization expense for intangible assets subject
to amortization is estimated to be $170.1 million in 2007, $127.8 million in
2008, $78.5 million in 2009, $46.7 million in 2010 and $21.1 million in
2011.
9
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
5.
|
Stock-Based
Compensation:
|
Stock-based
compensation expense was as follows for the three and nine months ended
September 30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Compensation
expense related to stock options issued by Alltel
|
|
$
|
4.9
|
|
|
$
|
4.5
|
|
|
$
|
13.7
|
|
|
$
|
14.7
|
|
Compensation
expense related to stock options converted to Alltel stock
options
in connection
with the acquisition of Western Wireless
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
1.5
|
|
Compensation
expense related to restricted stock awards
|
|
|
3.7
|
|
|
|
7.1
|
|
|
|
9.8
|
|
|
|
13.4
|
|
Compensation
expense before income taxes
|
|
|
9.1
|
|
|
|
12.1
|
|
|
|
24.5
|
|
|
|
29.6
|
|
Income
tax benefit
|
|
|
(3.0
|
)
|
|
|
(4.2
|
)
|
|
|
(7.9
|
)
|
|
|
(9.6
|
)
|
Compensation
expense, net of tax
|
|
$
|
6.1
|
|
|
$
|
7.9
|
|
|
$
|
16.6
|
|
|
$
|
20.0
|
|
Under
the
provisions of SFAS No. 123(R), stock-based compensation expense recognized
during the period is based on the portion of the share-based payment awards
that
is ultimately expected to vest. Accordingly, stock-based compensation
expense recognized in the three and nine months ended September 30, 2007 and
2006 has been reduced for estimated forfeitures.
SFAS No.
123(R)
requires
forfeitures to be estimated at the time of grant and revised, if necessary,
in
subsequent periods if actual forfeitures differ from those
estimates. Pre-vesting forfeitures were based on Alltel’s historical
experience and were estimated to be 4.7 percent and 5.1 percent for the nine
months ended September 30, 2007 and 2006, respectively. Compensation
expense for stock option awards granted after January 1, 2006 is expensed using
a straight-line single option method. Stock-based compensation
expense is included in selling, general, administrative and other expenses
within Alltel’s unaudited interim consolidated statements of
income. Of the total pretax stock-based compensation expense
presented in the table above, amounts allocated to discontinued operations
totaled $1.6 million and $4.0 million for the three and nine months ended
September 30, 2006, respectively.
Under
the
Company’s stock-based compensation plans, Alltel may grant fixed and
performance-based incentive and non-qualified stock options, restricted stock,
and other equity securities to officers and other management
employees. The maximum number of shares of the Company’s common stock
that may be issued to officers and other management employees under all stock
compensation plans in effect at September 30, 2007 was 26.3 million
shares.
Stock
Options
– Fixed stock options granted under the stock-based compensation
plans generally become exercisable over a period of one to five years after
the
date of grant. Under Alltel’s stock option plan for non-employee
directors (the “Directors’ Plan”), the Company grants fixed, non-qualified stock
options to directors for up to 1.0 million shares of common
stock. Under the Directors’ Plan, directors receive a one-time option
grant to purchase 12,000 shares of common stock when they join the
Board. Directors are also granted each year, on the date of the
annual meeting of stockholders, an option to purchase a specified number of
shares of common stock (currently 7,800 shares). Options granted
under the Directors’ Plan become exercisable the day immediately preceding the
date of the first annual meeting of stockholders following the date of
grant. For all plans, the exercise price of the option equals the
market value of Alltel’s common stock on the date of grant. The
maximum term for each stock option granted is 10 years. The Company’s
practice has been to issue new shares of common stock upon the exercise of
stock
options.
The
fair
value of each option award was estimated on the grant date using the
Black-Scholes option valuation model and the following assumptions:
|
|
|
Nine
Months Ended September 30,
|
|
2007
|
2006
|
Weighted
average grant date fair value per share
|
$17.41
|
$15.19
|
Expected
life
|
5.9
years
|
5.9
years
|
Expected
volatility
|
20.9%
|
22.9%
|
Dividend
yield
|
0.8%
|
0.8%
|
Risk-free
interest rate
|
4.7%
|
4.5%
|
The
expected life assumption was determined based on the Company’s historical stock
option exercise experience using a rolling 10-year average for three separate
groups of employees that exhibited similar historical exercise
behavior. Alltel believes that its historical experience is the best
estimate of future exercise patterns currently available. The
expected volatility assumption was based on a combination of the implied
volatility derived from publicly traded options to purchase
10
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
5. Stock-Based
Compensation, Continued:
Alltel
common stock and the Company’s historical common stock
volatility. Implied volatility was derived from one and two-year
traded options, while historical volatility was calculated using the weighted
average of historical daily price changes of the Company’s common stock over the
most recent period equal to the expected life of the stock option on the date
of
grant. Alltel believes that estimating expected volatility based on a
combination of implied and historical volatility is more representative of
future stock price trends than using historical volatility alone.
The
expected dividend yield was based on the Company’s approved annual dividend rate
in effect following the completion of the spin-off of the Company’s wireline
operations to Alltel’s shareholders of $.50 per share. Future
increases to the dividend rate were not included in the development of the
dividend yield assumption because Alltel’s board of directors has not approved
any increase to the dividend rate following completion of the
spin-off. The risk-free interest rate was determined using the
implied yield currently available for zero-coupon U.S. government issues with
a
remaining term equal to the expected life of the stock options.
Activity
under all of the Company’s stock option plans for the nine months ended
September 30, 2007 was as follows:
|
|
|
|
|
|
|
(Thousands)
|
|
|
Weighted
|
|
|
Number
of
|
|
|
Average
Price
|
|
|
Shares
|
|
|
Per
Share
|
|
Outstanding
at December 31, 2006
|
16,176.2
|
|
|
$46.78
|
|
Granted
|
1,601.4
|
|
|
61.66
|
|
Exercised
|
(2,627.2)
|
|
|
37.41
|
|
Forfeited
|
(129.8)
|
|
|
46.06
|
|
Expired
|
(1.2)
|
|
|
26.18
|
|
Outstanding
at September 30, 2007
|
15,019.4
|
|
|
$50.01
|
|
Exercisable
at end of period
|
10,779.6
|
|
|
$49.11
|
|
The
total
intrinsic value of stock options exercised during the nine months ended
September 30, 2007 was $72.2 million, and Alltel received $60.3 million in
cash
from the exercise of stock options. As of September 30, 2007, the
total intrinsic value of stock options outstanding was $295.4 million, while
the
total intrinsic value of stock options exercisable was $221.8
million.
Non-vested
stock options as of September 30, 2007 and changes during the nine months ended
September 30, 2007 were as follows:
|
|
|
|
(Thousands)
|
|
|
Weighted
|
|
|
|
Number
of
|
|
|
Average
Price
|
|
|
|
Shares
|
|
|
Per
Share
|
|
Non-vested
at December 31, 2006
|
|
4,391.9
|
|
|
$
45.89
|
Granted
|
|
1,601.4
|
|
|
61.66
|
Vested
|
|
(1,676.7)
|
|
|
44.90
|
Forfeited
|
|
(76.8)
|
|
|
41.31
|
Non-vested
at September 30, 2007
|
|
4,239.8
|
|
|
$52.32
|
|
At
September 30, 2007, the total unamortized compensation cost for non-vested
stock
option awards amounted to $44.5 million and is expected to be recognized over
a
weighted average period of 3.6 years.
Restricted
Stock
– During each of the past four years, Alltel granted to certain senior
management employees and non-employee directors restricted stock
awards. These awards had an aggregate fair value on the date of grant
of $15.5 million in 2007, $18.6 million in 2006, $11.1 million in 2005 and
$8.5
million in 2004. The cost of the restricted stock awards is
determined based on the fair market value of the shares at the date of grant
reduced by the $1.00 par value per share charged to the employee and is expensed
ratably over the vesting period. The restricted shares granted to
employees in 2007, 2006 and 2004 vest in equal increments over a three-year
period following the date of grant. Certain awards granted in 2006,
representing 96,000 shares, vest in increments of 40%, 30% and 30% over a
five-year period beginning three years after the date of grant. The
restricted shares granted to employees in 2005 vest three years from the date
of
grant. Restricted shares granted to non-employee directors vest one
year from the date of grant.
11
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
5.
|
Stock-Based
Compensation, Continued:
|
Non-vested
restricted stock activity for the nine months ended September 30, 2007 was
as
follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Number
of
|
|
|
Fair
Value
|
|
|
Shares
|
|
|
Per
Share
|
|
Non-vested
at December 31, 2006
|
487,552
|
|
|
$58.37
|
|
Granted
|
255,520
|
|
|
60.64
|
|
Vested
|
(128,441)
|
|
|
57.58
|
|
Forfeited
|
(3,833)
|
|
|
53.18
|
|
Non-vested
at September 30, 2007
|
610,798
|
|
|
$59.52
|
|
At
September 30, 2007, unrecognized compensation expense for the restricted shares
amounted to $18.4 million and is expected to be recognized over a weighted
average period of 2.0 years.
|
6.
|
Employee
Benefit Plans and Postretirement Benefits Other Than
Pensions:
|
Alltel
maintains a qualified defined benefit pension plan, which covers substantially
all employees. In December 2005, the qualified defined benefit
pension plan was amended such that future benefit accruals for all eligible
non-bargaining employees ceased as of December 31, 2005 (December 31, 2010
for
employees who had attained age 40 with two years of service as of December
31,
2005). The Company also maintains a supplemental executive retirement
plan that provides unfunded, non-qualified supplemental retirement benefits
to a
select group of management employees. In addition, Alltel has entered
into individual retirement agreements with certain retired executives providing
for unfunded supplemental pension benefits. Alltel funds the accrued
costs of these plans as benefits are paid. The Company provides
postretirement healthcare and life insurance benefits for eligible
employees. Employees share in the cost of these
benefits. Alltel funds the accrued costs of these plans as benefits
are paid.
The
components of pension expense, including provision for executive retirement
agreements, were as follows for the three and nine months ended September
30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Benefits
earned during the year
|
|
$
|
2.7
|
|
|
$
|
2.3
|
|
|
$
|
8.2
|
|
|
$
|
14.1
|
|
Interest
cost on benefit obligation
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
9.6
|
|
|
|
32.3
|
|
Special
termination benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9.0
|
|
Settlement
and curtailment losses
|
|
|
-
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
3.8
|
|
Amortization
of prior service cost
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Amortization
of net actuarial loss
|
|
|
1.2
|
|
|
|
1.0
|
|
|
|
3.6
|
|
|
|
16.2
|
|
Expected
return on plan assets
|
|
|
(3.6
|
)
|
|
|
(3.4
|
)
|
|
|
(10.8
|
)
|
|
|
(45.3
|
)
|
Net
periodic benefit expense
|
|
$
|
3.8
|
|
|
$
|
3.6
|
|
|
$
|
11.4
|
|
|
$
|
30.9
|
|
Of
the
total pension expense presented in the table above, amounts allocated to
discontinued operations totaled $20.0 million for the nine months ended
September 30, 2006. As previously discussed in Note 1, on July 17,
2006, Alltel completed the spin-off of its wireline telecommunications business
to its stockholders and merger of that wireline business with
Valor. Two former executive officers of Alltel, who were eligible to
receive supplemental retirement benefits payable under the Company’s
supplemental executive retirement plan, joined Windstream. As a
result, the supplemental executive retirement plan was amended to provide for
the immediate pay out of the accrued supplemental retirement benefits earned
by
the two executives at the time the spin-off was consummated. The
special termination benefits paid to the two executives and the corresponding
settlement and curtailment losses presented in the table above have been
included in the amount of pension expense allocated to discontinued operations
for the nine months ended September 30, 2006.
In
connection with the spin-off, Alltel transferred to Windstream the portion
of
the Alltel defined benefit pension plan, which represented the accumulated
benefit obligation and fair value of plan assets attributable to the active
and
retired employees of the wireline business who transferred to
Windstream. The amount of pension plan assets and accumulated benefit
obligations transferred to Windstream was determined by an independent actuary
and totaled $851.2 million and $790.9 million, respectively. The
assumptions used to estimate the accumulated benefit obligation were as follows:
(1) discount rate of 6.3 percent, (2) long-term rate of return on plan assets
of
8.5 percent and (3) rate of future compensation increases of 3.5
12
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
6.
|
Employee
Benefit Plans and Postretirement Benefits Other Than Pensions,
Continued:
|
percent. Alltel
disclosed in its financial statements for the year ended December 31, 2006
that
it expected to contribute $3.4 million for retirement benefits in 2007
consisting solely of amounts necessary to fund the expected benefit payments
related to the unfunded supplemental retirement plans. Through
September 30, 2007, Alltel had contributed $2.5 million to fund the supplemental
retirement plans. Alltel does not expect that any contribution to the
qualified defined pension plan calculated in accordance with the minimum funding
requirements of the Employee Retirement Income Security Act of 1974 will be
required in 2007. Future discretionary contributions to the plan will
depend on various factors, including future investment performance, changes
in
future discount rates and changes in the demographics of the population
participating in Alltel’s qualified pension plan.
The
Company also provides postretirement healthcare and life insurance benefits
for
eligible employees. Employees share in the cost of these
benefits. The Company funds the accrued costs of these plans as
benefits are paid. The components of postretirement expense were as
follows for the three and nine month periods ended September
30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Benefits
earned during the year
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Interest
cost on benefit obligation
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
6.8
|
|
Amortization
of transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.4
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.9
|
|
Recognized
net actuarial loss
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.3
|
|
|
|
3.2
|
|
Expected
return on plan assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
periodic benefit expense
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
0.9
|
|
|
$
|
11.6
|
|
Of
the
total postretirement expense presented in the table above, amounts allocated
to
discontinued operations totaled $10.3 million for the nine months ended
September 30, 2006. Alltel also transferred to Windstream the portion
of the Alltel postretirement benefit plan, which represented the accumulated
benefit obligation attributable to the active and retired employees of the
wireline business who transferred to Windstream. The amount of the
accumulated benefit obligation transferred to Windstream was determined by
an
independent actuary and totaled $222.5 million. The assumed discount
rate used to estimate the accumulated benefit obligation was 6.3
percent.
|
7.
|
Integration
Expenses, Restructuring and Other
Charges:
|
A
summary
of the integration expenses, restructuring and other charges recorded by Alltel
were as follows for the three and nine months ended September
30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Severance
and employee benefit costs
|
|
$
|
0.3
|
|
|
$
|
-
|
|
|
$
|
4.7
|
|
|
$
|
-
|
|
Rebranding
and signage costs
|
|
|
3.9
|
|
|
|
-
|
|
|
|
4.3
|
|
|
|
8.3
|
|
Computer
system conversion and other integration expenses
|
|
|
1.7
|
|
|
|
-
|
|
|
|
6.1
|
|
|
|
2.5
|
|
Lease
termination costs
|
|
|
2.6
|
|
|
|
-
|
|
|
|
2.6
|
|
|
|
-
|
|
Costs
associated with pending acquisition of Alltel
|
|
|
2.5
|
|
|
|
-
|
|
|
|
35.6
|
|
|
|
-
|
|
Total
integration expenses, restructuring and other charges
|
|
$
|
11.0
|
|
|
$
|
-
|
|
|
$
|
53.3
|
|
|
$
|
10.8
|
|
During
2007, Alltel incurred $10.4 million of integration expenses related to its
2006
acquisitions of Midwest Wireless and properties in Illinois, Texas and
Virginia. The system conversion and other integration expenses
primarily consisted of internal payroll, contracted services and other
programming costs incurred in converting the acquired properties to Alltel’s
customer billing and operational support systems, a process that the Company
expects to complete during the fourth quarter of 2007. In connection
with the closing of two call centers, Alltel also recorded severance and
employee benefit costs of $4.7 million and lease termination fees of $2.6
million.
