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)
May 4, 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 2.0 million telephone access lines (as of December 31,
2000) for approximately $6,471.0 million in cash, which was later reduced to
$6,321.0 million 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 definitive
agreements to purchase from Verizon Communications, formerly GTE Corp.
(Verizon), approximately 381,200 telephone access lines (as of December 31,
2000) in Arizona, California, Illinois/Wisconsin, Minnesota and Nebraska
for approximately $1,171.0 million in cash. On June 30, 2000, we closed on
the Nebraska purchase of approximately 62,200 access lines for
approximately $205.4 million in cash. On August 31, 2000, we closed on the
Minnesota purchase of approximately 142,400 access lines for approximately
$438.9 million in cash. On November 30, 2000, we closed on the
Illinois/Wisconsin purchase of approximately 112,900 access lines for
approximately $303.9 million in cash. We expect that the remainder of the
Verizon transactions, which are subject to various state and federal
regulatory approvals will close on a state-by-state basis in the first half
of 2001. Our expected cash requirement to complete the Verizon acquisitions
is $222.8 million in 2001.
On June 16, 1999, we announced a series of definitive agreements to
purchase from Qwest Communications, formerly US West (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 for approximately $1,650.0 million in cash and the
assumption of certain liabilities. On October 31, 2000, we closed on the
North Dakota purchase of approximately 17,000 access lines for
approximately $38.0 million in cash. We expect that the remainder of the
Qwest 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. Our expected cash requirements to complete the
Qwest acquisitions are $989.3 million and $622.7 million in 2001 and 2002,
respectively.
On July 12, 2000, we announced a definitive agreement to purchase from
Global Crossing Ltd. (Global) 100% of the stock of Frontier Corp., 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 $3,650.0 million in cash which price was later reduced to
$3,500.0 million. We have received approval for the proposed purchase from
the Federal Communications Commission and all other state Public Service
Commissions with the exception of Minnesota. Subject to the timely receipt
of the Minnesota regulatory approval, we expect that this transaction will
be completed and paid for in full by the end of June 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, 2000, 1999 and 1998
* Frontier Incumbent Local Exchange Carrier Businesses for the years ended
December 31, 2000, 1999 and 1998
(b) Pro forma Financial Information
* Pro forma Balance Sheet as of December 31, 2000 and Pro forma Income
Statements for the year ended December 31, 2000
(c) Exhibits
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Pricewaterhouse Coopers 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: May 4, 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 2.0 million telephone access lines (as of December
31, 2000) for approximately $6,471.0 million in cash which was subsequently
reduced to $6,321.0 million. 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:
Verizon Acquisition
-------------------
On May 27, September 21, and December 16, 1999, we announced
definitive agreements to purchase from Verizon Communications
Inc., formerly GTE Corp. (Verizon), approximately 381,200
telephone access lines (as of December 31, 2000) in Arizona,
California, Illinois/Wisconsin, Minnesota and Nebraska for
approximately $1,171.0 million in cash. On June 30, 2000, we
closed on the Nebraska purchase of approximately 62,200 access
lines for approximately $205.4 million in cash. On August 31,
2000, we closed on the Minnesota purchase of approximately
142,400 access lines for approximately $438.9 million in cash. On
November 30, 2000, we closed on the Illinois/Wisconsin purchase
of approximately 112,900 access lines for approximately $303.9
million in cash. We expect that the remainder of the Verizon
transactions which are subject to various state and federal
regulatory approvals will close on a state-by-state basis in the
first half of 2001. Our expected cash requirement to complete the
Verizon acquisitions is $222.8 million in 2001.
Qwest Acquisition
------------------
On June 16, 1999, we announced a series of definitive agreements
to purchase from Qwest Communications, formerly U S WEST (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 for approximately
$1,650.0 million in cash and the assumption of certain
liabilities. On October 31, 2000, we closed on the North Dakota
purchase of approximately 17,000 access lines for approximately
$38.0 million in cash. We expect that the remainder of the Qwest
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. Our expected cash requirements
to complete the Qwest acquisitions are $989.3 million and $622.7
million in 2001 and 2002, respectively.
Global Crossing Acquisition
---------------------------
On July 12, 2000, we announced a definitive agreement to purchase
from Global Crossing Ltd. (Global) 100% of the stock of Frontier
Corp., 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 $3,650.0 million in
cash which price was later reduced to $3,500.0 million. We have
received approval for the proposed purchase from the Federal
Communications Commission and all other state Public Service
Commissions with the exception of Minnesota. Subject to the
timely receipt of the Minnesota regulatory approval, we expect
that this transaction will be completed and paid for in full by
the end of June 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 (including the sale of the water, gas and electric properties)
had the Acquisitions been completed as of December 31, 2000 for the pro forma
balance sheet and at the beginning of the year for the pro forma income
statement. The Frontier Acquisition on the pro forma balance sheet represents
the balance sheet of the Frontier Acquisition as of December 31, 2000. The GTE
and U S WEST Acquisitions on the pro forma balance sheet represent the assets to
be acquired from GTE and U S WEST as of December 31, 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 Acquisition, corporate overhead expenses are not
included in the statement of revenue 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
at the beginning of the year. If the companies had actually been combined at the
beginning of the year, 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-Ks filed by us on November 14, 2000 and March
29, 2001 and the historical financial statements of Citizens Communications
Company.
