Filed Pursuant to Rule 424(B)(2)
Registration Statement Nos. 333-58044 and 333-07047
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 9, 2001)
[LOGO]
16,000,000 EQUITY UNITS
CITIZENS COMMUNICATIONS COMPANY
6 3/4% EQUITY UNITS
--------------
Each Equity Unit consists of a warrant, also referred to herein as a purchase
contract, issued by us and a senior note due 2006 issued by us.
- Each purchase contract will obligate you to purchase from us, no later
than August 17, 2004 for a price of $25, the following number of shares of
our common stock:
- if the average closing price of our common stock over the 20-trading
day period ending on the third trading day prior to August 17, 2004
equals or exceeds $14.52, 1.7218 shares;
- if the average closing price of our common stock over the same period
is less than $14.52, but greater than $12.10, a number of shares having
a value, based on the average closing price over that period, equal to
$25; and
- if the average closing price of our common stock over the same period
is less than or equal to $12.10, 2.0661 shares.
- The senior notes will be pledged to secure your obligation to purchase our
common stock under the related purchase contract. You may use the proceeds
from the remarketing of your senior notes to satisfy your payment
obligations under the purchase contracts.
- Each senior note will bear interest at a rate of 6 3/4% per annum.
Interest payments will be made on February 17, May 17, August 17 and
November 17 of each year, beginning August 17, 2001.
The Equity Units have been approved for listing on The New York Stock Exchange
under the symbol "CZB" subject to official notice of issuance. On June 13, 2001,
the last reported sale price for our common stock on The New York Stock Exchange
was $12.10 per share.
Concurrently with this offering, we are also offering 21,875,000 shares of
our common stock. This offering is not conditioned on the completion of our
concurrent common stock offering.
INVESTING IN THE EQUITY UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-19 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 4 OF THE ACCOMPANYING
PROSPECTUS.
-------------------
UNDERWRITING
PRICE TO DISCOUNTS AND
PUBLIC COMMISSIONS NET PROCEEDS
-------- ------------- ------------
Per Equity Unit........................... $25.00 $0.75 $24.25
Total................................... $400,000,000 $12,000,000 $388,000,000
We have granted the underwriters a 30-day option to purchase up to 2,400,000
additional Equity Units on the same terms and conditions set forth above solely
to cover over-allotments, if any. The underwriters expect to deliver the Equity
Units to purchasers on or about June 19, 2001.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSIONS HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
JOINT BOOK-RUNNING MANAGERS
MORGAN STANLEY DEAN WITTER JPMORGAN
------------
JOINT LEAD MANAGERS
BANC OF AMERICA SECURITIES LLC SALOMON SMITH BARNEY
------------
LEHMAN BROTHERS
-------------
THE BUCKINGHAM RESEARCH GROUP
INCORPORATED
DAIN RAUSCHER WESSELS
FIRST UNION SECURITIES, INC.
LEGG MASON WOOD WALKER
INCORPORATED
MIZUHO INTERNATIONAL PLC
ROBERTSON STEPHENS
TD SECURITIES
June 13, 2001
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary............................... S-3
The Offering.......................... S-7
Risk Factors.......................... S-19
Use of Proceeds....................... S-22
Capitalization........................ S-23
Consolidated Selected Financial and
Operating Data...................... S-25
Price Range of Common Stock and
Dividend Policy..................... S-29
Description of the Equity Units....... S-30
Description of the Purchase
Contracts........................... S-34
Certain Provisions of the Purchase
Contracts, the Purchase Contract
Agreement and the Pledge
Agreement........................... S-41
Description of the Senior Notes....... S-44
Book-Entry Systems.................... S-53
Material United States Federal Income
Tax Consequences.................... S-55
Certain ERISA Considerations.......... S-64
Incorporation of Documents by
Reference........................... S-66
Underwriters.......................... S-67
Legal Matters......................... S-69
Pro Forma Combined Financial
Statements.......................... P-1
PROSPECTUS
PAGE
----
About This Prospectus................. 3
Risk Factors.......................... 4
Forward-Looking Statements............ 9
Use of Proceeds....................... 10
Ratio of Earnings to Fixed Charges.... 10
Citizens Communications Company....... 11
Citizens Communications Capital Trust
I................................... 25
Accounting Treatment.................. 25
Selling Stockholder................... 26
Description of Debt Securities........ 27
Description of Capital Stock.......... 35
Description of Warrants............... 37
Description of Depositary Shares...... 39
Description of Trust Preferred
Securities.......................... 42
Description of Guarantee.............. 43
Plan of Distribution.................. 46
Where You Can Find More Information... 48
Incorporation of Documents by
Reference........................... 48
Legal Matters......................... 49
Experts............................... 49
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus supplement and the accompanying prospectus. We are
offering to sell the Equity Units, and seeking offers to buy the Equity Units,
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus supplement and the accompanying prospectus is
accurate only as of the date of this prospectus supplement and the date of the
accompanying prospectus, regardless of the time of delivery of this prospectus
supplement or any sales of the Equity Units. In this prospectus supplement and
the accompanying prospectus, unless otherwise indicated or where the context
otherwise requires, "we," "us" and "our" refer to Citizens Communications
Company and its subsidiaries. In this prospectus supplement and the accompanying
prospectus, unless otherwise indicated, "Citizens" refers to Citizens
Communications Company and does not include its subsidiaries.
S-2
SUMMARY
THIS SUMMARY HIGHLIGHTS ONLY SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. TO BETTER UNDERSTAND THIS OFFERING, YOU
SHOULD READ THIS ENTIRE PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND
THE ADDITIONAL DOCUMENTS TO WHICH WE REFER YOU. SEE "CITIZENS COMMUNICATIONS
COMPANY," "WHERE YOU CAN FIND MORE INFORMATION" IN THE ACCOMPANYING PROSPECTUS
AND "INCORPORATION OF DOCUMENTS BY REFERENCE" IN THIS PROSPECTUS SUPPLEMENT AND
IN THE ACCOMPANYING PROSPECTUS.
CITIZENS COMMUNICATIONS COMPANY
We are a telecommunications-focused company providing wireline
communications services primarily to rural areas and small and medium-sized
towns and cities as an incumbent local exchange carrier, or ILEC. In addition,
we provide competitive local exchange carrier, or CLEC, service to business
customers and to other communications carriers in certain metropolitan areas in
the western United States through Electric Lightwave, Inc., or ELI, our
85%-owned subsidiary. We also provide public utility services including natural
gas transmission and distribution, electric transmission and distribution and
water distribution and wastewater treatment services to primarily rural and
suburban customers throughout the United States.
With approximately 1.4 million telephone access lines in 17 states we were
the eighth largest local access wireline telephone provider in the United States
as of December 31, 2000. Upon consummation of telephone access line acquisitions
contracted for during 1999 and 2000, we expect to be the sixth largest ILEC in
the United States with approximately 3.1 million telephone access lines in 27
states. In fiscal years 1999 and 2000, revenues from our ILEC services segment
were $903.2 million and $963.7 million, respectively, and adjusted EBITDA
(operating income plus depreciation and amortization) was $327.1 million and
$434.1 million, respectively. Revenues in fiscal years 1999 and 2000, from our
CLEC services segment were $187.0 million and $244.0 million, respectively, and
adjusted EBITDA was $(57.6) million and $1.8 million, respectively.
In 1999, we announced plans to divest our public utilities services
segments. Consistent with this effort, we have contracted to sell our water and
wastewater utility services segments and portions of our gas and electric
properties and are presently engaged in the sale of or are seeking buyers for
our remaining gas and electric utility services segments. Pending these
divestitures, we continue to provide gas and electric utility services and water
and wastewater services.
STRATEGY
We are transforming ourselves into a company that focuses exclusively on
providing telecommunications services. We primarily operate in rural areas and
small and medium-sized towns where, we believe we have a competitive advantage
because of our relatively larger size, greater resources, local focus and lower
levels of competition. We believe that our operations in these areas will
provide us with steady revenue growth and margin enhancement opportunities. To
reach our objective we intend to:
- Target telecommunications needs of rural areas and small and medium-sized
towns and cities;
- Continue to achieve economies of scale through clustering and increase
operational efficiencies;
- Increase penetration rates of the services offered to our markets;
- Retain existing customers and attract new customers through the
introduction of new technology and improved marketing and customer
services;
- Strengthen and build strategic partnerships as a member of the local
communities;
S-3
- Increase utilization of our CLEC's high-capacity, installed, fiber-optic
infrastructure; and
- Divest our public utilities services segment's business and assets.
ACQUISITIONS
We have entered into agreements with Verizon Communications Inc., Qwest
Communications International Inc. and Global Crossing, Ltd. to acquire
approximately 2.0 million telephone access lines. Through March 31, 2001, we had
closed on the acquisition of 334,500 of these telephone access lines and we
expect to close on the acquisition of the remaining 1,700,200 of these telephone
access lines in 2001 and 2002.
Between May and December 1999, we announced agreements to purchase from
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. As of March 31, 2001, we had closed on
the purchase of approximately 317,500 telephone access lines. We expect that the
remainder of the Verizon acquisitions, which are subject to various state and
federal regulatory approvals, will close on a state-by-state basis in 2001.
In June 1999, we announced agreements to purchase from 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. As of March 31, 2001, we had closed on the purchase of
approximately 17,000 telephone access lines for approximately $38.0 million in
cash. The remainder of the Qwest acquisitions, covering 539,800 access lines,
are subject to the satisfaction of certain closing conditions including, without
limitation, financial representations and warranties and the receipt of
governmental consents. We have already received all required state regulatory
approvals other than from Minnesota. Subject to satisfaction of the required
closing conditions, we anticipate closing the acquisitions on a state-by-state
basis. We cannot assure you that all required closing conditions will be
satisfied. We are currently in discussions with Qwest relating to the
satisfaction of closing conditions. We do not believe that the failure to close
any or all of the remaining Qwest acquisitions will have a material adverse
effect on us, including our ability to implement our telecommunications
strategies.
