-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PqeggMFWNoAkiaj/fy3KooJwRrDPrAVsNdKApsxef9eaUBwsV6IrjvTo3GANcx2j elL3/SRyld1uqiWUdsFnyA== 0000020520-01-000003.txt : 20010402 0000020520-01-000003.hdr.sgml : 20010402 ACCESSION NUMBER: 0000020520-01-000003 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010329 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS COMMUNICATIONS CO CENTRAL INDEX KEY: 0000020520 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 060619596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11001 FILM NUMBER: 1585124 BUSINESS ADDRESS: STREET 1: HIGH RIDGE PK BLDG 3 STREET 2: P O BOX 3801 CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2033298800 MAIL ADDRESS: STREET 1: HIGH RIDGE PARK BLDG NO 3 CITY: STAMFORD STATE: CT ZIP: 06905 FORMER COMPANY: FORMER CONFORMED NAME: CITIZENS UTILITIES CO DATE OF NAME CHANGE: 19920703 8-K 1 0001.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: (Date of earliest event reported) March 29, 2001 CITIZENS COMMUNICATIONS COMPANY ------------------------------- (Exact name of registrant as specified in charter) Delaware 001-11001 06-0619596 - ---------------------------- --------------------------- ------------------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 3 High Ridge Park, P.O. Box 3801, Stamford, Connecticut 06905 - -------------------------------------------------------- ----- (Address of principal executive offices) (Zip code) (203) 614-5600 -------------- (Registrant's telephone number, including area code) No change since last report --------------------------- (Former name or former address, if changed since last report) Item 5. Other Events. ------------- From May 27, 1999 through July 12, 2000 we entered into several agreements to acquire approximately 2,034,700 telephone access lines (as of December 31, 2000) for approximately $6.5 billion in cash. These transactions have been and will be accounted for using the purchase method of accounting. The results of operations of the acquired properties have been and will be included in our financial statements from the dates of acquisition of each property. These agreements and the status of each transaction are described as follows: On May 27, September 21, and December 16, 1999, we announced 6 definitive agreements to purchase from Verizon Communications (Verizon) approximately 381,200 telephone access lines (as of December 31, 2000) in Arizona, California, Illinois/Wisconsin, Minnesota and Nebraska (the GTE Acquisitions) for approximately $1,171,000,000 in cash. These acquisitions are subject to various state and federal regulatory approvals. On June 30, 2000, we closed on the Nebraska purchase of approximately 62,200 telephone access lines for approximately $205,000,000 in cash. On August 31, 2000, we closed on the Minnesota purchase of approximately 142,400 telephone access lines for approximately $439,000,000 in cash. On November 30, 2000, we closed on the Illinois/Wisconsin purchase of approximately 112,900 telephone access lines for approximately $304,000,000 in cash. Therefore, as of December 31, 2000, we have closed on approximately 83% of the access lines contracted for from Verizon for 81% of the aggregate purchase price. We expect that the remainder of the Verizon transactions will close on a state-by-state basis in the first half of 2001. On June 16, 1999, we announced a series of definitive agreements to purchase from Qwest Communications (Qwest) approximately 556,800 telephone access lines (as of December 31, 2000) in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming (the U S WEST Acquisitions) for approximately $1,650,000,000 in cash and the assumption of certain liabilities. On October 31, 2000, we closed on the North Dakota purchase of approximately 17,000 telephone access lines for approximately $38,000,000 in cash. We expect that the remainder of the U S WEST acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis by the end of the first quarter of 2002. On July 12, 2000, we announced a definitive agreement to purchase from Global Crossing Ltd. 100% of the stock of Frontier Corp., (the Frontier Acquisition) which owns approximately 1,096,700 telephone access lines (as of December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and Wisconsin, for approximately $3,650,000,000 in cash. We expect that this transaction, which is subject to various state and federal regulatory approvals, will be completed in the second half of 2001. The GTE Acquisitions, the U S WEST Acquisitions and the Frontier Acquisition are collectively referred to as the Acquisitions. We are filing the financial statements of the businesses to be acquired and pro forma financial information related to probable acquisitions for purposes of incorporation by reference. This Current Report on Form 8-K contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. Statements that are not historical facts are forward-looking statements made pursuant to the Safe Harbor Provisions of the Litigation Reform Act of 1995. In addition, words such as "believes", "anticipates", "expects" and similar expressions are intended to identify "forward-looking statements". Forward-looking statements (including oral representations) are only predictions or statements of current plans, which we review continuously. All forward-looking statements may differ from actual results because of, but not limited to, changes in the local and overall economy, changes in market conditions for debt and equity securities, the nature and pace of technological changes, the number and effectiveness of competitors in our markets, success in overall strategy, changes in legal or regulatory policy, changes in legislation, our ability to identify future markets and successfully expand existing ones, the mix of products and services offered in our target markets, the effects of acquisitions and dispositions and the ability to effectively integrate businesses acquired. These important factors should be considered in evaluating any statement contained herein and/or made by us or on our behalf. We do not intend to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. ------------------------------------------------------------------ (a) Financial Statements of Businesses to be acquired * Selected U S WEST Exchanges, Special Purpose Financial Statements for the years ended December 31, 1999, 1998 and 1997 * Selected U S WEST Exchanges, for the nine months ended September 30, 2000 and 1999 * Frontier Incumbent Local Exchange Carrier Businesses for the years ended December 31, 1999, 1998 and 1997 * Frontier Incumbent Local Exchange Carrier Businesses for the nine months ended September 30, 2000 and 1999 (b) Pro forma Financial Information * Pro forma Balance Sheet as of September 30, 2000 and Pro forma Income Statements for the nine months ended September 30, 2000 and for the year ended December 31, 1999 (c) Exhibits 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Arthur Andersen LLP 23.3 Consent of PricewaterhouseCoopers LLP SIGNATURE -------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS COMMUNICATIONS COMPANY ------------------------------- (Registrant) By: /s/ Robert J. Larson ----------------------- Robert J. Larson Vice President and Chief Accounting Officer Date: March 29, 2001 Citizens Communications Company Pro Forma Combining Financial Information From May 27, 1999 through July 12, 2000 we entered into several agreements to acquire approximately 2,034,700 telephone access lines (as of December 31, 2000) for approximately $6.5 billion in cash. These transactions have been and will be accounted for using the purchase method of accounting. The results of operations of the acquired properties have been and will be included in our financial statements from the dates of acquisition of each property. These agreements and the status of each transaction are described as follows: On May 27, September 21, and December 16, 1999, we announced 6 definitive agreements to purchase from Verizon Communications (Verizon) approximately 381,200 telephone access lines (as of December 31, 2000) in Arizona, California, Illinois/Wisconsin, Minnesota and Nebraska (the GTE Acquisitions) for approximately $1,171,000,000 in cash. These acquisitions are subject to various state and federal regulatory approvals. On June 30, 2000, we closed on the Nebraska purchase of approximately 62,200 telephone access lines for approximately $205,000,000 in cash. On August 31, 2000, we closed on the Minnesota purchase of approximately 142,400 telephone access lines for approximately $439,000,000 in cash. On November 30, 2000, we closed on the Illinois/Wisconsin purchase of approximately 112,900 telephone access lines for approximately $304,000,000 in cash. Therefore, as of December 31, 2000, we have closed on approximately 83% of the access lines contracted for from Verizon for 81% of the aggregate purchase price. We expect that the remainder of the Verizon transactions will close on a state-by-state basis in the first half of 2001. On June 16, 1999, we announced a series of definitive agreements to purchase from Qwest Communications (Qwest) approximately 556,800 telephone access lines (as of December 31, 2000) in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming (the U S WEST Acquisitions) for approximately $1,650,000,000 in cash and the assumption of certain liabilities. On October 31, 2000, we closed on the North Dakota purchase of approximately 17,000 telephone access lines for approximately $38,000,000 in cash. We expect that the remainder of the U S WEST acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis by the end of the first quarter of 2002. On July 12, 2000, we announced a definitive agreement to purchase from Global Crossing Ltd. 100% of the stock of the Frontier Incumbent Local Exchange businesses,(the Frontier Acquisition) which owns approximately 1,096,700 telephone access lines (as of December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and Wisconsin, for approximately $3,650,000,000 in cash. We expect that this transaction, which is subject to various state and federal regulatory approvals, will be completed in the second half of 2001. The GTE Acquisitions, the U S WEST Acquisitions and the Frontier Acquisition are collectively referred to as the Acquisitions. The following unaudited pro forma condensed combined financial information of Citizens Communications Company and the Acquisitions, which are referred to as "Pro Forma Citizens Communications Company," has been prepared to illustrate the effects of the Acquisitions and related financing had the Acquisitions been completed as of September 30, 2000 for the pro forma balance sheet or at the beginning of the periods presented for the pro forma income statements. The Frontier Acquisition on the pro forma balance sheet represents the unaudited balance sheet of the Frontier Acquisition as of September 30, 2000. The GTE and U S WEST Acquisitions on the proforma balance sheet represents the assets to be acquired from GTE and U S WEST as of September 30, 2000, including our preliminary allocation of purchase price. The amount in shareholders' equity represents the net assets acquired. As stated in the notes to the financial statements of the U S WEST and GTE Acquisitions, corporate overhead expenses are not included in the respective statements of revenues and expenses. We have prepared the pro forma financial information using the purchase method of accounting. We expect that we will continue to have increased expenses until all acquisitions are fully integrated. We expect to achieve economies of scale with the acquired properties that will both expedite our ability to provide an expanded menu of telecommunication services and make those services incrementally more profitable but can provide no assurance that such economies will be realized. We expect that these acquisitions will therefore provide us the opportunity to increase revenue and decrease cost per access line. The unaudited pro forma information reflects the increased expenses to the extent they have been incurred in the periods presented, but does not reflect economies of scale. Certain of our regulated telecommunications operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 requires regulated entities to record regulatory assets and liabilities as a result of actions of regulators. We are currently evaluating the continued applicability of SFAS 71. We do not expect to account for the assets acquired in the Acquisitions under SFAS 71; as a result, the pro forma financial information account for the Acquisitions completed and to be completed as non-regulated entities pending the outcome of our evaluation. The pro forma information, while helpful in illustrating the financial characteristics of the combined company, does not attempt to predict or suggest future results. The pro forma information also does not attempt to show how the combined company would actually have performed had the companies been combined throughout these periods. If the companies had actually been combined in prior periods, these companies and businesses might have performed differently. You should not rely on pro forma financial information as an indication of the results that would have been achieved if the Acquisitions had taken place earlier or the future results that the companies will experience after completion of these transactions. These unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements of the Acquisitions included herein and in the Form 8-K filed by us on November 14, 2000 and the historical financial statements of Citizens Communications Company. Citizens Communications Company and Subsidiaries Pro Forma Balance Sheet Data As of September 30, 2000 (unaudited)
Pro Forma Citizens ----------------------------------------------------------- Communciations Frontier(10) GTE and U S WEST (Amounts in thousands) 9/30/00 Acquisition Acquisitions Adjustments Adjusted ------------------------------------------------------------------------------- Cash $ 45,963 $ 43,832 $ $1,615,998 (1) $ 45,963 (1,659,830) (2) Accounts receivable, net 220,257 456,703 - 676,960 Short-term investments 224,655 - - 224,655 Other 37,954 16,023 - 53,977 Assets held for sale 1,129,054 - (1,129,054) (1) - --------------------------------------------------------- ----------- Total current assets 1,657,883 516,558 - (1,172,886) 1,001,555 Net property, plant & equipment 3,255,120 1,014,687 774,959 - 5,044,766 Excess cost over net assets acquired 466,358 1,538,999 1,402,041 1,122,088 (2) 4,529,486 Investments 147,457 - (147,457) (2) - Regulatory assets 181,800 - - 181,800 Deferred debits and other assets 172,301 36,256 - 208,557 Assets of discontinued operations 638,892 - (638,892) (1) - --------------------------------------------------------- ----------- Total assets $ 6,519,811 $ 3,106,500 $ 2,177,000 $ (837,147) $ 10,966,164 ========================================================= =========== Long-term debt due within one year $ 84,187 $ 3,117 $ $ - $ 87,304 Accounts payable and other current liabilities 306,803 232,266 - 539,069 --------------------------------------------------------- ----------- Total current liabilities 390,990 235,383 - 626,373 Deferred income taxes 433,993 87,631 - 521,624 Customer advances for construction and contributions in aid of construction 190,395 - - 190,395 Deferred credits and other liabilities 70,845 138,723 - 209,568 Regulatory liabilities 25,251 - - 25,251 Long-term debt 2,925,680 116,851 2,656,325 (2) 5,698,856 Liabilities related to assets held for sale 235,857 - (235,857) (1) - Liabilities of discontinued operations 196,446 - (196,446) (1) - --------------------------------------------------------- ----------- Total liabilities 4,469,457 578,588 - 2,224,022 7,272,067 Company Obligated Mandatorily Redeemable Convertible Preferred Securities * 201,250 - - 201,250 Shareholders' equity 1,849,104 2,527,912 2,177,000 280,355 (1) 3,492,847 (4,704,912) (2) 1,363,388 (2) --------------------------------------------------------- ----------- Total liabilities and shareholders' equity $ 6,519,811 $ 3,106,500 $ 2,177,000 $ (837,147) $ 10,966,164 ========================================================= ===========
*Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership, substantially all the assets of which are convertible debentures of the Company. See Notes to Pro Forma Condensed Financial Statements. Citizens Communications Company and Subsidiaries Pro Forma Income Statement Data For the nine months ended September 30, 2000 (unaudited)
Citizens Communciations GTE Acquisitions U S WEST Frontier(10) Total (Amounts in thousands - except per-share amounts) 9/30/00 GTE GTE Minnesota Acquisitions Acquisition Acquisitions --------------------------------------------------------------------------- Revenue $ 1,320,019 $ 99,117 $ 56,962 $ 255,212 $ 562,128 $ 973,419 Operating expenses 902,266 32,735 23,323 115,626 290,241 461,925 Depreciation and amortization 278,483 23,112 545 66,214 150,174 240,045 Acquisition assimilation expenses 24,130 - - - - - ------------------------------------------------------------------------- Income from operations 115,140 43,270 33,094 73,372 121,713 271,449 Investment and other income, net 14,913 - - - 22,216 22,216 Minority interest 12,222 - - - - - Interest expense 128,899 2,548 1,686 - 4,899 9,133 Income tax expense (benefit) 5,097 16,687 12,687 27,780 66,174 123,328 Convertible preferred dividends 4,657 - - - - - ------------------------------------------------------------------------- Income (loss) from continuing operations $ 3,622 $ 24,035 $ 18,721 $ 45,592 $ 72,856 $ 161,204 ========================================================================= Weighted average shares outstanding -Basic 263,725 Weighted average shares outstanding -Diluted 268,042 Income (loss) from continuing operations per basic share $ 0.01 Income (loss) from continuing operations per diluted share $ 0.01 Elimination of Pro Forma Gas and Electric ----------------------------- Operations Adjustments Adjusted ---------------------------------------------- (Amounts in thousands - except per-share amount) Revenue $ (440,632) $ - $ 1,852,806 Operating expenses (356,518) 9,000 (3) 1,016,673 Depreciation and amortization (38,881) 179,524 (4) 671,697 12,526 (5) Acquisition assimilation expenses - 24,130 ---------------------------------------------- Income from operations (45,233) (201,050) 140,306 Investment and other income, net 1,203 (16,486) (6) 21,846 Minority interest - - 12,222 Interest expense (26,014) 183,299 (7) 295,317 Income tax expense (benefit) (6,026) (131,673) (8) (9,274) Convertible preferred dividends - - 4,657 ---------------------------------------------- Income (loss) from continuing operations $ (11,990) $ (269,162) $ (116,326) ============================================== Weighted average shares outstanding -Basic 263,725 Weighted average shares outstanding -Diluted 268,042 Income (loss) from continuing operations per basic share $ (0.44) Income (loss) from continuing operations per diluted share $ (0.44) See Notes to Pro Forma Condensed Financial Statements.
Citizens Communications Company and Subsidiaries Pro Forma Income Statement Data For the year ended December 31, 1999 (unaudited)
Citizens Communciations GTE Acquisitions U S WEST Frontier(10) Total (Amounts in thousands - except per-share amounts) 12/31/99 GTE GTE Minnesota Acquisitions Acquisition Acquisitions --------------------------------------------------------------------------- Revenue $ 1,598,236 $ 147,644 $ 85,848 $ 329,364 $ 734,213 $1,297,069 Operating expenses (9) 1,213,775 59,923 30,298 147,511 365,785 603,517 Depreciation and amortization 310,185 35,272 771 85,003 139,086 260,132 Acquisition assimilation expenses 3,916 - - - - - ------------------------------------------------------------------------- Income from operations 70,360 52,449 54,779 96,850 229,342 433,420 Investment and other income, net 243,797 - - - 21,745 21,745 Minority interest 23,227 - - - - - Interest expense 119,675 5,509 2,430 - 7,410 15,349 Income tax expense 74,900 18,978 21,520 36,804 107,602 184,904 Convertible preferred dividends 6,210 - - - - - ------------------------------------------------------------------------- Income (loss) from continuing operations $ 136,599 $ 27,962 $ 30,829 $ 60,046 $ 136,075 $ 254,912 ========================================================================= Weighted average shares outstanding -Basic 260,481 Weighted average shares outstanding -Diluted 262,260 Income (loss) from continuing operations per basic share $ 0.52 Income (loss) from continuing operations per diluted share $ 0.52 Elimination of Pro Forma Gas and Electric ----------------------------- Operations Adjustments Adjusted ---------------------------------------------- Revenue $ (510,808) $ - $ 2,384,497 Operating expenses (9) (400,760) - 1,416,532 Depreciation and amortization (47,756) 284,366 (3) 826,327 19,400 (4) Acquisition assimilation expenses - - 3,916 ---------------------------------------------- Income from operations (62,292) (303,766) 137,722 Investment and other income, net (196) (22,446) (5) 242,900 Minority interest - 23,227 Interest expense (32,703) 247,746 (6) 350,067 Income tax expense (10,313) (171,223) (7) 78,268 Convertible preferred dividends - 6,210 ---------------------------------------------- Income (loss) from continuing operations $ (19,472) $ (402,735) $ (30,696) ============================================== Weighted average shares outstanding -Basic 260,481 Weighted average shares outstanding -Diluted 262,260 Income (loss) from continuing operations per basic share $ (0.12) Income (loss) from continuing operations per diluted share $ (0.12)
See Notes to Pro Forma Condensed Financial Statements. Notes to Pro Forma Condensed Financial Statements (1) Reflects the effect of our proposed sales of our public services properties, net of estimated taxes of $415,000,000. Cash proceeds from discontinued operations and assets held for sale have been estimated using the actual contract price for properties where we have reached an agreement with a buyer and signed a definitive contract to sell and using net book value for properties not yet under contract. Currently, we have agreements to sell all our water and wastewater operations, one of our electric operations and one of our natural gas operations. The proceeds from these agreements aggregate approximately $1,470,000,000 in cash plus the assumption of certain liabilities. The balance of the cash proceeds from discontinued operations and assets held for sale is equal to the net book values of the other public service properties. We do not expect any of such properties to be sold at a loss. (2) Represents the acquisition of the stock of the Frontier Acquisition and the remaining assets to be acquired (as of September 30, 2000) in the GTE and U S WEST Acquisitions. Such acquisitions are assumed to be funded through the use of cash on hand (including cash proceeds, net of tax, from the assumed sale of the public service properties), sales of investments, the issuance of long-term debt securities and the issuance of equity securities. The pro forma condensed financial statements assume that debt and equity securities would be issued in amounts that result in a long term debt to long term debt and equity ratio of 62% subsequent to the transactions contemplated herein. The following represents the adjustment to record the Acquisitions:
(in thousands) Elimination of historical shareholder's equity of the Frontier Acquisition and the net assets of the GTE and U S WEST Acquisitions $4,704,912 Decrease in investments utilized to partially fund the Acquisitions (147,457) Issuance of long term debt (2,656,325) Issuance of equity (1,363,388) Use of cash on hand (1,659,830) ----------- Excess of cost over net assets acquired $1,122,088 ----------
For purposes of the accompanying pro forma combined financial statements, we have recorded the acquired assets and assets to be acquired at their historical carrying values and have reflected the excess of cost over such amounts as excess of cost over net assets acquired. The final allocation of purchase price to assets and liabilities acquired will depend upon the final purchase prices and the final estimates of fair values of assets and liabilities as of the various closing dates. We undertake studies to determine the fair values of assets acquired and allocate the purchase prices accordingly. We believe that the excess of cost over historical net assets acquired and to be acquired will be allocated to property, plant and equipment, customer base, other identifiable intangibles and goodwill. However, there can be no assurance that the actual allocation will not differ significantly from the pro forma allocation. (3) Represents an increase in selling, general and administrative expenses of the GTE Combined Entities to reverse a pension credit recorded during the nine months ended September 30, 2000 that will not continue. (4) Reflects amortization expense of the excess of cost over net assets acquired in the Acquisitions using the straight-line method over a 15 year period. Should the allocation of such excess of cost over historical net assets acquired differ significantly as described in Note 2, amortization expense could be impacted since the depreciable lives of assets other than goodwill may be shorter or longer than 15 years. (5) Represents an adjustment for depreciation expense related to GTE Minnesota since the GTE historical financial statements do not include depreciation related to these assets. (6) Represents the elimination of investment income associated with the investment portfolio which is assumed to have been sold to partially fund the Acquisitions. (7) Represents pro forma interest expense from the beginning of the period presented on the debt assumed to have been issued to partially fund the Acquisitions. The interest rate is assumed to be 7.8%. (8) Represents adjustments to income taxes based on income before income taxes using the applicable incremental income tax rate. (9) During 1999, we recorded a pre-tax charge of $5,760,000 in other operating expenses in connection with a plan to restructure our corporate office activities. These costs are not expected to have a continuing impact on our operations. During 1999, Frontier had one-time pre-tax gains totaling $4.7 million which are included in other income in their income statement. The gains are associated with their sales of various telephone properties and will not have a continuing impact on our operations. (10) On September, 30, 1999, Global Crossing acquired Frontier Corporation and all of its subsidiaries (including the LEC businesses that we are acquiring), in a merger transaction. In accordance with Accounting Principles Board Opinion No. 16, "Business Combinations", the excess of the purchase price on the net assets acquired and the liabilities assumed was allocated to Frontier Corporation and its subsidiaries based upon their fair market value at the date of the acquisition. Accordingly, the Frontier Acquisition in the accompanying pro forma income statements for the year ended December 31, 1999 reflect the depreciation expense on the revised balances commencing October 1, 1999. Frontier was amortizing the associated goodwill over a 20 year period. Citizens has included the full year 1999 and nine months ended September 30, 2000 amortization of goodwill over a 15 year period in its pro forma adjustment 3. SELECTED U S WEST EXCHANGES --------------------------- (As Described in Footnote 1) SPECIAL PURPOSE FINANCIAL STATEMENTS ------------------------------------ AS OF SEPTEMBER 30, 2000 ------------------------ UNAUDITED --------- SELECTED U S WEST EXCHANGES --------------------------- (As Described in Footnote 1) STATEMENTS OF SELECTED ASSETS, LIABILITIES ------------------------------------------ AND PARENT'S EQUITY -------------------
September 30, 2000 December 31, 1999 ------------------ ----------------- Unaudited (Dollars in Thousands) ASSETS ------ CURRENT ASSETS: Accounts Receivable, less allowance $ 40,881 $ 46,327 for uncollectibles of $1,721 and $1,254 Inventories and Supplies 4,674 6,542 Other Current Assets 636 685 -------------- ------------- Total Current Assets 46,191 53,554 PROPERTY, PLANT AND EQUIP - NET 661,810 607,700 -------------- ------------- Total Assets $ 708,001 $ 661,254 ============== ============= LIABILITIES AND PARENT'S EQUITY ------------------------------- CURRENT LIABILITIES: Accounts Payable $ 44,943 $ 56,582 Accrued Expenses 28,001 28,849 ------------- ------------ Total Current Liabilities 72,944 85,431 LONG TERM LIABILITIES 2,540 2,936 PARENT'S EQUITY 632,517 572,887 ------------- ------------ Total Liabilities and Parent's Equity $ 708,001 $ 661,254 ============= ============
The accompanying notes are an integral part of these special purpose financial statements. SELECTED U S WEST EXCHANGES --------------------------- (As Described in Footnote 1) STATEMENTS OF REVENUES AND EXPENSES ----------------------------------- Unaudited
Nine Months Ended -------------------------------------------- September 30, 2000 September 30, 1999 -------------------- ------------------ (Dollars in Thousands) OPERATING REVENUES: Local Service $ 118,980 $ 113,372 Access Service 114,791 103,789 Long Distance Service 13,312 19,531 Other Services 8,129 8,800 ------------- --------------- Total Operating Revenues 255,212 245,492 ------------- --------------- OPERATING EXPENSES: Operating Expenses 78,963 76,005 Selling, General and Administrative Expenses 36,663 36,545 Depreciation and Amortization 66,214 64,917 ------------- --------------- Total Operating Expenses 181,840 177,467 ------------- --------------- INCOME BEFORE INCOME TAXES 73,372 68,025 PROVISION FOR INCOME TAXES 27,780 25,850 ------------- --------------- INCOME AFTER INCOME TAXES $ 45,592 $ 42,175 ============= ===============
The accompanying notes are an integral part of these special purpose financial statements. SELECTED U S WEST EXCHANGES --------------------------- (As Described in Footnote 1) STATEMENTS OF CASH FLOWS ------------------------
For the Nine Months Ended September 30, 2000 ------------------------- (Dollars in Thousands) OPERATING ACTIVITIES: Income After Income Taxes $ 45,592 Adjustment to Income After Income Taxes Depreciation & Amortization 66,214 Changes in Operating Assets & Liabilities Accounts Receivables 5,447 Inventories, supplies and other current assets 1,916 Accounts payables and accrued expenses (12,090) Other (60,415) ------------ Cash Provided by Operating Activities 46,664 ------------ INVESTING ACTIVITIES: Expenditures for Property, Plant, & Equipment (40,516) FINANCING ACTIVITIES: Change in Parent's Advances (6,148) ------------ CASH: Change - Beginning Balance - ------------ Ending Balance $ - ============ The accompanying notes are an integral part of these special purpose financial statements.