Citizens Communications Company and Subsidiaries
Pro Forma Balance Sheet Data
As of December 31, 2000
(unaudited)
Pro Forma
Citizens -------------------------------------------------------------
Communications Frontier GTE and U S WEST
(Amounts in thousands) 12/31/00 Acquisition Acquisitions Adjustments Adjusted
------------------ ------------- -------------- ----------- -----------
Cash $ 31,223 $ 41,550 $ - $ 1,855,406 (1) $ 92,479
(1,835,700) (2)
Accounts receivable, net 243,304 1,524,682 (1,411,727) (2) 356,259
Short-term investments 38,863 - - 38,863
Other 63,490 41,766 - 105,256
Assets held for sale 1,212,307 - (1,212,307) (1) -
Assets of discontinued operations 673,515 - (673,515) (1) -
-------------- ---------- ---------- ---------- -----------
Total current assets 2,262,702 1,607,998 - (3,277,843) 592,857
Net property, plant & equipment 3,509,767 1,052,745 605,171 5,167,683
Excess cost over net assets acquired 633,268 1,521,250 1,230,529 1,223,500) (2) 4,608,547
Investments 214,359 - - 214,359
Regulatory assets 175,949 - - 175,949
Deferred debits and other assets 158,961 65,641 (46,932) (2) 177,670
-------------- ---------- ---------- ----------- -----------
Total assets $ 6,955,006 $ 4,247,634 $ 1,835,700 $(2,101,275) $ 10,937,065
============== ========== ========== =========== ===========
Long-term debt due within one year $ 181,014 $ 3,142 $ - $ - $ 184,156
Accounts payable and other current liabilities 330,383 1,294,303 (1,139,831) (2) 484,855
Liabilities related to assets held for sale 290,575 - (290,575) (1) -
Liabilities of discontinued operations 190,496 - (190,496) (1) -
-------------- ---------- ---------- ----------- -----------
Total current liabilities 992,468 1,297,445 - (1,620,902) 669,011
Deferred income taxes 490,487 120,124 - 610,611
Customer advances for construction
and contributions in aid of construction 205,604 - - 205,604
Deferred credits and other liabilities 108,321 148,232 (29,552) (2) 227,001
Regulatory liabilities 24,573 - - 24,573
Long-term debt 3,062,289 116,057 2,400,000 (2) 5,578,346
-------------- ---------- ----------- ----------- -----------
Total liabilities 4,883,742 1,681,858 - 749,546 7,315,146
Equity forward contracts 150,013 150,013
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities * 201,250 - - 201,250
Shareholders' equity 1,720,001 2,565,776 1,835,700 450,655 (1) 3,270,656
(4,112,200) (2)
1,100,000 (2)
(289,276) (2)
-------------- ---------- ---------- ----------- -----------
Total liabilities and shareholders' equity $ 6,955,006 $ 4,247,634 $ 1,835,700 $(2,101,275) $ 10,937,065
============== ========== ========== =========== ===========
*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
Proforma Income Statement Data
For the year ended December 31, 2000
(unaudited)
GTE Acquisitions
Citizens --------------------------
Communications GTE Combined U S WEST Frontier Total
(Amounts in thousands, except per-share amounts) 12/31/00 GTE Minnesota Entities Acquisition Acquisition Acquisitions
-------------- ------------- ------------ ----------- ----------- ------------
Revenue $ 1,802,358 $ 56,962 $ 121,334 $ 335,076 $ 746,302 $ 1,259,674
Operating expenses 1,292,950 23,323 44,188 147,635 370,893 586,039
Depreciation and amortization 387,607 545 28,712 88,802 200,669 318,728
----------- --------- --------- --------- --------- -----------
Income from operations 121,801 33,094 48,434 98,639 174,740 354,907
Investment and other income, net 3,350 - - 23,347 64,583 87,930
Minority interest 12,222 - - - - -
Interest expense 187,366 1,686 2,933 - 24,067 28,686
Income tax expense (benefit) (16,132) 12,687 18,105 45,379 103,417 179,588
Convertible preferred dividends 6,210 - - - - -
----------- --------- --------- --------- --------- -----------
Income (loss) from continuing operations $ (40,071) $ 18,721 $ 27,396 $ 76,607 $ 111,839 $ 234,563
=========== ========= ========= ========= ========= ===========
Weighted average shares outstanding -Basic 261,744
Weighted average shares outstanding -Diluted 266,931
Loss from continuing operations per basic share $ (0.15)
Loss from continuing operations per diluted share $ (0.15)
Elimination of Proforma
Gas and Electric -----------------------------
(Amounts in thousands, except per-share amounts) Operations Adjustments Adjusted
---------------- ------------- -------------
Revenue $ 597,823 $ - $ 2,464,209
Operating expenses 526,472 9,000 (3) 1,361,517
Depreciation and amortization 47,857 228,953 (4) 889,957
12,526 (5)
----------- ---------- -----------
Income from operations 23,494 (250,479) 202,735
Investment and other income, net 5,073 (27,770) (6) 58,437
Minority interest - - 12,222
Interest expense 36,056 265,339 (7) 445,335
Income tax expense (benefit) (2,417) (178,662) (8) (12,789)
Convertible preferred dividends - - 6,210
----------- ---------- -----------
Income (loss) from continuing operations $ (5,072) $ (364,926) $ (165,362)
=========== ========== ===========
Weighted average shares outstanding -Basic 261,744
Weighted average shares outstanding -Diluted 266,931
Loss from continuing operations per basic share $ (0.63)
Loss from continuing operations per diluted share $ (0.63)
See Notes to Pro Forma Condensed Financial Statements.
Notes to Pro Forma Condensed Financial Statements
(1) Reflects the effect of the sales of our public utilities services
properties, net of estimated income taxes. For the pro forma balance sheet
data, cash proceeds from these dispositions are assumed to be the contract
price for those properties for which we have reached an agreement with a
buyer and signed a definitive contract to sell, and the net book values for
those properties not yet under contract. Such net cash proceeds are assumed
to aggregate $1,855.4 million. This results in an addition to retained
earnings of $450.7 million at December 31, 2000 reflecting the estimated
net book gain on the sale of these properties. 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 $1,380.0 million in cash plus
the assumption of certain liabilities. We do not expect any of such
properties to be sold at a loss. For the pro forma income statement data,
we have eliminated the operations of the gas and electric properties as if
they had been disposed of on January 1, 2000. The water operations were
classified as discontinued operations and therefore are not included in
Citizens income statement data from continuing operations.
(2) Represents the acquisition of the stock of the Frontier Acquisition and the
remaining assets to be acquired (as of December 31, 2000) in the GTE and
U S WEST Acquisitions. Such acquisitions are assumed to be funded through
the cash proceeds, net of tax, from the assumed sale of the public service
properties, 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 63% subsequent to the
transactions contemplated herein. The following represents the adjustment
to record the Acquisitions:
(in thousands)
Elimination of historical shareholder's equity and related party balances
of the Frontier Acquisition and the net equity in assets acquired of the
GTE and U S WEST Acquisitions $ 4,112,200
Issuance of long term debt (2,400,000)
Issuance of equity (1,100,000)
Cash proceeds used from sales of public utilities services properties (1,835,700)
-------------
Excess of cost over net assets acquired $ 1,223,500
-------------
For purposes of the accompanying pro forma combined financial statements,
we have reflected the acquired assets and the assets to be acquired
(including our estimate of the GTE and U S WEST purchase price allocations)
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.
The Frontier related party balances comprise: Accounts receivable,
affiliates; advances to affiliates; due from affiliates; and accounts
payable, affiliates; advances from affiliates; notes payable' notes payable
to affiliates; and due to affiliates. These amounts become due when we
acquire Frontier and our eliminated in our pro forma adjustments. The net
impact to retained earnings of these eliminations is $289.3 million.
(3) Represents an increase in selling, general and administrative expenses of
the GTE Combined Entities to reverse a pension credit recorded during the
year ended December 31, 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.
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 over 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. Frontier was amortizing
the associated goodwill over a 25 year period. Citizens included the full
year 2000 amortization of goodwill over a 15 year period.
(5) Represents an adjustment for depreciation expense related to GTE Minnesota
since the GTE historical financial statements did not include depreciation
related to these assets held for sale.
(6) Represents the elimination of a gain reported by the U S WEST Acquisition
associated with the sale of their North Dakota properties to Citizens and
the elimination of our investment income related to our bond portfolio sold
during 2000 to partially fund the acquisitions.
(7) Represents pro forma interest expense from the beginning of the year on the
debt assumed to have been issued to partially fund the Acquisitions. The
interest rate is assumed to be 9.0%.
(8) Represents adjustments to income taxes based on income before income taxes
using the applicable incremental income tax rate.
QWEST COMMUNICATIONS INTERNATIONAL INC.