As
further discussed in Note 13, on May 20, 2007, Alltel entered into an agreement
to be acquired by two private investment firms. In connection with
this transaction, Alltel incurred $35.6 million of incremental costs,
principally consisting of financial advisory, legal and regulatory filing
fees. Included in this amount are attorneys’ fees and expenses
incurred in connection with the settlement of certain shareholder lawsuits
as
further discussed in Note 14. Upon successful closing of the
transaction, Alltel will be obligated to pay additional financial advisory
and
legal fees of approximately $65.0 million, which will be expensed in the period
the transaction closes.
13
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
7.
|
Integration
Expenses, Restructuring and Other Charges,
Continued:
|
The
integration expenses, restructuring and other charges decreased net income
$7.6
million and $46.4 million for the three and nine months ended September 30,
2007, respectively.
In
the
first quarter of 2006, the Company incurred $10.8 million of integration
expenses related to its acquisition of Western Wireless. The system
conversion and other integration expenses included internal payroll and employee
benefit costs, contracted services, relocation expenses and other programming
costs incurred in converting Western Wireless’ customer billing and operational
support systems to Alltel’s internal systems, a process which was completed
during March 2006. The integration expenses, restructuring and other
charges decreased net income $6.6 million for the nine months ended September
30, 2006.
The
following is a summary of the activity related to the liabilities associated
with the Company’s integration and other restructuring activities for the nine
months ended September 30, 2007:
|
|
(Millions)
|
|
|
|
Balance,
beginning of period
|
|
$
|
0.1
|
|
Integration
expenses, restructuring and other charges recorded during the
period
|
|
|
53.3
|
|
Cash
outlays during the period
|
|
|
(36.6
|
)
|
Balance,
end of period
|
|
$
|
16.8
|
|
At
September 30, 2007, the remaining unpaid liability related to Alltel’s
integration and restructuring activities consisted of severance and employee
benefit costs of $4.2 million, legal and other fees associated with the pending
merger transaction of $10.0 million and lease and contract termination costs
of
$2.6 million and is included in other current liabilities in the accompanying
consolidated balance sheet.
8.
|
Gain
(Loss) on Exchange or Disposal of Assets and
Other:
|
Through
its merger with Western Wireless, Alltel acquired marketable equity
securities. On January 24, 2007, Alltel completed the sale of these
securities for $188.7 million in cash and recorded a pretax gain from the sale
of $56.5 million. This transaction increased net income $36.8 million
in the nine month period ended September 30, 2007.
On
August
25, 2006, Alltel repurchased prior to maturity $1.0 billion of long-term debt,
consisting of $664.3 million of 4.656 percent equity unit notes due 2007, $61.0
million of 6.65 percent unsecured notes due 2008, $147.0 million of 7.60 percent
unsecured notes due 2009 and $127.7 million of 8.00 percent notes due 2010
pursuant to cash tender offers announced by the Company on July 31,
2006. Concurrent with the debt repurchase, Alltel also terminated the
related pay variable/receive fixed, interest rate swap agreement that had been
designated as a fair value hedge against the 6.65 percent unsecured notes due
2008. In connection with the early termination of the debt and
interest rate swap agreement, Alltel incurred net pretax termination fees of
$23.0 million. As further discussed in Note 10, following the
spin-off of the wireline business, Alltel completed a debt exchange with two
investment banks. On July 17, 2006, Alltel transferred to the
investment banks certain debt securities received in the spin-off transaction
in
exchange for certain Alltel debt securities, consisting of $988.5 million of
commercial paper borrowings and $685.1 million of 4.656 percent equity unit
notes due 2007. In completing the tax-free debt exchange, Alltel
incurred a loss of $27.5 million. These transactions decreased net
income $38.8 million in both the three and nine month periods ended September
30, 2006.
On
November 10, 2005, federal legislation was enacted that included provisions
to
dissolve and liquidate the assets of the Rural Telephone Bank
(“RTB”). In connection with the dissolution and liquidation, during
April 2006, the RTB redeemed all outstanding shares of its Class C
stock. As a result, the Company received liquidating cash
distributions of $198.7 million in exchange for its $22.1 million investment
in
RTB Class C stock and recognized a pretax gain of $176.6
million. This transaction increased net income $107.6 million in the
nine month period ended September 30, 2006.
14
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
In
determining its quarterly provision for income taxes, Alltel uses an estimated
annual effective tax rate, which is based on the Company’s expected annual
income, statutory rates and tax planning opportunities and includes the effects
of uncertain tax positions accounted for in accordance with FIN
48. Significant or unusual items, such as the taxes related to the
sale of a business, are separately recognized in the quarter in which they
occur. Differences between the federal income tax statutory rates and
effective income tax rates, which include both federal and state income taxes,
were as follows for the three and nine month periods ended September
30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Statutory
federal income tax rates
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase
(decrease):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income taxes, net of federal benefit
|
|
|
4.1
|
|
|
|
4.7
|
|
|
|
4.0
|
|
|
|
3.9
|
|
Non-deductible
costs associated with pending acquisition of Alltel
|
|
|
0.2
|
|
|
|
-
|
|
|
|
1.1
|
|
|
|
-
|
|
Non-deductible
loss on debt exchange
|
|
|
-
|
|
|
|
3.4
|
|
|
|
-
|
|
|
|
1.0
|
|
Reversal
of income tax contingency reserves
|
|
|
(8.1
|
)
|
|
|
-
|
|
|
|
(3.0
|
)
|
|
|
-
|
|
Effective
tax rate adjustment
|
|
|
-
|
|
|
|
1.5
|
|
|
|
-
|
|
|
|
0.2
|
|
Tax-exempt
interest income
|
|
|
(0.2
|
)
|
|
|
(2.7
|
)
|
|
|
(0.2
|
)
|
|
|
(1.4
|
)
|
Other
items, net
|
|
|
(0.3
|
)
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Effective
income tax rates
|
|
|
30.7
|
%
|
|
|
42.3
|
%
|
|
|
37.0
|
%
|
|
|
38.9
|
%
|
As
discussed in Note 2, during the third quarter of 2007, Alltel recorded a
reduction in its income tax contingency reserves to reflect the expiration
of
certain state statutes of limitations, the effects of which resulted in a
decrease in income tax expense associated with continuing operations of $33.8
million. The effective income tax rates in both 2007 periods were
adversely affected by the non-deductibility for both federal and state income
tax purposes of the $35.6 million in financial advisory, legal and regulatory
filing fees incurred by Alltel in connection with the proposed merger
transaction (see Note 7). The effective income tax rates in both 2007 periods
also reflected lower estimated annual tax benefits to be derived from tax-exempt
interest income resulting from an expected reduction in Alltel’s average daily
cash balance when compared to 2006.
Conversely,
the effective income tax rates in both 2006 periods were adversely affected
by
the non-deductibility for both federal and state income tax purposes of the
$27.5 million loss incurred by Alltel in connection with completing the debt
exchange (see Note 8) and an increase in Alltel’s estimated annual effective tax
rate reflecting lower expected annual pretax income following the wireline
spin-off. These adverse effects were partially offset by increases in
tax-exempt interest income.
|
10.
|
Discontinued
Operations:
|
As
discussed in Note 1, on July 17, 2006, Alltel completed the spin-off of the
Company’s wireline telecommunications business. Pursuant to the plan
of distribution and immediately prior to the effective time of the merger with
Valor described below, Alltel contributed all of the assets of its wireline
telecommunications business to ALLTEL Holding Corp. (“Alltel Holding” or
“Spinco”), a wholly-owned subsidiary of the Company, in exchange for: (i) the
issuance to Alltel of Spinco common stock that was distributed on a pro rata
basis to Alltel’s stockholders as a tax-free stock dividend, (ii) the payment of
a special dividend to Alltel in the amount of $2.3 billion and (iii) the
distribution by Spinco to Alltel of certain Spinco debt securities, consisting
of $1,746.0 million aggregate principal amount of 8.625 percent senior notes
due
2016 (the “Spinco Securities”). The Spinco Securities were issued at
a discount, and accordingly, at the date of distribution to Alltel, the Spinco
Securities had a carrying value of $1,703.2 million (par value of $1,746.0
million less discount of $42.8 million). In connection with the spin-off, Alltel
also transferred to Spinco $260.8 million of long-term debt that had been issued
by the Company’s wireline subsidiaries. On July 17, 2006, Alltel
exchanged the Spinco Securities received in the spin-off transaction for certain
of its outstanding debt securities (see Note 8).
Immediately
after the consummation of the spin-off, Alltel Holding merged with and into
Valor, with Valor continuing as the surviving corporation. As a
result of the merger, all of the issued and outstanding shares of Spinco common
stock were converted into the right to receive an aggregate number of shares
of
common stock of Valor. Valor issued in the aggregate approximately
403 million shares of common stock to Alltel stockholders pursuant to the
merger, or 1.0339267 shares of Valor common stock for each share of Spinco
common stock outstanding as of the effective time of the merger. Upon
completion of the merger, Alltel stockholders owned approximately 85 percent
of
the outstanding equity interests of the surviving corporation, which is named
Windstream, and the stockholders of Valor owned the remaining 15 percent of
such
equity interests.
15
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
10.
|
Discontinued
Operations, Continued:
|
In
connection with the spin-off and merger of Alltel’s wireline business with
Valor, Alltel incurred $25.7 million of incremental costs in 2006, primarily
consisting of the $12.4 million of special termination benefits payable to
the
two executives and the corresponding settlement and curtailment losses
previously discussed (see Note 6) and additional consulting and legal fees
of
$5.6 million. The remaining expenses included internal payroll and
employee benefit costs, contracted services, relocation expenses and other
costs
incurred in preparation of separating the wireline operations from Alltel’s
internal customer billing and operational support systems. Of the
total spin-related expenses incurred, $5.0 million and $25.7 million were
recorded in the three and nine months ended September 30, 2006, respectively,
and have been classified as discontinued operations. During 2006 and
prior to the spin-off, Alltel transferred to Spinco certain assets and
liabilities related to the operations of Spinco’s business that were previously
utilized or incurred on a shared basis with Alltel’s wireless
business. As previously discussed in Note 6, Alltel also transferred
the portion of the Alltel defined pension and postretirement benefit plans
attributable to the active and retired employees of the wireline business who
transferred to Windstream. The distribution and related agreements
with Windstream provide that Alltel and Windstream will provide each other
with
certain transition services for specified periods at negotiated
prices. In addition, Alltel will provide Windstream with
interconnection, transport and other specified services at negotiated
rates. The agreements also provide for a settlement process, which
could result in adjustments in future periods.
As
a
condition of receiving approval from the U.S. Department of Justice (“DOJ”) and
the Federal Communications Commission (“FCC”) for its October 3, 2006
acquisition of Midwest Wireless, on September 7, 2006, Alltel agreed to divest
certain wireless operations in four rural markets in Minnesota. On
April 3, 2007, Alltel completed the sale of these markets to Rural Cellular
Corporation for $48.5 million in cash.
As
a
condition of receiving approval for the merger with Western Wireless from the
DOJ and the FCC, Alltel agreed to divest certain wireless operations of Western
Wireless in 16 markets in Arkansas, Kansas and Nebraska, as well as the Cellular
One brand. On December 19, 2005, Alltel completed an exchange of
wireless properties with U.S. Cellular that included a substantial portion
of
the divestiture requirements related to the merger. In December 2005,
Alltel sold the Cellular One brand and during the first quarter of 2006, Alltel
completed the sale of the remaining market in Arkansas to
Cingular. During 2005, Alltel completed the sales of Western
Wireless’ international operations in the countries of Georgia, Ghana and
Ireland for $570.3 million in cash. During the second quarter of
2006, Alltel completed the sales of Western Wireless’ international operations
in the countries of Austria, Bolivia, Côte d’Ivoire, Haiti, and Slovenia for
approximately $1.7 billion in cash. In connection with the sales of
the international operations completed in the second quarter of 2006, Alltel
recorded an after tax loss of $9.3 million. There was no gain or loss
realized upon the sales of the international operations in the countries of
Georgia, Ghana and Ireland and the domestic markets in Arkansas, Kansas and
Nebraska.
As
a
result of the above transactions, the wireline telecommunications business,
the
acquired international operations and interests of Western Wireless and the
domestic markets to be divested by Alltel have been classified as discontinued
operations in the Company’s interim consolidated financial statements for all
periods presented. Depreciation of long-lived assets related to the
international operations and the domestic markets to be divested in Arkansas,
Kansas and Nebraska was not recorded subsequent to the completion of the merger
on August 1, 2005. Depreciation of long-lived assets and amortization
of finite-lived intangible assets related to the four markets in Minnesota
to be
divested was not recorded subsequent to September 7, 2006, the date of Alltel’s
agreement with the DOJ and FCC to divest these markets.
