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): September 17, 2001
CITIZENS COMMUNICATIONS COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 001-11001 06-0619596
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) 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 telephone access lines. 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
$1,171,000,000 in cash. On June 30, 2000, we closed on the Nebraska
purchase of approximately 62,200 access lines for approximately
$205,400,000 in cash. On August 31, 2000, we closed on the Minnesota
purchase of approximately 142,400 access lines for approximately
$438,900,000 in cash. On November 30, 2000, we closed on the
Illinois/Wisconsin purchase of approximately 112,900 access lines for
approximately $303,900,000 in cash. We expect that the Arizona and
California transactions, which are subject to various state and
federal regulatory approvals, will close during 2001. Our expected
cash requirement to complete the Verizon acquisitions is $222,800,000.
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 $1,650,000,000 in
cash and the assumption of certain liabilities. On October 31, 2000,
we closed on the North Dakota purchase of approximately 17,000 access
lines for approximately $38,000,000 in cash. On July 20, 2001, we
delivered a notice of termination for the remaining acquisition
agreements with Qwest.
Frontier Acquisition
--------------------
On July 12, 2000, we announced a definitive agreement to purchase from
Global Crossing Ltd. 100% of the stock of Frontier Corp.'s local
exchange carrier subsidiaries (Frontier), which own 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. On June
29, 2001, we closed on the Frontier acquisition for approximately
$3,368,000,000 in cash, subject to purchase price adjustment.
We intend to sell all of our public utility services segments. On July 2,
2001, we sold our Louisiana gas operations for $363.4 million in cash plus
the assumption of certain liabilities and have entered into agreements to
sell a substantial portion of the public utility services segments for
$1,026,000,000 in cash and $90,000,000 in debt. These agreements and the
status of each transaction are described as follows:
Water and Wastewater
--------------------
On October 18, 1999, we announced the agreement to sell all of our
water and wastewater operations to American Water Works, Inc. for
$745,000,000 in cash and $90,000,000 of assumed debt. These
transactions are currently expected to close in the second half of
2001 following regulatory approval. The contract may be terminated if
the required approvals are not received by September 30, 2001.
Electric
--------
Our electric utility division in Hawaii is under contract to be sold
to Kauai Island Electric Co-op for $270,000,000 in cash including the
assumption of certain liabilities by the purchaser. In August 2000,
the Hawaii Public Utilities Commission denied the application
requesting approval of the purchase by Kauai Island Electric Co-op. We
are considering a variety of options, including filing a request for
reconsideration of the decision, which may include filing a new
application. Our agreement for the sale of this division may be
terminated if regulatory approval is not received before February
2002.
Gas
---
On July 2, 2001, we sold our gas operations in Louisiana to Atmos
Energy Corporation for $363,400,000 in cash plus the assumption of
certain liabilities, subject to purchase price adjustment. In July
2001, an agreement was signed to sell our Colorado Gas division to
Kinder Morgan for $11,000,000. This transaction is expected to close in
the fourth quarter of 2001 following regulatory approval.
The GTE Acquisitions, the U S WEST North Dakota Acquisition and the
Frontier Acquisition are collectively referred to as the Acquisitions. All
of the public utilities services dispositions (including those not yet
under contract) are collectively referred to as the Dispositions. We are
filing the Frontier financial statements and pro forma financial
information related to probable and completed aquisitions 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, Exhibits
(a) Financial Statements of Business Acquired.
Financial Statements of the Frontier Incumbent Local Exchange Carrier
Business for the quarter and year to date period ended June 30, 2001.
(b) Pro forma Financial Information
Pro forma Balance Sheet as of June 30, 2001 and Pro forma Income Statements
for the six months ended June 30, 2001 and the year ended December 31,
2000.
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: September 17, 2001
Proforma Financial Information
From May 27, 1999 through July 12, 2000, we entered into several agreements
to acquire telephone access lines. 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
$1,171,000,000 in cash. On June 30, 2000, we closed on the Nebraska
purchase of approximately 62,200 access lines for approximately
$205,400,000 in cash. On August 31, 2000, we closed on the Minnesota
purchase of approximately 142,400 access lines for approximately
$438,900,000 in cash. On November 30, 2000, we closed on the
Illinois/Wisconsin purchase of approximately 112,900 access lines for
approximately $303,900,000 in cash. We expect that the Arizona and
California transactions, which are subject to various state and
federal regulatory approvals, will close during 2001. Our expected
cash requirement to complete the Verizon acquisitions is $222,800,000.