SELECTED QWEST EXCHANGES
Special Purpose Financial Statements
As Of December 31, 2000, 1999 And 1998
Together With Report Of Independent Public Accountants
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Qwest Communications International Inc.
and Citizens Communications Company:
We have audited the accompanying special purpose statements of selected assets,
liabilities and parent's equity of Qwest Communications International Inc.'s
selected Qwest Exchanges (the "Exchanges," as described in Footnote 1) as of
December 31, 2000 and 1999, and the related statements of revenues and expenses
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of Qwest Communications
International 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 Qwest Communications International Inc.'s selected Qwest
Exchanges as of December 31, 2000 and 1999, and the related revenues and
expenses and cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
Denver, Colorado,
May 4, 2001.
QWEST COMMUNICATIONS INTERNATIONAL INC.
---------------------------------------
SELECTED QWEST EXCHANGES
------------------------
(As Described In Footnote 1)
STATEMENTS OF REVENUES AND EXPENSES
-----------------------------------
Year Ended December 31,
-----------------------------------------
2000 1999 1998
---------- ---------- ----------
(dollars in thousands)
OPERATING REVENUES:
Local services $156,003 $152,161 $140,863
Access services 151,194 139,241 137,148
Long-distance services 17,046 26,154 34,563
Other services 10,833 11,808 11,504
---------- ---------- ----------
Total operating revenues 335,076 329,364 324,078
---------- ---------- ----------
OPERATING EXPENSES:
Operating expenses 100,800 99,626 91,769
Selling, general and administrative expenses 46,835 47,885 46,872
Depreciation and amortization 88,802 85,003 81,263
---------- ---------- ----------
Total operating expenses 236,437 232,514 219,904
---------- ---------- ----------
OPERATING INCOME 98,639 96,850 104,174
GAIN ON SALE OF NORTH DAKOTA EXCHANGES 23,347 - -
---------- ---------- -----------
INCOME BEFORE INCOME TAXES 121,986 96,850 104,174
PROVISION FOR INCOME TAXES 45,379 36,804 39,481
---------- ---------- ----------
INCOME AFTER INCOME TAXES $ 76,607 $ 60,046 $ 64,693
========== ========== ==========
The accompanying notes are an integral part of these special purpose
financial statements.
QWEST COMMUNICATIONS INTERNATIONAL INC.
---------------------------------------
SELECTED QWEST EXCHANGES
------------------------
(As Described In Footnote 1)
STATEMENTS OF SELECTED ASSETS, LIABILITIES
------------------------------------------
AND PARENT'S EQUITY
-------------------
December 31,
--------------------------
ASSETS 2000 1999
------ ----------- ---------
(dollars in thousands)
CURRENT ASSETS:
Accounts receivable, less allowance for uncollectibles of
$2,059 and $1,254 $ 44,567 $ 46,327
Inventories and supplies 4,502 6,542
Other current assets 618 685
---------- ----------
Total current assets 49,687 53,554
PROPERTY, PLANT AND EQUIPMENT - net 551,778 607,700
CUSTOMER ACQUISITION COSTS 26,500 -
---------- ----------
Total assets $ 627,965 $ 661,254
========== ==========
LIABILITIES AND PARENT'S EQUITY
-------------------------------
CURRENT LIABILITIES:
Accounts payable $ 45,279 $ 56,582
Accrued expenses 26,692 28,849
---------- ----------
Total current liabilities 71,971 85,431
DEFERRED REVENUE 26,500 -
OTHER LIABILITIES 5,576 2,936
PARENT'S EQUITY 523,918 572,887
---------- ----------
Total liabilities and parent's equity $ 627,965 $ 661,254
========== ==========
The accompanying notes are an integral part of these special purpose
financial statements.
QWEST COMMUNICATIONS INTERNATIONAL INC.
---------------------------------------
SELECTED QWEST EXCHANGES
------------------------
(As Described in Footnote 1)
STATEMENTS OF CASH FLOWS
------------------------
Year Ended December 31,
-----------------------------------------
2000 1999 1998
---------- ----------- ----------
(dollars in thousands)
OPERATING ACTIVITIES:
Income after income taxes $ 76,607 $ 60,046 $ 64,693
Adjustments -
Depreciation and amortization 88,802 85,003 81,263
Provision for income taxes 45,379 36,804 39,481
Gain on sale of exchange (23,347) - -
Costs incurred by Parent (1,351) 8,055 2,712
Changes in operating assets and liabilities-
Accounts receivable 1,760 (657) 367
Inventories, supplies and other current assets 2,107 (1,064) (784)
Accounts payable and accrued expenses (10,820) 16,758 (8,122)
----------- ----------- -----------
Cash provided by operating activities 179,137 204,945 179,610
----------- ----------- -----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (54,043) (42,792) (57,757)
Proceeds received from sale of North Dakota exchanges 37,995 - -
----------- ----------- -----------
Cash used for investing activities (16,048) (42,792) (57,757)
----------- ----------- -----------
FINANCING ACTIVITIES:
Change in Parent's advances (163,089) (162,153) (121,853)
----------- ----------- -----------
Cash used for financing activities (163,089) (162,153) (121,853)
----------- ----------- -----------
CASH:
Increase - - -
Beginning balance - - -
----------- ----------- -----------
Ending balance $ - $ - $ -
=========== =========== ===========
The accompanying notes are an integral part of these special purpose
financial statements.
QWEST COMMUNICATIONS INTERNATIONAL INC.
---------------------------------------
SELECTED QWEST EXCHANGES
------------------------
(As Described in Footnote 1)
NOTES TO SPECIAL PURPOSE FINANCIAL STATEMENTS
---------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 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 Qwest Corporation
(the "Company"), a wholly owned subsidiary of Qwest Communications International
Inc. ("QCII" or the "Parent"). On June 30, 2000, QCII completed its acquisition
of U S WEST, Inc. ("U S WEST"), of which U S WEST Communications, Inc. was a
wholly owned subsidiary. U S WEST Communications, Inc. is now known as Qwest
Corporation.
On June 16, 1999, the Company entered into a series of definitive agreements for
Citizens Communications Company ("Citizens", formerly known as 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 2002. 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.
In the fourth quarter of 2000, the sale of approximately 17,000 access lines
representing eight exchanges in North Dakota was closed for approximately $38.0
million. The operation and ownership of these access lines were assumed by
Citizens upon consummation of the sale. As such, the revenues and expenses for
these eight exchanges are included in these special purpose financial statements
as of the ten-month period ended October 31, 2000. Selected information for
these exchanges is as follows:
(unaudited)
2000 1999 1998
--------- ----------- ----------
Total revenues $10,519 $12,545 $12,435
Income before income taxes 5,213 5,695 5,518
Income after income taxes 3,274 3,531 3,427
Total assets 12,102 16,526 14,738
Parent's equity 9,980 14,134 12,608
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 QCII
and its subsidiaries. The special purpose financial statements also include
expenses related to all employees who support the Exchanges, some of whom are
expected to remain employees of the Company.
QCII and the Company incur certain costs that relate to the Exchanges. To
prepare these special purpose financial statements, management allocated certain
assets, liabilities, revenues and expenses to the Exchanges. 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 QCII 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 QCII.