16
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
10.
|
Discontinued
Operations, Continued:
|
The
following table includes certain summary income statement information related
to
the wireline telecommunications business, international operations and the
domestic markets to be divested reflected as discontinued operations for the
three and nine months ended September 30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
and sales
|
|
$
|
-
|
|
|
$
|
127.3
|
|
|
$
|
7.8
|
|
|
$
|
1,830.8
|
|
Operating
expenses (a)
|
|
|
-
|
|
|
|
97.4
|
|
|
|
10.6
|
|
|
|
1,253.6
|
|
Operating
income (loss)
|
|
|
-
|
|
|
|
29.9
|
|
|
|
(2.8
|
)
|
|
|
577.2
|
|
Minority
interest expense in unconsolidated entities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6.0
|
)
|
Loss
on disposal of discontinued operations
|
|
|
(0.3
|
)
|
|
|
-
|
|
|
|
(0.1
|
)
|
|
|
(14.8
|
)
|
Other
income, net
|
|
|
-
|
|
|
|
0.6
|
|
|
|
1.3
|
|
|
|
0.9
|
|
Interest
expense (b)
|
|
|
-
|
|
|
|
(0.7
|
)
|
|
|
-
|
|
|
|
(9.1
|
)
|
Pretax
income (loss) from discontinued operations
|
|
|
(0.3
|
)
|
|
|
29.8
|
|
|
|
(1.6
|
)
|
|
|
548.2
|
|
Income
tax expense (benefit) (c)
|
|
|
(4.2
|
)
|
|
|
7.9
|
|
|
|
(2.5
|
)
|
|
|
222.6
|
|
Income
from discontinued operations
|
|
$
|
3.9
|
|
|
$
|
21.9
|
|
|
$
|
0.9
|
|
|
$
|
325.6
|
|
Notes
to summary income statement information table:
(a)
|
Operating
expenses for the nine-month period of 2007 included an impairment
charge
of $1.7 million to reflect the fair value less cost to sell of the
four
rural markets in Minnesota required to be divested. Operating
expenses for 2006 excluded general corporate overhead expenses previously
allocated to the wireline business in accordance with Emerging Issues
Task
Force Issue No. 87-24, “Allocation of Interest Expense to Discontinued
Operations”. The amount of corporate overhead expenses added
back to Alltel’s continuing operations totaled $7.0 million for the nine
months ended September 30, 2006.
|
|
(b)
|
Except
for $260.8 million of long-term debt directly related to the wireline
business that was transferred to Windstream and a $50.0 million credit
facility agreement that was assumed by the buyer of the Bolivian
operations, Alltel had no outstanding indebtedness directly related
to the
wireline business, the international operations or the domestic markets
to
be divested, and accordingly, no additional interest expense was
allocated
to discontinued operations for the periods presented.
|
|
(c)
|
Income
taxes in the three and nine month periods of 2007 reflected a change
in
the estimate of tax benefits associated with transaction costs incurred
in
connection with the wireline spin-off and the reversal of income
tax
contingency reserves applicable to the sold financial services division
due to the expiration of certain state statutes of
limitation.
|
17
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
11.
|
Comprehensive
Income:
|
Comprehensive
income was as follows for the three and nine months ended September
30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$
|
282.6
|
|
|
$
|
187.2
|
|
|
$
|
708.4
|
|
|
$
|
913.5
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) arising in the period
|
|
|
-
|
|
|
|
-
|
|
|
|
(1.1
|
)
|
|
|
24.2
|
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.4
|
)
|
|
|
8.5
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.7
|
)
|
|
|
15.7
|
|
Less
reclassification adjustments for gains included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
(56.5
|
)
|
|
|
-
|
|
Income
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
19.7
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36.8
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) in the period
|
|
|
-
|
|
|
|
-
|
|
|
|
(57.6
|
)
|
|
|
24.2
|
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20.1
|
)
|
|
|
8.5
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(37.5
|
)
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustments for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2.1
|
)
|
Reclassification
adjustments for losses included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.9
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
included in net periodic benefit cost for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost
|
|
|
0.3
|
|
|
|
-
|
|
|
|
0.8
|
|
|
|
-
|
|
Amortization
of net actuarial loss
|
|
|
1.2
|
|
|
|
-
|
|
|
|
3.6
|
|
|
|
-
|
|
|
|
|
1.5
|
|
|
|
-
|
|
|
|
4.4
|
|
|
|
-
|
|
Income
tax expense
|
|
|
0.6
|
|
|
|
-
|
|
|
|
1.7
|
|
|
|
-
|
|
|
|
|
0.9
|
|
|
|
-
|
|
|
|
2.7
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
postretirement benefit plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
included in net periodic benefit cost for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.3
|
|
|
|
-
|
|
Income
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss) before tax
|
|
|
1.6
|
|
|
|
-
|
|
|
|
(52.9
|
)
|
|
|
27.0
|
|
Income
tax expense (benefit)
|
|
|
0.6
|
|
|
|
-
|
|
|
|
(18.3
|
)
|
|
|
8.5
|
|
Other
comprehensive income (loss)
|
|
|
1.0
|
|
|
|
-
|
|
|
|
(34.6
|
)
|
|
|
18.5
|
|
Comprehensive
income
|
|
$
|
283.6
|
|
|
$
|
187.2
|
|
|
$
|
673.8
|
|
|
$
|
932.0
|
|
The
components of accumulated other comprehensive income (loss) were as
follows:
|
|
(Millions)
|
|
September
30, 2007
|
|
|
December
31,
2006
|
|
Unrealized
holding gains on investments
|
|
$
|
-
|
|
|
$
|
37.5
|
|
Defined
benefit pension plans
|
|
|
(23.1
|
)
|
|
|
(25.8
|
)
|
Other
postretirement benefit plan
|
|
|
(2.0
|
)
|
|
|
(2.2
|
)
|
Accumulated
other comprehensive income (loss)
|
|
$
|
(25.1
|
)
|
|
$
|
9.5
|
|
18
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
Basic
earnings per share of common stock was computed by dividing net income
applicable to common shares by the weighted average number of common shares
outstanding during each period. Diluted earnings per share reflects
the potential dilution that could occur assuming conversion or exercise of
all
dilutive unexercised stock options and outstanding convertible debt, restricted
and preferred stock. The dilutive effect of stock options was
determined using the treasury stock method. Under the treasury stock
method, the proceeds received from the exercise of stock options, the amount
of
compensation cost for future service not yet recognized by the Company and
the
amount of tax benefits that would be recorded in additional paid-in capital
when
the stock options become deductible for income tax purposes are assumed to
be
used to repurchase shares of the Company’s common stock. The number
of stock options that were not included in the computation of diluted earnings
per share was approximately 1.6 million and 2.1 million shares of common stock
for the three and nine month periods ended September 30, 2007,
respectively. Conversely, the number of stock options not included in
the computation of diluted earnings per share was approximately 1.8 million
shares for both the three and nine month periods ended September 30,
2006. The dilutive effects of the convertible preferred stock and the
convertible notes acquired in the Western Wireless merger were computed using
the if-converted method. 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 months ended September 30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
278.7
|
|
|
$
|
165.3
|
|
|
$
|
707.5
|
|
|
$
|
587.9
|
|
Income
from discontinued operations
|
|
|
3.9
|
|
|
|
21.9
|
|
|
|
0.9
|
|
|
|
325.6
|
|
Less
preferred dividends
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Net
income applicable to common shares
|
|
$
|
282.5
|
|
|
$
|
187.1
|
|
|
$
|
708.3
|
|
|
$
|
913.4
|
|
Weighted
average common shares outstanding for the period
|
|
|
343.5
|
|
|
|
384.6
|
|
|
|
348.5
|
|
|
|
386.7
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
|
$.81
|
|
|
|
$.43
|
|
|
|
$2.03
|
|
|
|
$1.52
|
|
From
discontinued operations
|
|
|
.01
|
|
|
|
.06
|
|
|
|
-
|
|
|
|
.84
|
|
Net
income
|
|
|
$.82
|
|
|
|
$.49
|
|
|
|
$2.03
|
|
|
|
$2.36
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income applicable to common shares
|
|
$
|
282.5
|
|
|
$
|
187.1
|
|
|
$
|
708.3
|
|
|
$
|
913.4
|
|
Adjustment
for interest expense on convertible notes, net of tax
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.3
|
|
Adjustment
for convertible preferred stock dividends
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Net
income applicable to common shares assuming conversion
of
preferred stock and convertible notes
|
|
$
|
282.6
|
|
|
$
|
187.3
|
|
|
$
|
708.4
|
|
|
$
|
913.8
|
|
Weighted
average common shares outstanding for the period
|
|
|
343.5
|
|
|
|
384.6
|
|
|
|
348.5
|
|
|
|
386.7
|
|
Increase
in shares resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
exercise of stock options
|
|
|
2.7
|
|
|
|
1.2
|
|
|
|
2.4
|
|
|
|
1.2
|
|
Assumed
conversion of convertible notes
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.7
|
|
Assumed
conversion of preferred stock
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Non-vested
restricted stock awards
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.1
|
|
Weighted
average common shares assuming conversion of the
above
securities
|
|
|
346.9
|
|
|
|
386.7
|
|
|
|
351.5
|
|
|
|
388.9
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
|
$.80
|
|
|
|
$.43
|
|
|
|
$2.01
|
|
|
|
$1.51
|
|
From
discontinued operations
|
|
|
.01
|
|
|
|
.05
|
|
|
|
-
|
|
|
|
.84
|
|
Net
income
|
|
|
$.81
|
|
|
|
$.48
|
|
|
|
$2.01
|
|
|
|
$2.35
|
|
19
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
|
13.
|
Pending
Acquisition of Alltel by Two Private Investment
Firms:
|
On
May
20, 2007, Alltel entered into an Agreement and Plan of Merger (the “Agreement”)
with Atlantis Holdings LLC, a Delaware limited liability company (“Parent”) and
Atlantis Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary
of
Parent (“Merger Sub”). Under the terms of the Agreement, Merger Sub
will be merged with and into Alltel (the “Merger”), with Alltel surviving the
Merger as a wholly-owned subsidiary of Parent. Merger Sub and Parent
are affiliates of private investment funds TPG Partners V, L.P. and GS Capital
Partners VI Fund, L.P. (together the “Sponsors”). Pursuant to the Agreement, at
the effective time of the Merger, each outstanding share of $1.00 par value
common stock of Alltel will be cancelled and converted into the right to receive
$71.50 in cash. Similarly, pursuant to the Agreement, at the
effective time of the Merger, each outstanding share of Series C $2.06 no par
cumulative convertible preferred stock and each outstanding share of Series
D
$2.25 no par cumulative convertible preferred stock will be cancelled and
converted into the right to receive $523.22 and $481.37 in cash,
respectively. In addition, immediately prior to the effective time of
the Merger, all shares of Company restricted stock, unless otherwise agreed
to
by the holder and Parent, will vest and will be converted into the right to
receive in cash the merger consideration of $71.50 per share. All
options to acquire shares of Alltel common stock will vest immediately prior to
the effective time of the Merger. Holders of such options will,
unless otherwise agreed to by the holder and Parent, be entitled to receive
an
amount in cash equal to the excess, if any, of the merger consideration of
$71.50 per share over the exercise price for each share of Alltel common stock
subject to the option.
The
merger consideration will be funded by Alltel’s available cash on hand, cash
equity contributions received from the Sponsors and new borrowings by Alltel
Communications, Inc. (“ACI”), a wholly-owned subsidiary of
Alltel. Parent has received equity commitment letters from the
Sponsors, pursuant to which, subject to certain conditions, the Sponsors have
agreed to make or secure aggregate capital contributions of up to $4.6 billion
in cash. Parent has also received debt commitment letters from
various banks to provide ACI with (1) a senior secured term loan facility of
up
to $14.0 billion and a senior secured revolving credit facility of up to $1.5
billion, (2) a senior unsecured cash pay bridge facility of up to $4.7 billion
less the amount of any senior unsecured cash pay notes issued in lieu of such
bridge facility and (3) a senior unsecured pay-in-kind option bridge facility
of
up to $3.0 billion less the amount of any senior unsecured pay-in-kind notes
issued in lieu of such bridge facility. The aggregate principal
amount of the senior secured term loan facility may be increased by up to $750.0
million under certain circumstances.
Consummation
of the Merger is subject to certain conditions, including the approval of the
Merger by the stockholders of Alltel and the receipt of regulatory approvals,
including the approval of the FCC. On August 29, 2007, at a special
meeting, stockholders of Alltel approved the Merger. The transaction
is expected to close by the end of 2007. The Agreement contains
certain termination rights for each of Alltel and the Sponsors and further
provides that, upon termination of the Agreement under specified circumstances
involving an alternative transaction, Alltel may be required to pay the Sponsors
a termination fee of $625.0 million. As further discussed below in
Note 14, on July 19, 2007, the Sponsors agreed to waive the termination fee
payable by Alltel to the extent it exceeds $550 million. During the
second and third quarters of 2007,
Alltel
incurred
incremental
expenses related to the planned Merger, principally consisting of financial
advisory, legal and regulatory filing fees. (See Notes 7 and 14 for a
further discussion of these expenses.)
|
14.
|
Commitments
and Contingencies – Legal
Proceedings:
|
Subsequent
to the announcement of the merger agreement, Alltel, its directors, and in
certain cases the Sponsors (or entities purported to be affiliates thereof),
were named in sixteen putative class actions alleging claims for breach of
fiduciary duty and aiding and abetting such alleged breaches arising out of
the
proposed sale of Alltel. Eight of the complaints were filed in the
Circuit Court of Pulaski County, Arkansas and were subsequently consolidated
into one class action complaint for breach of fiduciary duty. The
other eight complaints were filed in the Delaware Court of Chancery and were
also consolidated into one complaint.
Among
other things, the complaints in the Arkansas and Delaware actions allege that
(1) Alltel conducted an inadequate process for extracting maximum value for
its
shareholders, including prematurely terminating an auction process by entering
into a merger agreement with Parent on May 20, 2007, despite previously setting
June 6, 2007, as the outside date for submitting bids; (2) the Alltel directors
are in possession of material non-public information about Alltel; (3) the
Alltel directors have material conflicts of interest and are acting to better
their own interests at the expense of Alltel’s shareholders, including through
the vesting of certain options for Scott Ford, the retention of an equity
interest in Alltel after the merger by certain of Alltel’s directors and
executive officers, and the employment of certain Alltel executives, including
Scott Ford, by Alltel (or its successors) after the merger is completed; (4)
taking into account the current value of Alltel stock, the strength of its
business, revenues, cash flow and earnings power, the intrinsic value of
Alltel’s equity, the consideration offered in connection with the proposed
merger is inadequate; (5) the merger agreement contained provisions that will
deter higher bids, including a $625.0 million termination fee payable to the
Sponsors and restrictions on Alltel’s ability to solicit higher
20
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
_____
14.
|
Commitments
and Contingencies – Legal Proceedings,
Continued:
|
bids;
(6)
that Alltel’s financial advisors, JPMorgan Securities Inc. (“JPMorgan”), Merrill
Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”) and Stephens Inc. have
conflicts resulting from their relationships with the Sponsors; and (7) that
the
preliminary proxy statement filed by Alltel with the SEC on June 13, 2007 failed
to disclose material information concerning the merger. The
complaints seek, among other things, class action status, a court order
enjoining Alltel and its directors from consummating the merger, and the payment
of attorneys’ fees and expenses.
On
July
19, 2007, the parties in the shareholder litigation entered into a memorandum
of
understanding contemplating the settlement of the litigation described
above. Shareholders of Alltel who are members of the class expected
to be certified in the shareholder litigation will receive written notice of
the
terms of the proposed settlement. Among other things, the memorandum
of understanding provides that: (1) the termination fee payable under certain
circumstances by Alltel to Parent is waived to the extent it exceeds $550
million; (2) certain additional disclosures were made in the proxy statement
filed with the SEC on July 24, 2007 asking shareholders to approve the merger
transaction; and (3) shares personally owned by Scott Ford and Warren Stephens
were voted in the same proportion in favor, against and abstaining as all votes
cast other than with respect to such shares at the special shareholders’ meeting
held on August 29, 2007. Alltel also agreed that, at a regularly
scheduled meeting of its board of directors on July 19, 2007, the board would
request and receive oral advice from JPMorgan and Merrill Lynch concerning
whether they had learned of any matter that would cause them to withdraw or
modify their fairness opinions. At the July 19, 2007 board of
directors’ meeting, JPMorgan and Merrill Lynch advised the board that, taking
into consideration the types of factors and analyses considered in rending
their
May 20, 2007 opinions, they were aware of no matter, during the period since
May
20, 2007, that would cause them to withdraw or modify their fairness
opinions. Certain provisions of the proposed settlement and the
memorandum of understanding are subject to court approval. In
connection with the settlement, Alltel agreed to pay certain attorneys’ fees and
expenses. These amounts have been included in integration expenses,
restructuring and other charges in the accompanying unaudited interim
consolidated statement of income for the nine months ended September 30, 2007.
(See Note 7).