SELECTED U S WEST EXCHANGES --------------------------- (As Described in Footnote 1) NOTES TO SPECIAL PURPOSE FINANCIAL STATEMENTS --------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 ----------------------------------------------------- UNAUDITED --------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The accompanying special purpose financial statements present the assets, liabilities, parent's equity, revenues, expenses and cash flows of 174 local exchange areas in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming (the "Exchanges"). These statements present the revenues and expenses directly attributed and allocated to the Exchanges, as described herein, and selected assets, liabilities and parent's equity as of and during the periods presented. The Exchanges are 100% owned by U S WEST Communications, Inc. (the "Company"), a wholly owned subsidiary of Qwest Communications International, Inc (formerly U S WEST, Inc.). These statements represent amounts incurred on a historical basis when the local exchange areas were held by and operated as an integral part of the Company. Certain prior year balances have been restated to reflect the replacement of two exchanges. On June 30, 2000, U S WEST merged with and into Qwest Communications International Inc. The combined companies operate under the name Qwest Communications International Inc. On June 16, 1999, the Company entered into a series of definitive agreements for Citizens Utilities Company (now Citizens Communications Company) to purchase local-exchange telephone properties serving approximately 530,000 telephone access lines in nine states for approximately $1.65 billion in cash. Approval of the sale is subject to review by federal and state regulatory agencies. The transfer of ownership, which will occur on a state by state basis, is expected to be completed in 2001. The Exchanges consist of access lines from customers' premises to telephone exchange offices and switching and interoffice facilities to originate and terminate telecommunications services within the local exchange service territories, as defined by each state's public utility commission. The accompanying special purpose financial statements include the assets, liabilities and related operations of the Exchanges historically incurred by the Company and exclude all other assets, liabilities and related operations of U S WEST and its subsidiaries. The special purpose financial statements also include expenses related to all employees who support the Exchanges, some of which are expected to remain employees of the Company. U S WEST and the Company incur certain costs that relate to the Exchanges. To prepare these special purpose financial statements, management allocated certain assets, liabilities and expenses to the Exchanges on a basis that approximates actual cost. Management believes such allocations are reasonable; however, the allocations could differ from amounts that would be determined if the Exchanges operated on a stand-alone basis. The 1999 annual audited financial information was allocated to the 1999 quarters based on actual state level revenue and expenses for the quarter. Because of the Exchanges' relationship with U S WEST and its subsidiaries, the assets, liabilities, revenues and expenses are not necessarily indicative of what would have occurred had the Exchanges operated as a stand-alone entity. These special purpose financial statements are not necessarily indicative of future financial position or results of operations. Corporate overhead expenses are not included in the statements of revenues and expenses as these amounts are not allocated or charged to the Exchanges by the Company or U S WEST. Cash and debt are centrally managed by US WEST. Therefore, the associated balances (including interest) are excluded from the accompanying financial statements. Parent's equity reflects the Company's investment in the Exchanges, accumulated earnings and losses of the Exchanges and intercompany activity with U S WEST. Parent's equity also reflects debits and credits for expense items recognized in these special purpose financial statements for which the related asset or liability is excluded because it is considered to be a U S WEST or Company balance sheet item. These debits and credits primarily include the assets and liabilities of the benefit plans and income tax assets and liabilities not allocated to the Exchanges. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion management, the Quarterly Special Purpose Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. These Consolidated Financial Statemens should be read in conjunction with the Company's 1999 Special Purpose Financial Statements and notes thereto. ARTHUR ANDERSEN U S WEST, INC. SELECTED U S WEST EXCHANGES Special Purpose Financial Statements As Of December 31, 1999, 1998 and 1997 Together With Report Of Independent Public Accountants ARTHUR ANDERSEN REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To U S WEST, Inc. and Citizens Utilities Company: We have audited the accompanying special purpose statements of selected assets, liabilities and parent's equity of U S WEST, Inc.'s selected U S WEST Exchanges (the "Exchanges," as described in Footnote 1) as of December 31, 1999 and 1998, and the related statements of revenues and expenses and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of U S WEST, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the special purpose financial statements referred to above present fairly, in all material respects, the selected assets, liabilities and parent's equity of U S WEST, Inc.'s selected U S WEST Exchanges as of December 31, 1999 and 1998, and the related revenues and expenses and cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Denver, Colorado, May 19,2000.
US WEST, INC. ------------- SELECTED US WEST EXCHANGES -------------------------- (As Described In Footnote 1) STATEMENTS OF REVENUES AND EXPENSES ----------------------------------- Year Ended December 31, -------------------------------------------- 1999 1998 1997 ------------- ----------- ---------- (dollars in thousands) OPERATING REVENUES:: Local services $ 152,161 $ 140,863 $ 131,380 Access services 139,241 137,148 123,179 Long-distance services 26,154 34,563 41,593 Other services 11,808 11,504 10,629 ------------- ----------- ---------- Total operating revenues 329,364 324,078 306,781 ------------- ----------- ---------- OPERATING EXPENSES: Operating expenses 99,626 91,769 91,117 Selling, general and administrative expenses 47,885 46,872 46,915 Depreciation and amortization 85,003 81,263 84,552 ------------- ----------- ---------- Total operating expenses 232,514 219,904 222,584 ------------- ----------- ---------- INCOME BEFORE INCOME TAXES 96,850 104,174 84,197 PROVISION FOR INCOME TAXES 36,804 39,481 31,910 ------------- ----------- ---------- INCOME AFTER INCOME TAXES 60,046 $ 64,693 $ 52,287 $ ============= =========== ==========
The accompanying notes are an integral part of these special purpose financial statements. U S WEST, INC. ------------- SELECTED U S WEST EXCHANGES --------------------------- (As Described In Footnote 1) STATEMENTS OF SELECTED ASSETS, LIABILITIES ------------------------------------------ AND PARENT'S EQUITY -------------------
December 31, ----------------------------------- ASSETS 1999 1998 ------ -------------- --------------- (dollars in thousands) CURRENT ASSETS: Accounts receivable, less allowance for uncollectibles of $1,254 and $1,334 $ 46,327 $ 45,670 Inventories and supplies 6,542 5,754 Other current assets 685 409 ----------- ------------- Total current assets 53,554 51,833 PROPERTY, PLANT AND EQUIPMENT - net 607,700 651,236 ----------- ------------- Total assets $ 661,254 $ 703,069 =========== ============= LIABILITIES AND PARENT'S EQUITY ------------------------------- CURRENT LIABILITIES: Accounts payable $ 56,582 $ 42,061 Accrued expenses 28,849 26,612 ----------- ------------- Total current liabilities 85,431 68,673 LONG-TERM LIABILITIES 2,936 2,437 PARENT'S EQUITY 572,887 631,959 ----------- ------------- Total liabilities and parent's equity $ 661,254 $ 703,069 =========== =============
The accompanying notes are an integral part of these special purpose financial statements. U S WEST, INC. ------------- SELECTED U S WEST EXCHANGES --------------------------- (As Described in Footnote 1) STATEMENTS OF CASH FLOWS ------------------------
Year Ended December 31, -------------------------------------------- 1999 1998 1997 ------------- ----------- ---------- (dollars in thousands) OPERATING ACTIVITIES: Income after income taxes $ 60,046 $ 64,693 $ 52,287 Adjustments to income after income taxes- Depreciation and amortization 85,003 81,263 84,552 Changes in operating assets and liabilities- Accounts receivable (657) 367 (2,702) Inventories, supplies and other current assets (1,064) (784) (991) Accounts payable and accrued expenses 16,758 (8,122) 12,901 Other 44,859 42,193 42,500 ------------- ----------- ---------- Cash provided by operating activities 204,945 179,610 188,547 ------------- ----------- ---------- INVESTING ACTIVITIES: Expenditures for property, plant and (42,792) (57,757) (58,710) equipment ------------- ----------- --- ---------- Cash used for investing activities (42,792) (57,757) (58,710) ------------- ----------- ---------- FINANCING ACTIVITIES: Change in parent's advances (162,153) (121,853) (129,837) ------------- ----------- ---------- Cash used for financing activities (162,153) (121,853) 129,837) ------------- ----------- ---------- CASH: Increase - - - Beginning balance - - - ------------- ----------- ---------- Ending balance $ - $ - $ - ============= =========== ==========
The accompanying notes are an integral part of these special purpose financial statements. U S WEST, INC. ------------- SELECTED U S WEST EXCHANGES --------------------------- (As Described in Footnote 1) NOTES TO SPECIAL PURPOSE FINANCIAL STATEMENTS --------------------------------------------- FOR THE YEARS ENDED DECEMBER 31,1999 AND 1998 --------------------------------------------- (Dollars in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------- Basis of Presentation - --------------------- The accompanying special purpose financial statements present the assets, liabilities, parent's equity, revenues, expenses and cash flows of 174 local exchange areas in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming (the "Exchanges"). These statements present the revenues and expenses directly attributed and allocated to the Exchanges, as described herein, and selected assets, liabilities and parent's equity as of and during the periods presented. The Exchanges are 100% owned by U S WEST Communications, Inc. (the "Company"), a wholly owned subsidiary of U S WEST, Inc. ("U S WEST"). These statements represent amounts incurred on a historical basis when the local exchange areas were held by and operated as an integral part of the Company. Certain prior year balances have been restated to reflect the replacement of two exchanges. On June 16, 1999, the Company entered into a series of definitive agreements for Citizens Utilities Company to purchase local-exchange telephone properties serving approximately 530,000 telephone access lines in nine states for approximately $1.65 billion in cash. Approval of the sale is subject to review by federal and state regulatory agencies. The transfer of ownership, which will occur on a state by state basis, is expected to be completed in 2001. The Exchanges consist of access lines from customers' premises to telephone exchange offices and switching and interoffice facilities to originate and terminate telecommunications services within the local exchange service territories, as defined by each state's public utility commission. The accompanying special purpose financial statements include the assets, liabilities and related operations of the Exchanges historically incurred by the Company and exclude all other assets, liabilities and related operations of U S WEST and its subsidiaries. The special purpose financial statements also include expenses related to all employees who support the Exchanges, some of which are expected to remain employees of the Company. U S WEST and the Company incur certain costs that relate to the Exchanges. To prepare these special purpose financial statements, management allocated certain assets, liabilities and expenses to the Exchanges on a basis that approximates actual cost. Management believes such allocations are reasonable; however, the allocations could differ from amounts that would be determined if the Exchanges operated on a stand-alone basis. Because of the Exchanges' relationship with U S WEST and its subsidiaries, the assets, liabilities, revenues and expenses are not necessarily indicative of what would have occurred had the Exchanges operated as a stand-alone entity. These special purpose financial statements are not necessarily indicative of future financial position or results of operations. Corporate overhead expenses are not included in the statements of revenues and expenses as these amounts are not allocated or charged to the - 2 - Exchanges by the Company or U S WEST. Cash and debt are centrally managed by U S WEST. Therefore, the associated balances (including interest) are excluded from the accompanying financial statements. Parent's equity reflects the Company's investment in the Exchanges, accumulated earnings and losses of the Exchanges and intercompany activity with U S WEST. Parent's equity also reflects debits and credits for expense items recognized in these special purpose financial statements for which the related asset or liability is excluded because it is considered to be a U S WEST or Company balance sheet item. These debits and credits primarily include the assets and liabilities of the benefit plans and income tax assets and liabilities not allocated to the Exchanges. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash - ---- U S WEST funds and disburses, through centrally managed bank accounts, the Exchanges' cash requirements. In addition, cash receipts from the collection of accounts receivable are remitted directly to bank accounts controlled by the Company. Inventories and Supplies - ------------------------ New and reusable materials are carried at average cost, except for significant individual items that are valued based on specific costs. Nonreusable material is carried at its estimated salvage value. Inventory was allocated to the Exchanges based on relative property, plant and equipment balances. Property, Plant and Equipment - ----------------------------- Property, plant and equipment is carried at cost. Property, plant and equipment is depreciated using straight-line group methods. When the depreciable property, plant and equipment is retired or sold, gross book cost less salvage value is generally charged to accumulated depreciation; no gain or loss is recognized. The average depreciable lives used for the major categories of property, plant and equipment are as follows: Category Life (years) ------------------------------------ ------------ Buildings 22 - 53 Telecommunications network equipment 3 - 17 Telecommunications outside plant 5 - 30 General purpose computers and other 5 - 20 The Company's asset accounting systems include certain plant assets that cannot be identified with a specific local exchange. Management is currently working to identify these assets for inclusion in the plant assets to be sold. Management does not believe the additions to net plant will have a material impact on the Exchanges' financial position or results of operations. - 3 - Interest related to qualifying construction projects is capitalized and included in property, plant and equipment. Amounts capitalized were $947, $747 and $740 in 1999, 1998 and 1997, respectively. As interest is not incurred by the Exchanges, capitalized interest represents amounts incurred by the Company which were allocated to the Exchanges' assets. These amounts are reflected as a capital contribution to the Exchanges by the Company. Revenue Recognition - ------------------- Local telephone and voice messaging services are generally billed in advance with revenues recognized when services are provided. Revenues derived from access, inside wire and long-distance services are recognized as services are provided. Income Taxes - ------------ The Exchanges are not a taxable entity. The Exchanges' operating results are included with U S WEST for income tax purposes. Although the Exchanges contribute significant plant-related temporary differences (including investment tax credits) to U S WEST's deferred tax balances, U S WEST does not allocate income tax expense, income tax payables or deferred income taxes to the Exchanges. The provisions included in the accompanying special purpose financial statements were calculated based on the income of the Exchanges and the Company's effective tax rate adjusted for permanent differences not attributable to the Exchanges. Taxes payable resulting from the sale of the assets of the Exchanges will be paid by the Company. Allocation of Expenses - ---------------------- The Exchanges share certain services with other business groups of U S WEST. These services are allocated to the Exchanges on a basis that approximates actual cost. All expenses were allocated to the Exchanges on a cost causative basis. Operating expenses were allocated to the Exchanges based on the related plant account balances while selling, general and administrative expenses were allocated to the Exchanges based on minutes of equipment use, number of access lines and the related plant and revenue accounts. - 4 - 2. PROPERTY, PLANT AND EOUIPMENT: ------------------------------ The components of property, plant and equipment are as follows:
December 31, --------------------------------- 1999 1998 ------------- --------------- Land and buildings $ 67,537 $ 67,649 Telecommunications network equipment 451,048 448,597 Telecommunications outside plant 799,147 782,688 General purpose computers and other 20,164 18,843 Construction in progress 45,263 46,588 ---------- ----------- 1,383,159 1,364,365 ---------- ----------- Less accumulated depreciation: Buildings 21,310 24,044 Telecommunications network equipment 289,264 265,743 Telecommunications outside plant 453,942 412,721 General purpose computers and other 10,943 10,621 ---------- ----------- 775,459 713,129 ---------- ----------- Property, plant and equipment, net $ 607,700 $ 651,236 ========== =========== 3. ACCRUED EXPENSES: ---------------- Accrued expenses consist of the following: December 31, --------------------------------- 1999 1998 ------------- --------------- Accrued property taxes $ 8,083 $ 7,961 Advanced billings 7,751 7,133 Employee-related liabilities 7,022 5,907 Customer deposits 1,158 1,306 Other 4,835 4,305 ---------- ---------- Total accrued expenses $ 28,849 $ 26,612 ========== ==========
- 5 - 4. PARENT'S EQUITY: ---------------- Activity in parent's equity is as follows: Parent's equity, January 1, 1997 $ 689,047 Income after income taxes 52,287 Transactions with related asset/liability on Parent's books (Note 1) 33,611 Net change in Parent's advances (129,837) ------- Parent's equity, December 31, 1997 645,108 ------- Income after income taxes 64,693 Transactions with related asset/liability on Parent's books (Note 1) 44,011 Net change in Parent's advances (121,853) ------- Parent's equity, December 31, 1998 631,959 ------- Income after income taxes 60,046 Transactions with related asset/liability on Parent's books (Note 1) 43,035 Net change in Parent's advances (162,153) ------- Parent's equity, December 31, 1999 $ 572,887 =========
5. EMPLOYEE BENEFITS: ----------------- The majority of the Exchanges' employees are covered by defined benefit pension plans sponsored by U S WEST. Management benefits are based upon their salary while occupational employee benefits are based upon years of service and job classification. The projected unit credit method is used for the determination of pension cost for financial reporting purposes and the aggregate costs method for funding purposes. Net pension credit for the Exchanges, allocated based on headcount, for 1999, 1998 and 1997 were $3,160, $2,246 and $772, respectively. Pension funding was not required in 1999, 1998 and 1997. U S WEST also sponsors plans that provide certain health and life insurance benefits to retired employees. The projected unit credit method is used for the determination of the postretirement medical and life costs for financial reporting purposes. Net postretirement benefit costs, allocated based on headcount, for 1999, 1998 and 1997 were $3,487, $4,031 and $4,259, respectively. The amount funded is based on regulatory account requirements. The assets and liabilities associated with these benefit plans have been excluded from the accompanying balance sheets because the Company does not allocate the associated assets and liabilities. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (AUDITED) AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 (UNAUDITED) FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED BALANCE SHEETS DECEMBER 31, 1999 (AUDITED) AND SEPTEMBER 30, 2000 (UNAUDITED) (in thousands of dollars)
December 31, September 30, 1999 2000 -------------------------------------------- ASSETS: Current assets Cash and cash equivalents $ 83,842 $ 43,832 Telecommunications accounts receivable (net of allowance for uncollectible accounts of $9,351 and $11,773 in 1999 and 2000, respectively) 105,177 103,078 Accounts receivable affiliates 22,828 22,490 Advances to affiliates 312,375 331,135 Materials and supplies 1,395 1,479 Deferred income taxes 5,257 4,273 Prepayments and other 22,736 10,271 -------------------- ------------------- Total current assets 553,610 516,558 Property, plant, and equipment, net 968,951 1,014,687 Goodwill and customer base, net 1,592,250 1,538,999 Due from affiliate 14,595 23,559 Other assets 10,895 12,697 -------------------- ------------------- Total assets $ 3,140,301 $ 3,106,500 ==================== =================== LIABILITIES AND SHAREHOLDER'S EQUITY: Current liabilities: Accounts payable $ 91,135 $ 78,239 Accounts payable affiliates 48,602 88,214 Advances from affiliates 30,068 28,017 Deferred credits 11,025 2,301 Current portion of long-term debt 5,496 3,117 Accrued income taxes 9,423 23,078 Advanced billings 10,785 12,417 Other current liabilities 2,734 - -------------------- ------------------- Total current liabilities 209,268 235,383 Long-term debt, net of current maturities 116,876 116,851 Notes payable to affiliates 13,600 4,700 Deferred income taxes 107,255 87,631 Postretirement benefit obligation 107,955 105,562 Due to affiliate 24,852 28,124 Other long-term liabilities 2,835 337 -------------------- ------------------ Total liabilities 582,641 578,588 -------------------- ------------------ Shareholder's equity: Combined equity 2,561,252 2,611,079 Retained earnings (deficit) (3,592) (83,167) -------------------- ------------------- Total shareholder's equity 2,557,660 2,527,912 -------------------- ------------------- Total liabilities and shareholder's equity $ 3,140,301 $ 3,106,500 ==================== ===================
The accompanying notes to financial statements are an integral part of these balance sheets. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED STATEMENTS OF INCOME FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (AUDITED) AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 (UNAUDITED) (in thousands of dollars)
Period from Period from January 1, January 1, 1999 2000 through through September 30, September 30, 1999 2000 ------------------- ------------------- Revenue $ 547,237 $562,128 Costs and expenses: Operating expenses 237,006 266,864 Depreciation and amortization 85,672 150,174 Taxes other than income taxes 29,130 23,377 ------------------- ------------------- Total costs and expenses 351,808 440,415 ------------------- ------------------- Operating income 195,429 121,713 Interest expense (5,345) (4,899) Equity in earnings on investments in affiliates 4,236 1,656 Other income (expense), net 10,645 20,560 ------------------- ------------------- Income before taxes 204,965 139,030 Income tax expense 82,198 66,174 ------------------- ------------------- Net income $ 122,767 $ 72,856 =================== ===================
The accompanying notes to financial statements are an integral part of these statements. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (AUDITED) AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 (UNAUDITED) (in thousands of dollars)
January 1, January 1, 1999 2000 Through Through September 30, September 30, 1999 2000 ---------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 122,767 72,856 ---------------- --------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 85,672 150,174 (Gain)/loss on sale of assets (4,656) 7 Equity in earnings on investments in affiliates (4,236) (1,656) Changes in operating assets and liabilities, exclusive of impacts of dispositions and acquisitions: Accounts receivable 1,884 2,099 Accounts receivable affiliates and due from affiliates 37,576 (8,626) Material and supplies (341) (84) Prepayments and other current assets 7,201 13,449 Other assets (31,258) (410) Accounts payable and deferred credits (18,429) (21,620) Accounts payable affiliates and due to affiliates 17,035 42,884 Accrued income taxes and other liabilities (17,086) 1,155 Postretirement benefit obligation 7,163 (2,393) Deferred income taxes (1,359) (20,330) ---------------- --------------- Total adjustments 79,166 154,649 ---------------- --------------- Net cash provided by operating activities 201,933 227,505 ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant, and equipment (129,688) (142,659) Proceeds from asset sales 7,708 - Distributions from cellular partnerships 2,388 1,261 Advances to affiliates (62,502) (80,142) ---------------- --------------- Net cash used in investing activities (182,094) (221,540) ---------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt (2,271) (2,404) Dividends paid (22,329) (41,050) Advances from affiliates 3,123 (2,051) Other financing activities 337 (470) ---------------- --------------- Net cash used in financing activities (21,140) (45,975) ---------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,301) (40,010) CASH AND CASH EQUIVALENTS, beginning of period 64,109 83,842 ---------------- --------------- CASH AND CASH EQUIVALENTS, end of period $ 62,808 $ 43,832 ================ ===============
The accompanying notes to financial statements are an integral part of these statements. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Description of Business and Organization - ---------------------------------------- The accompanying combined financial statements include the following wholly owned subsidiaries of Global Crossing North America ("GCNA"):
Frontier Telephone of Rochester, Inc. ("FTR") Frontier Communications of Seneca-Gorham, Inc. Frontier Communications of Rochester, Inc. Frontier Communications of New York, Inc. Frontier Subsidiary Telco Inc. and Subsidiaries Frontier Communications of Ausable Valley, Inc. Frontier Communications of Sylvan Lake, Inc.