Cash and debt are centrally managed by QCII. 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 QCII.
Parent's equity also reflects deemed contributions for charges recognized in
these special purpose financial statements for which no asset or liability is
recorded. These deemed contributions primarily include provisions for income
taxes, pensions credits and other post-employment benefit charges.
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
- ----
QCII 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. 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 is generally charged to
accumulated depreciation and 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
Interest related to qualifying construction projects is capitalized and included
in property, plant and equipment. Amounts capitalized were $1,187, $947 and $747
in 2000, 1999 and 1998, respectively. As interest is not incurred by the
Exchanges, capitalized interest represents amounts incurred by the Company which
were allocated to the Exchanges' assets.
Revenue Recognition
- -------------------
Local telephone and voice messaging services are generally billed in advance
with revenues recognized when services are provided. Revenues derived from
access and long-distance services are recognized as services are provided.
Payments received in advance are deferred until the service is provided.
Up-front fees received are deferred and recognized over the longer of the
contractual period or the expected customer relationship, generally 2 to 10
years.
New Accounting Pronouncements
- -----------------------------
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 provides the SEC Staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company adopted SAB 101 during the fourth quarter of 2000 effective as of
January 1, 2000. There is no cumulative effect on income from the adoption of
SAB 101.
Income Taxes
- ------------
The Exchanges are not a taxable entity. The Exchanges' operating results are
included with QCII for income tax purposes. Although the Exchanges contribute
significant plant-related temporary differences (including investment tax
credits) to QCII deferred tax balances, QCII does not allocate 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.
Allocation of Expenses
- ----------------------
The Exchanges share certain services with other business groups of QCII. 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. The allocation methodology
used for the Exchanges was developed in a manner substantially consistent with
the methodology presented in the Company's Cost Allocation Manual as filed with
the state and federal regulatory bodies.
2. PROPERTY, PLANT AND EQUIPMENT:
The components of property, plant and equipment are as follows:
December 31,
-----------------------------
2000 1999
-------------- ------------
Land and buildings $ 64,250 $ 67,537
Telecommunications network equipment 447,617 451,048
Telecommunications outside plant 797,864 799,147
General purpose computers and other 17,067 20,164
Construction in progress 36,257 45,263
-------------- ------------
1,363,055 1,383,159
-------------- ------------
Less accumulated depreciation:
Buildings 23,544 21,310
Telecommunications network equipment 294,425 289,264
Telecommunications outside plant 481,994 453,942
General purpose computers and other 11,314 10,943
-------------- ------------
811,277 775,459
-------------- ------------
Property, plant and equipment, net $ 551,778 $ 607,700
============== ============
3. ACCRUED EXPENSES:
-----------------
Accruied expenses consist of the following:
December 31,
-----------------------------
2000 1999
-------------- ------------
Accrued property taxes $ 8,603 $ 8,083
Advanced billings 8,398 7,751
Employee-related liabilities 4,610 7,022
Customer deposits 1,068 1,158
Other 4,013 4,835
-------------- ------------
Total accrued expenses $ 26,692 $ 28,849
============== ============
4. PARENT'S EQUITY:
----------------
Activity in parent's equity is as follows:
Parent's equity, December 31, 1997 $ 645,108
Income after income taxes 64,693
Deemed contributions 44,011
Net change in Parent's advances (121,853)
---------
Parent's equity, December 31, 1998 631,959
Income after income taxes 60,046
Deemed contributions 43,035
Net change in Parent's advances (162,153)
---------
Parent's equity, December 31, 1999 572,887
Income after income taxes 76,607
Deemed contributions 37,513
Net change in Parent's advances (163,089)
---------
Parent's equity, December 31, 2000 $ 523,918
=========
5. EMPLOYEE BENEFITS:
------------------
The majority of the Exchanges' employees are covered by defined benefit pension
plans sponsored by QCII. 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 cost method
for funding purposes. Net pension credit for the Exchanges, allocated based on
headcount, for 2000, 1999 and 1998 were $6,964, $3,160 and $2,246, respectively.
QCII 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 2000, 1999 and 1998 were $425, $3,487 and $4,031, respectively.
FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 2000
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN
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 2000, and the related
combined statements of income, shareholder's equity, and cash flows for the nine
months ended September 30, 1999, the three months ended December 31, 1999 and
the year ended December 31, 2000. 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
for the year ended December 31, 1998, 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 2000, and the results of
their operations and their cash flows for the nine months ended September 30,
1999, the three months ended December 31, 1999 and the year ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
New York, New York
February 15, 2001 (except
with respect to the matter
discussed in Note 12, as to
which the date is April 18, 2001).
PRICEWATERHOUSECOOPERS
REPORT OF INDEPENDENT ACCOUNTANTS
Frontier Incumbent Local Exchange Carrier Businesses:
In our opinion, the accompanying combined statements of income, shareholders'
equity and cash flows for the year ended December 31, 1998 present fairly, in
all material respects, the results of operations and cash flows of the Frontier
Incumbent Local Exchange Carrier Businesses for the year ended December 31, 1998
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 audit. We conducted our audit 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
audit provides 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, 1999 AND 2000
(in thousands of dollars)
1999 2000
---------------- ----------------
ASSETS:
Current assets:
Cash and cash equivalents $ 83,842 $ 41,550
Telecommunications accounts receivable (net of
allowance for uncollectible accounts of $9,351
and $12,498 in 1999 and 2000, respectively) 105,177 112,955
Accounts receivable, affiliates 22,828 68,880
Advances to affiliates 312,375 311,752
Materials and supplies 1,395 1,389
Deferred income taxes 5,257 7,618
Notes receivable, affiliates - 1,031,095
Prepayments and other 22,736 32,759
---------------- ----------------
Total current assets 553,610 1,607,998
Property, plant, and equipment, net 968,951 1,052,745
Goodwill and customer base, net 1,592,250 1,521,250
Due from affiliate 14,595 46,932
Other assets 10,895 18,709
---------------- ----------------
Total assets $ 3,140,301 $ 4,247,634
================ ================
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current liabilities:
Accounts payable $ 91,135 $ 102,637
Accounts payable, affiliates 48,602 113,606
Advances from affiliates 30,068 26,225
Deferred credits 11,025 2,997
Current portion of long-term debt 5,496 3,142
Accrued income taxes 9,423 20,508
Advanced billings 10,785 11,852
Notes payable - 1,000,000
Other current liabilities 2,734 16,478
---------------- ----------------
Total current liabilities 209,268 1,297,445
Long-term debt, net of current maturities 116,876 116,057
Notes payable to affiliates 13,600 4,700
Deferred income taxes 107,255 120,124
Post-retirement benefit obligation 107,955 109,617
Due to affiliate 24,852 24,852
Other long-term liabilities 2,835 9,063
---------------- ----------------
Total liabilities 582,641 1,681,858
---------------- ----------------
Shareholder's equity:
Contributed capital 2,561,252 2,609,961
Accumulated deficit (3,592) (44,185)
---------------- ----------------
Total shareholder's equity 2,557,660 2,565,776
---------------- ----------------
Total liabilities and shareholder's equity $ 3,140,301 $ 4,247,634