On
June
25, 2007, T-Mobile Austria Holding GmbH (“TMA Holding”) provided to the Company
notice of warranty claims against Western Wireless International Austria
Corporation (“WWI”), a wholly-owned subsidiary of Alltel, related to an August
10, 2005 purchase agreement, between T-Mobile Global Holding Nr.3 GmbH, T-Mobile
Austria GmbH and WWI. Alltel completed the sale of WWI’s operations
in Austria to T-Mobile Austria GmbH on April 28, 2006. In the notice,
TMA Holding alleges that WWI breached certain representations and warranties
contained within the purchase agreement and claims damages as a result of the
breach of no less than €150.9 million, or approximately $215.4 million, at
current exchange rates. While the Company is still investigating the
warranty claims, it believes they are without merit, and therefore, Alltel
intends to vigorously defend itself against the alleged
claims. Accordingly, as of September 30, 2007, Alltel has not
recorded a reserve for estimated loss, if any, that could result from the
ultimate resolution of this matter.
15.
|
Subsequent
Event
–
Tender Offers to Repurchase Long-Term
Debt:
|
On
October 15, 2007, Alltel announced that its wholly-owned subsidiaries, Alltel
Communications, Inc. (“ACI”) and Alltel Ohio Limited Partnership (“Alltel Ohio”)
are commencing cash tender offers and consent solicitations to repurchase up
to
$389.3 million of aggregate principal amount of their outstanding debt
securities. The tender consists of separate offers for the remaining
$39.0 million of 6.65 percent unsecured notes due 2008 issued by ACI, $53.0
million of 7.60 percent unsecured notes due 2009 issued by ACI and $297.3
million of 8.00 percent notes due 2010 issued by Alltel Ohio. The
tender offers and consent solicitations are being conducted as part of the
financing in connection with the pending Merger (see Note 13). The
terms and conditions of the tender offers and consent solicitations are
described in the Offer to Purchase and Consent Solicitation Statement (the
“Offer to Purchase”), dated October 15, 2007. The total cash
consideration for each $1,000 principal amount of notes tendered and accepted
for payment will be determined in the manner described in the Offer to
Purchase. Consummation of each tender offer and consent solicitation
is conditioned upon satisfaction or waiver of the conditions set forth in the
Offer to Purchase, including closing of the Merger and receipt of valid tenders
from a majority in principal amount of the relevant series of debt
securities. Each tender offer will expire on November 13, 2007,
unless extended or earlier terminated by the Company.
21
ALLTEL
CORPORATION
FORM
10-Q
PART
I - FINANCIAL INFORMATION
The
following is a discussion and analysis of the historical results of operations
and financial condition of ALLTEL Corporation (“Alltel” or the
“Company”). This discussion should be read in conjunction with the
unaudited consolidated financial statements, including the notes thereto, for
the interim periods ended September 30, 2007 and 2006, and Alltel’s Annual
Report on Form 10-K for the year ended December 31, 2006.
EXECUTIVE
SUMMARY
Alltel
provides wireless voice and advanced data services to more than 12 million
residential and business customers in 35 states. Among the highlights
in the third quarter of 2007:
·
|
Revenues
and sales increased 14 percent over 2006 driven by Alltel’s continued
focus on quality customer growth, improvements in data revenues and
additional Eligible Telecommunications Carrier (“ETC”) support. Growth in
revenues and sales in the quarter also reflected the effects of Alltel’s
October 3, 2006 acquisition of Midwest Wireless Holdings (“Midwest
Wireless”). Average revenue per customer and retail revenue per
customer both increased 4 percent year-over-year to $55.96 and $49.62,
respectively, due to continued growth in data and ETC revenues, partially
offset by lower voice revenues per customer. Average revenue
per customer for the third quarter of 2007 also reflected growth
in data
roaming revenues and additional wholesale transport revenues earned
from
charging third parties, principally Windstream Corporation (“Windstream”),
for use of Alltel’s fiber-optic
network.
|
·
|
Excluding
the effects of acquisitions, gross customer additions were 905,000
in the
quarter, a 9 percent increase from a year ago, while net customer
additions were 205,000, a 103 percent increase from
2006. Postpay churn decreased 36 basis points from the same
period a year ago to 1.31 percent, while total churn declined 28
basis
points year-over-year to 1.9 percent, marking the seventh consecutive
quarter that both churn metrics improved on a comparative year-over-year
basis.
|
·
|
Operating
income increased 21 percent from a year ago, primarily reflecting
the
growth in revenues and sales noted above and declines in bad debt
and
roaming expenses. The decrease in roaming expense resulted from
negotiated lower cost per minute charges, when compared to the rates
in
effect in the third quarter of
2006.
|
During
the remainder of 2007, Alltel will continue to face significant challenges
resulting from competition in the wireless industry and changes in the
regulatory environment, including the effects of potential changes to the rules
governing universal service and inter-carrier compensation. In
addressing these challenges, Alltel will continue to focus its efforts on
improving customer service, enhancing the quality of its networks, expanding
its
product and service offerings, and conducting advocacy efforts in favor of
governmental policies that will benefit Alltel’s business and its
customers.
PENDING
ACQUISITION OF ALLTEL BY TWO PRIVATE INVESTMENT FIRMS
On
May
20, 2007, Alltel entered into an Agreement and Plan of Merger (the “Agreement”)
with Atlantis Holdings LLC, a Delaware limited liability company (“Atlantis
Holdings” or “Parent”) and Atlantis Merger Sub, Inc., a Delaware corporation and
wholly-owned subsidiary of Parent (“Merger Sub”). Under the terms of
the Agreement, Merger Sub will be merged with and into Alltel (the “Merger”),
with Alltel surviving the Merger as a wholly-owned subsidiary of
Parent. Merger Sub and Parent are affiliates of private investment
funds TPG Partners V, L.P. and GS Capital Partners VI Fund, L.P. (together
the
“Sponsors”). Under the terms of the Agreement, Atlantis Holdings will
acquire all of the outstanding common stock of Alltel for $71.50 per share
in
cash. The merger consideration will be funded by Alltel’s available
cash on hand, cash equity contributions received from the Sponsors of up to
$4.6
billion and new borrowings of up to $23.2 billion by Alltel Communications,
Inc.
(“ACI”), a wholly-owned subsidiary of Alltel.
Completion
of the transaction, which is currently expected to occur by the end of 2007,
is
contingent upon customary closing conditions, and certain regulatory approvals,
including the approval of the Federal Communications Commission
(“FCC”). Alltel’s Board of Directors has unanimously approved the
Agreement and on August 29, 2007, at a special meeting, stockholders of Alltel
approved the Merger. (See Note 13 to the interim unaudited
consolidated financial statements for additional information regarding this
pending transaction.)
22
SPIN-OFF
OF WIRELINE TELECOMMUNICATIONS BUSINESS
On
July
17, 2006, Alltel completed the spin-off of its wireline telecommunications
business to its stockholders and the merger of that wireline business with
Valor
Communications Group, Inc. (“Valor”). Pursuant to the plan of
distribution and immediately prior to the effective time of the merger with
Valor described below, Alltel contributed all of the assets of its wireline
telecommunications business to ALLTEL Holding Corp. (“Alltel Holding” or
“Spinco”), a wholly-owned subsidiary of the Company, in exchange for: (i) the
issuance to Alltel of Spinco common stock that was distributed on a pro rata
basis to Alltel’s stockholders as a tax-free stock dividend, (ii) the payment of
a special dividend to Alltel in the amount of $2.3 billion and (iii) the
distribution by Spinco to Alltel of certain Spinco debt securities, consisting
of $1,746.0 million aggregate principal amount of 8.625 percent senior notes
due
2016 (the “Spinco Securities”). The Spinco Securities were issued at
a discount, and, at the date of distribution to Alltel, the Spinco Securities
had a carrying value of $1,703.2 million (par value of $1,746.0 million less
discount of $42.8 million). Alltel also transferred to Spinco $260.8
million of long-term debt that had been issued by the Company’s wireline
subsidiaries.
Immediately
after the consummation of the spin-off, Alltel Holding merged with and into
Valor, with Valor continuing as the surviving corporation. As a
result of the merger, all of the issued and outstanding shares of Spinco common
stock were converted into the right to receive an aggregate number of shares
of
common stock of Valor. Valor issued in the aggregate approximately
403 million shares of common stock to Alltel stockholders pursuant to the
merger, or 1.0339267 shares of Valor common stock for each share of Spinco
common stock outstanding as of the effective time of the merger. Upon
completion of the merger, Alltel stockholders owned approximately 85 percent
of
the outstanding equity interests of the surviving corporation, which is named
Windstream, and the stockholders of Valor owned the remaining 15 percent of
such
equity interests.
Following
the spin-off of the wireline business, Alltel completed a tax-free debt exchange
in which Alltel transferred to two investment banks the Spinco debt securities
received in the spin-off transaction in exchange for certain Alltel debt
securities, consisting of $988.5 million of commercial paper borrowings and
$685.1 million of 4.656 percent equity unit notes due 2007. On August
25, 2006, Alltel repurchased prior to maturity $1.0 billion of long-term debt,
consisting of $664.3 million of 4.656 percent equity unit notes due 2007, $61.0
million of 6.65 percent unsecured notes due 2008, $147.0 million of 7.60 percent
unsecured notes due 2009 and $127.7 million of 8.00 percent notes due 2010
pursuant to cash tender offers announced by Alltel on July 31,
2006. Proceeds from the special cash dividend were used to fund both
a portion of the repurchase of $1.0 billion of long-term debt discussed above
and Alltel’s repurchase of approximately 50.5 million of its common shares at a
total cost of more than $2.95 billion, as further discussed below.
ACQUISITIONS
On
October 3, 2006, Alltel completed its acquisition of Midwest Wireless for $1.083
billion in cash. In connection with this acquisition, Alltel added
approximately 433,000 wireless customers and expanded its wireless operations
in
Minnesota, Iowa and Wisconsin. As a condition of receiving approval
for this acquisition from the FCC and the U.S. Department of Justice (“DOJ”),
Alltel agreed to divest four rural markets in Minnesota. On April 3,
2007, Alltel completed the sale of these markets to Rural Cellular Corporation
(“Rural Cellular”).
During
the second quarter of 2006, Alltel purchased for $217.6 million in cash wireless
properties covering approximately 727,000 potential customers (“POPs”) in
Illinois, Texas and Virginia. On March 16, 2006, Alltel purchased
from Palmetto MobileNet, L.P. for $456.3 million in cash the remaining ownership
interests in ten wireless partnerships that cover approximately 2.3 million
POPs
in North and South Carolina. Prior to this transaction, Alltel owned
a 50 percent interest in each of the ten wireless
partnerships. During the first quarter of 2006, Alltel also acquired
the remaining ownership interest in a wireless property in Wisconsin in which
the Company owned a majority interest. (See Notes 3 and 10 to the
interim unaudited consolidated financial statements for additional information
regarding these acquisitions and dispositions.)
23
CUSTOMER
AND OTHER OPERATING STATISTICS
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
(Thousands,
except per customer amounts)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Customers
|
12,447.1
|
|
11,162.3
|
|
-
|
|
-
|
|
Average
customers
|
12,338.4
|
|
11,133.2
|
|
12,140.3
|
|
10,933.6
|
|
Gross
customer additions (a)
|
904.8
|
|
805.4
|
|
2,562.2
|
|
2,493.5
|
|
Net
customer additions (a)
|
205.0
|
|
77.2
|
|
623.1
|
|
500.0
|
|
Market
penetration
|
15.6%
|
|
14.5%
|
|
-
|
|
-
|
|
Postpay
customer churn
|
1.31%
|
|
1.67%
|
|
1.27%
|
|
1.60%
|
|
Total
churn
|
1.90%
|
|
2.18%
|
|
1.78%
|
|
2.03%
|
|
Retail
minutes of use per customer per month (b)
|
746
|
|
645
|
|
708
|
|
629
|
|
Retail
revenue per customer per month (c)
|
$49.62
|
|
$47.66
|
|
$48.28
|
|
$47.18
|
|
Average
revenue per customer per month (d)
|
$55.96
|
|
$53.76
|
|
$54.21
|
|
$52.63
|
|
Notes
to Customer and Other Operating Statistics Table:
(a)
|
Includes
the effects of acquisitions. Excludes reseller customers for
all periods presented.
|
|
|
(b)
|
Represents
the average monthly minutes that Alltel’s customers use on both the
Company’s network and while roaming on other carriers’
networks.
|
|
|
(c)
|
Retail
revenue per customer per month is calculated by dividing retail revenues
by average customers for the period. A reconciliation of the
revenues used in computing retail revenue per customer per month
is as
follows for the three and nine month periods ended September
30:
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
revenues
|
|
$
|
2,071.5
|
|
|
$
|
1,795.4
|
|
|
$
|
5,923.2
|
|
|
$
|
5,178.7
|
|
Less
wholesale roaming revenues
|
|
|
(196.5
|
)
|
|
|
(171.5
|
)
|
|
|
(520.8
|
)
|
|
|
(486.1
|
)
|
Less
wholesale transport revenues
|
|
|
(38.1
|
)
|
|
|
(32.2
|
)
|
|
|
(127.4
|
)
|
|
|
(50.4
|
)
|
Total
retail revenues
|
|
$
|
1,836.9
|
|
|
$
|
1,591.7
|
|
|
$
|
5,275.0
|
|
|
$
|
4,642.2
|
|
(d)
|
Average
revenue per customer per month is calculated by dividing service
revenues
by average customers for the period.
|
|
|
The
total
number of customers served by Alltel increased by more than 1.2 million
customers, or 12 percent, during the twelve month period ended September 30,
2007. The acquisition of Midwest Wireless completed on October 3,
2006, as previously discussed, accounted for approximately 433,000 of the
overall increase in customers during the twelve month period ended September
30,
2007. During the third quarter of 2007, Alltel added 205,000 net
customers, substantially all of which were on postpay rate plans. The
increase in net customer additions in the three months ended September 30,
2007
was driven primarily by lower churn, as further discussed below, and continued
growth in the “My Circle” service offering. The Company’s “My Circle”
offering enables Alltel customers, on select rate plans, to make and receive
unlimited free calls to up to ten phone numbers connected to any wireless or
wireline network, and add these phone numbers to their mobile-to-mobile
service. Overall, the Company’s wireless market penetration rate
(number of customers as a percent of the total population in Alltel’s service
areas) increased to 15.6 percent as of September 30, 2007.
The
level
of customer growth for the remainder of 2007 will be dependent upon the
Company’s ability to attract new customers and retain existing customers in a
highly competitive marketplace. Alltel will continue to focus its
efforts on sustaining value-added customer growth by improving service quality
and customer satisfaction, managing its distribution channels and customer
segments, offering attractively priced rate plans, launching new or enhanced
product offerings, selling additional services to existing customers,
integrating acquired operations, and pursuing strategic
acquisitions.
Alltel
continues to focus its efforts on lowering customer churn (average monthly
rate
of customer disconnects). To improve customer retention, Alltel
continues to upgrade its telecommunications network in order to offer expanded
network coverage and quality and to provide enhanced service offerings to its
customers. Alltel believes that its multi-year efforts devoted to
retail store upgrades, process improvements, branding, advertising and
innovative offerings such as My Circle are driving improvements in customer
churn metrics.
24
As
a
result of these efforts, postpay customer churn decreased 36 basis points and
33
basis points in the three and nine month periods of 2007, respectively, compared
to the same periods a year ago. Primarily due to improvements in
postpay customer churn, as well as improvements in prepay churn rates, total
churn also decreased in the three and nine months ended September 30, 2007
compared to the same prior year periods.