These entities are hereafter collectively referred to as the Frontier Incumbent Local Exchange Businesses (the "Company" or the "Frontier ILEC's"). The Frontier ILEC's, headquartered in Rochester, New York, are providers of local telephone services to customers in thirteen states. On September 30, 1999, Global Crossing, Ltd. ("Global Crossing") acquired Frontier Corporation ("Frontier") and all of its subsidiaries, including the Company, in a merger transaction (the "Global Crossing merger"). In accordance with Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations," the excess of the purchase price over the net assets acquired and the liabilities assumed was allocated to Frontier and its subsidiaries based upon their fair market value at the date of the acquisition. The fair market value was determined by GCNA with the assistance of a third-party appraiser. Accordingly, the Company's financial statements for the nine months ended September 30, 2000 reflect the allocated fair value of the Global Crossing merger. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 Basis of Presentation - --------------------- The accompanying unaudited interim condensed combined financial statements include the companies previously identified and their majority-owned subsidiaries after elimination of all significant intercompany balances and transactions. These unaudited interim condensed combined financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission ("SEC") regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The unaudited interim condensed combined financial statements reflect all adjustments necessary to fairly present the results of operations, financial position and cash flows for the periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the audited combined financial statements and notes thereto for the fiscal year ended December 31, 1999. Citizens Transaction - -------------------- On July 11, 2000, GCNA and GCNA's parent company, Global Crossing Limited, signed a Stock Purchase Agreement ("Agreement") with Citizens Communications Company ("Citizens") to sell the Frontier ILEC's to Citizens for $3.65 billion, subject to adjustment under the terms of the Agreement. In February 2001, the Agreement with Citizens was amended to provide for the transfer of certain assets and liabilities related to the Company's qualified other postretirement benefits to Citizens. Assets and liabilities for virtually all retirees and all transferring active ILEC employees will be transferred upon the sale. The transaction is expected to close in 2001, subject to regulatory approvals. Impairment of Long-Lived Assets - ------------------------------- In the event that facts and circumstances indicate that the carrying amount of a long-lived asset may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if a write-down to fair value is required. Fair value may be determined based on quoted market prices or discounted cash flows. Revenue Recognition - ------------------- The Company derives revenue primarily from charges for local telephone services, network access for interconnection of long distance companies, directory advertising, billing and collection, and other services provided to long distance companies. The Company also derives revenue from the sale, leasing, and maintenance of telephone equipment and the sale of enhanced services such as voice mail, custom calling features, Internet, and advanced number identification products such as Caller ID. Customers are billed on monthly cycle dates. Revenue is recognized as service is provided net of an estimate for uncollectible accounts. Unbilled usage is accrued and was $14.5 million and $14.4 million at December 31, 1999 and September 30, 2000, respectively. Certain revenues derived from local telephone services are billed monthly in advance and are recognized the following month when services are provided. Segment Reporting - ----------------- The Company is a provider of local telephone services and operates in one segment as defined by Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information". FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 2. DIVESTITURES ------------ Orion Cellular - -------------- In June 1999, the Company completed the sale of O.T. Cellular Telephone Company (Illinois RSA #3). The sale resulted in a pretax gain of $2 million and is included in other income in the accompanying combined statements of income. Schuyler Minburn Exchange & Schuyler Cellular - --------------------------------------------- In September 1999, the Company completed the sale of its local telephone exchange serving Woodward, Iowa and its interest in Central Iowa Cellular. The sale resulted in a pretax gain of $2.7 million and is included in other income in the accompanying combined statements of income. 3. NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 effective as of January 1, 2000. The net impact was immaterial to the Company's results of operations. 4. SUBSEQUENT EVENTS ----------------- On October 13, 2000, a subsidiary of the Company, Frontier Subsidiary Telco, Inc., completed a $1 billion term loan facility with Citibank, N.A. as administrative agent. Proceeds from the loan were used to refinance higher interest bearing affiliate debt and will remain outstanding until GCNA completes the sale of its local exchange business to Citizens Communications. The loan has a maximum maturity of eighteen months. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 TOGETHER WITH AUDITORS' REPORTS Report of Independent Public Accountants To Frontier Incumbent Local Exchange Carrier Businesses: We have audited the accompanying combined balance sheets of the companies identified in Note 1, collectively referred to as the Frontier Incumbent Local Exchange Carrier Businesses, each of which is a wholly owned indirect subsidiary of Global Crossing, Ltd., as of December 31, 1999, and the related combined statements of operations, shareholder's equity, and cash flows for the nine-month period ended September 30, 1999 (the Predecessor) and the three-month period ended December 31, 1999. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The combined financial statements of the Frontier Incumbent Local Exchange Carrier Businesses as of December 31, 1998 and 1997, were audited by other auditors whose report dated February 15, 2001 expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Frontier Incumbent Local Exchange Carrier Businesses as of December 31, 1999, and the results of their operations and their cash flows for the nine-month period ended September 30, 1999 (the Predecessor) and the three-month period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP New York, New York February 15, 2001 Report of Independent Accountants Frontier Incumbent Local Exchange Carrier Businesses: In our opinion, the accompanying combined balance sheets as of December 31, 1998 and 1997 and the related combined statements of income, shareholders' equity and cash flows for each of the years ended December 31, 1998 and 1997 present fairly, in all material respects, the financial position, results of operations and cash flows of the Frontier Incumbent Local Exchange Carrier Businesses at December 31, 1998 and 1997 and for each of the years ended December 31, 1998 and 1997 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have not audited the combined financial statements of Frontier Incumbent Local Exchange Carrier Businesses for any period subsequent to December 31, 1998. PricewaterhouseCoopers LLP Rochester, New York February 15, 2001 FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED BALANCE SHEETS DECEMBER 31, 1997, 1998 (PREDECESSOR), AND 1999 (SUCCESSOR) (in thousands of dollars)
December 31, December 31, December 31, 1997 1998 1999 ---------------- ---------------- --------------- ASSETS: Current assets Cash and cash equivalents $ 13,996 $ 64,109 $ 83,842 Telecommunications accounts receivable (net of allowance for uncollectible accounts of $4,193, $7,644, and $9,351 in 1997, 1998, and 1999, respectively) 106,501 103,870 105,177 Accounts receivable, affiliates 26,068 27,280 22,828 Advances to affiliates 200,453 224,500 312,375 Materials and supplies 1,682 1,266 1,395 Deferred income taxes 2,814 5,674 5,257 Prepayments and other 19,082 19,266 22,736 ---------------- ---------------- --------------- Total current assets 370,596 445,965 553,610 Property, plant, and equipment, net 646,807 696,531 968,951 Goodwill and customer base, net 93,056 90,201 1,592,250 Due from affiliate - 3,990 14,595 Other assets 21,737 25,949 10,895 ---------------- ---------------- --------------- Total assets $ 1,132,196 $ 1,262,636 $ 3,140,301 ================ ================ =============== LIABILITIES AND SHAREHOLDER'S EQUITY: Current liabilities: Accounts payable $ 58,466 $ 80,753 $ 91,135 Accounts payable, affiliates 13,168 10,788 48,602 Advances from affiliates 26,606 31,322 30,068 Deferred credits 9,240 12,053 11,025 Current portion of long-term debt 2,802 2,627 5,496 Accrued income taxes 7,873 20,428 9,423 Advanced billings 9,608 10,814 10,785 Other current liabilities 5,849 5,239 2,734 ---------------- ---------------- --------------- Total current liabilities 133,612 174,024 209,268 Long-term debt, net of current maturities 125,437 122,686 116,876 Notes payable to affiliates 13,600 13,600 13,600 Deferred income taxes 5,268 5,188 107,255 Postretirement benefit obligation 40,602 46,022 107,955 Due to affiliate 10,614 9,414 24,852 Other long-term liabilities 4,318 4,253 2,835 ---------------- ---------------- --------------- Total liabilities 333,451 375,187 582,641 ---------------- ---------------- --------------- Shareholder's equity: Preferred stock, par value $100; 4,000 shares authorized ; 275, 270, and 0 shares issued and outstanding in 1997, 1998, and 1999, respectively 275 270 - Combined equity 279,886 279,886 - Contributed capital 302,317 302,351 2,561,252 Retained earnings (deficit) 216,267 304,942 (3,592) ---------------- ---------------- --------------- Total shareholder's equity 798,745 887,449 2,557,660 ---------------- ---------------- --------------- Total liabilities and shareholder's equity $ 1,132,196 $ 1,262,636 $ 3,140,301 ================ ================ ===============
The accompanying notes to financial statements are an integral part of these balance sheets. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998, THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (PREDECESSOR), AND THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1999 (SUCCESSOR) (in thousands of dollars)
Period from Period from January 1, October 1, 1999 1999 Year Ended Year Ended Through Through December 31, December 31, September 30, December 31, 1997 1998 1999 1999 ---------------- ---------------- ---------------- ---------------- Revenues $ 665,296 $ 700,207 $ 547,237 $ 186,976 Costs and expenses: Operating expenses 291,174 308,058 237,006 89,682 Depreciation and amortization 103,961 106,589 85,672 53,414 Taxes other than income taxes 36,461 38,207 29,130 9,967 ---------------- ---------------- ---------------- ---------------- Total costs and expenses 431,596 452,854 351,808 153,063 ---------------- ---------------- ---------------- ---------------- Operating income 233,700 247,353 195,429 33,913 Interest expense (12,275) (9,076) (5,345) (2,065) Equity in earnings on investments in affiliates 2,652 4,564 4,236 1,413 Other income (expense), net 33,338 14,365 10,645 5,451 ---------------- ---------------- ---------------- ---------------- Income before taxes 257,415 257,206 204,965 38,712 Income tax expense 100,064 98,640 82,198 25,404 ---------------- ---------------- ---------------- ---------------- Net income $ 157,351 $ 158,566 $ 122,767 $ 13,308 ================ ================ ================ ================
The accompanying notes to financial statements are an integral part of these statements. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998, THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (PREDECESSOR), AND THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1999 (SUCCESSOR), (in thousands of dollars)
Preferred Combined Contributed Retained Stock Equity Capital Earnings Total ------------ ------------- ------------- ------------- ------------- BALANCE, December 31, 1996 $ 2,760 $ 278,795 $ 302,387 $ 117,747 $ 701,689 Net Income - - - 157,351 157,351 Redemptions (2,485) - - - (2,485) Common and preferred dividends - - - (58,831) (58,831) Equity adjustment on asset transfer January 1995 - 1,091 - - 1,091 Other - - (70) - (70) ------------ ------------- ------------- ------------- ------------- BALANCE, December 31, 1997 275 279,886 302,317 216,267 798,745 Net income - - - 158,566 158,566 Redemptions (5) - - - (5) Common and preferred dividends - - - (70,054) (70,054) Other - - 34 163 197 ------------ ------------- ------------- ------------- ------------- BALANCE, December 31, 1998 270 279,886 302,351 304,942 887,449 Net income - - - 122,767 122,767 Redemptions (270) - - - (270) Common and preferred dividends - - - (22,329) (22,329) ------------ ------------- ------------- ------------- ------------- BALANCE, September 30, 1999 - 279,886 302,351 405,380 987,617 Net income - - - 13,308 13,308 Common and preferred dividends - - - (16,900) (16,900) Global Crossing merger (Note 1) - (279,886) 685,266 (405,380) - Purchase accounting adjustments (Note 1) - - 1,573,821 - 1,573,821 Other - - (186) - (186) ------------ ------------- ------------- ------------- ------------- BALANCE, December 31, 1999 $ - $ - $2,561,252 $ (3,592) $2,557,660 ============ ============= ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998, THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (PREDECESSOR), AND THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1999 (SUCCESSOR), (in thousands of dollars)