================ ================
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 YEAR ENDED DECEMBER 31, 1998,
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (PREDECESSOR),
THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1999,
AND THE YEAR ENDED DECEMBER 31, 2000
(in thousands of dollars)
Period from Period from
January 1, October 1,
1999 1999
Year Ended through through Year Ended
December 31, September 30, December 31, December 31,
1998 1999 1999 2000
---------------- ---------------- ---------------- ----------------
Revenues $ 700,207 $ 547,237 $ 186,976 $ 746,302
Costs and expenses:
Operating expenses 308,058 237,006 89,682 342,603
Depreciation and amortization 106,589 85,672 53,414 200,669
Taxes other than income taxes 38,207 29,130 9,967 28,290
---------------- ---------------- ---------------- ----------------
Total costs and expenses 452,854 351,808 153,063 571,562
---------------- ---------------- ---------------- ----------------
Operating income 247,353 195,429 33,913 174,740
Interest expense (9,076) (5,345) (2,065) (24,067)
Interest income 14,598 11,707 6,173 42,191
Equity in earnings on investments
in affiliates 4,564 4,236 1,413 2,049
Other income (expense), net (233) (1,062) (722) 20,343
---------------- ---------------- ---------------- ----------------
Income before taxes 257,206 204,965 38,712 215,256
Income tax expense 98,640 82,198 25,404 103,417
---------------- ---------------- ---------------- ----------------
Net income $ 158,566 $ 122,767 $ 13,308 $ 111,839
================ ================ ================ ================
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 YEAR ENDED DECEMBER 31, 1998,
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (PREDECESSOR),
THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1999,
AND THE YEAR ENDED DECEMBER 31, 2000
(in thousands of dollars)
Preferred Combined Contributed Retained
Stock Equity Capital Earnings Total
------------ ------------ ------------- ------------ -------------
BALANCE, December 31, 1997 $ 275 $ 279,886 $ 302,317 $ 216,267 $ 798,745
Net income - - - 158,566 158,566
Redemptions (5) - - - (5)
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)
Dividends - - - (22,329) (22,329)
------------ ------------ ------------- ------------ -------------
BALANCE, September 30, 1999 - 279,886 302,351 405,380 987,617
Net income - - - 13,308 13,308
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
Net income - - - 111,839 111,839
Dividends - - - (152,432) (152,432)
Capital contribution - - 50,000 - 50,000
Purchase accounting adjustments (Note 1) - - (1,803) - (1,803)
Other - - 512 - 512
------------ ------------ ------------- ------------ -------------
BALANCE, December 31, 2000 $ - $ - $2,609,961 $ (44,185) $2,565,776
============ ============ ============= ============ =============
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 YEAR ENDED DECEMBER 31, 1998,
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (PREDECESSOR),
THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1999,
AND THE YEAR ENDED DECEMBER 31, 2000
(in thousands of dollars)
Period from Period from
January 1, October 1,
1999 1999
Year Ended through through Year Ended
December 31, September 30, December 31, December 31,
1998 1999 1999 2000
------------ -------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 158,566 $ 122,767 $ 13,308 $ 111,839
------------ -------------- -------------- -------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 106,589 85,672 53,414 200,669
(Gain)/loss on sale of assets - (4,656) 29 360
Equity in earnings on investments in affiliates (4,564) (4,236) (1,413) (2,049)
Changes in operating assets and liabilities,
exclusive of impacts of dispositions and acquisitions:
Accounts receivable 2,631 1,884 (3,191) (7,778)
Accounts receivable, affiliates and due from affiliates (5,202) 37,576 (43,701) (78,389)
Material and supplies 416 (341) 212 6
Prepayments and other current assets (184) 7,201 (10,671) (10,023)
Other assets (1,936) (31,258) 34,289 (9,213)
Accounts payable 22,287 (18,429) 25,544 3,474
Accounts payable affiliates and due to affiliates (3,580) 17,035 20,779 65,004
Accrued taxes, advanced billings, and other liabilities 15,899 (17,086) 28,261 23,224
Post-retirement benefit obligation 5,420 7,163 (2,635) 1,662
Deferred income taxes (2,940) (1,359) (12,227) 9,331
------------ -------------- -------------- -------------
Total adjustments 134,836 79,166 88,690 196,278
------------ -------------- -------------- -------------
Net cash provided by operating activities 293,402 201,933 101,998 308,117
------------ -------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant, and equipment (153,458) (129,688) (48,264) (212,837)
Proceeds from asset sales - 7,708 13,815 481
Distributions from investment in affiliates 2,368 2,388 690 2,223
Advance to affiliates (24,047) (62,502) (25,400) (60,759)
------------ -------------- -------------- -------------
Net cash used in investing activities (175,137) (182,094) (59,159) (270,892)
------------ -------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt borrowings - - - 1,000,000
Repayments of debt (2,926) (2,271) (670) (3,173)
Dividends paid (70,054) (22,329) (16,900) (41,050)
Advances from affiliates 4,716 3,123 (4,377) (3,843)
Notes receivable from affiliates - - - (1,031,095)
Other financing activities 112 337 142 (356)
------------ -------------- -------------- -------------
Cash flows used in financing activities (68,152) (21,140) (21,805) (79,517)
------------ -------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 50,113 (1,301) 21,034 (42,292)
CASH AND CASH EQUIVALENTS, beginning of period 13,996 64,109 62,808 83,842
------------ -------------- -------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 64,109 $ 62,808 $ 83,842 $ 41,550
============ ============== ============== =============
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, 1999 AND 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 11 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 and the year ended December 31, 2000 reflect the allocated
fair value of the Global Crossing merger and thus, are not comparable to the
financial statements for periods prior to October 1, 1999. In connection with
the Global Crossing merger, the Company originally 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.
During 2000, an additional purchase accounting adjustment was recorded resulting
in an increase of $1.2 million to the Company's deferred tax liability and $0.6
million to property, plant, and equipment.
Citizens Transaction
- --------------------
On July 11, 2000, GCNA and GCNA's parent company, Global Crossing Limited,
signed a Stock Purchase Agreement (the "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. The transaction is
expected to close in 2001, subject to regulatory approvals.
In February 2001, the Agreement with Citizens was amended to provide for the
transfer of certain assets and liabilities related to GCNA's qualified pension
and other postretirement benefits from GCNA to Citizens. Assets and liabilities
for virtually all retirees and all transferring active employees will be
transferred upon the sale. GCNA will retain only those liabilities and assets
associated with certain active nontransferring Global Crossing employees. See
subsequent events discussed in Note 12.
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, 2000, goodwill and customer base consisted of the
following (in thousands):
Intangible Accumulated Amortization
Balance Amortization Net Balance Period
------------- ------------- ------------- ------------
Allocated goodwill $ 1,500,000 $ 75,000 $ 1,425,000 25 years
Customer base 110,000 13,750 96,250 10 years
------------- ------------- -------------
Total $ 1,610,000 $ 88,750 $ 1,521,250
============= ============= =============
Investments
- -----------
The Company has investments in various cellular partnerships that have been
reported using the equity method of accounting in accordance with Statement of
Position No. 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. No gain or
loss was recorded on the disposal of this investment. The Company's partnership
investment balances in other cellular partnerships were $5.8 million and $4.7
million at December 31, 1999 and 2000, 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 GCNA for the federal income tax liability resulting from the filing
by GCNA 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.