Primarily
due to growth in data and ETC revenues, retail revenue per customer per month
and average revenue per customer per month both increased in the three and
nine
months ended September 30, 2007, compared to the same periods a year
ago. Retail revenue per customer per month increased 4 percent and 2
percent to $49.62 and $48.28 in the three and nine month periods ended September
30, 2007, respectively. Similarly, average revenue per customer per
month increased 4 percent and 3 percent to $55.96 and $54.21 in the three and
nine month periods ended September 30, 2007, respectively. Growth in
both retail and average revenue per customer per month in the three and nine
month periods of 2007 was affected by decreases in voice revenues per customer
reflecting the effects of increased sales of family and prepay rate
plans. Average revenue per customer for the three and nine month
periods of 2007 also reflected growth in data roaming revenues and additional
wholesale transport revenues earned from charging third parties, principally
Windstream, for use of Alltel’s fiber-optic network. Growth in
service revenues and sustaining average revenue per customer per month for
the
balance of 2007 will depend upon Alltel’s ability to maintain market share in a
competitive marketplace by adding new customers, retaining existing customers,
increasing customer usage, and continuing to sell data services.
CONSOLIDATED
RESULTS OF OPERATIONS
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
and sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
$
|
2,071.5
|
|
|
$
|
1,795.4
|
|
|
$
|
5,923.2
|
|
|
$
|
5,178.7
|
|
Product
sales
|
|
|
210.0
|
|
|
|
211.9
|
|
|
|
611.9
|
|
|
|
617.1
|
|
Total revenues and sales
|
|
|
2,281.5
|
|
|
|
2,007.3
|
|
|
|
6,535.1
|
|
|
|
5,795.8
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
682.2
|
|
|
|
610.1
|
|
|
|
1,933.4
|
|
|
|
1,726.9
|
|
Cost
of products sold
|
|
|
300.0
|
|
|
|
293.8
|
|
|
|
876.1
|
|
|
|
849.8
|
|
Selling,
general, administrative and other
|
|
|
496.1
|
|
|
|
438.3
|
|
|
|
1,445.5
|
|
|
|
1,298.5
|
|
Depreciation
and amortization
|
|
|
358.2
|
|
|
|
307.1
|
|
|
|
1,060.0
|
|
|
|
916.0
|
|
Integration
expenses, restructuring and other charges
|
|
|
11.0
|
|
|
|
-
|
|
|
|
53.3
|
|
|
|
10.8
|
|
Total costs and expenses
|
|
|
1,847.5
|
|
|
|
1,649.3
|
|
|
|
5,368.3
|
|
|
|
4,802.0
|
|
Operating
income
|
|
|
434.0
|
|
|
|
358.0
|
|
|
|
1,166.8
|
|
|
|
993.8
|
|
Non-operating
income, net
|
|
|
14.2
|
|
|
|
42.9
|
|
|
|
40.3
|
|
|
|
77.6
|
|
Interest
expense
|
|
|
(46.2
|
)
|
|
|
(63.8
|
)
|
|
|
(140.3
|
)
|
|
|
(234.9
|
)
|
Gain
(loss) on exchange or disposal of assets and other
|
|
|
-
|
|
|
|
(50.5
|
)
|
|
|
56.5
|
|
|
|
126.1
|
|
Income
from continuing operations before income taxes
|
|
|
402.0
|
|
|
|
286.6
|
|
|
|
1,123.3
|
|
|
|
962.6
|
|
Income
taxes
|
|
|
123.3
|
|
|
|
121.3
|
|
|
|
415.8
|
|
|
|
374.7
|
|
Income
from continuing operations
|
|
|
278.7
|
|
|
|
165.3
|
|
|
|
707.5
|
|
|
|
587.9
|
|
Income
from discontinued operations
|
|
|
3.9
|
|
|
|
21.9
|
|
|
|
0.9
|
|
|
|
325.6
|
|
Net
income
|
|
$
|
282.6
|
|
|
$
|
187.2
|
|
|
$
|
708.4
|
|
|
$
|
913.5
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$.81
|
|
|
|
$.43
|
|
|
|
$2.03
|
|
|
|
$1.52
|
|
Income
from discontinued operations
|
|
|
.01
|
|
|
|
.06
|
|
|
|
-
|
|
|
|
.84
|
|
Net
income
|
|
|
$.82
|
|
|
|
$.49
|
|
|
|
$2.03
|
|
|
|
$2.36
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$.80
|
|
|
|
$.43
|
|
|
|
$2.01
|
|
|
|
$1.51
|
|
Income
from discontinued operations
|
|
|
.01
|
|
|
|
.05
|
|
|
|
-
|
|
|
|
.84
|
|
Net
income
|
|
|
$.81
|
|
|
|
$.48
|
|
|
|
$2.01
|
|
|
|
$2.35
|
|
Revenues
and sales increased 14 percent, or $274.2 million, and 13 percent, or $739.3
million, for the three and nine months ended September 30, 2007, compared to
the
same periods of 2006. Service revenues increased by 15 percent, or
$276.1 million, and 14 percent, or $744.5 million, in the three and nine month
periods of 2007, respectively, as compared to the same periods a year
ago. The acquisitions of Midwest Wireless and other wireless
properties in Illinois, Texas and Virginia previously discussed accounted for
approximately $87.8 million and $276.6 million of the overall increases in
service revenues for the three and nine months ended September 30, 2007,
respectively. In addition to the effects of the acquisitions, service
revenues also reflected growth in access revenues,
25
which
increased $52.1 million and $119.8 million in the three and nine month periods
of 2007, respectively, from the same periods a year ago. The
increases in access revenues in both 2007 periods were primarily driven by
non-acquisition-related growth in Alltel’s postpay customer base and increased
revenues derived from the Company’s ”U” prepaid service
offerings. Service revenues for 2007 also reflected growth in
revenues derived from data services, including text and picture messaging and
downloadable applications, such as music, games, ringtones, wall paper and
other
office applications. Compared to the same periods a year ago,
revenues from data services increased $98.1 million, or 79 percent, and $257.7
million, or 80 percent, in the three and nine months ended September 30, 2007,
respectively, reflecting strong demand for these services. Service
revenues also included increases in regulatory fee revenues of $30.9 million
and
$88.6 million during the three and nine month periods of 2007, respectively,
compared to the same prior year periods. The increases in regulatory
fees reflected additional Universal Service Fund (“USF”) revenues earned by
Alltel due, in part, to an increase in the interstate safe-harbor percentage,
effective October 1, 2006, and growth in postpay customer revenues eligible
to
receive USF support. Growth in USF revenues attributable to Alltel’s
certification in 24 states as an ETC accounted for $10.8 million and $37.6
million of the overall increases in regulatory fees in the three and nine months
ended September 30, 2007, respectively. When compared to the same
periods in 2006, revenues from the sale of wireless equipment protection plans
also increased $8.2 million and $22.9 million in the three and nine month
periods of 2007, respectively, primarily due to customer growth and continued
demand for these plans.
As
compared to the same periods of 2006, wholesale revenues increased $20.2 million
and $73.4 million in the three and nine months ended September 30, 2007,
respectively, primarily due to growth in data roaming revenues and additional
transport revenues earned from charging third parties, principally Windstream,
for use of Alltel’s fiber-optic network. Growth in wholesale revenues
also included the effects of migrating Sprint Nextel Corporation and AT&T
Mobility LLC (formerly Cingular Wireless LLC) roaming traffic to lower rates
in
exchange for long-term roaming agreements signed with each carrier during the
second quarter of 2006.
The
above
increases in service revenues were partially offset by lower airtime and retail
roaming revenues and a reduction in revenues from termination fees assessed
to
customers who cancel their service contracts prior to
expiration. Compared to the same periods in 2006, airtime and retail
roaming revenues decreased $15.7 million and $67.6 million in the three and
nine
month periods of 2007, respectively, primarily due to the continued effects
of
customers migrating to rate plans with a larger number of packaged
minutes. Such rate plans, for a flat monthly service fee, provide
customers with a specified number of airtime minutes and include unlimited
weekend, nighttime and mobile-to-mobile minutes at no extra
charge. Revenues attributable to early termination fees declined $7.0
million and $24.2 million in the three and nine month periods of 2007,
respectively, primarily due to improvement in customer churn rates, as
previously discussed.
Product
sales decreased $1.9 million and $5.2 million, or 1 percent, in both the three
and nine months ended September 30, 2007, respectively, compared to the same
periods a year ago. The decreases primarily reflected the effects of
increased rebates offered to customers in connection with the sales of wireless
handsets. During 2007, Alltel has expanded the number of wireless
handset models eligible for rebates. The reductions in product sales
in both periods of 2007 attributable to rebates were partially offset by the
effects of increased sales resulting from the overall growth in gross customer
additions and from acquisitions. Product sales attributable to
acquisitions increased $2.1 million and $8.9 million in the three and nine
month
periods of 2007, respectively.
Cost
of
services increased 12 percent, or $72.1 million and $206.5 million, in the
three
and nine months ended September 30, 2007, respectively, compared to the same
periods of 2006. The acquisitions accounted for $25.9 million and
$88.8 million of the overall increases in cost of services in the three and
nine
month periods of 2007, respectively. In addition to the effects of
the acquisitions, cost of services also reflected higher network-related costs
of $23.2 million and $99.4 million in the three and nine month periods of 2007,
respectively, reflecting increased network traffic due to
non-acquisition-related customer growth, increased minutes of use and expansion
of network facilities. Cost of services also reflected increased
customer service expenses of $8.8 million and $28.7 million in the three and
nine month periods of 2007, respectively, primarily due to additional costs
associated with Alltel’s retention efforts focused on improving customer
satisfaction and reducing postpay churn. In addition, cost of
services increased $17.0 million and $44.6 million in the three and nine month
periods of 2007, respectively, due to higher USF fees resulting from an increase
in the safe-harbor percentage and the related growth in regulatory fee revenues
discussed above. Compared to the same periods in 2006, payments to
data content providers increased $10.0 million and $26.2 million in the three
and nine months ended September 30, 2007, respectively, consistent with the
growth in revenues derived from data services discussed above. The
above increases in cost of services in the three and nine month periods of
2007
were partially offset by decreases in bad debt expense of $13.3 million and
$42.9 million, respectively, primarily due to reduced write-offs resulting
from
improvements in the Company’s
26
internal
and third-party outsourcing collection efforts. Compared to the same
periods a year ago, cost of services also reflected decreases in roaming
expenses of $6.4 million and $46.6 million in the three and nine month periods
ended September 30, 2007, respectively, due to lower negotiated per minute
roaming rates.
Cost
of
products sold increased $6.2 million, or 2 percent, and $26.3 million, or 3
percent, for the three and nine month periods ended September 30, 2007,
respectively, as compared to the same periods in 2006. The increases
in both 2007 periods were primarily attributable to the acquisitions discussed
above, which accounted for $8.2 million and $25.5 million of the overall
increases in cost of products sold in the three and nine month periods,
respectively.
Selling,
general, administrative and other expenses increased 13 percent, or $57.8
million, and 11 percent, or $147.0 million, for the three and nine months ended
September 30, 2007, respectively, as compared to the same periods of
2006. The acquisitions accounted for $12.8 million and $47.0 million
of the overall increases in these expenses in the three and nine month periods
of 2007, respectively. In addition to the effects of the
acquisitions, selling, general, administrative and other expenses for the three
and nine months ended September 30, 2007 also included increased advertising
costs of $10.3 million and $31.1 million, respectively. Advertising
costs in both 2007 periods reflected growth in television and national cable
advertising directed at promoting Alltel brand awareness among consumers and
the
effects of an overall increase in advertising spending levels following the
April 2006 launch of the “My Circle” offering. Higher commission
costs and increased costs to provide and administer the Company’s wireless
equipment protection plans also contributed to the increases in selling,
general, administrative and other expenses in the three and nine month periods
of 2007. When compared to the same periods of 2006, commission costs
increased $23.5 million and $44.8 million in the three and nine month periods
of
2007, respectively, consistent with the growth in gross customer additions
and
higher commissions paid to agents, reflecting increased sales of data services
and features and reduced charge-backs resulting from lower customer
churn. Costs associated with providing and administering the wireless
equipment protection plans increased $7.9 million and $19.2 million in the
three
and nine month periods of 2007, respectively, consistent with the growth in
wireless equipment protection plan revenues previously discussed.
Depreciation
and amortization expense increased $51.1 million, or 17 percent, and $144.0
million, or 16 percent, in the three and nine months ended September 30, 2007,
respectively, as compared to the same periods of 2006. The increases
in both 2007 periods primarily reflected growth in operating plant in service
and the effects of a fourth quarter 2006 prospective change in the depreciable
lives of certain operating equipment, which accounted for $11.2 million and
$38.2 million, respectively, of the overall increases in depreciation and
amortization expense. The depreciable lives were shortened in
response to the rapid pace of technological development and Alltel’s plans to
expand and upgrade its network facilities with 1x-EVDO technology. In
addition to these factors, depreciation and amortization expense in the three
and nine month periods of 2007 also included $7.9 million and $29.5 million,
respectively, of additional expense attributable to the acquisitions previously
discussed.
Integration
Expenses, Restructuring and Other Charges
A
summary
of the integration expenses, restructuring and other charges recorded by Alltel
were as follows for the three and nine months ended September
30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Severance
and employee benefit costs
|
|
$
|
0.3
|
|
|
$
|
-
|
|
|
$
|
4.7
|
|
|
$
|
-
|
|
Rebranding
and signage costs
|
|
|
3.9
|
|
|
|
-
|
|
|
|
4.3
|
|
|
|
8.3
|
|
Computer
system conversion and other integration expenses
|
|
|
1.7
|
|
|
|
-
|
|
|
|
6.1
|
|
|
|
2.5
|
|
Lease
termination costs
|
|
|
2.6
|
|
|
|
-
|
|
|
|
2.6
|
|
|
|
-
|
|
Costs
associated with pending acquisition of Alltel
|
|
|
2.5
|
|
|
|
-
|
|
|
|
35.6
|
|
|
|
-
|
|
Total
integration expenses, restructuring and other charges
|
|
$
|
11.0
|
|
|
$
|
-
|
|
|
$
|
53.3
|
|
|
$
|
10.8
|
|
During
2007, Alltel incurred $10.4 million of integration expenses related to its
2006
acquisitions of Midwest Wireless and properties in Illinois, Texas and
Virginia. The system conversion and other integration expenses
primarily consisted of internal payroll, contracted services and other
programming costs incurred in converting the acquired properties to Alltel’s
customer billing and operational support systems, a process that the Company
expects to complete during the fourth quarter of 2007. In connection
with the closing of two call centers, Alltel also recorded severance and
employee benefit costs of $4.7 million and lease termination fees of $2.6
million. As previously discussed, on May 20, 2007, Alltel entered
into an agreement to be acquired by two private investment firms. In
connection with this transaction, Alltel incurred $35.6 million of incremental
costs, principally consisting of financial advisory, legal and regulatory filing
fees. Upon successful closing of the transaction, Alltel will
be
27
obligated
to pay additional financial advisory and legal fees of approximately $65.0
million, which will be expensed in the period the transaction
closes. The integration expenses, restructuring and other charges
decreased net income $7.6 million and $46.4 million for the three and nine
months ended September 30, 2007, respectively.