January 1, October 1, 1999 1999 Year Ended Year Ended Through Through December 31, December 31, September 30, December 31, 1997 1998 1999 1999 ------------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 157,351 $ 158,566 $ 122,767 $ 13,308 ------------- ------------- ------------- ------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 103,961 106,589 85,672 53,414 (Gain)/loss on sale of assets (21,487) - (4,656) 29 Equity in earnings on investments in affiliates (2,652) (4,564) (4,236) (1,413) Other charges 577 - - Changes in operating assets and liabilities, exclusive of impacts of dispositions and acquisitions: Accounts receivable 8,429 2,631 1,884 (3,191) Accounts receivable, affiliates and due from affiliates (1,918) (5,202) 37,576 (43,701) Material and supplies 2,034 416 (341) 212 Prepayments and other current assets (1,830) (184) 7,201 (10,671) Other assets 1,701 (1,936) (31,258) 34,289 Accounts payable (9,429) 22,287 (18,429) 25,544 Accounts payable, affiliates, and due to affiliates (30,599) (3,580) 17,035 20,779 Taxes accrued and other liabilities 782 15,899 (17,086) 28,261 Postretirement benefit obligation 4,081 5,420 7,163 (2,635) Deferred income taxes (2,641) (2,940) (1,359) (12,227) ------------- ------------- ------------- ------------- Total adjustments 51,009 134,836 79,166 88,690 ------------- ------------- ------------- ------------- Net cash provided by operating activities 208,360 293,402 201,933 101,998 ------------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant, and equipment (109,279) (153,458) (129,688) (48,264) Proceeds from asset sales 33,234 - 7,708 13,815 Distributions from cellular partnerships 2,405 2,368 2,388 690 Advances to affiliates (51,344) (24,047) (62,502) (25,400) ------------- ------------- ------------- ------------- Net cash used in investing activities (124,984) (175,137) (182,094) (59,159) ------------- ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt (27,174) (2,926) (2,271) (670) Dividends paid (58,831) (70,054) (22,329) (16,900) Advances from affiliates 2,998 4,716 3,123 (4,377) Other financing activities (56) 112 337 142 ------------- ------------- ------------- ------------- Net cash used in financing activities (83,063) (68,152) (21,140) (21,805) ------------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 313 50,113 (1,301) 21,034 CASH AND CASH EQUIVALENTS, beginning of period 13,683 13,996 64,109 62,808 ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 13,996 $ 64,109 $ 62,808 $ 83,842 ============= ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements. FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES NOTES TO COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, 1998, AND 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Description of Business and Organization The accompanying combined financial statements include the following wholly owned subsidiaries of Global Crossing North America ("GCNA"):
Frontier Telephone of Rochester, Inc. ("FTR") Frontier Communications of Seneca-Gorham, Inc. Frontier Communications of Rochester, Inc. Frontier Communications of New York, Inc. Frontier Subsidiary Telco Inc. and Subsidiaries Frontier Communications of Ausable Valley, Inc. Frontier Communications of Sylvan Lake, Inc.
These entities are hereafter collectively referred to as the Frontier Incumbent Local Exchange Carrier Businesses (the "Company" or the "Frontier ILEC's"). The Frontier ILEC's, headquartered in Rochester, New York, are providers of local telephone services to customers in eleven states. On September 30, 1999, Global Crossing, Ltd. ("Global Crossing") acquired Frontier Corporation ("Frontier") and all of its subsidiaries, including the Company, in a merger transaction (the "Global Crossing merger"). In accordance with Accounting Principles Board Opinion ("APB") No. 16, Business Combinations, the excess of the purchase price over the net assets acquired and the liabilities assumed was allocated to Frontier and its subsidiaries based upon their fair market value at the date of the acquisition. The fair market value was determined by GCNA with the assistance of a third-party appraiser. Accordingly, the Company's financial statements for the three months ended December 31, 1999 reflect the allocated fair value of the Global Crossing merger, and thus are not comparable to the financial statements for the years ended December 31, 1997 and 1998 and the nine-month period ended September 30, 1999. In connection with the Global Crossing merger, the Company recorded the following adjustments (in thousands): Allocated goodwill $ 1,500,000 Increase to property, plant, and equipment 212,354 Allocation to customer base 110,000 Increase to deferred tax liability (106,656) Adjustment to other postretirement benefit obligations (57,405) Elimination of existing goodwill (88,061) Increase to assets held for sale 5,899 Increase in taxes payable (2,310) ----------------- Increase to additional paid-in capital $ 1,573,821 In addition, the accumulated depreciation on the property, plant, and equipment was eliminated, and depreciation commenced on the revised balances on October 1, 1999. Principles of Combination - ------------------------- The combined financial information includes the companies identified above and their majority-owned subsidiaries after elimination of all significant intercompany transactions. Investments in entities in which the Company does not have a controlling interest are accounted for using the equity method. Use of Estimates - ---------------- Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Materials and Supplies - ---------------------- Materials and supplies are stated at the lower of cost or market, based on a weighted average unit cost. Property, Plant, and Equipment - ------------------------------ The investment in property, plant, and equipment was recorded at fair market value as of the date of the Global Crossing merger. Additions to property, plant, and equipment are recorded at cost. Improvements that significantly add to productive capacity or extend useful life are capitalized. Maintenance and repairs are expensed as incurred. The Company's provision for depreciation of property, plant, and equipment is based on the composite group method using estimated service lives of the various classes of plant. Building improvements 5 years Buildings 40 years Local and fiber service lines 12 to 25 years Central office equipment and switching facilities 3 to 20 years Station equipment 10 to 21 years Furniture, office equipment, vehicles, tools,and other 2 to 20 years The cost of depreciable telephone property units retired, plus removal costs, less salvage is charged to accumulated depreciation. When nontelephone property, plant, and equipment is retired or sold, the resulting gain or loss is recognized currently as an element of other income. Goodwill and Customer Base - -------------------------- Goodwill and other intangible assets are amortized using the straight-line method. As of December 31, 1999, goodwill and customer base consisted of the following (in thousands):
Intangible Accumulated Net Amortization Balance Amortization Balance Period --------------- --------------- -------------- ------------ Allocated Goodwill $ 1,500,000 $ 15,000 $ 1,485,000 25 years Customer Base 110,000 2,750 107,250 10 years ------------- ------------ ------------- Total $ 1,610,000 $ 17,750 $ 1,592,250 ============= ============ =============
Investments - ----------- Financial results of the Company's investment in a corporation has been reported using the cost method as a result of its 16.7 ownership percentage. The investment balance of $.2 million at December 31, 1997 and December 31, 1998 is included in other assets in the combined balance sheets. The Company also has investments in various cellular partnerships that have been reported using the equity method of accounting in accordance with Statement of Position 78-9, Accounting for Investments in Real Estate Ventures, which states that an investor in a general partnership should account for its investment by the equity method. The partnership investment balances are included in other assets in the combined balance sheets. The Company had a 15 percent share in a joint venture which was sold in December 1999. The partnership investment balances related to this joint venture were $3.3 million and $4.6 million at December 31, 1997 and December 31, 1998, respectively. No gain or loss was recorded on the disposal of this investment. The Company's partnership investment balances in other cellular partnerships were $5.0 million, $6.2 million, and $5.8 million at December 31, 1997, December 31, 1998, and December 31, 1999, respectively. Impairment of Long-Lived Assets - ------------------------------- In the event that facts and circumstances indicate that the carrying amount of a long-lived asset may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if a write-down to fair value is required. Fair value may be determined based on quoted market prices or discounted cash flows. Fair Value of Financial Instruments - ----------------------------------- Cash and cash equivalents are valued at their carrying amounts, which are reasonable estimates of fair value. The fair value of long-term debt is estimated using rates currently available to the Frontier ILEC's for debt with similar terms and maturities. The fair value of all other financial instruments approximates cost due to the short maturities of these instruments. Federal Income Taxes - -------------------- Prior to the Global Crossing merger, the Company was included in the consolidated federal income tax return of its parent, Frontier. Post merger, the Company is included in the consolidated federal income tax return of GCNA. The Company pays its parent for the federal income tax liability resulting from the filing by the parent of its U.S. federal income tax return, determined on a separate entity basis. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are anticipated to be in effect when those differences are expected to reverse. Allocation of Corporate Overhead - -------------------------------- The results of operations of the Company include allocations of corporate expenses from GCNA. These costs primarily include executive, corporate planning, legal, tax, human resources, treasury, corporate communications, and corporate accounting functions. They are allocated to the Company based on a weighted average of four factors: employees, revenues, capitalization, and common equity. Allocations of these corporate mutually beneficial costs is performed on a basis management considers reasonable. Related Party Transactions - -------------------------- The Company has transactions in the normal course of business with GCNA and certain other GCNA affiliates, as discussed further in Note 13. Amounts related to these transactions are reflected in accounts receivable affiliate and accounts payable affiliate in the balance sheets. The Company has advances to and advances from affiliate related to investing and financing activities with the parent. In accordance with a cash management agreement, GCNA pays interest to the Company on these investments at GCNA's average commercial paper borrowing rate, determined on a monthly basis. This rate ranged from 4.95 percent to 8.01 percent for 1999, 5.24 percent to 5.69 percent for 1998, and 5.40 percent to 5.82 percent for 1997. The Company has recorded a due from affiliate and due to affiliate which primarily represents amounts owed to and from GCNA for net periodic pension benefits and the related deferred taxes. The Company has notes payable to affiliates which have interest rates ranging from 6.50 percent to 9.25 percent and mature between 2003 and 2020. The proceeds from these notes were used to pay down higher interest rate debt. Revenue Recognition - ------------------- The Company derives revenue primarily from charges for local telephone services, network access for interconnection of long distance companies, directory advertising, billing and collection, and other services provided to long distance companies. The Company also derives revenue from the sale, leasing and maintenance of telephone equipment and the sale of enhanced services such as voice mail, custom calling features, Internet, and advanced number identification products such as Caller ID. Customers are billed on monthly cycle dates. Revenue is recognized as service is provided net of an estimate for uncollectible accounts. Unbilled usage is accrued and was $11.8 million, $15.3 million, and $14.5 million at December 31, 1997, 1998, and 1999, respectively. Customers are billed an activation fee upon installation which is deferred by the Company and amortized over the estimated average customer life in accordance with Staff Accounting Bulletin No. 101 as discussed further in Note 11. Certain revenues derived from local telephone services are billed monthly in advance and are recognized the following month when services are provided. Market Risk Disclosure - ---------------------- As of December 31, 1999, the Company does not have any significant concentration of business transacted with a particular customer, supplier, or lender that could, if suddenly eliminated, severely impact its operations. The Company periodically performs ongoing credit evaluations of its larger customers' financial condition to limit credit risk to the extent possible. Supplemental Disclosures to the Statement of Cash Flows - ------------------------------------------------------- The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Actual interest paid was $9.9 million, $9.0 million, $9.9 million, and $1.6 million for the years ended December 31, 1997 and 1998, the nine months ended September 30, 1999, and the three months ended December 31, 1999, respectively. Actual income taxes paid were $88.6 million, $92.1 million, $77.9 million, and $14.5 million, for the years ended December 31, 1997 and 1998, the nine months ended September 30, 1999, and the three months ended December 31, 1999, respectively. Interest costs associated with the construction of capital assets are capitalized. Total amounts capitalized during 1997, 1998, and 1999 were $2.2 million, $2.1 million, and $4.2 million, respectively. The Company had cash restricted for dividend payments to GCNA of $2.4 million, $53.0 million, and $52.6 million at December 31, 1997, 1998, and 1999, respectively. Segment Reporting - ----------------- The Company is a provider of local telephone services and operates in one segment as defined by Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information. Common Stock Adjustment - ----------------------- The value assigned to the Company's common stock of Frontier Telephone of Rochester was determined based on the historical book value of the assets transferred from Frontier to the Company on January 1, 1995. In the first quarter of 1997, a $1.1 million adjustment was required to recognize additional deferred taxes associated with assets transferred which had not previously been allocated from the parent. This adjustment is reflected as an increase to common stock and a decrease to deferred taxes. Other Comprehensive Income - -------------------------- The Company did not have any other comprehensive income in 1997, 1998, or 1999. 2. DIVESTITURES ------------ Upstate Cellular Network - ------------------------ In December 1999, the Company completed the sale of its interest in a joint venture. There was no gain or loss on the sale, as these assets had been reflected on the Company's books at their fair market value as a result of the Global Crossing merger. Orion Cellular - -------------- In June 1999, the Company completed the sale of O.T. Cellular Telephone Company (Illinois RSA #3). The sale resulted in a pretax gain of $2 million and is included in other income in the accompanying combined statements of income. Schuyler Minburn Exchange & Schuyler Cellular - --------------------------------------------- In September 1999, the Company completed the sale of its local telephone exchange serving Woodward, Iowa and its interest in Central Iowa Cellular. The sale resulted in a pretax gain of $2.7 million and is included in other income in the accompanying combined statements of income. South Alabama Cellular Communications Partnership - ------------------------------------------------- On January 31, 1997, the Company completed the sale of its 69.5 percent equity interest in the South Alabama Cellular Communications Partnership. The sale resulted in a pretax gain of $21.5 million and is included in other income in the accompanying combined statements of income. 3. OTHER CHARGES ------------- In October 1997, Frontier Corporation, the former parent, recorded a pretax charge of $86.8 million consisting of a restructuring charge and a write-down for asset and lease impairments. The restructuring charge was primarily associated with a reduction in workforce of approximately 700 positions, program cancellations, and the exiting of certain product lines. The Company's allocated share of this charge was $4.2 million, primarily comprised of severance and related employee termination benefits. The related liability was retained by the parent. The plan was executed in accordance with the original program and was completed prior to December 31, 1998. The charge is reflected in operating expenses in the accompanying combined statements of income. 4. PROPERTY, PLANT, AND EQUIPMENT ------------------------------ Major classes of property, plant, and equipment are summarized below (in thousands):