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. An estimate for
uncollectible accounts is recorded in operating expenses. Unbilled usage is
accrued and was $14.5 million and $16.2 million at December 31, 1999 and 2000,
respectively. Certain revenues derived from local telephone services are billed
monthly in advance and are recognized the following month when services are
provided. 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 9.
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 11. Amounts related
to these transactions are reflected in accounts receivable affiliate and
accounts payable affiliate in the accompanying balance sheets. The Company has
advances to and advances from affiliates 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 and 8.63 percent to 8.94 percent for 2000. The
Company has recorded a due from affiliate which primarily represents amounts
owed from GCNA for net periodic pension benefits. The Company has notes payable
to affiliates which have interest rates ranging from 8.40 percent to 9.25
percent and mature between 2005 and 2020. The proceeds from these notes were
used to pay down higher interest rate debt.
Market Risk Disclosure
- ----------------------
As of December 31, 2000, 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 $9.0 million, $9.9 million, $1.6 million, and $20.1
million for the year ended December 31, 1998, the nine months ended September
30, 1999, the three months ended December 31, 1999, and the year ended December
31, 2000, respectively. Actual income taxes paid were $92.1 million, $77.9
million, $14.5 million, and $65.2 million for the year ended December 31, 1998,
the nine months ended September 30, 1999, the three months ended December 31,
1999, and the year ended December 31, 2000, respectively. Interest costs
associated with the construction of capital assets are capitalized. Total
amounts capitalized during 1999 and 2000 were $4.2 million and $4.8 million,
respectively. The Company had cash restricted for dividend payments to GCNA of
$52.6 million at December 31, 1999. There was no cash restricted for dividend
payments to GCNA at December 31, 2000.
Of the total dividends paid of $152.4 million for the year ended December 31,
2000, $111.4 million was noncash. Capital contributions of $50.0 million were
also noncash.
Other Comprehensive Income
- --------------------------
The Company did not have any other comprehensive income in 1998, 1999, and 2000.
Reclassifications
- -----------------
It is the Company's policy to reclassify prior year balances to conform to
current year presentation.
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.
3. PROPERTY, PLANT, AND EQUIPMENT
------------------------------
Major classes of property, plant, and equipment at December 31 are summarized
below (in thousands):
1999 2000
------------- -------------
Land and buildings $ 113,780 $ 113,466
Local and toll service lines 401,281 443,498
Central office equipment 292,221 376,440
Station equipment 12,265 14,410
Furniture, office equipment, vehicles, tools, and other 41,750 49,003
Plant under construction 143,500 198,970
------------- ------------
1,004,797 1,195,787
Less: Accumulated depreciation (35,846) (143,042)
------------- ------------
$ 968,951 $ 1,052,745
============= ============
Depreciation expense was approximately $103.7 million, $83.6 million, $35.8
million, and $129.7 million for the year ended December 31, 1998, the nine
months ended September 30, 1999, the three months ended December 31, 1999, and
the year ended December 31, 2000, respectively.
4. LONG-TERM DEBT
--------------
Long-term debt consisted of the following at December 31 (in thousands):
1999 2000
------------ -------------
7.51 percent medium-term notes due 2002 (a) $ 40,000 $ 40,000
7.61 percent senior notes due 2003 (b) 35,000 35,000
Rural Utilities Service (RUS) debt (c) 47,372 44,199
Note payable (d) - 1,000,000
------------ -------------
Total long-term debt (including current portion) 122,372 1,119,199
Less: Current portion of long-term debt (5,496) (1,003,142)
------------ -------------
Total long-term debt $ 116,876 $ 116,057
============ =============
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 approximates the carrying value of $1.1 billion as of
December 31, 2000.
(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 RUS 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.
(d) 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 the Frontier ILEC's to Citizens as discussed in
Note 1. The loan has a maximum maturity of 18 months from October 13, 2000.
The interest rate on the loan ranged from 7.88 percent to 10.19 percent in
2000.
At December 31, 2000, aggregate debt maturities were (in thousands):
2001 $ 1,003,142
2002 43,300
2003 38,027
2004 2,869
2005 2,863
Thereafter 28,998
--------------
$ 1,119,199
==============
5. INCOME TAXES
------------
The provision for income taxes consists of the following (in thousands):
Period from Period from
Year ended January 1, 1999 October 1, 1999
December 31, through September through December Year ended
1998 30, 1999 31, 1999 December 31, 2000
---------------- ----------------- ----------------- -----------------
Federal:
Current $ 91,174 $ 70,032 $ 24,988 $ 81,761
Deferred (3,073) 2,597 (1,737) 9,466
--------------- ---------------- ---------------- ----------------
88,101 72,629 23,251 91,227
--------------- ---------------- ---------------- ----------------
State:
Current 10,406 8,452 2,160 12,325
Deferred 133 1,117 (7) (135)
--------------- ---------------- ---------------- ----------------
10,539 9,569 2,153 12,190
--------------- ---------------- ---------------- ----------------
Total income taxes $ 98,640 $ 82,198 $ 25,404 $ 103,417
=============== ================ ================ ================
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 January 1, 1999 October 1, 1999
December 31, through September through December Year ended
1998 30, 1999 31, 1999 December 31, 2000
---------------- ---------------- - ----------------- -----------------
Federal income tax expense at statutory
rate $ 90,022 $ 71,738 $ 13,549 $ 75,340
State income tax (net of federal
benefit) 6,850 6,220 1,399 7,923
Goodwill amortization 1,001 1,346 5,250 21,000
Nondeductible step up in basis - - 3,876 -
Other 767 2,894 1,330 (846)
---------- ------------ --------- ---------
Total income tax $ 98,640 $ 82,198 $ 25,404 $ 103,417
========== ============ ========= =========
Deferred tax assets (liabilities) comprised the following at December 31 (in
thousands):
1999 2000
----------- -------------
Accelerated depreciation $ (168,492) $ (157,723)
Other (2,630) -
----------- -------------
Gross deferred tax liabilities (171,122) (157,723)
----------- -------------
Basis adjustment - purchased telephone companies 22,803 20,265
Employee benefits obligation 44,137 30,517
Deferred compensation 235 829
Bad debt expense 3,979 5,524
Partnership taxable income adjustment (2,090) (7,674)
Other 60 (4,244)
----------- -------------
Gross deferred tax assets 69,124 45,217
----------- -------------
Net deferred tax assets (liabilities) $ (101,998) $ (112,506)
=========== =============
6. 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
GCNA 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 overfunded, the Company recorded a net
periodic pension benefit of approximately $3.7 million, $6.7 million, $2.2
million, and $26.7 million for the year ending December 31, 1998, the nine
months ended September 30, 1999, the three months ended December 31, 1999, and
the year ended December 31, 2000, respectively.