In
the
first quarter of 2006, Alltel incurred $10.8 million of integration expenses
related to its August 1, 2005 merger with Western Wireless Corporation (“Western
Wireless”). These expenses consisted of $8.3 million of rebranding
and signage costs and $2.5 million of system conversion and other integration
costs. The system conversion and other integration expenses included
internal payroll and employee benefit costs, contracted services, relocation
expenses and other programming costs incurred in converting Western Wireless’
customer billing and operational support systems to Alltel’s internal systems, a
process which was completed during March 2006. The integration
expenses, restructuring and other charges decreased net income $6.6 million
in
the nine months ended September 30, 2006.
At
September 30, 2007, the remaining unpaid liability related to Alltel’s
integration and restructuring activities consisted of severance and employee
benefit costs of $4.2 million, legal and other fees associated with the pending
merger transaction of $10.0 million and lease and contract termination costs
of
$2.6 million and is included in other current liabilities in the accompanying
consolidated balance sheet. Cash outlays for the remaining unpaid
liability will be disbursed over the next 12 months and will be funded from
operating cash flows. (See Note 7 to the unaudited interim
consolidated financial statements for additional information regarding the
integration expenses, restructuring and other charges.)
Primarily
as a result of the growth in revenues and sales discussed above, operating
income increased $76.0 million, or 21 percent, and $173.0 million, or 17
percent, for the three and nine months ended September 30, 2007, respectively,
compared to the same periods of 2006. The acquisitions of Midwest
Wireless and properties in Illinois, Texas and Virginia accounted for $34.8
million and $94.5 million of the overall increases in operating income in the
three and nine month periods of 2007, respectively. Operating income
comparisons for the three and nine months ended September 30, 2007 were also
favorably affected by the declines in bad debt and roaming expenses previously
discussed, partially offset by the adverse effects of integration expenses,
restructuring and other charges discussed above.
Non-Operating
Income, Net
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Equity
earnings in unconsolidated partnerships
|
|
$
|
17.1
|
|
|
$
|
17.3
|
|
|
$
|
48.5
|
|
|
$
|
45.6
|
|
Minority
interest in consolidated partnerships
|
|
|
(8.8
|
)
|
|
|
(11.7
|
)
|
|
|
(27.4
|
)
|
|
|
(37.1
|
)
|
Other
income, net
|
|
|
5.9
|
|
|
|
37.3
|
|
|
|
19.2
|
|
|
|
69.1
|
|
Non-operating
income, net
|
|
$
|
14.2
|
|
|
$
|
42.9
|
|
|
$
|
40.3
|
|
|
$
|
77.6
|
|
As
indicated in the table above, non-operating income, net decreased $28.7 million,
or 67 percent, and $37.3 million or 48 percent, in the three and nine month
periods ended September 30, 2007, respectively, as compared to the same periods
in 2006. The decreases in both 2007 periods primarily reflected
reductions in interest income earned on the Company’s cash and short-term
investments due to a significant decrease in Alltel’s average available cash on
hand. Compared to the same periods a year ago, interest income
decreased $30.0 million and $46.8 million during the three and nine months
ended
September 30, 2007, respectively. As further discussed below under
“Cash Flows from Financing Activities – Continuing Operations”, during 2007,
Alltel repurchased 22.0 million shares of its common stock at a total cost
of
$1,360.3 million and funded the repurchase with available cash on
hand.
Compared
to the same period a year ago, the increase in equity earnings in unconsolidated
partnerships of $2.9 million in the nine month period of 2007 primarily
reflected improved operating results in those markets in which the Company
owns
a minority interest. Conversely, the decreases in minority interest
expense of $2.9 million and $9.7 million in the three and nine month periods
of
2007, respectively, primarily reflected the effects of increased advertising,
network-related, interconnection and data transport charges incurred by the
majority-owned partnerships, consistent with the overall increases in these
expenses. Alltel’s acquisitions in the first quarter of 2006 of the
remaining ownership interests in wireless properties in North Carolina, South
Carolina and Wisconsin also contributed to the decrease in minority interest
expense in the nine month period of 2007.
28
Interest
Expense
Interest
expense decreased $17.6 million, or 28 percent, and $94.6 million, or 40
percent, in both the three and nine months ended September 30, 2007,
respectively, compared to the same periods of 2006. The decreases in
interest expense primarily reflected the favorable effects on interest costs
resulting from a reduction in Alltel’s long-term debt balance of $2.9 billion
that occurred subsequent to the completion of the wireline
spin-off. As previously discussed, on August 25, 2006, Alltel
repurchased prior to maturity $1.0 billion of long-term debt, and on July 17,
2006, the Company completed a $1.7 billion tax-free debt exchange with two
investment banks. In addition, on November 1, 2006, Alltel repaid, at
maturity, a $186.3 million, 9.0 percent senior unsecured note.
Gain
(Loss) on Exchange or Disposal of Assets and Other
Through
its merger with Western Wireless, Alltel acquired marketable equity
securities. On January 24, 2007, Alltel completed the sale of these
securities for $188.7 million in cash and recorded a pretax gain from the sale
of $56.5 million. This transaction increased net income $36.8 million
in the nine month period ended September 30, 2007.
On
August
25, 2006, Alltel repurchased prior to maturity $1.0 billion of long-term debt,
consisting of $664.3 million of 4.656 percent equity unit notes due 2007, $61.0
million of 6.65 percent unsecured notes due 2008, $147.0 million of 7.60 percent
unsecured notes due 2009 and $127.7 million of 8.00 percent notes due 2010
pursuant to cash tender offers announced by Alltel on July 31,
2006. Concurrent with the debt repurchase, Alltel also terminated the
related pay variable/receive fixed, interest rate swap agreement that had been
designated as a fair value hedge against the 6.65 percent unsecured notes due
2008. In connection with the early termination of the debt and
interest rate swap agreement, Alltel incurred net pretax termination fees of
$23.0 million. Following the spin-off of the wireline business,
Alltel completed a debt exchange with two investment banks. On July
17, 2006, Alltel transferred to the investment banks the Spinco debt securities
received in the spin-off transaction in exchange for certain Alltel debt
securities, consisting of $988.5 million of commercial paper borrowings and
$685.1 million of 4.656 percent equity unit notes due 2007. In
completing the tax-free debt exchange, Alltel incurred a loss of $27.5
million. These transactions decreased net income $38.8 million in
both the three and nine month periods ended September 30, 2006.
On
November 10, 2005, federal legislation was enacted that included provisions
to
dissolve and liquidate the assets of the Rural Telephone Bank
(“RTB”). In connection with the dissolution and liquidation, during
April 2006, the RTB redeemed all outstanding shares of its Class C
stock. As a result, the Company received liquidating cash
distributions of $198.7 million in exchange for its $22.1 million investment
in
RTB Class C stock and recognized a pretax gain of $176.6
million. This transaction increased net income $107.6 million in the
nine month period ended September 30, 2006.
Income
Taxes
Income
tax expense increased $2.0 million, or 2 percent, and increased $41.1 million,
or 11 percent, in the three and nine month periods ended September 30, 2007,
respectively, compared to the same periods of 2006. The increase in
income tax expense in both the three and nine month periods of 2007 reflected
overall growth in Alltel’s operating income, consistent with the increases in
revenues and sales previously discussed, lower interest costs, and the gain
realized on the sale of marketable equity securities. The effects on
income tax expense attributable to these factors were partially offset by
decreases in Alltel’s effective income tax rates. As presented in
Note 9 to the unaudited interim consolidated financial statements, Alltel’s
effective income tax rates decreased to 30.7 percent and 37.0 percent for the
three and nine months ended September 30, 2007, respectively, compared to 42.3
percent and 38.9 percent for the corresponding periods of
2006. During the third quarter of 2007, Alltel recorded a reduction
in its income tax contingency reserves to reflect the expiration of certain
state statutes of limitations, the effects of which resulted in a decrease
in
income tax expense associated with continuing operations of $33.8
million. The effective income tax rates in both 2007 periods were
adversely affected by the non-deductibility for both federal and state income
tax purposes of the $35.6 million in financial advisory, legal and regulatory
filing fees incurred by Alltel in connection with the proposed merger
transaction discussed above. The effective income tax rates in both
2007 periods also reflected lower estimated annual tax benefits to be derived
from tax-exempt interest income resulting from an expected reduction in Alltel’s
average daily cash balance when compared to 2006.
Conversely,
the effective income tax rates in both 2006 periods were adversely affected
by
the non-deductibility for both federal and state income tax purposes of the
$27.5 million loss incurred by Alltel in connection with completing the debt
exchange and an increase in Alltel’s estimated annual effective tax rate
reflecting lower expected annual pretax income following the wireline
spin-off. These adverse effects were partially offset by increases in
tax-exempt interest income.
29
For
2007,
Alltel’s annual effective income tax rate is expected to range between 37.0
percent and 38.0 percent, absent the effects of any future significant or
unusual items, such as the reversal of income tax contingency reserves and
the
effects of the proposed merger transaction, including deferred income taxes
due
to the anticipated generation of net operating losses subsequent to the
merger.
In
determining its quarterly provision for income taxes, Alltel uses an estimated
annual effective tax rate, which is based on the Company’s expected annual
income, statutory rates and tax planning opportunities and includes the effects
of uncertain tax positions accounted for in accordance with Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN
48”). Significant or unusual items, such as the taxes related to the
sale of a business, are separately recognized in the quarter in which they
occur.
Net
Income and Earnings per Share from Continuing Operations
Net
income from continuing operations increased $113.4 million, or 69 percent,
and
$119.6 million, or 20 percent, in the three and nine month periods ended
September 30, 2007, respectively, compared to the same periods of
2006. Basic and diluted earnings per share from continuing operations
increased 88 percent and 86 percent for the three months ended September 30,
2007, respectively, compared to the same period of 2006. For the nine
months ended September 30, 2007, basic and diluted earnings per share from
continuing operations increased 34 percent and 33 percent, respectively,
compared to the same period of 2006. The increases in net income and
earnings per share in both 2007 periods were driven by the overall growth in
Alltel’s operating income, lower interest expense and a reduction in the
Company’s effective income tax rates when compared to the corresponding periods
of 2006, partially offset by lower interest income. Net income and
earnings per share comparisons for the three and nine months ended September
30,
2007 were also affected by the effects of the gains realized on the sale or
liquidation of investments, debt prepayment expenses and loss incurred in
connection with the cash tender offers and debt exchange previously
discussed. When compared to the corresponding periods of 2006, the
changes in basic and diluted earnings per share in the three and nine month
periods of 2007 also reflected overall decreases in weighted average share
counts due to Alltel’s repurchase of its common stock, as further discussed
below.
Discontinued
Operations
As
previously discussed, on July 17, 2006, Alltel completed the spin-off of its
wireline telecommunications business to its stockholders and the merger of
that
wireline business with Valor. In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment
or Disposal of Long-Lived Assets”, the results of operations, assets,
liabilities and cash flows of the wireline telecommunications business have
been
presented as discontinued operations for all periods presented.
As
a
condition of receiving approval from the DOJ and FCC for its acquisition of
Midwest Wireless, Alltel agreed on September 7, 2006 to divest four rural
markets in Minnesota. On April 3, 2007, Alltel completed the sale of
these markets to Rural Cellular for $48.5 million in cash. During
2005, Alltel also had agreed to divest certain wireless operations of Western
Wireless in 16 markets in Arkansas, Kansas and Nebraska, as well as the Cellular
One brand as a condition of receiving approval from the DOJ and FCC for the
merger with Western Wireless. In December 2005, Alltel completed an
exchange of wireless properties with United States Cellular Corporation that
included a substantial portion of the divestiture requirements related to the
Western Wireless merger and included the Kansas and Nebraska
markets. In December 2005, Alltel also sold the Cellular One brand,
and in March 2006, Alltel sold the remaining market in
Arkansas. During 2005, Alltel completed the sales of Western
Wireless’ international operations in the countries of Georgia, Ghana and
Ireland for $570.3 million in cash. During the second quarter of
2006, Alltel completed the sales of Western Wireless’ international operations
in the countries of Austria, Bolivia, Côte d’Ivoire, Haiti, and Slovenia for
approximately $1.7 billion in cash. The acquired international
operations and interests of Western Wireless and the domestic markets in
Arkansas, Kansas, Minnesota, and Nebraska required to be divested by Alltel
have
been classified as discontinued operations in the accompanying consolidated
financial statements for all periods presented.
30
The
table
presented below includes certain summary income statement information related
to
the wireline business, international operations and the domestic markets to
be
divested reflected as discontinued operations for the three and nine months
ended September 30:
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
and sales
|
|
$
|
-
|
|
|
$
|
127.3
|
|
|
$
|
7.8
|
|
|
$
|
1,830.8
|
|
Operating
expenses
|
|
|
-
|
|
|
|
97.4
|
|
|
|
10.6
|
|
|
|
1,253.6
|
|
Operating
income (loss)
|
|
|
-
|
|
|
|
29.9
|
|
|
|
(2.8
|
)
|
|
|
577.2
|
|
Minority
interest expense in unconsolidated entities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6.0
|
)
|
Loss
on disposal of discontinued operations
|
|
|
(0.3
|
)
|
|
|
-
|
|
|
|
(0.1
|
)
|
|
|
(14.8
|
)
|
Other
income, net
|
|
|
-
|
|
|
|
0.6
|
|
|
|
1.3
|
|
|
|
0.9
|
|
Interest
expense
|
|
|
-
|
|
|
|
(0.7
|
)
|
|
|
-
|
|
|
|
(9.1
|
)
|
Pretax
income (loss) from discontinued operations
|
|
|
(0.3
|
)
|
|
|
29.8
|
|
|
|
(1.6
|
)
|
|
|
548.2
|
|
Income
tax expense (benefit)
|
|
|
(4.2
|
)
|
|
|
7.9
|
|
|
|
(2.5
|
)
|
|
|
222.6
|
|
Income
from discontinued operations
|
|
$
|
3.9
|
|
|
$
|
21.9
|
|
|
$
|
0.9
|
|
|
$
|
325.6
|
|
Operating
expenses for 2007 included an impairment charge of $1.7 million to reflect
the
fair value less cost to sell of the four rural markets in Minnesota required
to
be divested and resulted in the write-down in the carrying values of goodwill
and customer list allocated to these markets. The depreciation of
long-lived assets related to the international operations and the domestic
markets in Arkansas, Kansas and Nebraska to be divested ceased as of August
1,
2005, the date of the Western Wireless merger. Depreciation of
long-lived assets and amortization of finite-lived intangible assets related
to
the four markets in Minnesota to be divested was not recorded subsequent to
September 7, 2006, the date of Alltel’s agreement with the DOJ and FCC to divest
these markets. The cessation of depreciation and amortization expense
had the effect of reducing operating expenses by approximately $1.0 million
in
the nine months ended September 30, 2007. Comparatively, the
cessation of depreciation and amortization expense had the effect of reducing
operating expenses by approximately $0.4 million and $25.9 million in the three
and nine months ended September 30, 2006, respectively. Income taxes
in the three and nine month periods of 2007 reflected a change in the estimate
of tax benefits associated with transaction costs incurred in connection with
the wireline spin-off and the reversal of income tax contingency reserves
applicable to the sold financial services division due to the expiration of
certain state statutes of limitation. (See Note 10 to the unaudited
interim consolidated financial statements for additional information regarding
the discontinued operations.)