1997 1998 1999 ----------- ------------ ------------- Land and buildings $ 86,726 $ 89,518 $ 113,780 Local and toll service lines 820,274 860,638 401,281 Central office equipment 607,029 677,420 292,221 Station equipment 53,342 41,838 12,265 Furniture, office equipment, vehicles, tools, and other 67,430 78,547 41,750 Plant under construction 92,106 108,035 143,500 ----------- ------------ ------------- 1,726,907 1,855,996 1,004,797 Less: Accumulated depreciation (1,080,100) (1,159,465) (35,846) ----------- ------------ ------------- $ 646,807 $ 696,531 $ 968,951 =========== ============ =============
Depreciation expense was approximately $101.1 million, $103.7 million, $83.6 million, and $35.8 million for the years ended December 31, 1997 and 1998, the nine months ended September 30, 1999, and the three months ended December 31, 1999, respectively. 5. LONG-TERM DEBT -------------- Long-term debt consisted of the following at December 31 (in thousands):
1997 1998 1999 ------------ ----------- ----------- 7.51% medium-term notes due 2002 (a) $ 40,000 $ 40,000 $ 40,000 7.61% senior notes due 2003 (b) 35,000 35,000 35,000 Rural Utilities Service (RUS) debt (c) 53,239 50,313 47,372 ------------ ----------- ----------- Total long-term debt (including current portion) 128,239 125,313 122,372 Less: Current portion of long-term debt 2,802 2,627 5,496 ------------ ----------- ----------- Total long-term debt $ 125,437 $ 122,686 $ 116,876 ============ =========== ===========
In accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company estimates that the fair value of the debt, based on rates currently available to the Company for debt with similar terms and remaining maturities, is $121.9 million, as compared to the carrying value of $122.4 million. (a) The medium-term notes were issued by Frontier Telephone of Rochester in connection with the Company's Open Market Plan agreement with the New York State Public Service Commission ("NYSPSC"). The notes are unsecured and mature on March 27, 2002. (b) The senior notes were issued by Frontier Communications of Minnesota, a subsidiary of Frontier Subsidiary Telco, Inc., under a private placement offering. Certain assets of the Company are pledged as security, and the notes mature on February 1, 2003. (c) The outstanding Rural Utilities Service debt was issued in varying amounts by several subsidiaries of the Company. The interest rates on the debt range from 2 percent to 9 percent, and the debt matures in varying amounts from 2000 through 2026. Certain assets of the issuing companies are pledged as security. At December 31, 1999, aggregate debt maturities were (in thousands): 2000 $ 5,496 2001 3,522 2002 43,618 2003 38,336 2004 2,962 Thereafter 28,438 ----------- $ 122,372 =========== 6. INCOME TAXES ------------ The provision for income taxes consists of the following (in thousands):
Period from Period from January 1, October 1, Year Ended Year Ended 1999 to September 1999 to December December 31, 1997 December 31, 1998 30, 1999 31, 1999 ----------------- ----------------- ----------------- ---------------- Federal: Current $ 96,991 $ 91,174 $ 70,032 $ 24,988 Deferred (7,658) (3,073) 2,597 (1,737) ----------- ----------- ----------- ----------- 89,333 88,101 72,629 23,251 ----------- ----------- ----------- ----------- State: Current 6,805 10,406 8,452 2,160 Deferred 3,926 133 1,117 (7) ----------- ----------- ----------- ----------- 10,731 10,539 9,569 2,153 ----------- ----------- ----------- ----------- Total income taxes $ 100,064 $ 98,640 $ 82,198 $ 25,404 =========== =========== =========== ===========
The reconciliation of the federal statutory income tax rate with the effective income tax rate reflected in the financial statements is as follows (in thousands):
Period from Period from Year Ended Year Ended January 1, October 1, December 31, December 31, 1999 to September 1999 to December 1997 1998 30, 1999 31, 1999 -------------- ------------ ------------------ ---------------- Federal income tax expense at statutory rate $ 90,095 $ 90,022 $ 71,738 $ 13,549 State income tax (net of federal benefit) 6,975 6,850 6,220 1,399 Goodwill amortization 1,001 1,001 1,346 5,250 Nondeductible amortization of stepped-up basis - - - 3,876 Other 1,993 767 2,894 1,330 ------------- ------------ ------------ ------------ Total income tax $ 100,064 $ 98,640 $ 82,198 $ 25,404 ============= ============ ============ ============
Deferred tax assets (liabilities) comprised the following at December 31 (in thousands):
1997 1998 1999 ---------------- --------------- ---------------- Accelerated depreciation $ (54,363) $ (49,016) $ (168,492) Other (1,013) (1,441) (2,630) ---------------- --------------- ---------------- Gross deferred tax liabilities (55,376) (50,457) (171,122) ---------------- --------------- ---------------- Basis adjustment - purchased telephone companies 26,437 23,378 22,803 Employee benefits obligation 19,373 20,363 44,137 Deferred compensation 1,061 1,026 235 Acquisition related and other charges 780 656 - Bad debt expense 666 2,777 3,979 Partnership taxable income adjustment 409 407 (2,090) Other 4,196 2,336 60 ---------------- --------------- --------------- Gross deferred tax assets 52,922 50,943 69,124 ---------------- --------------- --------------- Net deferred tax assets (liabilities) $ (2,454) $ 486 $ (101,998) ================ =============== ===============
7. SERVICE PENSIONS AND BENEFITS ----------------------------- Prior to the Global Crossing merger, the Company participated in Frontier noncontributory plans, which were carried over post-merger and sponsored by GCNA, with identical terms. These noncontributory plans provide service pensions and certain death benefits. In 1995 and 1996, defined benefit plans sponsored by Frontier were frozen. As such, no new participants have been added to the plans. On an annual basis, contributions are remitted to the trustees to ensure proper funding of the plans. As the plans are over-funded, the Company recorded a net periodic pension benefit of approximately $6.7 million $3.7 million, $6.7 million, and $2.2 million for the years ended December 31, 1997 and 1998, the nine months ended September 30, 1999, and the three months ended December 31, 1999, respectively. Prior to the Global Crossing merger, the Company participated in a number of Frontier defined contribution plans, which were carried over post-merger and sponsored by GCNA, with identical terms. The most significant plan covers nonbargaining employees, who can elect to make contributions through payroll deduction. Frontier/Global Crossing provides a contribution of 0.5 percent of gross compensation in common stock for every employee eligible to participate in the plan. The common stock used for matching contributions is purchased on the open market by the plan's trustee. Frontier/Global Crossing also provides 100 percent matching contributions in its common stock up to three percent of gross compensation, and may, at the discretion of management, provide additional contributions based upon GCNA financial results. The total cost recognized by the Company for defined contribution plans was $2.9 million for the year ended December 31, 1997, $3.7 million for the year ended December 31, 1998, $3.0 million for the nine months ended September 30, 1999, and $1.0 million for the three months ended December 31, 1999. 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ------------------------------------------- The Company provides health care and life insurance benefits to most employees. Plan assets consist principally of life insurance policies and money market instruments. In adopting SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, the Company elected to defer the recognition of the accrued obligation of $119.6 million over a period of twenty years. In accordance with APB No. 16, Business Acquisitions, the Company recognized the unamortized accrued obligation upon the effective date of the Global Crossing merger. The status of the plans is as follows (in thousands):
Period from Period from January 1, October 1, Year Ended Year Ended 1999 to September 1999 to December December 31, 1997 December 31, 1998 30, 1999 31, 1999 ------------------ ----------------- ---------------- ---------------- Change in benefit obligation: Benefit obligation at beginning of the period $ 102,095 $ 115,585 $ 126,614 $ 111,661 Service cost 688 597 444 118 Interest cost 7,546 7,892 6,027 2,086 Amendments (2,812) 414 1,133 - Actuarial loss (gain) 14,987 9,528 (15,504) (2,892) Benefits paid (6,919) (7,402) (7,053) (1,991) ------------ ----------- ---------- ----------- Benefit obligation at end of the period 115,585 126,614 111,661 108,982 ------------ ----------- ---------- ----------- Change in plan assets: Fair value of plan assets at beginning of the period 5,322 5,038 4,430 2,988 Actual return on plan assets 359 78 191 180 Employer contribution 6,276 6,716 5,420 1,877 Benefits paid (6,919) (7,402) (7,053) (1,991) ------------ ----------- ---------- ----------- Fair value of plan assets at end of the period 5,038 4,430 2,988 3,054 ------------ ----------- ---------- ----------- Funded status (110,547) (122,184) (108,673) (105,928) Unrecognized transition obligation 76,687 71,520 - - Unrecognized prior service cost 1,261 1,516 - - Unrecognized net (gain) loss (8,003) 3,126 (34) (2,027) ------------ ----------- ---------- ----------- Accrued benefit cost $ (40,602) $ (46,022) $ (108,707) $ (107,955) ============ =========== ========== ===========
The components of the estimated postretirement benefit cost are as follows (in thousands):
Period from Period from January 1, October 1, Year Ended Year Ended 1999 to September 1999 to December December 31, 1997 December 31, 1998 30, 1999 31, 1999 ----------------- ----------------- ----------------- ---------------- Service cost $ 688 $ 597 $ 444 $ 118 Interest on accumulated postretirement benefit obligation 7,546 7,892 6,027 2,086 Amortization of transition obligation 5,149 5,167 3,829 - Return on plan assets (475) (447) (289) (67) Amortization of prior service cost 217 164 206 - Amortization of gains (1,801) (1,172) (379) - ----------- ------------ ------------ ------------- Net postretirement cost $ 11,324 $ 12,201 $ 9,838 $ 2,137 =========== ============ ============ =============
The following assumptions were used to value the postretirement benefit obligation for the years ended December 31:
1997 1998 1999 ------- ------- ------ Weighted average discount rate 7.00% 6.75% 7.88% Expected return on plan assets 9.50 9.50 9.50 Rate of salary increase 5.00 5.00 5.00 Assumed rate of increase in cost of covered health care benefits 5.00 5.00 5.00
Increases in health care costs were assumed to decline consistently to a rate of 5.0 percent by 2006 and remain at that level thereafter. If the health care cost trend rates were increased by one percentage point, the accumulated postretirement benefit health care obligation as of December 31, 1999 would increase by $8.2 million while the sum of the service and interest cost components of the net postretirement benefit health care cost for 1999 would increase by $0.8 million. If the health care cost trend rates were decreased by one percentage point, the accumulated postretirement benefit health care obligations as of December 31, 1999 would decrease by $7.4 million while the sum of the service and interest cost components of the net postretirement benefit health care cost for 1999 would decrease by $0.7 million. The Company changed its assumptions used in 1997, 1998, and 1999 for the weighted average discount rate. This change in assumption did not have a material effect on the postretirement expense for these periods. 9. STOCK OPTION PLANS AND OTHER COMMON STOCK TRANSACTIONS ------------------------------------------------------ Certain employees of the Company had been granted stock options by Frontier. As a result of the Global Crossing merger described in Note 1, all Frontier options outstanding became fully vested and were converted into options of Global Crossing common stock having the same terms and conditions, except that the exercise price and the number of shares issuable upon exercise were divided and multiplied, respectively, by 2.05. Accordingly, on the effective date of the Global Crossing merger, Company employees received 2.05 options of Global Crossing common stock for each option in Frontier stock. At December 31, 1999, 2,004,407 options of Global Crossing common stock were held by employees of the Company. The Company accounts for stock compensation under the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. As provided by SFAS No. 123, the Company has elected not to recognize compensation cost related to stock options issued to employees with exercise prices equal to the market price at the date of issuance. Had the Company elected to recognize compensation cost based on the fair value of the options at grant date as prescribed by SFAS No. 123, the following results would have occurred using the Black-Scholes option valuation model (in thousands): Three Months Ended December 31, 1999 -------------- Net income as reported $13,308 Pro forma net income $12,861 Fair value of options granted $12,562 Volatility 40.00% Dividend yield 0.00% Risk-free interest rates 6.558% Expective lives 4-6 years These options will vest immediately upon the close of the Citizens Communications Company ("Citizens") transaction discussed in Note 14. Forfeitures are recognized as they occur.