Prior to the Global Crossing merger, the Company also 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
deductions. 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. 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 $3.7 million for the year ended December 31,
1998, $3.0 million for the nine months ended September 30, 1999, $1.0 million
for the three months ended December 31, 1999, and $6.8 million for the year
ended December 31, 2000.
7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
-------------------------------------------
The Company provides postretirement 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 20
years. In accordance with APB No. 16, 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, 1999 October 1, 1999
Year Ended through September through Year Ended
December 31, 1998 30, 1999 December 31, 1999 December 31, 2000
------------------ ----------------- ----------------- ------------------
Change in benefit obligation:
Benefit obligation at beginning of the period $ (115,585) $ (126,614) $ (111,661) $ (108,982)
Service cost (597) (444) (118) (461)
Interest cost (7,892) (6,027) (2,086) (8,508)
Amendments (414) (1,133) - -
Actuarial (loss) gain (9,528) 15,504 2,892 (7,561)
Benefits paid 7,402 7,053 1,991 7,088
------------- -------------- ------------ -------------
Benefit obligation at end of the period (126,614) (111,661) (108,982) (118,424)
------------- -------------- ------------ -------------
Change in plan assets:
Fair value of plan assets at beginning of
the period 5,038 4,430 2,988 3,054
Actual return on plan assets 78 191 180 440
Employer contribution 6,716 5,420 1,877 7,089
Benefits paid (7,402) (7,053) (1,991) (7,088)
------------- -------------- ------------ -------------
Fair value of plan assets at end of the
period 4,430 2,988 3,054 3,495
------------- -------------- ------------ -------------
Funded status (122,184) (108,673) (105,928) (114,929)
Unrecognized transition obligation 71,520 - - -
Unrecognized prior service cost 1,516 - - -
Unrecognized net loss (gain) 3,126 (34) (2,027) 5,312
------------- -------------- ------------ -------------
Accrued benefit cost $ (46,022) $ (108,707) $ (107,955) $ (109,617)
============= ============== ============ =============
The components of the estimated postretirement benefit cost are as follows (in
thousands):
Period from Period from
January 1, 1999 October 1, 1999
Year Ended through September Through Year Ended
December 31, 1998 30, 1999 December 31, 1999 December 31, 2000
----------------- ----------------- ----------------- -----------------
Service cost $ 597 $ 444 $ 118 $ 461
Interest on accumulated postretirement benefit
obligation 7,892 6,027 2,086 8,508
Amortization of transition obligation 5,167 3,829 - -
Expected return on plan assets (447) (289) (67) (268)
Amortization of prior service cost 164 206 - -
Amortization of (gain) loss (1,172) (379) - 33
-------------- -------------- ------------ -------------
Net postretirement cost $ 12,201 $ 9,838 $ 2,137 $ 8,734
============== ============== ============ =============
The following assumptions were used to value the postretirement benefit obligation for the years ended December 31:
1998 1999 2000
------- ------ ------
Weighted average discount rate 6.75% 7.88% 7.50%
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, 2000 would
increase by $9.2 million while the sum of the service and interest cost
components of the net postretirement benefit health care cost for 2000 would
increase by $0.6 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, 2000 would decrease by $8.4 million while the sum
of the service and interest cost components of the net postretirement benefit
health care cost for 2000 would decrease by $0.6 million.
The Company changed its assumptions used in 1998, 1999, and 2000 for the
weighted average discount rate. This change in assumption did not have a
material effect on the postretirement expense for these periods.
8. 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 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, 2000,
1,793,602 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 ("SFAS No. 123"). 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 for the three months ended December 31, 1999 and the year ended December
31, 2000 (in thousands):
Period from
October 1, 1999
through December Year Ended
31, 1999 December 31, 2000
------------------ -----------------
Net income as reported $13,308 $ 111,839
Pro forma net income $12,861 $ 108,774
Fair value of options granted $12,562 $ 21,511
Volatility 40.00% 84.77%
Dividend yield 0.00% 0.00%
Risk-free interest rate 6.558% 5.920%
Expected lives 4 - 6 years 4 years
These options will vest immediately upon the close of the Citizens transaction
discussed in Note 1. Forfeitures are recognized as they occur. At December 31,
2000, options outstanding and options exercisable are as follows:
Weighted Average
Range of Exercise Options Remaining Contractual Weighted Average
Prices Outstanding Life Exercise Price
----------------- ----------- --------------------- ----------------
$10.67 - $21.44 791,742 7.28 $14.11
$26.25 - $30.50 983,660 8.76 $26.38
$45.00 - $51.50 18,200 8.94 $46.07
---------
1,793,602
=========
Weighted Average
Range of Exercise Options Remaining Contractual Weighted Average
Prices Exercisable Life Exercise Price
----------------- ----------- --------------------- ----------------
$10.67 - $21.44 756,442 7.15 $13.87
$26.25 - $30.50 340,662 8.74 $26.25
$45.00 - $51.50 5,049 8.92 $45.00
---------
1,102,153
=========
Additional information regarding options granted and outstanding is summarized
below:
Weighted Average
Options Exercise Price
---------- ----------------
Outstanding at December 31, 1999 2,004,407 $20.79
Granted 75,700 $25.92
Canceled (124,552) $26.59
Exercised (161,953) $36.25
---------- ------
Outstanding at December 31, 2000 1,793,602 $21.16
========== ======
9. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, is effective for
the Company as of January 1, 2001. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities measured at fair
value. The accounting for changes in the fair value of a derivative depends on
the use of the derivative. The Company has determined the adoption of SFAS No.
133 will not have a material impact on the financial statements.
Effective January 1, 2000, the Company adopted Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition in Financial Statements, which requires amortization of certain
start-up and activation revenues and deferral of associated costs over the
longer of the contract period or expected customer relationship. Previously,
such revenues and expenses were recognized upon service activation. The net
impact of SAB No. 101 reduced revenues and operating costs by approximately
$11.9 million. There was no net current year cumulative effect from prior year
activity as revenues and costs were deferred in equal amounts.
10. 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 $5.1 million, $4.2 million, $1.7
million, and $4.1 million for the year ended December 31, 1998, the nine months
ended September 30, 1999, the three months ended December 31, 1999, and the year
ended December 31, 2000, respectively.
Minimum annual rental commitments under noncancelable operating leases in effect
on December 31, 2000 were as follows (in thousands):
Years Buildings Equipment
----- ------------ ------------
2001 $ 2,432 $ 179
2002 2,424 135
2003 2,266 265
2004 1,131 151
2005 853 16
Thereafter 98 129
--------- ---------
Total $ 9,204 $ 875
========= =========
Intrastate Regulation: Open Market Plan
- ---------------------------------------
The Company has been operating under the terms of the original Open Market Plan
since January 1, 1995. The Open Market Plan is a negotiated agreement between
the Company and the New York State Public Service Commission which provides the
Company with earnings incentives under a price cap regulatory plan in exchange
for reductions in certain local service rates and the opening of its market and
network infrastructure to competition. The Open Market Plan promotes
telecommunications competition in the Rochester, New York marketplace by
providing for (1) interconnection of competing local networks including
reciprocal compensation for terminating traffic, (2) equal access to network
databases, (3) access to local telephone numbers, (4) service provider telephone
number portability, and (5) certain wholesale discounts to resellers of local
services.