In July 2000, we announced an agreement to purchase from Global Crossing
100% of the stock of the Frontier Corp. and its related subsidiaries, which own
approximately 1.1 million 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.
DIVESTITURES
Through our public utilities services segments, we provide gas and electric,
water and wastewater utility services. We have entered into agreements to sell a
substantial portion of our public utilities services segments for
$1,380.0 million in cash and $90.0 million in debt. In certain cases, we may
remain contingently liable for certain liabilities assumed by the relevant
purchasers.
Our water and wastewater segment is under contract to be sold to American
Water Works, Inc., one of the largest water utilities in the country, for
$745.0 million in cash and the assumption of $90.0 million in debt by the
purchaser. This transaction is expected to close in the second half of 2001
S-4
following the receipt of regulatory approval. This contract may be terminated if
the required approvals are not received by September 30, 2001.
Our natural gas operations in Louisiana are under contract to be sold to
Atmos Energy Corporation for $365.0 million in cash plus the assumption of
certain liabilities. We received approval for this sale from the Louisiana
Public Service Commission in April 2001 and this transaction is expected to
close by the end of June 2001.
Our electric utility division in Hawaii is under contract to be sold to
Kauai Island Electric Co-op for $270.0 million in cash plus the assumption of
certain liabilities by the purchaser. In August 2000, the Hawaii Public Utility
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 or filing a new application. Our
agreement for the sale of this division may be terminated if regulatory approval
is not received before February 2002.
We intend to sell our remaining public utility assets, which include gas
operations in Arizona, Colorado, and Hawaii and electric utility operations in
Arizona and Vermont. We expect to use the proceeds of pending and future public
utilities' sales to preserve the strength of our balance sheet and provide
additional financing for acquisitions.
RECENT DEVELOPMENTS
CONCURRENT ISSUANCE OF COMMON STOCK
We are offering concurrently an aggregate of 21,875,000 shares of our common
stock (or 25,156,250 shares if the underwriters' over-allotment option is
exercised in full) in a separate offering which we expect to make at or about
the same time as this offering. The offering of the Equity Units is not
contingent on the completion of the offering of our common stock.
SALE OF NOTES
We issued on May 23, 2001 an aggregate of $1,750.0 million of notes,
consisting of $700.0 million principal amount of 8.50% notes due 2006 and
$1,050.0 million principal amount of 9.25% notes due 2011. The net proceeds of
the offering were approximately 1,718.2 million. Of these net proceeds,
approximately $650.0 million was used to temporarily repay existing credit
facilities and the remainder is being held for general corporate purposes and to
finance acquisitions. The amount of the commitment under our existing bank
credit facility was reduced by the amount of the net proceeds of that offering.
We have received:
- from Moody's Investor Service, Inc. ("Moody's") a rating of Baa2 for our
long-term debt on review for a possible downgrade;
- from Standard and Poor's Rating Services, a division of McGraw-Hill, Inc.
("S&P"), a rating of BBB for our corporate credit and senior unsecured
debt with a negative outlook; and
- from Fitch IBCA, Duff & Phelps ("Fitch") a rating of BBB for our senior
unsecured debt with a stable outlook.
Each of Moody's, S&P and Fitch has indicated that, in order to maintain our
current ratings, we should undertake action to strengthen our balance sheet. We
are contemplating the issuance of additional equity, refinancing our credit
facility indebtedness, and perhaps raising capital by selling some significant
telecommunications assets to one or more joint ventures, which we expect to
operate. Market conditions permitting, we may undertake one or more of these or
other actions to preserve the strength of our balance sheet and maintain our
current ratings.
S-5
FIRST QUARTER RESULTS
In the quarter ended March 31, 2001, consolidated first quarter revenue from
our continuing operations, which includes revenue from our telecommunications,
electric and gas operations, was $624.3 million, an increase of 39% from the
first quarter of 2000. Our ILEC and CLEC operations (telecommunications and ELI
operations) accounted for $349.1 million and $282.4 million of first quarter
2001 and 2000 revenue, respectively. Our gas operations accounted for
$220.5 million and $113.1 million of the first quarter 2001 and 2000 revenue,
respectively. Our electric operations accounted for $54.7 million and
$53.2 million of the first quarter 2001 and 2000 revenue, respectively.
Our first quarter 2001 adjusted EBITDA (operating income plus depreciation
and amortization) from continuing operations totaled $193.6 million, a 44%
increase over first quarter 2000 adjusted EBITDA of $134.7 million. The current
and year-ago quarters include $153.1 million and $95.5 million in adjusted
EBITDA, respectively, from our telecommunications and ELI operations. The first
quarter 2001 and first quarter 2000 also include $28.8 million and
$24.5 million in adjusted EBITDA, respectively, from our gas operations and
$11.7 million and $14.7 million, respectively, in adjusted EBITDA from our
electric operations.
See "Where You Can Find More Information" in the accompanying prospectus and
"Incorporation of Documents by Reference" in this prospectus supplement and the
accompanying prospectus.
S-6
THE OFFERING
UNLESS WE STATE OTHERWISE, THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
DOES NOT INCLUDE 2,400,000 EQUITY UNITS THAT MAY BE ISSUED TO THE UNDERWRITERS
PURSUANT TO THEIR OVER-ALLOTMENT OPTION. IF THE UNDERWRITERS EXERCISE THEIR
OVER-ALLOTMENT OPTION IN FULL, THE TOTAL NUMBER OF EQUITY UNITS OFFERED WILL BE
18,400,000.
Each Equity Unit consists of a purchase
contract and a senior note................... We are offering 16,000,000 Equity Units. The stated
amount and issue price of each Equity Unit is $25.
Each Equity Unit consists of two parts:
- a purchase contract, also referred to herein as a
warrant, for shares of our common stock; and
- a senior note due August 17, 2006 issued by
Citizens.
The senior note will be pledged to secure the Equity
Unit holder's obligation to Citizens under the
purchase contract to purchase shares of our common
stock.
You will receive from each Equity Unit:
- interest on the senior note at the rate of 6 3/4%
of the aggregate principal amount per year, or
$1.6875 per year, paid quarterly; and
- on or prior to August 17, 2004, between 1.7218 and
2.0661 shares of our common stock, depending on the
average closing price of our common stock over the
20-trading day period ending on the third trading
day prior to August 17, 2004.
You will be required under the purchase
contract to purchase our common stock on or
prior to August 17, 2004..................... We will enter into a warrant agreement, also referred
to herein as a purchase contract agreement, with The
Chase Manhattan Bank, which will act as agent for all
of the holders of the Equity Units (as well as the
holders of the Treasury Equity Units discussed
below). For each Equity Unit that you purchase, a
contract will be issued under the purchase contract
agreement which relates to a contractual arrangement
between you and Citizens for the purchase of shares
of our common stock. We refer to this contract as a
"warrant" or a "purchase contract." Under each
purchase contract, you will be obligated to purchase,
at an aggregate purchase price of $25 for each of
your Equity Units, a variable number of shares of our
common stock. You will not be obligated to pay the
purchase price until August 17, 2004 which has been
set as the "purchase contract settlement date" and
you will not receive shares of our common stock until
you have settled your purchase contract. You may use
the proceeds from the remarketing of your senior
notes to satisfy your payment obligations under
purchase contracts, as more fully described later
under "Description of the Purchase Contracts" in this
S-7
prospectus supplement. Instead of participating in a
remarketing, you will have the option of settling
your purchase contract by settling early or by
delivering to the remarketing agent or its designated
entity the treasury portfolio in the case of an
initial remarketing or by settling with cash in the
case of a final remarketing.
The number of shares of our common stock that you
will be entitled to receive on the purchase contract
settlement date will depend on the average closing
price of a share of our common stock over a
20-trading day period ending on the third trading day
prior to the purchase contract settlement date. Until
you actually purchase the shares of our common stock,
your obligation to pay the $25 purchase price will be
secured by the senior note that is part of your
Equity Unit, which will be pledged to our collateral
agent as collateral. In certain cases, the treasury
portfolio, as described below, may replace the senior
notes as collateral. You may substitute as collateral
a U.S. treasury security for the senior note. See
"Description of the Equity Units--Creating Treasury
Equity Units by Substituting a Treasury Security for
Senior Notes" in this prospectus supplement.
The Equity Units will include senior notes... In addition to the purchase contract, each Equity
Unit also will include senior notes. Citizens will
pay you cash interest payments of $0.4219 each
quarter on each senior note. The interest rate may be
reset as a result of the successful initial
remarketing on or after May 17, 2004 and will in any
event be reset on August 17, 2004. Interest will
accrue at a rate of 6 3/4% per annum from the date
the Equity Units are issued and will continue until
August 17, 2004. If you continue to own your senior
note after the purchase contract settlement date,
Citizens will pay you interest on your senior note
from August 17, 2004 until August 17, 2006, at a
reset rate that is described in more detail in this
prospectus supplement.