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 $1,650,000,000 in
cash and the assumption of certain liabilities. On October 31, 2000,
we closed on the North Dakota purchase of approximately 17,000 access
lines for approximately $38,000,000 in cash. On July 20, 2001, we
delivered a notice of termination for the remaining acquisition
agreements with Qwest.
Frontier Acquisition
--------------------
On July 12, 2000, we announced a definitive agreement to purchase from
Global Crossing Ltd. 100% of the stock of Frontier Corp.'s local
exchange carrier subsidiaries (Frontier), which own 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. On June
29, 2001, we closed on the Frontier acquisition for approximately
$3,368,000,000 in cash, subject to purchase price adjustment.
We intend to sell all of our public utility services segments. On July 2,
2001, we sold our Louisiana gas operations for $363.4 million in cash plus
the assumption of certain liabilities and have entered into agreements to
sell a substantial portion of the public utility services segments for
$1,026,000,000 in cash and $90,000,000 in debt. These agreements and the
status of each transaction are described as follows:
Water and Wastewater
--------------------
On October 18, 1999, we announced the agreement to sell all of our
water and wastewater operations to American Water Works, Inc. for
$745,000,000 in cash and $90,000,000 of assumed debt. These
transactions are currently expected to close in the second half of
2001 following regulatory approval. The contract may be terminated if
the required approvals are not received by September 30, 2001.
Electric
--------
Our electric utility division in Hawaii is under contract to be sold
to Kauai Island Electric Co-op for $270,000,000 in cash including the
assumption of certain liabilities by the purchaser. In August 2000,
the Hawaii Public Utilities Commission denied the application
requesting approval of the purchase by Kauai Island Electric Co-op. We
are considering a variety of options, including filing a request for
reconsideration of the decision, which may include filing a new
application. Our agreement for the sale of this division may be
terminated if regulatory approval is not received before February
2002.
Gas
---
On July 2, 2001, we sold our gas operations in Louisiana to Atmos
Energy Corporation for $363,400,000 in cash plus the assumption of
certain liabilities, subject to purchase price adjustment. In July
2001, an agreement was signed to sell our Colorado Gas division to
Kinder Morgan for $11,000,000. This transaction is expected to close in
the fourth quarter of 2001 following regulatory approval.
The GTE Acquisitions, the U S WEST North Dakota Acquisition and the
Frontier Acquisition are collectively referred to as the Acquisitions. All
of the public utilities services dispositions (including those not yet
under contract) are collectively referred to as the Dispositions. The
following unaudited pro forma condensed combined statements of income
information has been prepared to illustrate the effects of the Acquisitions
and related financings and the Dispositions had these transactions been
completed at the beginning of the periods presented. Cash proceeds from the
Dispositions that have not yet been sold have been estimated using the
actual contract price for properties where we have signed a definitive
contract to sell and using net book value for properties not yet under
contract. The following unaudited pro forma condensed balance sheet
information as of June 30, 2001 has been prepared assuming the Acquisitions
and Dispositions not consummated by June 30, 2001 had been completed at
that date.
We have prepared the pro forma financial information using the purchase
method of accounting. 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 for these properties. We have not
accounted for the Acquisitions under SFAS 71.
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 periods presented. If the
companies had actually been combined at the beginning of the periods
presented, 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.
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements of the
Acquisitions and the historical financial statements of Citizens
Communications Company.