On August 25, 1999, the New York State Public Service Commission ("NYSPSC")
opened a proceeding regarding the Company's performance under the terms and
conditions of the original Open Market Plan and a general review of the
Company's financial condition, earnings, service quality, and competition in the
Rochester market. 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 by the NYSPSC on March 30, 2000. Under the
approved Joint Proposal, the Company will (1) remain under price cap regulation
through December 31, 2004 (with a possibility for NYSPSC review two years into
the Plan), (2) be required to measure and report on new service quality metrics
for wholesale carriers, (3) be subject to increased potential penalties related
to both retail and wholesale service targets, (4) be required to lower certain
residential and commercial service rates, and (5) be required to make
investments in its network infrastructure which will permit the advancement of
competition in the Rochester Market and the deployment of new services to
customers. Maximum potential service penalties under the Joint Proposal are
$17.0 million annually, as compared to a maximum of $7.0 million under the
original Open Market Plan.
The Company has provided Rochester area customers with significant rate
reductions under the Open Market Plan. Since inception of the Plan in 1995
through December 31, 2000, rate reductions of $19.5 million have been
implemented. Additional rate reductions of $1.5 million were implemented on
January 1, 2001. Under the terms of the Joint Proposal (the amended Open Market
Plan), the Company will continue to reduce local measured service rates by $0.5
million annually, beginning on January 1, 2002, as well as reduce the rate
charged for its flat rate unlimited intralata toll product.
Interstate Regulation: Price Cap
- --------------------------------
For interstate operations, the Company has been under Price Cap regulation since
its election on July 1, 1991. The major change in interstate tariffed rates for
2000 was the adoption of the CALLS (Coalition for Local and Long Distance
Services) proposal into the annual July 1 price cap filing. In summary, under
the CALLS proposal PICC (Primary Interexchange Carrier Charge) rates were
eliminated, switched access rates were reduced, and CALC (customer access line
charge) rates were increased. The net effect on interstate revenues of the
Company is expected to be less than a $1.0 million reduction in total.
Other Regulatory Actions
- ------------------------
Under the Telecommunications Act of 1996, in an effort to promote competition,
the Federal Communications Commission adopted new national rules for
interconnection and specifically rules regarding the identification, access to,
and pricing of unbundled network elements (UNEs). Subsequently, a number of
proceedings, both federal and state, have been opened to address the many legal
and technical issues of implementing this section of the FCC rules. The NYSPSC
has opened a proceeding and is currently considering the prices that local
exchange companies in New York may charge for UNEs such as links, ports, local
switching, transport, operator services, collocation, line sharing, and other
network elements. The Company is actively participating in this proceeding.
During July 1999, the NYSPSC issued an Opinion and Order on several specific
UNEs for which the Company had previously submitted cost studies. As a result
permanent rates were established for unbundled links, ports, switching, and
interoffice transport. The Company continues to participate in this proceeding
for the costing of other unbundled network service elements. Under the terms of
the Joint Proposal, discussed above, the Company has completed several new UNE
cost studies for the purpose of establishing UNE tariffed rates for those
network elements where permanent rates have not yet been established. The
results of the NYSPSC review of these cost studies may affect some UNE rates for
competitors; however, the Company cannot predict the outcome any action in this
proceeding.
Dividend Policy
- ---------------
The Open Market Plan prohibited 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
had 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.
11. TRANSACTIONS WITH AFFILIATES
----------------------------
The Company incurred charges of $29.6 million, $17.4 million, $3.7 million, and
$17.9 million from GCNA for the year ended December 31, 1998, the nine-month
period ended September 30, 1999, the three-month period ended December 31, 1999,
and the year ended December 31, 2000, respectively, for allocated corporate
charges for executive, corporate planning, legal, tax, human resources,
treasury, corporate communications, and corporate accounting 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 year ended December 31, 1998, the nine-month period ended
September 30, 1999, the three-month period ended December 31, 1999, and the year
ended December 31, 2000, the Company incurred charges of $38.5 million, $25.3
million, $9.3 million, and $35.6 million, respectively, for these services.
Advances to affiliates include $312.4 million and $311.8 million of investments
held by GCNA on behalf of the Company at December 31, 1999, and 2000,
respectively.
The Company remitted dividends to GCNA of $70.1 million, $22.3 million, $16.9
million, and $152.4 million in the year ended December 31, 1998, the nine months
ended September 30, 1999, the three months ended December 31, 1999, and the year
ended December 31, 2000, respectively.
On October 13, 2000, the Company completed a $1 billion term loan facility with
Citibank, N.A. as administrative agent. The debt will remain outstanding until
GCNA completes the sale of its local exchange business to Citizens and has a
maximum maturity of 18 months. Proceeds from the loan were used to refinance
affiliate debt. Accordingly, the Company holds an 800 million British pound
denominated note receivable with an affiliate. The foreign exchange gain for the
year ended December 31, 2000 was $21.9 million and is recorded in other income.
The interest rate on the note is a variable rate which ranged from 6.95 percent
to 7.06 percent in 2000. The Company also holds a $190 million note receivable
from GCNA which has a variable interest rate that ranged from 7.62 percent to
7.64 percent in 2000. The notes will remain outstanding until GCNA completes the
sale of its local exchange business to Citizens. The notes have a maximum
maturity of 18 months.
As discussed in Note 1, the Company earned $14.6 million, $11.7 million, $6.2
million, and $42.2 million related to the cash management agreement with GCNA
for the years ended December 31, 1998, the nine months ended September 30, 1999,
the three months ended December 31, 1999, and the year ended December 31, 2000,
respectively, as well as interest earned on affiliate receivables.
12. SUBSEQUENT EVENT
----------------
In April 2001, the Agreement with Citizens was amended to provide for, among
other things, (i) an acceleration of the anticipated closing date for the
transaction, (ii) an adjustment to the purchase price, which reflects a
reduction in the amount of cash to be received by Global Crossing at closing in
connection with the transaction from $3.65 billion to $3.5 billion, subject to
adjustments concerning closing date liabilities and working capital balances,
and (iii) a $100 million credit, which will be applied against future services
to be rendered to Citizens over a five year period.
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
May 4, 2001 of our report dated May 4, 2001, 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, 2000 and 1999 and the
related statements of revenues and expenses and cash flows for each of the three
years in the period ended December 31, 2000 included herein and to all
references to our Firm included in this Registration Statement.
Arthur Andersen LLP
Denver, Colorado,
May 4, 2001
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 (except with respect to the
matter discussed in Note 12 of the combined financial statements, as to which
the date is April 18, 2001) on the combined financial statements of Frontier
Incumbent Local Exchange Carrier Businesses.
Arthur Andersen LLP
New York, New York
May 4, 2001
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 in the Current Report on Form 8-K of Citizens
Communications Company dated May 4, 2001.
PricewaterhouseCoopers LLP
Rochester, New York
May 4, 2001