The senior notes will be pledged as
collateral under the pledge agreement........ When you purchase an Equity Unit, the senior note
that is part of that Equity Unit will be pledged as
collateral to secure your obligation to purchase our
common stock on or prior to August 17, 2004 under the
related purchase contract. We will enter into a
pledge agreement under which The Bank of New York
will act as collateral agent and will hold your
senior note as collateral until the $25 purchase
price under the purchase contract has been paid. In
the event of a successful initial remarketing or a
tax event redemption as described below, the
applicable ownership interest in the treasury
portfolio may replace your senior note security as
collateral. Even though your senior note will be
pledged as collateral, you will be the beneficial
owner of it.
S-8
You can create Treasury Equity Units by
substituting treasury securities for senior
notes........................................ For every 40 Equity Units you own, you may create 40
Treasury Equity Units by substituting U.S. treasury
securities for the senior notes that are a part of
the Equity Units.
A Treasury Equity Unit will consist of:
- a warrant, also referred to herein as a purchase
contract, for shares of our common stock that is
identical to the purchase contract that is a part
of the Equity Unit; and
- a 1/40 undivided beneficial ownership interest in a
related zero-coupon U.S. treasury security (CUSIP
No. 912820 BK 2), the "treasury security," that
has a principal amount at maturity of $1,000, and
matures on August 16, 2004, the business day prior
to the purchase contract settlement date.
To create Treasury Equity Units, you must:
- for each group of 40 Treasury Equity Units you wish
to create, transfer the treasury security to The Bank
of New York, which is acting as the securities
intermediary under the pledge agreement. The
treasury security will become the collateral
supporting your obligation to purchase shares of
our common stock, and the collateral agent will
release the 40 senior notes from the pledge. Those
senior notes then will be separately tradable and
will no longer be a part of an Equity Unit or a
Treasury Equity Unit; and
- pay to the collateral agent any fees or expenses
incurred in connection with the substitution.
You may substitute a treasury security for senior
notes at any time prior to or on the fifth business
day preceding August 17, 2004, unless the treasury
portfolio has replaced the senior notes as a result
of a successful initial remarketing or a tax event
redemption, as described below. Interest payments
will continue to be made on the senior note. Because
each treasury security has a principal amount at
maturity of $1,000, you may substitute Treasury
Equity Units for Equity Units only in multiples of
40. For each group of 40 Equity Units you own, after
substitution of the U.S. treasury securities for the
senior notes that are part of the 40 Equity Units,
you will receive 40 Treasury Equity Units.
S-9
A Treasury Equity Unit holder will be
required to accrue original issue discount on
the Treasury Equity Unit and will not receive
any cash payments on the Treasury Equity
Unit......................................... If you own Treasury Equity Units, because the
treasury security included in the Treasury Equity
Units is a zero-coupon security, you generally should
be required for U.S. federal income tax purposes to
include in gross income each year your allocable
share of original issue discount or acquisition
discount on the treasury security that accrues in
such year. You, however, will not receive any
payments on the Treasury Equity Units. See "Material
United States Federal Income Tax Consequences" in
this prospectus supplement.
So long as you continue to own any senior notes,
whether as part of an Equity Unit or as a separate
security, you will receive interest payments on them,
separately from the Treasury Equity Units.
You can recreate Equity Units................ If you own 40 Treasury Equity Units, you may recreate
40 Equity Units at any time prior to or on the
seventh business day preceding August 17, 2004,
unless the treasury portfolio has replaced the
treasury securities as a component of the Treasury
Equity Units as a result of a successful initial
remarketing or a tax event redemption described
below. Because the treasury security has a principal
amount at maturity of $1,000, you must recreate
Equity Units from Treasury Equity Units in multiples
of 40. For each group of 40 Treasury Equity Units you
submit, you will receive 40 Equity Units.
To recreate Equity Units, you must:
- for each group of 40 Equity Units you wish to
recreate, transfer 40 senior notes to the securities
intermediary. The securities intermediary then will
deposit the senior notes in the collateral account
maintained under the pledge arrangement. The 40
senior notes will become the collateral supporting
your obligation to purchase the shares of our
common stock, and the collateral agent will release
the treasury security from the pledge. That
treasury security then will be separately tradable
and will not be part of any Equity Unit; and
- pay to the collateral agent any fees or expenses
incurred in connection with the substitution.
The senior notes will first be remarketed on
the third business day immediately preceding
May 17, 2004................................. Unless you deliver the treasury portfolio to the
remarketing agent or its designated entity prior to
or on the fifth business day preceding May 17, 2004,
your senior note will first be remarketed on the
third business day immediately preceding May 17,
2004. The remarketing agent will use its
S-10
reasonable efforts to obtain a price of approximately
100.25% of the purchase price for the treasury
portfolio, which is described below. The portion of
the proceeds from the remarketing equal to the
treasury portfolio purchase price will be applied to
purchase the treasury portfolio. The treasury
portfolio will be substituted for the senior notes
and will be pledged to the collateral agent to secure
your obligation to purchase our common stock under
the purchase contracts. When paid at maturity, the
principal amount of the treasury portfolio equal to
the principal amount of the senior notes will
automatically be applied to satisfy your obligation
to purchase common stock under your purchase
contract. In addition, the remarketing agent may
deduct, as a remarketing fee, an amount not exceeding
25 basis points (.25%) of the treasury portfolio
purchase price from any amount of the proceeds in
excess of the treasury portfolio purchase price. The
remarketing agent will then remit to you any
remaining portion of the proceeds for your benefit.
If the first remarketing fails, the
remarketing agent will use its reasonable
efforts to remarket the senior notes from
time to time thereafter prior to the tenth
business day preceding August 17, 2004....... If the first remarketing of the senior notes on the
third business day preceding May 17, 2004 fails
because the remarketing agent cannot obtain a price
of at least 100% of the treasury portfolio purchase
price or a condition precedent to the remarketing has
not been satisfied, the senior notes will continue to
be a component of the Equity Units, and the
remarketing agent in its discretion will use its
reasonable efforts to remarket all of the senior
notes from time to time thereafter prior to the tenth
business day preceding August 17, 2004. Instead of
participating in an additional remarketing, you can
deliver the treasury portfolio to the remarketing
agent or its designated entity on the second business
day immediately preceding any additional remarketing.
We refer to any such additional remarketing as an
"additional remarketing" and, collectively with the
first remarketing on the third business day preceding
May 17, 2004, as the "initial remarketing." In
addition, we refer to any initial remarketing that is
successful as the "successful initial remarketing,"
and any such remarketing will follow the procedures
set forth above for the first remarketing. In the
event that all attempts for an initial remarketing
fail because the remarketing agent cannot obtain a
price of at least 100% of the treasury portfolio
purchase price or a condition precedent to the
remarketing has not been satisfied, a final
remarketing will be attempted on the third business
day preceding
S-11
August 17, 2004, as described below. All senior notes
must be remarketed if any senior notes are
remarketed.
If all attempts for an initial remarketing
have failed, there will be a final
remarketing on the third business day
preceding August 17, 2004.................... If all attempts for an initial remarketing have
failed, the senior notes will be remarketed on the
third business day preceding August 17, 2004 except
for the senior notes of Equity Unit holders who have
notified the purchase contract agent on or prior to
the fifth business day before August 17, 2004 of
their intention to pay cash in order to satisfy their
obligations under the related purchase contracts. We
refer to this remarketing as the "final remarketing."
In this final remarketing the remarketing agent will
use its reasonable efforts to obtain a price of
approximately 100.25% of the aggregate principal
amount of these senior notes. The portion of the
proceeds from the remarketing equal to the aggregate
principal amount of the senior notes remarketed will
automatically be applied to satisfy in full the
Equity Unit holders' obligations to purchase common
stock under the related purchase contracts. The
remarketing agent will deduct as a remarketing fee an
amount not exceeding 25 basis points (.25%) of the
aggregate principal amount of the remarketed senior
notes from any amount of the proceeds in excess of
the aggregate principal amount of the remarketed
senior notes. The remarketing agent will remit any
remaining portion of the proceeds for the benefit of
the holder.
If the final remarketing fails and you are an
Equity Unit holder, we may take possession of
your senior note security.................... If the remarketing agent is unable to remarket the
senior notes on the third business day prior to
August 17, 2004, because the remarketing agent cannot
obtain a price of at least 100% of the aggregate
principal amount of the senior notes or a condition
precedent to the remarketing has not been satisfied
(a "failed final remarketing"), we will exercise our
rights as a secured party, and we may take possession
of your senior note. Your obligation to purchase
shares of our common stock would then be fully
satisfied, and you will receive the shares of our
common stock.
The "treasury portfolio" is a portfolio of
zero-coupon U.S. Treasury securities......... The treasury portfolio is a portfolio of zero-coupon
U.S. Treasury securities consisting of:
- interest or principal strips of U.S. Treasury
securities that mature on or prior to August 16,
2004, in an aggregate amount equal to the aggregate
principal amount of the senior notes included in
Equity Units; and
- with respect to the scheduled interest payment date
on the senior notes that occurs on August 17, 2004,
in the
S-12
case of a successful remarketing of the senior
notes, or with respect to each scheduled interest
payment date on the senior notes that occurs after
the tax event redemption date and on or before
August 17, 2004, in the case of a tax event
redemption, interest or principal strips of U.S.
Treasury securities that mature on or prior to that
interest payment date in an aggregate amount equal
to the aggregate interest payment that would be due
on that interest payment date on the aggregate
principal amount of the senior notes included in
Equity Units assuming no reset of the interest rate
on the senior notes.
If you hold a senior note that is not part of
an Equity Unit, you may choose to have it
remarketed................................... If you hold a senior note that is not part of an
Equity Unit, you may choose to have your senior note
remarketed in a remarketing. Equity Unit holders who
have created Treasury Equity Units or who have
settled their purchase contracts early may make such
an election, as more fully described in this
prospectus supplement.