Citizens Communications Company and Subsidiaries
Pro Forma Balance Sheet Data
As of June 30, 2001
(unaudited)
Proforma
Citizens ---------------------------------------
Communications
(Amounts in thousands) 6/30/2001 Adjustments Adjusted
----------------------------------------------------------
Cash $ 31,115 $ 2,118,411 (1) $ 1,926,726
(222,800) (2)
Accounts receivable, net 336,490 - 336,490
Short-term investments 18,463 - 18,463
Other current assets 40,424 - 40,424
Assets held for sale 1,240,998 (1,240,998) (1) -
Assets of discontinued operations 687,275 (687,275) (1) -
----------------------------------- -----------------
Total current assets 2,354,765 (32,662) 2,322,103
Net property, plant & equipment 4,662,361 53,393 (2) 4,715,754
Excess cost over net assets acquired 3,014,751 169,407 (2) 3,184,158
Investments 173,318 - 173,318
Regulatory assets 173,611 (109,102) (1) 64,509
Deferred debits and other assets 466,882 (16,126) (1) 450,756
------------------------------------ -----------------
Total assets $ 10,845,688 $ 64,910 $ 10,910,598
==================================== =================
Long-term debt due within one year $ 222,522 $ - $ 222,522
Accounts payable and other current liabilities 416,207 237,199 (1) 653,406
Liabilities related to assets held for sale 255,774 (255,774) (1) -
Liabilities of discontinued operations 189,856 (189,856) (1) -
------------------------------------ -----------------
Total current liabilities 1,084,359 (208,431) 875,928
Deferred income taxes 688,562 (38,228) (1) 650,334
Customer advances for construction
and contributions in aid of construction 200,688 - 200,688
Deferred credits and other liabilities 245,888 - 245,888
Regulatory liabilities 23,415 (12,425) (1) 10,990
Equity units 460,000 - 460,000
Long-term debt 5,818,312 5,818,312
------------------------------------ -----------------
Total liabilities 8,521,224 (259,084) 8,262,140
Equity forward contracts 107,018 107,018
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities * 201,250 - 201,250
Shareholders' equity 2,016,196 323,994 (1) 2,340,190
------------------------------------ -----------------
Total liabilities and shareholders' equity $ 10,845,688 $ 64,910 $ 10,910,598
==================================== =================
*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 six months period ended June 30, 2001
(unaudited)
Proforma for Acquisitions
Citizens Frontier GTE --------------------------------
(Amounts in thousands, except per-share amounts) Communications Acquisition Acquisitions Adjustments Adjusted
--------------------------------------------------------------------------------
Revenue $ 1,130,023 $ 387,796 $ 21,100 $ - 1,538,919
Operating expenses 761,519 203,920 7,834 - 973,273
Depreciation and amortization 220,072 103,686 3,862 56,262 (4) 383,882
-------------------------------------------------------------- -------------
Income from operations 148,432 80,190 9,404 (56,262) 181,764
Investment and other income, net 13,425 (4,990) - 50,064 (6) 26,753
(31,746) (7)
Interest expense 134,581 37,482 673 122,727 (8) 264,738
(30,725) (7)
Convertible preferred dividends 3,105 - - - 3,105
-------------------------------------------------------------- -------------
Pre-tax income 24,171 37,718 8,731 (129,946) (59,326)
Income tax expense (benefit) 9,573 27,985 3,513 (44,076) (9) (3,005)
-------------------------------------------------------------- -------------
Income (loss) from continuing operations $ 14,598 $ 9,733 $ 5,218 $ (85,870) $ (56,321)
============================================================== =============
Carrying cost of equity forward contracts 12,647
Income (loss) from continuing operations available
------------------
to common shareholders $ 1,951
==================
Weighted average shares outstanding -Basic 266,898 25,156 (10)
Weighted average shares outstanding -Diluted 270,237 25,156 (10)
Income (loss) from continuing operations
available to common shareholders per basic share $ 0.01
Income (loss) from continuing operations
available to common shareholders per diluted share $ 0.01
Elimination of
Gas and Electric Total
Operations Proforma
--------------------------------
Revenue $ 432,831 1,106,088
Operating expenses 371,271 602,002
Depreciation and amortization 6,105 377,777
--------------------------------
Income from operations $ 55,455 $ 126,309
Investment and other income, net 1,065 25,688
Interest expense 18,654 246,084
Convertible preferred dividends - 3,105
--------------------------------
Pre-tax income 37,866 (97,192)
Income tax expense (benefit) 12,458 (15,463)
--------------------------------
Income (loss) from continuing operations $ 25,408 $ (81,729)
================================
Carrying cost of equity forward contracts 12,647
Income (loss) from continuing operations available
-----------------
to common shareholders $ (94,376)
=================
Weighted average shares outstanding -Basic 292,054
Weighted average shares outstanding -Diluted 295,393
Income (loss) from continuing operations
available to common shareholders per basic share $ (0.32)
Income (loss) from continuing operations
available to common shareholders per diluted share $ (0.32)
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)