Weighted
Average Common Shares Outstanding
The
weighted average number of common shares outstanding decreased 11 percent and
10
percent in the three and nine month periods ended September 30, 2007,
respectively, compared to the same periods of 2006. The decreases
primarily reflected the effects of Alltel’s aggregate repurchase of
approximately 37.7 million of its common shares during the twelve month period
ended September 30, 2007, as further discussed below under “Cash Flows from
Financing Activities – Continuing Operations”. The decreases in weighted average
share counts in both 2007 periods attributable to the share repurchases were
partially offset by additional common shares issued upon the exercise of options
granted under Alltel’s employee stock-based compensation plans.
Regulatory
Matters
Alltel
is
subject to regulation primarily by the FCC as a provider of Commercial Mobile
Radio Services (“CMRS”). The FCC’s regulatory oversight consists of
ensuring that wireless service providers are complying with the Communications
Act of 1934, as amended (the “Communications Act”), and the FCC’s regulations
governing technical standards, outage reporting, spectrum usage, license
requirements, market structure, consumer protection, including public safety
issues like enhanced 911 emergency service (“E-911”), the Communications
Assistance for Law Enforcement Act (“CALEA”), accessibility requirements
(including hearing aid capabilities), and environmental matters governing tower
siting. State public service commissions are pre-empted under the
Communications Act from regulatory oversight of wireless carriers’ market entry
and retail rates, but they are entitled to address certain terms and conditions
of service offered by wireless service providers. The nation’s
telecommunications laws continue to be reviewed with bills introduced in
Congress, rulemaking proceedings pending at the FCC and various state regulatory
initiatives, the effects of which could significantly impact Alltel’s wireless
telecommunications business in the future.
31
Regulatory
Treatment for Wireless Broadband
The
FCC
has determined that wireless broadband internet access services are information
services under the Communications Act, and, as such, are subject to similar
regulatory treatment as other broadband services such as fiber to the home,
cable modem, Digital Subscriber Line (“DSL”), and broadband over power line
services. Certain interconnected broadband services, such as Voice
Over Internet Protocol (“VOIP”) have been made subject to various FCC mandates
including E-911, CALEA, Customer Proprietary Network Information (“CPNI”),
contributions to the Telecommunications Relay Services, universal service
contributions and access for the disabled, and will apply to Alltel to the
extent it offers wireless VOIP services or should the FCC extend the various
mandates to broadband services generally. Further, the FCC has
instituted an inquiry into whether regulatory intervention is necessary in
the
broadband market to ensure network neutrality.
Universal
Service
To
ensure
affordable access to telecommunications services throughout the United States,
the FCC and many state commissions administer universal service
programs. CMRS providers are required to contribute to the federal
USF and are required to contribute to some state universal service
funds. The rules and methodology under which carriers contribute to
the federal fund are the subject of an ongoing FCC rulemaking in which a change
from the current interstate revenue-based system to some other system based
upon
line capacity or utilized numbers is being considered. In the
meantime, the FCC has increased the safe-harbor percentage of a wireless
carrier’s revenue subject to a federal universal service assessment from 28.5
percent to 37.1 percent, adopted certain reporting requirements and clarified
the alternative methods under which CMRS providers contribute to the
fund. CMRS providers also are eligible to receive support from the
federal USF if they obtain designation as an ETC. The collection and
distribution of USF fees are under continual review by federal and state
legislative and regulatory bodies and are subject to audit by Universal Service
Administration Corporation (“USAC”). Certain of Alltel’s
contributions to, and distributions from, the USF are the subject of on-going
USAC audits. The Company does not anticipate any material adverse
findings. The Federal-State Universal Service Joint Board (“Joint
Board”) has recommended, among other things, to cap universal service support
for competitive eligible telecommunications carriers like Alltel, and the FCC
is
considering whether to adopt this recommendation and/or implement other changes
to the way universal service funds are disbursed to program
recipients. The Joint Board also has proposed that support mechanisms
for the future focus on broadband services in addition to supporting voice
and
mobility offerings as they do today. It is not possible to predict
whether any of the Joint Board’s recommendations will be
adopted. In the event that any of the Joint Board
recommendations are adopted, it is not possible at this time to predict the
impact of the adoption of one or more of these recommendations on Alltel’s
operations.
Alltel
is
designated as an ETC and receives USF support from the federal fund in the
following states: Alabama, Arkansas, California, Colorado, Florida, Georgia,
Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Montana, Nebraska,
Nevada, New Mexico, North Carolina, North Dakota, South Dakota, Texas, Virginia,
West Virginia, Wisconsin, and Wyoming. Alltel also receives state
universal service support for some offerings in Texas.
The
Communications Act and FCC regulations require that universal service receipts
be used to provision, maintain and upgrade the networks that provide the
supported services. Additionally, the Company accepted certain
federal and state reporting requirements and other obligations as a condition
of
the ETC certifications. The Company believes that it is substantially
compliant with the FCC regulations and with all of the federal and state
reporting requirements and other obligations related to universal service
support. During the third quarter of 2007, Alltel received
approximately $89.0 million of USF support.
E-911
Wireless
service providers are required by the FCC to provide E-911 in a two-phased
approach. In phase one, carriers must, within six months after
receiving a request 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 PSAP serving the geographic territory from which the E-911 call
originated. In phase two, carriers that have opted for a
handset-based solution must determine the location of the caller within 50
meters for 67 percent of the originated calls and 150 meters for 95 percent
of
the originated calls and deploy Automatic Location Identification (“ALI”)
capable handsets according to specified thresholds culminating with a
requirement that carriers reach a 95 percent deployment level of ALI capable
handsets within their subscriber base by December 31,
2005. Furthermore, on April 1, 2005, the FCC issued an order imposing
an E-911 obligation to deliver ALI data on carriers providing only roaming
services.
Alltel
began selling ALI-capable handsets in June 2002 and had complied with each
of
the intermediate handset deployment thresholds under the FCC’s order or
otherwise obtained short-term relief from the FCC to facilitate certain
acquisitions.
On
September 30, 2005,
due to the slowing pace
of
customer migration to ALI-capable handsets
32
and
lower
than FCC forecasted churn, Alltel filed a request with the FCC for a waiver
of
the December 31, 2005 requirement to achieve 95 percent penetration of
ALI-capable phones. The request included an explanation of the
Company’s compliance efforts to date and the expected date when it would meet
the 95 percent penetration rate of ALI-capable handsets, June 30,
2007. A number of other wireless carriers, including large national
carriers and CTIA-The Wireless Association (“CTIA”) on behalf of CMRS carriers
in general, also sought relief from the 95 percent requirement. On
January 5, 2007, the FCC issued a number of orders denying certain of the
waivers of the E-911 handset deployment requirement, including the waiver filed
by the Company. The FCC’s order imposed reporting requirements on the
Company and referred the issue of Alltel’s compliance with the rules to the
FCC’s Enforcement Bureau for consideration of further action. The
Company sought reconsideration of the order denying its waiver and subsequently
met the 95 percent standard in May 2007. However, on August 30, 2007,
the FCC’s Enforcement Bureau issued a Notice of Apparent Liability for
Forfeiture (“NAL”) against Alltel for its non-compliance with the 95 percent
deployment deadline. The fine proposed against the Company in the NAL
of $1.0 million was paid in full by Alltel on October 1, 2007.
The
FCC
initiated a rulemaking in response to a petition for declaratory ruling seeking
to specify the basis upon which CMRS carriers must measure the accuracy and
reliability of the location data provided to PSAPs for E-911 Phase II
service. Under the proposal before the FCC, CMRS carriers, including
the Company, will have to revise their methodology for determining accuracy
of
location data for purposes of compliance with the FCC’s rules. On
September 11, 2007, the FCC adopted an order establishing new E-911 accuracy
requirements, but the order has not yet been released. Accordingly,
the Company cannot determine at this time the impact, if any, that the changes
in the E-911 accuracy requirements may have on its operations.
CALEA
CALEA
requires wireless carriers to ensure that their networks are capable of
accommodating lawful intercept requests received from law enforcement
agencies. The FCC has imposed various obligations and compliance
deadlines, including those for VOIP and Broadband Internet Access Services,
with
which Alltel has materially complied. The FCC has under consideration
a petition filed by law enforcement agencies alleging that the standards for
packet data transmission for CDMA 2000 providers are deficient under
CALEA.
Inter-carrier
Compensation
Under
the
96 Act and the FCC’s rules, CMRS providers are subject to certain requirements
governing the exchange of telecommunications traffic with other
carriers. There is a pending rulemaking at the FCC addressing
inter-carrier compensation issues, which could impact Alltel’s future costs to
provide service.
Wireless
Spectrum
Alltel
holds FCC authorizations for Cellular Radiotelephone Service (“CRS”), Personal
Communications Service (“PCS”), and paging services, as well as ancillary
authorizations in the private radio and microwave services (collectively, the
“FCC Licenses”). Generally, FCC licenses are issued initially for
10-year terms and may be renewed for additional 10-year terms upon FCC approval
of the renewal application. The Company has routinely sought and been
granted renewal of its FCC Licenses without contest and anticipates that future
renewals of its FCC Licenses will be granted. Alltel’s wireless
licenses are subject to renewal and potential revocation in the event the
Company violates applicable laws. (See “Item 1A. Risk Factors” on
page 43 for additional information regarding Alltel’s wireless
licenses).
The
FCC
has eliminated the categorical limits on the amount of CMRS spectrum that a
licensee may hold. The FCC now evaluates acquisitions and mergers on
a case-by-case basis to determine whether such transactions will result in
excessive concentration of wireless spectrum in a market.
The
FCC
conducts proceedings through which additional spectrum is made available for
the
provision of wireless communications services, including broadband
services. The FCC recently completed the auction for Advanced
Wireless Services (“AWS”) spectrum and will begin the auction of spectrum in the
700 MHz band on January 24, 2008. Alltel did not participate in the
AWS spectrum auction. The FCC has adopted rules governing the 700 MHz
spectrum auction, and Alltel is now evaluating its participation in the
auction. The FCC also continues to consider various uses of
unlicensed spectrum and sharing of currently allocated spectrum between various
users. The FCC has, for example, instituted a rulemaking on the use
of “white spaces” in the television spectrum on an unlicensed
basis.
33
Customer
Billing
The
FCC
requires CMRS carriers to ensure that the descriptions of line items on customer
bills are clear and not misleading and has declared that any representation
of a
discretionary item on a bill as a tax or government-mandated charge is
misleading. The Federal Court of Appeals for the Eleventh Circuit has
vacated an order of the FCC preempting states from requiring or prohibiting
the
use of line items on CMRS carriers’ bills and remanded the decision to the FCC
for further proceedings. In February 2007, two CMRS providers filed a
petition for a writ of certiorari to the United States Supreme Court (“Supreme
Court”), seeking review of the Eleventh Circuit decision. This matter
remains pending before the Supreme Court. The FCC is also considering
additional CMRS billing regulations and state preemption issues including
whether early termination fees constitute a rate, and consequently, are beyond
a
state’s regulatory jurisdiction.
CMRS
Roaming
The
FCC
concluded a rulemaking proceeding in which it examined the potential rules
to be
applied to automatic roaming relationships between carriers. The
FCC’s prior rules required only that manual roaming be provided by a carrier to
any subscriber in good standing with his/her home market
carrier. Automatic roaming agreements, although common throughout the
CMRS industry, are not currently mandated by the FCC. The FCC’s new
rules require automatic roaming agreements between carriers subject to certain
limitations, but does not mandate price regulation. The Company
believes the FCC’s rules are generally consistent with its
practice.
CPNI
The
FCC
has recently concluded its rulemaking governing the protection of customer
information and call records, including the adequacy of security measures
employed by carriers to protect certain customer information. New FCC
rules, which will take effect on December 8, 2007, specify new notice and
customer authentication requirements as well as both certification requirements
and limitations on the disclosure of CPNI to the carriers joint venture partners
and contractors. The new rules remain subject to judicial appeal and
FCC reconsideration. While the Company has not been formally notified
that the FCC has terminated its investigation of carrier practices to protect
CPNI, the Company has received no further inquiries or notices from the
FCC.
Analog
Sunset
Under
current FCC rules, a carrier will not be required to offer analog wireless
services after February 2008. This analog “sunset” rule was the
subject of petitions seeking extension of the analog requirement beyond 2008,
which were denied by the FCC by order dated June 15, 2007. Alltel
plans to migrate its customers and network to all digital service after the
sunset of the rule.
Warn
Act/Emergency Alerts
On
October 13, 2006, the Warn Act was signed into law and provides that carriers
may, within two years, voluntarily choose to provide emergency alerts as part
of
their service offerings under standards and protocols adopted by the
FCC. The FCC convened the industry advisory committee required under
the Warn Act to consider technical standards and operating protocols, which
were
approved by the committee on October 3, 2007. A formal FCC rulemaking
on the standards is expected to be initiated soon.
Katrina
Panel Recommendations
On
June
8, 2007, the FCC released an order directing the Public Safety and Homeland
Security Bureau to implement several of the recommendations of the panel
convened to study network outages in the wake of Hurricane
Katrina. The FCC also adopted rules requiring wireless communications
providers to have emergency back-up power for cell sites as well as to conduct
studies and submit reports on the redundancy and resiliency of their E-911
networks. The rules regarding back-up power were reconsidered by the
FCC in an order issued October 4, 2007, and no new rules will go into effect
until the Office of Management and Budget approves the information collection
requirements. At this time, the Company is evaluating the impact of
the new rules.
34
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
Cash
flows from (used in):
|
|
|
|
|
|
|
Operating activities from continuing operations
|
|
$
|
1,838.8
|
|
|
$
|
997.0
|
|
Investing activities from continuing operations
|
|
|
(521.0
|
)
|
|
|
(1,174.1
|
)
|
Financing activities from continuing operations
|
|
|
(1,477.8
|
)
|
|
|
(2,055.2
|
)
|
Discontinued operations
|
|
|
50.4
|
|
|
|
4,341.8
|
|
Effect of exchange rate changes
|
|
|
-
|
|
|
|
(5.9
|
)
|
Increase
(decrease) in cash and short-term investments
|
|
$
|
(109.6
|
)
|
|
$
|
2,103.6
|
|
Total
capital structure (a)
|
|
|
$14,646.8
|
|
|
|
$16,292.5
|
|
Percent
of equity to total capital (b)
|
|
|
81.5%
|
|
|
|
82.0%
|
|
Book
value per share (c)
|
|
|
$34.66
|
|
|
|
$35.25
|
|
Notes:
(a)
|
Computed
as the sum of long-term debt including current maturities, redeemable
preferred stock and total shareholders’ equity.
|
(b)
|
Computed
by dividing total shareholders’ equity by total capital structure as
computed in (a) above.
|
(c)
|
Computed
by dividing total shareholders’ equity less preferred stock by the total
number of common shares outstanding at the end of the
period.
|
Cash
Flows from Operating Activities – Continuing Operations
For
the
nine months ended September 30, 2007, Alltel’s primary source of liquidity
continued to be cash provided from operations. Cash flows from
operations in 2007 reflected growth in earnings from Alltel’s business
operations and favorable changes in working capital requirements, driven
primarily by timing differences in the billing and collection of accounts
receivable, purchase of inventory and payment of accounts payable and income
taxes. During the first nine months of 2007, Alltel generated
sufficient cash flows from operations to fund its capital expenditure
requirements, dividend payments and scheduled long-term payments, as further
discussed below. Alltel expects to generate sufficient cash flows
from operations to fund its operating requirements during the balance of
2007.