Instead of participating in a remarketing,
you may settle your purchase contract by
paying cash for early settlement, paying cash
prior to or on the business day preceding
August 17, 2004, or upon termination......... Instead of participating in a remarketing, holders of
Equity Units or Treasury Equity Units may satisfy
their obligations, or their obligations will be
terminated, under the purchase contracts:
- by delivering the treasury portfolio to the
remarketing agent or its designated entity;
- through early settlement by the early delivery of
cash to the purchase contract agent in the manner
described in this prospectus supplement;
- in the case of holders of Equity Units, by settling
the related purchase contract with cash prior to or
on the fourth business day preceding August 17,
2004 pursuant to prior notification to the purchase
contract agent; or
- without any further action, upon the termination of
the purchase contracts as a result of bankruptcy,
insolvency or reorganization of Citizens.
You may settle the purchase contract early by
paying cash.................................. You may satisfy your obligation to purchase shares of
our common stock under your purchase contract at any
time prior to 5:00 p.m., New York City time, on the
fifth business day preceding the purchase contract
settlement date, unless the treasury portfolio has
replaced the senior note securities as a component of
the Equity Units as a
S-13
result of a successful initial remarketing or a tax
event redemption.
If you choose to settle early:
- you must deliver to the purchase contract agent a
notice indicating your election to "settle early";
- together with the notice, you must deliver to the
purchase contract agent a cash payment of $25 for
each purchase contract being settled early at any
time, but in no event later than 5:00 p.m., New
York City time, on the fifth business day preceding
the purchase contract settlement date;
- you will receive, for each Equity Unit or Treasury
Equity Unit you surrender, both:
- shares of our common stock, regardless of the
market price of the shares of our common stock
on the date of early settlement and subject to
anti-dilution adjustments; and
- your senior note (if you are settling an Equity
Unit) or a 1/40 undivided beneficial interest in
a treasury security (if you are settling a
Treasury Equity Unit); and
- you will retain the right to have your senior notes
securities remarketed.
You may settle Treasury Equity Units early only in
multiples of 40 Treasury Equity Units. You may not
settle your Equity Units early if the treasury
portfolio has replaced the senior notes as a
component of the Equity Units as a result of a
successful initial remarketing or a tax event
redemption.
You may settle the purchase contract by
paying cash prior to or on the fourth
business day preceding August 17, 2004 but
you must notify us prior to or on the fifth
business day preceding August 17, 2004....... Under the purchase contract that is part of each
Equity Unit, you will be obligated to pay $25 to
purchase shares of our common stock. To satisfy this
obligation, you may notify the purchase contract
agent at any time prior to or on the fifth business
day preceding August 17, 2004 of your intention to
make a cash payment and make a payment prior to or on
the fourth business day preceding August 17, 2004.
If you make this election, you must make a cash
payment of $25 for every purchase contract you wish
to settle and you will receive shares of our common
stock on the purchase contract settlement date at the
applicable settlement rate described below. Your
senior note will then be released from the pledge
arrangement and delivered to you. If you are a
Treasury Equity Unit holder you must
S-14
settle your purchase contracts with cash in groups of
40 purchase contracts.
You may settle the purchase contracts by
paying cash or having the proceeds of the
pledged treasury security applied............ Unless you notify the purchase contract agent that
you will pay cash for the shares of our common stock,
upon settlement of the purchase contracts related to
the Treasury Equity Units, we will receive the
proceeds of the treasury securities being held as
collateral under the pledge arrangement. This will
satisfy your obligation to deliver the purchase price
for the shares of our common stock, and you will
receive the shares of our common stock.
The purchase contracts will terminate upon
certain bankruptcy events.................... The purchase contracts will terminate automatically
if certain bankruptcy, insolvency or reorganization
events occur with respect to Citizens. If the
purchase contracts terminate upon one of these
events, then your rights and obligations under your
purchase contracts also will terminate, including
your obligation to pay for, and your right to
receive, shares of our common stock. Upon
termination, you will receive your senior note, your
treasury security or your ownership interest in the
treasury portfolio, as the case may be, free of our
security interest.
Upon settlement, you will receive a number of
shares of our common stock equal to the
settlement rate.............................. Unless you elect to settle your purchase contracts
early, the number of shares of our common stock you
will receive under your purchase contracts will
depend on the average of the closing price per share
of our common stock as reported on the New York Stock
Exchange for the 20-trading day period ending on the
third trading day prior to the purchase contract
settlement date.
The number of shares of our common stock you will
receive for each purchase contract will be determined
as follows:
- if the average closing price during the 20-trading
day period equals or exceeds $14.52, you will receive
1.7218 shares of our common stock;
- if the average closing price during the 20-trading
day period is less than $14.52 but greater than
$12.10, you will receive a number of shares of our
common stock having a value, based on the average
closing price during that period, equal to $25; and
- if the average closing price during the 20-trading
day period is less than or equal to $12.10, you will
receive 2.0661 shares of our common stock.
During the term of the Equity Units, we will adjust
the settlement rate to reflect the occurrence of
certain stock
S-15
dividends, stock splits and other events that could
affect the market price of our common stock. See
"Description of the Purchase Contracts--Anti-Dilution
Adjustments."
The interest rate on the senior notes will be
reset in connection with the initial
remarketing or, if it fails, the final
remarketing.................................. After the senior notes have been remarketed, the
interest rate on the senior notes will be the rate
determined by the remarketing agent in the
remarketing, which shall not be below the initial
rate and which we call the "reset rate." Unless a tax
event redemption has occurred as described in this
prospectus supplement under "Description of the
Senior Notes--Optional Redemption--Tax Events" the
interest rate on the senior notes will be reset on
the third business day immediately preceding May 17,
2004, and the reset rate will become effective on
May 17, 2004. However, if the remarketing of the
senior notes on that day results in a failed
remarketing, then the remarketing agent will use its
reasonable efforts in its discretion to remarket all
of the senior notes from time to time before the
tenth business day preceding August 17, 2004. The
interest rate will then be reset on the date that is
three business days following any such successful
initial remarketing. If the initial remarketing
fails, the interest rate will instead be reset in
connection with the final remarketing on the third
business day immediately preceding August 17, 2004,
and that reset rate will become effective on
August 17, 2004. We refer to any date on which the
reset rate is reset in connection with an initial
remarketing or the final remarketing as the "reset
effective date." In the event of a failed final
remarketing, the reset rate will be determined
pursuant to a formula, as described under
"Description of the Senior Notes--Failed Final
Remarketing" in this prospectus supplement, and this
rate will become effective on August 17, 2004.
The reset rate will be determined by the
reset agent.................................. In the case of a reset following the successful
initial remarketing on the third business day
immediately preceding May 17, 2004, or such other
date that is three business days following the date
of any subsequent successful initial remarketing, the
reset rate on the senior note securities will be a
rate determined by the reset agent as the rate the
senior note securities should bear in order for the
senior notes included in the Equity Units to have an
approximate aggregate market value on the reset date
of 100.25% of the treasury portfolio purchase price.
In the case of a reset following a successful final
remarketing on the third business day immediate
preceding August 17, 2004, the reset rate will be a
rate determined by the reset agent as the rate the
senior note securities should bear in order for each
senior note to have an approximate market
S-16
value of 100.25% of the aggregate principal amount of
the senior note.
Optional Remarketing......................... On or prior to the second business day immediately
preceding the remarketing date, but no earlier than
the interest payment date immediately preceding the
remarketing date, holders of senior notes that are
not part of Equity Units may elect to have their
senior notes remarketed in the same manner as senior
notes that are a part of Equity Units by delivering
their senior notes along with a notice of election to
the custodial agent designated by us.
Investing in the Equity Units is not the
equivalent of investing in Citizens common
stock........................................ The Equity Units reflect an interest in two
securities, the purchase contract and the senior
notes. In addition, because the number of shares of
our common stock that you will receive upon
settlement of a purchase contract may decline by
approximately 17% as the applicable market value
increases, the Equity Units give you less opportunity
for equity appreciation than you would have if you
invested directly in our common stock.
The Equity Units have been approved for
listing on The New York Stock Exchange
subject to official notice of issuance....... The Equity Units have been approved for listing on
The New York Stock Exchange under the symbol "CZB"
subject to official notice of issuance. If Treasury
Equity Units are created and then traded at a volume
that satisfies applicable exchange listing
requirements, we will try to list them on the
national securities exchanges or associations on
which the Equity Units are then listed or quoted.
However, we have no obligation to do so.
Material United States federal income tax
consequences................................. Because an Equity Unit will consist of a purchase
contract and a senior note, the purchase price of
each Equity Unit will be allocated between the
purchase contract and the related senior note in
proportion to their relative fair market values at
the time of purchase. We expect that as of the date
of issuance of the Equity Units, the fair market
value of each purchase contract will be $0.27 and the
fair market value of each senior note will be $24.73.
Because a portion of the $25 purchase price for the
Equity Units is allocated to the purchase contract,
the senior notes have been issued with original issue
discount.
The senior notes also generally will be treated as
contingent payment debt instruments. As such, you
will be required to accrue all stated interest as
original issue discount in respect of the senior
notes at the "comparable yield".
S-17
If you own Treasury Equity Units, you will be
required to include in taxable income your allocable
share of original issue discount or acquisition
discount on the treasury securities that accrues in
each year.
There is no statutory, judicial or administrative
authority directly addressing the tax treatment of
Equity Units or instruments similar to Equity Units.
Please consult your own tax advisor concerning the
tax consequences of an investment in Equity Units.
For additional information, see "Material United
States Federal Income Tax Consequences."