Acquisitions
-------------------------------------------------
GTE
Citizens Frontier GTE Combined Qwest
(Amounts in thousands, except per-share Communications Acquisition Minnesota Entities North Dakota
amounts) -----------------------------------------------------------------
Revenue $ 1,802,358 $ 746,302 $ 56,962 $ 121,334 $ 10,632
Operating expenses 1,292,950 370,893 23,323 44,188 3,058
Depreciation and amortization 387,607 200,669 545 28,712 2,270
-----------------------------------------------------------------
Income from operations 121,801 174,740 33,094 48,434 5,304
Investment and other income, net 3,350 64,583 - - -
Minority interest 12,222 - - - -
Interest expense 187,366 24,067 1,686 2,933 -
Convertible preferred dividends 6,210 - - - -
-----------------------------------------------------------------
Pre-tax income (56,203) 215,256 31,408 45,501 5,304
Income tax expense (benefit) (16,132) 103,417 12,687 18,105 2,007
-----------------------------------------------------------------
Income (loss) from continuing operations $ (40,071) $ 111,839 $ 18,721 $ 27,396 $ 3,297
=================================================================
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)
Proforma for Acquisitions Elimination of
----------------------------- Gas and Electric Total
Adjustments Adjusted Operations Proforma
-------------- -----------------------------------------
Revenue $ - $ 2,737,588 $ 597,823 $ 2,139,765
Operating expenses 9,000 (3) 1,743,412 526,472 1,216,940
Depreciation and amortization 137,874 (4) 770,203 47,857 722,346
12,526 (5)
-------------- -----------------------------------------
Income from operations (159,400) 223,973 23,494 200,479
Investment and other income, net (26,323) (6) 28,856 5,073 23,783
(12,754) (7)
Minority interest - 12,222 - 12,222
Interest expense 301,055 (8) 502,467 36,056 466,411
(14,640) (7)
Convertible preferred dividends - 6,210 - 6,210
-------------- -----------------------------------------
Pre-tax income (484,892) (243,626) (7,489) (236,137)
Income tax expense (benefit) (165,272) (9) (45,188) (2,417) (42,771)
-------------- ----------------------------------------
Income (loss) from continuing operations $ (319,620) $ (198,438) $ (5,072) $ (193,366)
============== =========================================
Weighted average shares outstanding -Basic 25,156 (10) 286,900
Weighted average shares outstanding -Diluted 25,156 (10) 292,087
Loss from continuing operations per basic share $ (0.67)
Loss from continuing operations per diluted share $ (0.67)
See Notes to Pro Forma Condensed Financial Statements.
Notes to Pro Forma Condensed Financial Statements
(1) Reflects the effect of the sale of our public utilities services
properties, including adjustments for the estimated income taxes due on the
gain. The estimated cash proceeds from the sale of our public utilities
service properties are $2,118,411,000. The adjustment to shareholders'
equity represents an increase to retained earnings representing the after
tax gain on the sale.
(2) Represents the purchase of the remaining GTE Acquisitions for approximately
$222,800,000 in cash. For purposes of the accompanying pro forma combined
financial statements, we have reflected the assets to be acquired at their
historical carrying values and have reflected the excess of cost over such
amounts as excess of cost over net assets acquired. The final allocation of
purchase price to assets and liabilities acquired will depend upon the
final purchase price and the final estimate of fair values of the assets
and liabilities acquired. 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 will be
allocated to property, plant and equipment, customer base, other
identifiable intangibles and goodwill. However, there can be no assurance
that the actual allocation will not differ significantly from the pro forma
allocation.
(3) Represents an increase in selling, general and administrative expenses of
the GTE Combined Entities to reverse a pension credit recorded during the
year ended December 31, 2000 that will not continue.
(4) Reflects amortization expense of the excess of cost over net assets
acquired for 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 from that described in Note 2 as well
as our initial allocation for properties recently purchased, 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 businesses that we are acquiring),
in a merger transaction. In accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations", the purchase price was allocated
to Frontier Corporation and its subsidiaries based upon the fair market
value at the date of the acquisition. Frontier was amortizing the
associated goodwill over a 25-year period. We included amortization of
goodwill over a 15-year period for the full year 2000 and the six months
ended June 30, 2001 to conform with our policy.
(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 reversal of a foreign exchange gain of $21,900,000 for the
year ended December 31, 2000 and the reversal of a foreign exchange loss of
$50,064,000 for the six months ended June 30, 2001 recorded by Frontier
Corp. related to a note receivable due from an affiliate of Frontier. Such
note is not part of the assets acquired by Citizens.