Cash
Flows from Investing Activities – Continuing Operations
During
the first nine months of 2007, capital expenditures continued to be Alltel’s
primary use of capital resources. Capital expenditures for the nine
months ended September 30, 2007 were $720.3 million compared to $718.6 million
for the same period in 2006. Capital expenditures in both years were
incurred to construct additional network facilities and to deploy 1XRTT data
and
1x-EVDO technology. The Company plans to continue expanding 1x-EVDO
deployments in its markets with an expected total coverage of approximately
70
percent of its POPs by the end of 2007. Alltel funded substantially
all of its capital expenditures through internally generated
funds. Investing activities also included outlays for capitalized
software development costs. Additions to capitalized software for the
nine months ended September 30, 2007 were $24.3 million compared to $24.0
million for the same period in 2006. The Company expects capital
expenditures, including capitalized software development costs, to be
approximately $1.15 billion to $1.25 billion for 2007, which will be funded
primarily from internally generated funds.
During
the first nine months of 2007, Alltel acquired for $2.5 million in cash an
additional ownership interest in a wireless property in Arkansas in which the
Company owned a majority interest. Alltel also acquired for $3.7
million in cash the remaining ownership interest in a wireless license covering
a rural service area in New Mexico. Cash outlays for the purchase of
property, net of cash acquired in the nine months ended September 30, 2006
were
$676.5 million. As previously discussed, on March 16, 2006, Alltel
purchased from Palmetto MobileNet, L.P. for $456.3 million in cash the remaining
ownership interests in ten wireless partnerships in North and South
Carolina. During the first nine months of 2006, Alltel also purchased
for $220.2 million in cash wireless properties in Illinois, Texas and Virginia
and acquired the remaining ownership interest in a wireless property in
Wisconsin in which the Company owned a majority interest.
Investing
activities for the nine months ended September 30, 2007 included proceeds from
the sale of investments of $188.7 million, consisting of the cash proceeds
received from the sale of marketable securities acquired by Alltel through
its
merger with Western Wireless. Investing activities for the nine
months ended September 30, 2007 and 2006 included proceeds from the return
on
investments of $40.2 million and $36.7 million, respectively. These
amounts primarily consisted of cash distributions received from Alltel’s
wireless minority investments.
35
Investing
activities for the nine months ended September 30, 2006 included proceeds from
the sale of investments of $200.5 million, principally consisting of the
liquidating cash distributions of $198.7 million received by Alltel in exchange
for its $22.1 million investment in RTB Class C stock, as previously
discussed.
Cash
Flows from Financing Activities – Continuing Operations
Common
and preferred dividend payments were $133.5 million for the nine months ended
September 30, 2007 compared to $447.1 million for the same period in
2006. Dividend payments in 2007 reflected the reduction in Alltel’s
annual dividend rate from $1.54 to $.50 per share following the completion
of
the wireline spin-off to Alltel’s shareholders on July 17,
2006. Alltel expects to continue the payment of cash dividends until
closing of the merger transaction. Sources of funding future dividend
payments include available cash on hand and operating cash flows.
Alltel
has a five-year, $1.5 billion unsecured line of credit under a revolving credit
agreement with an expiration date of July 28, 2009. Alltel incurred
no borrowings under the revolving credit agreement during the first nine months
of 2007. The Company also has established a commercial paper program
with a maximum borrowing capacity of $1.5 billion. Alltel classifies
commercial paper borrowings as long-term debt, because they are intended to
be
maintained on a long-term basis and are supported by the Company’s $1.5 billion
revolving credit agreement. Under the commercial paper program,
commercial paper borrowings are fully supported by the available borrowings
under the revolving credit agreement. Accordingly, before the
completion of the merger, the total amount outstanding under the commercial
paper program and the indebtedness incurred under the revolving credit agreement
could not exceed $1.5 billion. No commercial paper borrowings were
outstanding at September 30, 2007. During 2007, Alltel incurred
commercial paper borrowings of $100.0 million to fund general corporate
requirements. During the third quarter of 2007, Alltel repaid all
borrowings outstanding under its commercial paper program utilizing available
cash on hand. The commercial paper borrowings and related repayments
have been presented on a net basis within the unaudited consolidated statements
of cash flows because the original maturities were less than three
months. There were no commercial paper borrowings outstanding at
December 31, 2006 or September 30, 2006 compared to $1.0 billion of borrowings
outstanding at December 31, 2005. During the first nine months of
2006, Alltel did not incur any additional borrowings under the commercial paper
program. As previously discussed, on July 17, 2006, Alltel exchanged
$988.5 million of the $1.0 billion outstanding commercial paper borrowings
for
debt securities issued to the Company by Windstream in connection with the
spin-off of the wireline business. In August 2006, Alltel repaid the
remaining $11.5 million of outstanding commercial paper borrowings with
available cash on hand. All existing credit facilities of Alltel will
be cancelled immediately prior to closing of the merger.
Repayments
of long-term debt were $36.9 million for the nine months ended September 30,
2007 and consisted principally of the repayment of the remaining $35.6 million,
4.656 percent equity unit notes due May 17, 2007. The repayments were
funded by cash on hand. In connection with its acquisition of Western
Wireless, Alltel assumed $115.0 million of 4.625 percent convertible
subordinated notes due 2023 that were issued by Western Wireless in June 2003
(the “Western Wireless notes”). During January and February of 2006,
an aggregate principal amount of $100.0 million of the Western Wireless notes
were converted. As a result of the conversion, Alltel issued 3.4
million shares of its common stock and paid approximately $59.8 million in
cash
to holders of the Western Wireless notes during the first nine months of
2006. As of September 30, 2007, an aggregate principal amount of $2.0
million of Western Wireless notes remained outstanding.
Cash
flows from financing activities also included distributions to minority
investors, which amounted to $31.8 million and $27.7 million for the nine months
ended September 30, 2007 and 2006, respectively.
On
January 19, 2006, Alltel’s Board of Directors authorized the Company to
repurchase up to $3.0 billion of its outstanding common stock over a three-year
period ending December 31, 2008. Under this authorization, Alltel
repurchased shares, from time to time, on the open market or in negotiated
transactions, as circumstances warranted. Sources of funding stock repurchases
included available cash on hand, operating cash flows and borrowings under
the
Company’s commercial paper program. During the first nine months of
2007, Alltel repurchased 22.0 million of its common shares at a total cost
of
$1,360.3 million, substantially completing the $3.0 billion share repurchase
available under this authorization. During the first nine months of
2006, Alltel repurchased 12.8 million of its common shares at a total cost
of
$709.0 million and repurchased an additional 15.7 million shares at a total
cost
of $886.6 million during the fourth quarter of 2006 under this
authorization.
36
Liquidity
and Capital Resources
Alltel
believes it has sufficient cash and short-term investments on hand ($824.6
million at September 30, 2007) and has adequate operating cash flows to finance
its ongoing requirements, including capital expenditures, repayment of long-term
debt and payment of dividends (without regard to the potential cash flow effects
resulting from the financing of the proposed merger transaction, as further
discussed below). Pursuant to the terms of the merger agreement,
Alltel agreed that, between May 20, 2007 and the effective time of the merger,
subject to certain exceptions or unless otherwise agreed to by Atlantis
Holdings, Alltel would not incur any additional indebtedness (including the
issuance of any debt security) in an aggregate principal amount in excess of
$100.0 million. In connection with the proposed merger transaction,
Atlantis Holdings has received debt commitment letters from various banks to
provide ACI, a wholly-owned subsidiary of Alltel, for the purpose of financing
a
portion of the merger consideration and paying certain fees and expenses
incurred in connection with the merger with (1) a senior secured term loan
facility of up to $14.0 billion and a senior secured revolving credit facility
of up to $1.5 billion, (2) a senior unsecured cash pay bridge facility of up
to
$4.7 billion less the amount of any senior unsecured cash pay notes issued
in
lieu of such bridge facility and (3) a senior unsecured pay-in-kind option
bridge facility of up to $3.0 billion less the amount of any senior unsecured
pay-in-kind notes issued in lieu of such bridge facility. The
aggregate principal amount of the senior secured term loan facility may be
increased by up to $750.0 million under certain
circumstances. Atlantis Holdings has agreed to use its reasonable
best efforts to arrange the debt financing on the terms and conditions set
forth
in the commitments. The closing of the merger is not conditioned on
the receipt of the debt financing.
In
May
2007, subsequent to the announcement of the merger agreement, Standard &
Poor’s Corporation (“Standard & Poor’s”) and Fitch Ratings (“Fitch”)
downgraded their long-term credit ratings for Alltel to BB and BB-,
respectively. Presently, Moody’s Investors Service (“Moody’s”) has
not changed its credit ratings applicable to the Company. Alltel does
not believe that the recent downgrade of its long-term credit ratings will
have
a material adverse impact on its financial liquidity. At September
30, 2007, Alltel’s commercial paper and long-term credit ratings with Moody’s,
Standard & Poor’s and Fitch were as follows:
|
Description
|
Moody’s
|
Standard
&
Poor’s
|
Fitch
|
Commercial
paper credit rating
|
Prime-1
|
A-2
|
Withdrawn
|
Long-term
debt credit rating
|
A2
|
BB
|
BB-
|
Factors
that could affect Alltel’s short and long-term credit ratings would include, but
not be limited to, a material decline in the Company’s operating results and
increased debt levels relative to operating cash flows resulting from future
acquisitions or increased capital expenditure requirements. The
downgrade in Alltel’s credit ratings resulted in the Company incurring modestly
higher interest costs on its commercial paper borrowings. A further
downgrade in Alltel’s current short or long-term credit ratings would not
accelerate scheduled principal payments of Alltel’s existing long-term
debt.
The
revolving credit agreement contains various covenants and restrictions including
a requirement that, as of the end of each calendar quarter, Alltel maintain
a
total debt-to-capitalization ratio of less than 65 percent. For
purposes of calculating this ratio under the revolving credit agreements, total
debt would include amounts classified as long- term debt (excluding
mark-to-market adjustments for interest rate swaps), current maturities of
long-term debt outstanding, short-term debt and any letters of credit or other
guarantee obligations. As of September 30, 2007, Alltel’s total debt
to capitalization ratio was 18.6 percent. Under Alltel’s existing
indentures and borrowing agreements, there are no restrictions as to the payment
of dividends by the Company. In addition, there are no restrictions
on the payment of dividends among members of Alltel’s consolidated
group.
At
September 30, 2007, current maturities of long-term debt were $39.0 million
and
consisted of the remaining $39.0 million, 6.65 percent unsecured senior notes
due January 15, 2008. As previously discussed, on August 25, 2006,
Alltel repurchased for cash $61.0 million of the 6.65 percent
notes. In connection with the completion of the proposed merger
transaction, Alltel expects to repay or refinance certain of its existing
long-term debt obligations. On October 15, 2007, Alltel announced
cash tender offers to repurchase $389.3 million of outstanding debt securities,
consisting of the remaining $39.0 million of 6.65 percent unsecured notes due
2008 issued by ACI, $53.0 million of 7.60 percent unsecured notes due 2009
issued by ACI and $297.3 million of 8.00 percent notes due 2010 issued by Alltel
Ohio Limited Partnership. The tender offers are contingent upon the
closing of the merger transaction and would be paid with available cash on
hand
and funds raised in connection with the financing of the merger
transaction. The debt commitments discussed above contemplate that
$2.3 billion of Alltel’s existing long-term debt obligations will remain
outstanding following the completion of the merger transaction and would
consist
37
of
the
following: $800.0 million of 7.00 percent unsecured senior notes due July 1,
2012, $200.0 million of 6.50 percent unsecured senior notes due November 1,
2013, $300.0 million of 7.00 percent unsecured senior notes due March 15, 2016,
$300.0 million of 6.80 percent unsecured senior notes due May 1, 2029, and
$700.0 million of 7.875 percent unsecured senior notes due July 1,
2032.
Under
Alltel’s long-term debt borrowing agreements, acceleration of principal payments
would occur upon payment default, violation of debt covenants not cured within
30 days or breach of certain other conditions set forth in the borrowing
agreements. At September 30, 2007, the Company was in compliance with
all of its debt covenants. There are no provisions within Alltel’s
leasing agreements that would trigger acceleration of future lease
payments.
Alltel
does not use securitization of trade receivables, affiliation with special
purpose entities, variable interest entities or synthetic leases to finance
its
operations. Additionally, the Company has not entered into any
material arrangement requiring Alltel to guarantee payment of third party debt
or to fund losses of an unconsolidated special purpose entity.
Critical
Accounting Policies
Alltel
prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States. In its Annual
Report on Form 10-K for the year ended December 31, 2006, Alltel identified
the
critical accounting policies which affect its more significant estimates and
assumptions used in preparing its consolidated financial
statements. These critical accounting policies include accounting for
service revenues, evaluating the collectibility of trade receivables, accounting
for pension and other postretirement benefits, calculating stock-based
compensation and depreciation and amortization expense, determining the fair
values of goodwill and other indefinite-lived intangible assets, accounting
for
income taxes and business combinations. Except for a change in
accounting for uncertain tax positions resulting from the adoption of a new
accounting standard as discussed below, there were no material changes to
Alltel’s critical accounting policies during the first nine months of
2007.
In
July
2006, the FASB issued FIN 48, which clarified the accounting for uncertainty
in
income taxes recognized in an enterprise’s financial statements. As
required, Alltel adopted the provisions of FIN 48 effective January 1,
2007. FIN 48 addressed the determination of how tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the
tax
position will be sustained on examination by the taxing authorities, based
on
the technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized
upon
ultimate resolution. The impact of the Company’s reassessment of its
tax positions in accordance with FIN 48 did not have a material impact on its
results of operations, financial condition or liquidity. (See Note 2
to the unaudited interim consolidated financial statements for additional
information regarding the adoption of FIN 48.)
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS No. 157 clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures
related to fair value measurements that are included in a company’s financial
statements. SFAS No. 157 does not expand the use of fair value
measurements in financial statements, but emphasizes that fair value is a
market-based measurement and not an entity-specific measurement that should
be
based on an exchange transaction in which a company sells an asset or transfers
a liability (exit price). SFAS No. 157 also establishes a fair value
hierarchy in which observable market data would be considered the highest level,
while fair value measurements based on an entity’s own assumptions would be
considered the lowest level. For calendar year companies like Alltel,
SFAS No. 157 is effective beginning January 1, 2008. The Company is
currently evaluating the effects, if any, that SFAS No. 157 will have on its
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115”. SFAS No. 159 permits entities to measure at fair
value eligible financial assets and liabilities that are not currently required
to be measured at fair value. If the fair value option for an
eligible item is elected, unrealized gains and losses for that item will be
reported in current earnings at each subsequent reporting date. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to
facilitate comparison between the different measurement attributes the entity
elects for similar types of assets and liabilities. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company does not expect SFAS No. 159 to
have a material impact on its consolidated financial statements.
38
ALLTEL
CORPORATION
|
FORM
10-Q
|
PART
I – FINANCIAL INFORMATION
|