Use of proceeds.............................. The net proceeds we receive for the sale of the
Equity Units, together with the net proceeds from our
concurrent offering of 21,875,000 shares of our
common stock, after payment of estimated offering
expenses, will be approximately $638.1 million
(without regard to the exercise of any over-allotment
option). We plan to use the net proceeds from the
sale of the Equity Units and, if successful, the net
proceeds from our concurrent offering of our common
stock to finance our acquisitions and for general
corporate purposes. Until we use the proceeds of the
offerings in this manner, we may temporarily use them
to make short-term investments. The amount of the
commitment under our existing bank credit facility
will be reduced by the amount of the net proceeds of
this offering and our concurrent common stock
offering.
S-18
RISK FACTORS
IN CONSIDERING WHETHER TO PURCHASE OUR EQUITY UNITS, YOU SHOULD CAREFULLY
CONSIDER ALL THE INFORMATION WE HAVE INCLUDED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. IN PARTICULAR, YOU
SHOULD CAREFULLY CONSIDER THE RISK FACTORS DESCRIBED BELOW AND IN THE
ACCOMPANYING PROSPECTUS AND READ "FORWARD-LOOKING STATEMENTS" IN THE
ACCOMPANYING PROSPECTUS.
BECAUSE AN EQUITY UNIT CONSISTS OF A PURCHASE CONTRACT TO ACQUIRE SHARES OF
OUR COMMON STOCK AND A SENIOR NOTE ISSUED BY US, YOU ARE MAKING AN INVESTMENT
DECISION WITH REGARD TO OUR COMMON STOCK AND THE SENIOR NOTES, AS WELL AS THE
EQUITY UNITS.
YOU WILL BEAR THE ENTIRE RISK OF A DECLINE IN THE PRICE OF OUR COMMON STOCK.
The value of the shares of our common stock that you will receive upon the
settlement of the purchase contract is not fixed, but rather will depend on the
market value of our common stock near the time of settlement. Because the price
of our common stock fluctuates, the aggregate market value of the shares of our
common stock receivable upon settlement of the purchase contract may be more or
less than the stated amount of $25 per Equity Unit. If the market value of our
common stock near the time of settlement is less than $12.10, the aggregate
market value of the shares issuable upon settlement generally will be less than
the stated amount of the purchase contract, and your investment in an Equity
Unit may result in a loss. Therefore, you will bear the full risk of a decline
in the market value of our common stock prior to settlement of the purchase
contract.
YOU WILL RECEIVE ONLY A PORTION OF ANY APPRECIATION IN THE MARKET PRICE OF
OUR COMMON STOCK.
The aggregate market value of the shares of our common stock receivable upon
settlement of the purchase contract generally will exceed the stated amount of
$25 only if the average closing price of our common stock over the 20-trading
day period ending on the third trading day prior to August 17, 2004 equals or
exceeds the threshold appreciation price of $14.52 (which represents an
appreciation of 20% over the reference price of $12.10). Therefore, during the
period prior to settlement, an investment in an Equity Unit affords less
opportunity for equity appreciation than a direct investment in shares of our
common stock. If the applicable average closing price exceeds the reference
price of $12.10 but is less than the threshold appreciation price of $14.52, you
will realize no equity appreciation on our common stock for the period during
which you own the purchase contract. Furthermore, if the applicable average
closing price equals or exceeds the threshold appreciation price, you will
realize only 83.3% of the equity appreciation on the common stock underlying the
Equity Units for that period above the threshold appreciation price. See
"Description of the Purchase Contracts--General" in this prospectus supplement
for an illustration of the number of shares of our common stock that you would
receive at various average market prices.
THE MARKET PRICE OF OUR COMMON STOCK IS UNPREDICTABLE.
We cannot predict whether the market price of our common stock will rise or
fall. Many factors influence the trading price of our common stock, including
those described in other risk factors.
The market for our common stock likely will influence, and be influenced by,
any market that develops for the Equity Units. For example, investors'
anticipation of the distribution into the market of the additional shares of our
common stock issuable upon settlement of the purchase contracts could depress
the price of our common stock and increase its volatility. If the underwriters
exercise in full their over-allotment option, the largest number of shares of
our common stock issuable upon settlement of the purchase contracts would
constitute approximately 14% of our common stock outstanding as of March 31,
2001 after giving effect to the common shares issuable upon settlement of the
purchase contracts. The price of our common stock also could be affected by
possible sales of our common stock by investors who view the Equity Units as a
more attractive means of equity
S-19
participation in us and by hedging or arbitrage trading activity that may
develop involving the Equity Units and our common stock.
THE EQUITY UNITS AND TREASURY EQUITY UNITS PROVIDE LIMITED SETTLEMENT RATE
ADJUSTMENTS.
The number of shares of our common stock issuable upon settlement of each
purchase contract is subject to adjustment only for stock splits and
combinations, stock dividends and certain other specified transactions. The
number of shares of our common stock issuable upon settlement of each purchase
contract is not subject to adjustment for other events, such as employee stock
option grants, offerings of our common stock for cash or in connection with
certain acquisitions or other transactions, which may adversely affect the price
of our common stock. The terms of the Equity Units do not restrict our ability
to offer our common stock in the future or to engage in other transactions that
could dilute the value of our common stock. We have no obligation to consider
the interests of the holders of the Equity Units for any reason.
YOU HAVE NO SHAREHOLDER RIGHTS WITH RESPECT TO OUR COMMON STOCK.
Until you acquire shares of our common stock upon settlement of your
purchase contract, you will have no rights with respect to the shares of our
common stock, including voting rights, rights to respond to tender offers and
rights to receive any dividends or other distributions on our common stock. Upon
settlement of your purchase contract, you may be entitled to exercise the rights
of a holder of shares of our common stock only as to actions for which the
applicable record date occurs after the settlement date.
WE MAY REDEEM OUR SENIOR NOTES UPON OCCURRENCE OF A TAX EVENT.
We may redeem our senior notes in whole at any time upon the occurrence and
continuation of a tax event. See "Description of the Senior Notes--Optional
Redemption--Tax Event" in this prospectus supplement. A tax event redemption is
likely to constitute a taxable event to the beneficial owners of the senior
notes. If a tax event redemption occurs prior to settlement under the purchase
contracts, we will distribute the applicable redemption price to the securities
intermediary, in liquidation of the Equity Unit holders' interests. The
securities intermediary will use the redemption amount to purchase the treasury
portfolio as substitute collateral on behalf of the holders of the Equity Units.
It is impossible to predict the impact that the substitution of the treasury
portfolio as collateral for the redeemed senior notes will have on the market
price of the Equity Units.
YOUR PLEDGED SENIOR NOTE WILL BE ENCUMBERED BY OUR SECURITY INTEREST.
Although you will be the beneficial owner of a senior note, that senior note
will be pledged with the collateral agent to secure your obligation under the
purchase contract. Therefore, for so long as the purchase contract remains in
effect, you will not be allowed to withdraw your pledged senior note from this
pledge arrangement, except to create Treasury Equity Units or if you settle the
purchase contract early or settle the purchase contracts for cash on the
purchase contract settlement date as described in this prospectus supplement.
SECONDARY TRADING IN THE EQUITY UNITS, TREASURY EQUITY UNITS AND THE SENIOR
NOTES MAY BE LIMITED.
It is impossible to predict how the Equity Units, the Treasury Equity Units
and the senior notes will trade in the secondary market or whether the market
for any of these securities will be liquid or illiquid. There currently is no
secondary market for any of these securities, and we cannot assure you as to the
liquidity of any trading market that may develop, the ability of holders to sell
their securities in that market or whether any such market will continue.
S-20
The Equity Units have been approved for listing on The New York Stock
Exchange under the symbol "CZB", subject to official notice of issuance.
However, listing on The New York Stock Exchange will not guarantee the depth or
liquidity of the market for the Equity Units. If holders of the Equity Units
create Treasury Equity Units, the liquidity of the Equity Units could be
adversely affected. Moreover, if the number of Equity Units falls below The New
York Stock Exchange's requirement for continued listing (whether as a result of
the creation of Treasury Equity Units or otherwise), the Equity Units could be
delisted from The New York Stock Exchange, or trading in the Equity Units could
be suspended.
If Treasury Equity Units are traded to a sufficient extent to meet
applicable exchange listing requirements, we will try to list those securities
on the same national securities exchanges as the Equity Units. However, we do
not presently plan to list the Treasury Equity Units or the senior notes on any
securities exchange and have no obligation to do so in the future. The
underwriters have advised us that they presently intend to make a market for the
Equity Units, the Treasury Equity Units and the senior notes. However, they are
not obligated to do so and they may discontinue any market making at any time.
THE PURCHASE CONTRACT AGREEMENT IS NOT QUALIFIED UNDER THE TRUST INDENTURE
ACT AND THEREFORE THE OBLIGATIONS OF THE PURCHASE CONTRACT AGENT ARE LIMITED.
The purchase contract agreement is not an indenture under the Trust
Indenture Act. Therefore, the purchase contract agent will not qualify as a
trustee under the Trust Indenture Act, and you will not benefit from the
protections of that law, such as disqualification of an indenture trustee for
"conflicting interests," provisions preventing an indenture trustee from
improving its own position at the expense of the security holders and the
requirement that an indenture trustee deliver reports at least annually with
respect to the indenture trustee and the securities. Under the terms of the
purchase contract agreement, the purchase contract agent will have only limited
obligations to you as a holder of the Equity Unit.
THE DELIVERY OF SECURITIES IS SUBJECT TO POTENTIAL DELAY.