The pro forma income statement for the year ended December 31, 2000 also
includes an adjustment to eliminate $4,423,000 of our investment income
related to our bond portfolio sold during 2000 to partially fund the
Acquisitions.
(7) Represents the elimination of intercompany interest income recorded by
Frontier Corp. related to a note receivable due from an affiliate of
Frontier and interest expense recorded by Frontier Corp. related to a loan
facility used to fund this note receivable. Such note and loan facility are
not part of the assets and liabilities acquired by Citizens.
(8) Represents the increase in interest expense assuming the permanent
financings as described below were utilized at the beginning of the periods
presented to partially fund the Acquisitions. On May 18, 2001, we issued an
aggregate of $1.75 billion of notes consisting of $700 million principal
amount of 8.50% notes, due May 15, 2006 and $1.05 billion principal amount
of 9.25% notes due May 15, 2011. On June 13, 2001, we issued 18,400,000
equity units at $25 per unit for gross proceeds of $460,000,000. Each
equity unit consists of a 6 3/4 % senior note due 2006 and a purchase
contract for our common stock. On August 13, 2001, we issued an aggregate
of $1.75 billion of notes consisting of $300 million principal amount of
6.375% notes due August 15, 2004, $750 million principal amount of 7.625%
notes due August 15, 2008 and $700 million principal amount of 9.0 % notes
due August 15, 2031.
(9) Represents adjustments to income taxes based on income before income taxes
using the applicable incremental income tax rate.
(10) On June 13, 2001, we issued 25,156,250 shares of our common stock at
$12.10, for net proceeds of $289,787,000 (after underwriting discounts and
commissions).
FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES
COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND 2001
UNAUDITED
FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES
COMBINED BALANCE SHEETS
December 31, 2000
(in thousands of dollars)
December 31, 2000
------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 41,550
Telecommunications accounts receivable, net 112,955
Accounts receivable, affiliates 68,880
Advances to affiliates 311,752
Materials and supplies 1,389
Deferred income taxes 7,618
Notes receivable, affiliate 1,031,095
Prepayments and other 32,759
------------------
Total current assets 1,607,998
Property, plant, and equipment, net 1,052,745
Goodwill and customer base, net 1,521,250
Due from affiliate 46,932
Other assets 18,709
------------------
Total assets $ 4,247,634
==================
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current liabilities:
Accounts payable $ 102,637
Accounts payable, affiliates 113,606
Advances from affiliates 26,225
Deferred credits 2,997
Current portion of long-term debt 3,142
Accrued income taxes 20,508
Advanced billings 11,852
Notes payable 1,000,000
Other current liabilities 16,478
------------------
Total current liabilities 1,297,445
Long-term debt, net of current maturities 116,057
Notes payable to affiliates 4,700
Deferred income taxes 120,124
Post-retirement benefit obligation 109,617
Due to affiliate 24,852
Other long-term liabilities 9,063
------------------
Total liabilities 1,681,858
------------------
Shareholder's equity:
Contributed capital 2,609,961
Accumulated deficit (44,185)
------------------
Total shareholder's equity 2,565,776
------------------
Total liabilities and shareholder's equity $ 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 THREE MONTH PERIODS ENDED
JUNE 30, 2000 AND 2001
(in thousands of dollars)
(Unaudited)
March 31, March 31,
2000 2001
through through
June 30, June 30,
2000 2001
------------------ ------------------
Revenues $ 189,925 $ 195,528
Costs and expenses:
Operating expenses 85,841 101,372
Depreciation and amortization 48,226 52,061
Taxes other than income taxes 8,026 7,013
------------------ ------------------
Total costs and expenses 142,093 160,446
------------------ ------------------
Operating income 47,832 35,082
Interest expense (1,572) (15,802)
Interest income 7,719 21,928
Equity in earnings on investments in affiliates (256) 381
Other income (expense), net (123) (12,741)
------------------ ------------------
Income before taxes 53,600 28,848
Income tax expense 23,025 24,614
------------------ ------------------
Net income $ 30,575 $ 4,234
================== ==================
The accompanying notes to financial statements are an integral part of these
statements.
FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES
COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 2000 AND 2001
(in thousands of dollars)
(Unaudited)
January 1, January 1,
2000 2001
through through
June 30, June 30,
2000 2001
------------------ ------------------
Revenues $ 378,047 $ 387,796
Costs and expenses:
Operating expenses 173,250 192,533
Depreciation and amortization 100,611 103,686
Taxes other than income taxes 17,590 11,387
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Total costs and expenses 291,451 307,606
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Operating income 86,596 80,190
Interest expense (3,255) (37,482)
Interest income 15,467 46,150
Equity in earnings on investments in affiliates 233 762
Other income (expense), net (677) (51,902)
------------------ ------------------
Income before taxes 98,364 37,718
Income tax expense 46,050 27,985
------------------ ------------------
Net income $ 52,314 $ 9,733
================== ==================
The accompanying notes to financial statements are an integral part of these
statements.
FRONTIER INCUMBENT LOCAL EXCHANGE CARRIER BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 2000 AND 2001
(in thousands of dollars)
(Unaudited)
January 1, January 1,
2000 2001
Through Through
June 30, June 30,
2000 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,314 $ 9,733
------------------ ------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 100,611 103,686
Foreign Exchange Loss - 50,064
Changes in operating assets and liabilities,
exclusive of impacts of dispositions and acquisitions:
Accounts receivable 5,062 13,844
Accounts receivable, affiliates - 30,427
Material and supplies (285) (464)
Prepayments and other current assets 8,704 12,738
Deferred and other assets (7,679) (191,308)
Accounts payable (17,522) (12,561)
Accounts payable, affiliates - (36,470)
Long-term liabilities - 9,090
Accrued taxes, advanced billings and other liabilities 51,911 (25,744)
Post-retirement benefit obligation (996) 1,649
Deferred income taxes (19,654) 70,527
------------------ ------------------
Total adjustments 120,152 25,478
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Net cash provided by operating activities 172,466 35,211
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant, and equipment (98,902) (113,387)
Advances to affiliates - 1,095,172
Transactions with affiliates 79,454 -
------------------ ------------------
Net cash used in investing activities (19,448) 981,785
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (1,637) (6,269)
Advances from affiliates - (1,026,225)
Dividends paid (129,433) (23,000)
------------------ ------------------
Cash flows used in financing activities (131,070) (1,055,494)
------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,948 (38,498)
CASH AND CASH EQUIVALENTS, beginning of period 83,842 41,550
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $ 105,790 $ 3,052
================== ==================
NON-CASH TRANSACTIONS:
Affiliate transactions (36,711)
Sale of UCN cellular 2,843
OPEB adjustments 6,373
Equity earnnig adjustments 104
Transfer of fixed assets for sale of ILEC 27,391
The accompanying notes to financial statements are an integral part of these
statements.
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.
Citizens Transaction
--------------------
On July 11, 2000, GCNA and GCNA's parent company, Global Crossing Limited
("GCL"), 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
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.
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.
The transaction closed on June 29, 2001.
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.
Basis of Presentation
---------------------
These combined financial statements include all adjustments, which consist of
normal recurring accruals necessary to present fairly the results for the
interim period shown and should be read in conjunction with our combined audited
financial statements for the year ended December 31, 2000. Certain information
and footnote disclosures have been condensed pursuant to Securities and Exchange
Commission rules and regulations. The results of the interim periods are not
necessarily indicative of the results for the full year. 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. It is the Company's policy to reclassify prior year
balances to conform to current year presentation.
These unaudited combined interim financial statements for the three and six
month periods ended June 30, 2001 reflect certain adjustments recorded in
connection with the Citizen's transaction and in accordance with the Agreement
discussed above. Balances resulting from transactions with GCNA and GCL have
been canceled and extinguished, except for amounts included in "Advances to
affiliates", which may not be canceled under certain laws.
Adjustments have also been recorded to reflect certain tax assets and
liabilities to be maintained by GCNA and GCL. Additionally, assets, liabilities,
benefits & expenses related to pension and other post-retirmement benefits for
ILEC employees and retirees transfered to Citizens have been recorded.
However, adjustments related to purchase accounting in accordance with
Accounting Principles Board Opinion No. 16 ("Business Combinations") and
Statement of the Financial Accounting Standards No. 141, "Business
Combinations", have not been recorded.
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. 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.
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.
Other Comprehensive Income
--------------------------
The Company did not have any other comprehensive income in 2000 and 2001.