Range of Exercise Options Weighted Average Remaining Weighted Average Prices Outstanding Contractual Life Exercise Price ----------------- ----------- -------------------------- ---------------- $.50 - $11.00 132,215 7.06 $10.62 $11.01 - $17.00 782,077 8.39 14.54 $17.01 - $45.00 1,090,115 9.74 26.51 Range of Exercise Options Weighted Average Remaining Weighted Average Prices Exercisable Contractual Life Exercise Price ----------------- ----------- -------------------------- ---------------- $.50 - $11.00 132,215 7.06 $10.62 $11.01 - $17.00 782,077 8.39 14.54 $17.01 - $45.00 615 9.28 27.04
Additional information regarding options granted and outstanding is summarized below:
Weighted-Average Options Exercise Price ---------- ---------------- Outstanding at October 1, 1999 2,210,169 $19.75 Granted 15,300 45.00 Exercised (221,062) 13.83 --------- --------------- Outstanding at December 31, 1999 2,004,407 20.79 ========= ===============
10. PREFERRED STOCK --------------- Preferred stock consisted of the following at December 31, 1998 (in thousands of dollars, except share data): Frontier Communications of Ausable Valley, Inc. par value $100; 4,000 shares authorized; 5.50% Series - redeemable at par: Shares outstanding 2,702 Amount outstanding $270 Effective July 1, 1999, the Company redeemed all of the outstanding preferred stock of Frontier Communications of Ausable Valley, Inc. at approximately par value. 11. NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In May 1999, the FASB issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, which deferred the effective date of SFAS No. 133 by one year. This statement makes SFAS No. 133 effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The FASB amended SFAS No. 133 with SFAS No. 138 for certain derivative instruments and certain hedging activities. The Company has determined the adoption of SFAS No. 133 will not have a material impact on the financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In the fourth quarter of 2000, the Company adopted SAB No. 101. The net impact was immaterial to the Company's results of operations. 12. COMMITMENTS, CONTINGENCIES, AND OTHER ------------------------------------- Legal Matters - ------------- The Company and a number of its subsidiaries in the normal course of business are party to a number of judicial, regulatory, and administrative proceedings. The Company's management does not believe that any material liability will be incurred as a result of these matters. Leases - ------ The Company leases buildings, land, office space, and other equipment under various lease contracts. Total rental expense amounted to approximately $5.7 million, $5.1 million, $4.2 million, and $1.7 million for the years ended December 31, 1997 and 1998, the nine months ended September 30, 1999, and the three months ended December 31, 1999, respectively. Minimum annual rental commitments under noncancelable operating leases in effect on December 31, 1999 were as follows (in thousands): Years Buildings Equipment ----- ---------- ----------- 2000 $ 1,097 $ 1,513 2001 910 79 2002 873 69 2003 856 63 2004 178 52 Thereafter 137 - ---------- ---------- Total $ 4,051 $ 1,776 ========== ========== Other Matters - ------------- The Frontier subsidiary in Rochester, New York began its sixth year of operations under the Open Market Plan in January 2000. The Open Market Plan promotes telecommunications competition in the Rochester, New York marketplace by providing for (i) interconnection of competing local networks including reciprocal compensation for terminating traffic, (ii) equal access to network databases, (iii) access to local telephone numbers, (iv) service provider telephone number portability, and (v) certain wholesale discounts to resellers of local services. During the operation of the Open Market Plan, the Company is regulated under pure price-cap regulation rather than rate-of-return regulation. Planned rate reductions of $21.0 million (the "Rate Stabilization Plan") are being implemented for Rochester area consumers, including $18.0 million of reductions that occurred through 1999, and an additional $1.5 million which commenced in January 2000. Rates charged for basic residential and business telephone service may not be increased during the seven-year period of the Plan. The Company is permitted to raise prices on certain enhanced products such as Caller ID and call forwarding. On August 25, 1999, NYSPSC solicited comments regarding the Rochester incumbent local exchange subsidiary's financial condition, earnings, service quality, competition in the Rochester market, and the terms and conditions of the Open Market Plan. Settlement discussions in this NYSPSC proceeding resulted in a Joint Proposal for Open Market Plan Continuation and Modification (the "Joint Proposal"), which was approved by the NYSPSC on March 30, 2000. Under the Joint Proposal, FTR will (i) remain under price-cap' regulation through 2002 (and possibly for an additional two years); (ii) be required to improve specified elements of service quality and to offer certain additional services; (iii) be subject to increased potential penalties related to service targets, and (iv) be required to lower certain residential and commercial service rates. The impact of the Joint Proposal will not have a material adverse effect on the Company as a whole. The NYSPSC also has issued orders on other regulatory issues that affect the Frontier ILEC's subsidiaries located in the State of New York, related to service quality, staff allocations, provisions, and relations with other carriers. Dividend Policy - --------------- The Open Market Plan prohibits the payment of dividends by FTR to GCNA if (i) FTR's senior debt is downgraded to "BBB" by Standard & Poor's ("S&P"), or the equivalent rating by other rating agencies, or is placed on credit watch for such a downgrade, or (ii) a service quality penalty is imposed under the Open Market Plan with respect to FTR's retail services. Dividend payments to GCNA also require FTR's directors to certify that such dividends will not impair FTR's service quality or its ability to finance its short- and long-term capital needs on reasonable terms while maintaining an S&P debt rating target of "A". In 1999, FTR achieved the required service levels, but a previously imposed temporary restriction on dividend payments from FTR to GCNA remained in place until the NYSPSC was satisfied that FTR's service levels demonstrate that FTR has rectified the service deficiency. On October 18, 2000, the NYSPSC permanently eliminated from the Open Market Plan the dividend restriction associated with debt ratings and authorized the resumption of dividends. FTR subsequently paid a $23 million dividend to GCNA in 2000. 13. TRANSACTIONS WITH AFFILIATES ---------------------------- The Company incurred charges of $17.2 million, $29.6 million, $17.4 million, and $3.7 million from GCNA for the years ended December 31, 1997 and 1998, the nine-month period ended September 30, 1999, and the three-month period ended December 31, 1999, respectively, for allocated corporate charges for executive, corporate planning, legal, tax, human resources, treasury, corporate communications, corporate accounting functions, Internet, and engineering performed on its behalf. The Company contracts with Frontier Information Technologies, an information services subsidiary of GCNA, to provide and maintain its data processing systems. In the years ended December 31, 1997 and 1998, the nine-month period ended September 30, 1999, and the three-month period ended December 31, 1999, the Company incurred charges of $37.0 million, $38.5 million, $25.3 million, and $9.3 million, respectively, for these services. Advances to affiliates includes $151.7 million, $190.0 million, and $275.1 million of investments held by GCNA on behalf of the Company at December 31, 1997, 1998 and 1999, respectively. The Company remitted dividends to GCNA of $58.8 million, $70.1 million, $22.3 million, and $16.9 million in the years ended December 31, 1997 and 1998, the nine-month period ended September 30, 1999, and the three-month period ended December 31, 1999, respectively. The Company has notes payable to affiliates of $13.6 million at December 31, 1997, 1998, and 1999. The proceeds from these notes were used to pay down higher interest rate debt. 14. SUBSEQUENT EVENTS ----------------- On July 11, 2000, GCNA and GCNA's parent company, Global Crossing Limited, signed a Stock Purchase Agreement with Citizens Communications Company to sell the Frontier ILEC's to Citizens for $3.65 billion, subject to adjustment under the terms of the Stock Purchase Agreement. The transaction is expected to close in 2001, subject to regulatory approvals. On October 13, 2000, a subsidiary of the Company, Frontier Subsidiary Telco Inc., completed a $1 billion term loan facility with Citibank, N.A. as administrative agent. Proceeds from the loan will be used to refinance higher interest bearing debt and will remain outstanding until GCNA completes the sale of its local exchange business to Citizens Communications. The loan has a maximum maturity of 18 months. EX-23.1 2 0002.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Citizens Communications Company (formerly Citizens Utilities) Form 8-K filed on March 29, 2001 of our report dated May 19, 2000, on the special purpose statements of selected assets, liabilities and parent's equity of Qwest Communications International Inc.'s (formerly U S WEST, Inc.) selected Qwest Exchanges (formerly selected U S WEST Exchanges) as of December 31, 1999 and 1998 and the related statements of revenues and expenses and cash flows for each of the three years in the period ended December 31, 1999 included herein and to all references to our Firm included in this Registration Statement. Arthur Andersen LLP Denver, Colorado, March 29, 2001 EX-23.2 3 0003.txt EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Form 8-K of our report dated February 15, 2001 on the combined financial statements of Frontier Incumbent Local Exchange Carrier Businesses. Arthur Andersen LLP New York, New York March 29, 2001 EX-23.3 4 0004.txt EXHIBIT 23.3 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 33-52873, No. 33-63615, No. 333-7047 and No. 33-60729) and the Registration Statements on Form S-8 (No. 333-71821, No. 333-71597, No. 333-71029, No. 33-42972, No. 33-48683 and No. 33-54376) of Citizens Communications Company of our report dated February 15, 2001 relating to the combined financial statements of the Frontier Incumbent Local Exchange Carrier Businesses, which appears on Form 8-K of Citizens Communications Company dated March 29, 2001. PricewaterhouseCoopers LLP Rochester, New York March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----