The purchase contracts will terminate automatically if certain bankruptcy,
insolvency or reorganization events occur with respect to us. If the purchase
contracts terminate upon any of these events, your rights and obligations under
your purchase contracts also will terminate, including your obligation to pay
for, and your right to receive, shares of our common stock. Upon termination,
you will receive your senior note, your treasury security or your ownership
interest in the treasury portfolio. Notwithstanding the automatic termination of
the purchase contracts, procedural delays may affect the timing of the delivery
to you of your securities being held as collateral under the pledge agreement.
YOU MAY HAVE TO INCLUDE INTEREST FROM THE SENIOR NOTES IN YOUR TAXABLE
INCOME BEFORE YOU RECEIVE CASH.
Because a portion of the $25 price paid by holders of Equity Units is
allocated to the purchase contracts, the senior notes will be issued with
original issue discount for federal income tax purposes. Further, the senior
notes generally will be subject to the contingent payment rules, so all the
interest on the senior notes will be original issue discount for United States
federal income tax purposes. Consequently, original issue discount will accrue
from the issue date of the senior notes and possibly will be included in your
taxable income for United States federal income tax purposes before you receive
a cash payment to which the income is attributable.
THE TRADING PRICE OF THE SENIOR NOTES MAY NOT FULLY REFLECT THE VALUE OF
THEIR ACCRUED BUT UNPAID INTEREST.
The senior notes may trade at a price that does not fully reflect the value
of their accrued but unpaid interest. If you dispose of your senior notes
between record dates for interest payments, you will be required to include in
gross income the daily portions of original issue discount through the date of
S-21
disposition in income as ordinary income, and to add this amount to your
adjusted tax basis in the senior notes disposed of. To the extent the selling
price is less than your adjusted tax basis, you will recognize a loss.
USE OF PROCEEDS
The net proceeds we receive for the sale of the Equity Units, together with
the net proceeds from our concurrent offering of 21,875,000 shares of our common
stock, after payment of estimated offering expenses, will be approximately
$638.1 million (without regard to the excercise of any over-allotment option).
We plan to use the net proceeds from the sale of the Equity Units and, if
successful, the net proceeds from our concurrent offering of our common stock to
finance our acquisitions and for general corporate purposes. Until we use the
proceeds of the offerings in this manner, we may temporarily use them to make
short-term investments. The amount of the commitment under our existing bank
credit facility will be reduced by the amount of the net proceeds of this
offering and our concurrent common stock offering.
S-22
CAPITALIZATION
The following table represents our historical cash, short-term investments
and capitalization as of March 31, 2001 and such items: (a) adjusted for our
May 18, 2001 offering of $1.75 billion aggregate principal amount of senior
notes and the use of proceeds thereof; (b) further adjusted for this offering
and our concurrent offering of common stock (assuming the underwriters do not
exercise their over-allotment option in either offering) and (c) on a pro forma
basis to reflect the offerings and the acquisitions, divestitures and remaining
assumed financings described in the footnotes below and elsewhere in this
prospectus supplement and the accompanying prospectus. This table should be read
in conjunction with the Consolidated Selected Financial and Operating Data and
notes and the consolidated financial statements and footnotes included elsewhere
or incorporated by reference in this prospectus supplement and the accompanying
prospectus.
FURTHER ADJUSTED FOR
ADJUSTED THIS OFFERING
FOR THE AND THE
SENIOR CONCURRENT
NOTES COMMON STOCK
ACTUAL OFFERING(1) OFFERING(2) PRO FORMA(3)
-------- ----------- -------------------- ------------
(UNAUDITED IN MILLIONS)
Cash..................................... $ 28.4 $1,096.6 $1,734.7 $ 30.3(4)
Short-term investments................... 5.6 5.6 5.6 5.6
-------- -------- -------- --------
Total cash and short-term
investments.......................... 34.0 1,102.2 1,740.3 35.9
======== ======== ======== ========
Long-term debt, net of current portion
Senior notes........................... -- 1,750.0 1,750.0 1,750.0
Senior notes (component of Equity
Units)............................... -- -- 400.0 400.0
Debentures............................. 850.0 850.0 850.0 850.0
Industrial development revenue bonds... 385.5 385.5 385.5 385.5
Senior unsecured notes................. 361.0 361.0 361.0 361.0
Citizens' bank credit facility......... 650.0 -- -- 1,300.0(4)
ELI bank credit facility............... 400.0 400.0 400.0 400.0
Rural Utilities Service Loan
Contracts............................ 85.6 85.6 85.6 85.6
Other long-term debt and capital
leases............................... 103.0 103.0 103.0 219.1(5)
Commercial paper notes payable......... 146.4 146.4 146.4 146.4
-------- -------- -------- --------
Total long-term debt................. 2,981.5 4,081.5 4,481.5 5,897.6
-------- -------- -------- --------
Equity forward contracts................. 150.0 150.0 150.0 150.0
-------- -------- -------- --------
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities....... 201.3 201.3 201.3 201.3
-------- -------- -------- --------
Shareholders' equity
Common stock........................... 66.6 66.6 72.1 72.1
Additional paid-in capital............. 1,482.0 1,482.0 1,731.9 2,206.9(4)
Retained earnings...................... 252.9 252.9 252.9 657.5(6)
Accumulated other comprehensive income
(loss)............................... (19.2) (19.2) (19.2) (19.2)
Treasury stock......................... (52.0) (52.0) (52.0) (52.0)
-------- -------- -------- --------
Total shareholders' equity........... 1,730.3 1,730.3 1,985.7 2,865.3
======== ======== ======== ========
Total capitalization................. $5,063.1 $6,163.1 $6,818.5 $9,114.2
======== ======== ======== ========
------------------------
(1) Reflects the proceeds of the May 18, 2001 senior notes offering totalling
$1.75 billion. These notes were offered in two maturities: $700.0 million
due May 2006 and $1.05 billion due May 2011. Adjusted for the senior notes
offering, cash is assumed to increase by $1,068.2 million representing the
net proceeds of $1,718.2 million (after deducting estimated offering
expenses $31.8 million) net of the repayment of amounts outstanding under
Citizens' bank credit facility of $650.0 million.
S-23
(2) Reflects the proceeds of this offering and the proposed concurrent offering
of common stock totaling $664.7 million. Cash is assumed to increase by
$638.1 million (after deducting estimated offering expenses of
$26.6 million). Senior notes increased by $400.0 million for the amount of
the note component of the equity units (which includes debt discount of
$4.3 million representing the value of the warrant component). Common stock
increased by $5.5 million representing the number of shares of common stock
issued in the concurrent offering (21.9 million shares) times the par value
per share ($.25). Additional paid-in capital increased by $4.3 million for
the value of the warrant component of the equity units plus $245.6 million
representing the gross proceeds of the concurrent offering of common stock
of $264.7 million less the par value of the common stock of $5.5 million and
estimated expenses of $13.6 million.
(3) Reflects estimated cash, short-term investments and capitalization of the
Company following the total proposed acquisition financings and the proposed
acquisitions totaling $5,334.8 million for the purchase of all remaining
telephone access lines including the Verizon Arizona and California access
lines; the Qwest Arizona, Colorado, Idaho/Washington, Iowa, Minnesota,
Montana, Nebraska and Wyoming access lines; and the Frontier Incumbent Local
Exchange businesses.
(4) The purchase price for the proposed acquisitions is assumed to have been
financed at March 31, 2001 with the proceeds from the sales of our public
utilities services properties and the issuance of debt and equity. The
following represents the total assumed financings of the proposed
acquisitions:
($ IN MILLIONS)
---------------
Estimated after-tax proceeds from sales of public utilities
services properties....................................... $1,855.4
Proceeds from the May 18, 2001 senior notes offering after
estimated offering expenses and repayment of Citizens'
bank credit facility...................................... 1,068.2
Estimated proceeds from this offering and the concurrent
offering of common stock after estimated offering
expenses.................................................. 638.1
Additional long-term borrowings............................. 1,300.0
Issuance of additional equity............................... 475.0
Purchase of remaining acquisitions.......................... (5,334.8)
--------
Increase to cash............................................ $ 1.9
========
To the extent the proceeds from the sale of our public utilities
services properties are $100.0 million (pre-tax) greater than the amount
assumed above, the difference would result in our having to issue
$61.4 million less in debt or equity. We may obtain a portion of our future
long-term borrowings and issuances of additional equity through one or more
joint venture entities.
(5) The increase in other long-term debt represents $116.1 million of Frontier
debt to be assumed in the Frontier acquisition based on Frontier's long-term
debt as of December 31, 2000 (the latest date such information is
available).
(6) The proposed acquisitions are assumed to have been partially financed with
anticipated net cash proceeds from the sales of our public utilities
services properties, net of estimated income taxes on the assumed gain
related thereto. For pro forma presentation purposes, cash proceeds from
these dispositions are assumed to be the contract prices 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
$404.6 million reflecting the estimated net book gain on the sale of these
properties based on their carrying values at March 31, 2001. All long-term
financing of our public utilities properties, $134.4 million as of
March 31, 2001, was assumed to be transferred to the purchasers of such
properties and is not reflected as long-term debt in the capitalization
table above. In certain cases, we may remain contingently liable for certain
liabilities assumed by the relevant purchasers.
S-24
CITIZENS COMMUNICATIONS COMPANY
CONSOLIDATED SELECTED FINANCIAL AND OPERATING DATA
The following tables contain consolidated selected financial data of
Citizens as of the dates and for the periods indicated. Historical financial
data for the years ended December 31, 1998, 1999 and 2000 have been derived from
our audited financial statements. The unaudited pro forma financial information
has been prepared to illustrate the effects of the acquisitions and divestitures
described elsewhere as if the acquisitions had been completed as of
December 31, 2000 for the pro forma balance sheet or at the beginning of the
periods presented for the pro forma statements of operations. The unaudited pro
forma financial information does not reflect any joint venture we may enter into
as a financing vehicle. If we enter into a joint venture, we expect our
financial condition and results will materially differ from the results
indicated by the pro forma financial information.
The following data should be read together with the section under the
headings "Capitalization" and "Pro Forma Combined Financial Statements." For
copies of the financial data we incorporate by reference, see "Where You Can
Find More Information."
S-25
CONSOLIDATED FINANCIAL DATA
QUARTER ENDED PRO FORMA YEAR
YEAR ENDED DECEMBER 31, MARCH 31, ENDED
-------------------------------- -------------------------- DECEMBER 31,
1998 1999 2000 2000 2001 2000
-------- -------- ---------- ---------- ---------- --------------
($ IN MILLIONS, EXCEPT PER-SHARE AND OTHER FINANCIAL AND
OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Continuing Operations:(1)
Revenue..................... $1,448.6 $1,598.2 $ 1,802.3 $ 448.7 $ 624.3 $ 2,464.2
Operating expenses:
Cost of services and other
operating expenses........ 1,052.1 1,213.8 1,253.0 310.0 425.2 1,361.5
Depreciation and
amortization.............. 245.5 310.2 387.6 96.0 105.7 900.0
Acquisition assimilation
expenses.................. -- 3.9 39.9 4.0 5.5 --
-------- -------- ---------- ---------- ---------- ----------
Total operating expenses.... 1,297.6 1,527.9 1,680.5 410.0 536.4 2,261.5
-------- -------- ---------- ---------- ---------- ----------
Operating income (loss)..... 151.0 70.3 121.8 38.7 87.9 202.7
Investment and other income,
net(2).................... 6.1 243.9 3.4 5.6 2.8 58.4
Minority interest........... 14.0 23.2 12.2 6.3 -- 12.2
Interest expense............ 101.8 119.7 187.4 37.6 61.5 445.3
Income tax expense
(benefit)................. 16.7 74.9 (16.1) 4.8 9.0 (12.8)
Dividends on convertible
preferred securities, net
of income tax benefit..... 6.2 6.2 6.2 1.6 1.6 6.2
-------- -------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations..... 46.4 136.6 (40.1) 6.6 18.6 (165.4)
Income from discontinued
operations, net of tax.... 13.0 7.9 11.7 0.7 1.1 --
Cumulative effect of change
in accounting principle,
net of income tax and
related minority
interest.................. (2.3) -- -- -- -- --
-------- -------- ---------- ---------- ---------- ----------
Net income (loss)........... $ 57.1 $ 144.5 $ (28.4) $ 7.3 $ 19.7 $ (165.4)
======== ======== ========== ========== ========== ==========
SELECTED CASH FLOW SUMMARY
DATA:
Net cash provided by
continuing operating
activities................ $ 249.9 $ 370.3 $ 308.1 $ 113.3 $ 152.8 --
Net cash used for investing
activities................ (531.1) (552.9) (1,273.6) (157.6) (79.5) --
Net cash provided by (used
for) financing
activities................ 307.7 192.0 1,017.4 43.3 (71.4) --
S-26
QUARTER ENDED PRO FORMA YEAR
YEAR ENDED DECEMBER 31, MARCH 31, ENDED
-------------------------------- -------------------------- DECEMBER 31,
1998 1999 2000 2000 2001 2000
-------- -------- ---------- ---------- ---------- --------------
($ IN MILLIONS, EXCEPT PER-SHARE AND OTHER FINANCIAL AND
OPERATING DATA)
ADJUSTED EBITDA AND CAPITAL
EXPENDITURE DATA(3):
Adjusted EBITDA from
continuing operations....... $ 396.4 $ 380.5 $ 509.4 $ 134.7 $ 193.6 $ 1,102.7
Adjusted EBITDA from
discontinued operations..... 39.6 36.2 45.6 8.0 8.7 --
-------- -------- ---------- ---------- ---------- ----------
Total Company Adjusted
EBITDA...................... 436.0 416.7 555.0 142.7 202.3 1,102.7
-------- -------- ---------- ---------- ---------- ----------
Adjusted EBITDA from
continuing operations
excluding acquisition
assimilation expenses....... 396.4 384.5 549.3 138.7 199.1 1,102.7
-------- -------- ---------- ---------- ---------- ----------
Capital expenditures from
continuing operations....... 426.6 419.2 463.9 133.2 96.9 --
Capital expenditures from
assets held for sale........ 64.6 110.5 80.9 17.0 17.1 --
Capital expenditures from
discontinued operations..... 30.8 25.4 73.5 11.8 10.0 --
-------- -------- ---------- ---------- ---------- ----------
Total Company capital
expenditures................ 522.0 555.1 618.3 162.0 124.0 --
-------- -------- ---------- ---------- ---------- ----------
OTHER FINANCIAL DATA:
Consolidated ratio of
earnings(4) to fixed
charges(5).................. 1.28 2.22 .62 1.40 1.05 --
Consolidated ratio of earnings
to combined fixed charges
and preferred dividends..... 1.26 2.14 .64 1.39 1.05 --
BALANCE SHEET DATA (AS OF
DECEMBER 31, OR MARCH 31):
Cash and investments.......... $ 496.1 $ 628.5 $ 284.4 $ 590.6 $ 215.9 --
Net plant (continuing
operations)................. 2,705.1 2,888.7 3,509.8 2,947.0 3,498.7 --
Assets held for sale.......... 1,033.2 1,060.7 1,212.3 1,064.6 1,222.8 --
Assets of discontinued
operations.................. 598.4 595.7 673.5 587.7 674.0 --
Total assets.................. 5,292.9 5,771.7 6,955.0 5,758.5 6,811.7 --
Long-term debt (continuing
operations)................. 1,775.3 2,107.5 3,062.3 2,193.5 2,981.5 --
Shareholders' equity.......... 1,792.8 1,919.9 1,720.0 1,869.5 1,730.3 --
OTHER OPERATING DATA:
Access lines (as of
December 31, or
March 31)................... 951,500 996,800 1,371,200 1,007,250 1,387,293 3,071,400
Switched access minutes of use
(in millions)............... 4,526 5,224 5,755 1,323 1,811 N/A
------------------------
(1) Consists of our ILEC services segment, Electric Lightwave, Inc., our CLEC
services segment, and our natural gas and electric businesses. The natural
gas and electric businesses are presented in continuing operations in
selected income statement data and as assets held for sale in the balance
sheet data. We are reporting our water and wastewater businesses as
discontinued operations. All prior years have been restated to conform to
current presentation. Continuing operations reflect the elimination of
intercompany transactions.
S-27
(2) 1999 includes a gain of $69.5 million ($42.9 million net of tax) on the sale
of Centennial Cellular stock, a gain of $67.6 million ($41.7 million net of
tax) on the disposition of Century Communications Corp. ("Century") stock
and a gain of $83.9 million ($51.8 million net of tax) on the disposition of
an interest in a cable joint venture.
(3) Adjusted EBITDA is defined as operating income plus depreciation and
amortization.
(4) Earnings consist of income (loss) before income taxes plus fixed charges.
(5) Fixed charges consist of interest charges and an amount representing the
interest factor included in rentals (generally assumed to be one-third) and
preference security dividend requirements. Excluding the 1999 pre-tax
non-operating gains, described in Note 2, the ratio of earnings to fixed
charges for 1999 is 0.67 and the ratio of earnings to combined fixed charges
and preferred dividends for 1999 is 0.69.
SELECTED SECTOR FINANCIAL AND OPERATING DATA
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
------------------------------ -------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
($ IN MILLIONS, EXCEPT OPERATING DATA)
ILEC SERVICES SEGMENT
Total revenue.................................... $835.0 $903.2 $ 963.7 $ 226.3 $ 287.3
Adjusted EBITDA(1)............................... 336.2 327.1 434.1 102.0 149.0
Operating income................................. 154.5 100.9 157.9 32.0 62.7
Capital expenditures............................. 201.5 227.2 350.2 107.9 76.6
Access lines (as of December 31,
or March 31, in thousands)..................... 951.5 996.8 1,371.2 1,007.3 1,387.3
Switched access minutes of use (in millions)..... 4,526 5,224 5,755 1,323.0 1,811.0
ELECTRIC LIGHTWAVE, INC.(2)
Total revenue.................................... $100.9 $187.0 $ 244.0 $ 56.8 $ 62.6
Adjusted EBITDA(1)............................... (56.8) (57.6) 1.8 (6.7) 3.3
Operating loss................................... (73.8) (94.1) (59.9) (19.4) (15.6)
Capital expenditures(3).......................... 200.0 185.4 112.3 25.4 20.3
Route miles (as of December 31,
or March 31, in thousands)..................... 3.1 4.1 5.9 5.9 5.9
Fiber miles (as of December 31,
or March 31, in thousands)..................... 181.4 214.9 297.3 293.7 296.2
GAS SEGMENT
Total revenue.................................... $325.4 $307.0 $ 374.8 $ 113.1 $ 220.5
Adjusted EBITDA(1)............................... 66.3 54.2 27.5 24.5 28.8
Operating income................................. 42.2 32.0 8.3 18.1 28.6
Capital expenditures............................. 45.8 67.0 51.5 7.8 7.4
ELECTRIC SEGMENT
Total revenue.................................... $190.3 $203.8 $ 223.1 $ 53.2 $ 54.7
Adjusted EBITDA(1)............................... 49.8 55.8 43.9 14.7 11.7
Operating income................................. 27.1 30.3 15.2 7.9 11.7
Capital expenditures............................. 18.9 43.5 29.5 9.2 9.6
------------------------
(1) Adjusted EBITDA is defined as operating income plus depreciation and
amortization.
(2) Electric Lightwave, Inc. (ELI) is our 85%-owned publicly traded subsidiary.
This information is presented as-reported for ELI and does not reflect the
elimination of intercompany transactions.
(3) Excludes capitalized leases.
S-28
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock trades on The New York Stock Exchange under the symbol
"CZN." The reported last sale price of our common stock on June 13, 2001 on the
New York Stock Exchange was $12.10 per common share. The following table sets
forth the quarterly high and low sales prices for our common stock as reported
by The New York Stock Exchange for the periods indicated.
STOCK PRICES
-------------------
HIGH LOW
-------- --------
FISCAL YEAR 1999:
First Quarter............................................. $8.50 $7.25
Second Quarter............................................ 11.50 7.69
Third Quarter............................................. 12.44 10.88
Fourth Quarter............................................ 14.31 10.94
FISCAL YEAR 2000:
First Quarter............................................. 17.06 13.75
Second Quarter............................................ 18.00 14.31
Third Quarter............................................. 19.00 13.00
Fourth Quarter............................................ 15.31 12.50
FISCAL YEAR 2001:
First Quarter............................................. 15.88 12.05
Second Quarter (through June 13, 2001).................... 15.00 11.28
The amount and timing of dividends payable on common stock are within the
sole discretion of our Board of Directors. Our Board of Directors discontinued
the payment of dividends after the payment of the December 1998 stock dividend.
S-29
DESCRIPTION OF THE EQUITY UNITS
The following is a summary of some of the terms of the Equity Units. This
summary together with the summary of some of the terms of the purchase
contracts, the purchase contract agreement, the pledge agreement and the senior
notes set forth under the captions "Description of the Purchase Contracts,"
"Certain Provisions of the Purchase Contracts, the Purchase Contract Agreement
and the Pledge Agreement" and "Description of the Senior Notes" in this
prospectus supplement contains a description of all of the material terms of the
Equity Units but is not complete. We refer you to the forms of the warrant
agreement also referred to herein as a purchase contract agreement, the pledge
agreement and the senior notes that have been filed or incorporated by reference
as exhibits to the registration statement of which this prospectus supplement
and the accompanying prospectus form a part. This summary supplements the
description of purchase contracts and description of debt securities in the
accompanying prospectus, and, to the extent it is inconsistent, replaces the
description in the accompanying prospectus.
GENERAL
Each Equity Unit offered will initially consist of:
- a warrant, also referred to herein as a purchase contract, under which the
holder will purchase from Citizens on the purchase contract settlement
date, or upon early settlement, for $25, a number of shares of our common
stock equal to the applicable settlement rate described under "Description
of the Purchase Contracts-General" or "Description of the Purchase
Contracts-Early Settlement" in this prospectus supplement, as the case may
be; and
- a Citizens senior note having a principal amount of $25 or, following a
successful remarketing of the Citizens senior notes on the third business
day immediately preceding the purchase contract settlement date or the
occurrence of a tax event redemption prior to the purchase contract
settlement date, the appropriate applicable ownership interest in a
portfolio of zero-coupon U.S. Treasury securities.
The senior notes will be pledged under the pledge agreement to secure your
obligation to purchase our common stock under the purchase contract.
In addition, if a tax event occurs prior to the purchase contract settlement
date, we may cause the senior notes to be redeemed. Upon such a "tax event
redemption," the securities intermediary will use the proceeds from the
redemption of the senior notes to purchase a portfolio of zero-coupon U.S.
treasury securities that mature one business day prior to the purchase contract
settlement date and on the various dates upon which payments would have been due
on the senior notes. We refer to this portfolio of treasury securities as the
"treasury portfolio." The treasury portfolio will be substituted for the
redeemed senior notes as the collateral securing the holders obligations under
the related purchase contracts.
An "applicable ownership interest" means, with respect to an Equity Unit
that includes the treasury portfolio,
(1) a 1/40, or 2.5%, undivided beneficial ownership interest in a $1,000
face amount of a principal or interest strip in a U.S. treasury security
included in the treasury portfolio that matures on or prior to August 16,
2004; and
(2) for the scheduled interest payment on the senior notes that occurs
on August 17, 2004, in the case of a successful remarketing of the senior
notes, or for each scheduled interest payment date on the senior notes that
occurs after the date upon which the senior notes are redeemed due to a tax
event and on or before August 17, 2004, in the case of a tax event
redemption, a 0.04756%, undivided beneficial ownership interest in a $1,000
face amount of a principal or
S-30
interest strip in a U.S. treasury security included in the treasury
portfolio that matures on or prior to such date.
Unless otherwise specified, references in this prospectus supplement to the
"applicable ownership interest of the treasury portfolio" have the meaning
specified in clause (1) of this definition.
The purchase price of each Equity Unit will be allocated between the
purchase contract and the senior note in proportion to their respective fair
market values at the time of purchase. We expect that, at the time of issuance,
the fair market value of each purchase contract will be $0.27 and the fair
market value of each senior note will be $24.73.
So long as the units are in the form of Equity Units, either the related
senior notes or the applicable ownership interest of the treasury portfolio, as
applicable, will be pledged to the collateral agent to secure the holders'
obligations to purchase our common stock under the related purchase contracts.
CREATING TREASURY EQUITY UNITS BY SUBSTITUTING A TREASURY SECURITY FOR SENIOR
NOTES
Unless the treasury portfolio has replaced the senior notes as a component
of the Equity Units as the result of a successful initial remarketing of the
senior notes or a tax event redemption, each holder of 40 Equity Units may
create 40 Treasury Equity Units by substituting for the senior notes that are a
part of the Equity Unit a treasury security having an aggregate principal amount
at maturity equal to $1,000.
Each Treasury Equity Unit will consist of:
- a purchase contract under which the holder will purchase from us on the
purchase contract settlement date or upon early settlement, for $25, a
number of shares of our common stock equal to the applicable settlement
rate; and
- a 1/40 undivided beneficial ownership interest in a related zero-coupon
U.S. treasury security (CUSIP No. 912820 BK 2) with a principal amount at
maturity equal to $1,000 and maturing on August 16, 2004, the business day
preceding the purchase contract settlement date.
The term "business day" means any day other than a Saturday or a Sunday or a
day on which banking institutions in New York City are authorized or required by
law or executive order to remain closed or a day on which The Chase Manhattan
Bank, acting as indenture trustee with respect to the senior notes, is closed
for business.
The Treasury Equity Unit holder's beneficial ownership in the treasury
security will be pledged under the pledge agreement to secure the holder's
obligation to purchase shares of our common stock under the purchase contracts.
To create 40 Treasury Equity Units, a holder is required to:
- deposit with The Bank of New York, which is acting as the securities
intermediary under the pledge agreement, a zero-coupon U.S. treasury
security (CUSIP No. 912820 BK 2) with a principal amount at maturity equal
to $1,000 and maturing on August 16, 2004; and
- transfer to the purchase contract agent 40 Equity Units, accompanied by a
notice stating that the holder of the Equity Units has deposited a
treasury security with the securities intermediary, and requesting that
the purchase contract agent instruct the collateral agent to release the
related 40 senior notes.
Upon receiving instructions from the purchase contract agent and
confirmation of receipt of the treasury security by the securities intermediary,
the collateral agent will cause the securities
S-31
intermediary to release the related 40 senior notes from the pledge and deliver
them to the purchase contract agent, free and clear of our security interest.
The purchase contract agent then will:
- cancel the 40 Equity Units;
- transfer the related 40 senior notes to the holder; and
- deliver 40 Treasury Equity Units to the holder.
A treasury security will be substituted for the senior notes and will be
pledged to the collateral agent to secure the holder's obligation to purchase
shares of our common stock under the related purchase contracts. These senior
notes thereafter will trade separately from the Treasury Equity Units.
Holders who create Treasury Equity Units or recreate Equity Units, as
discussed below, will be responsible for any fees or expenses payable to the
collateral agent in connection with substitutions of collateral. See "Certain
Provisions of the Purchase Contracts, the Purchase Contract Agreement and the
Pledge Agreement-Miscellaneous" in this prospectus supplement.
RECREATING EQUITY UNITS
Unless the treasury portfolio has replaced the senior notes as a component
of the Equity Units as the result of a successful initial remarketing of the
senior notes or a tax event redemption, each holder of Treasury Equity Units
will have the right, at any time on or prior to the seventh business day
immediately preceding August 17, 2004, to substitute for the related treasury
securities held by the collateral agent senior notes in an aggregate stated
liquidation amount equal to the aggregate amount payable at stated maturity of
the treasury securities. This substitution would recreate Equity Units, and the
applicable treasury securities would be released to the holder.
Because treasury securities are issued in integral multiples of $1,000,
holders of Treasury Equity Units may make this substitution only in integral
multiples of 40 Treasury Equity Units. If the treasury portfolio has replaced
the senior notes as a component of the Equity Units as the result of a
successful initial remarketing of the senior notes or a tax event redemption,
holders of the Treasury Equity Units will not be able to recreate any Equity
Units.
Each holder of 40 Treasury Equity Units may recreate 40 Equity Units by:
- depositing with the securities intermediary 40 senior notes; and
- transferring to the purchase contract agent 40 Treasury Equity Units,
accompanied by a notice stating that such holder has deposited 40 senior
notes with the securities intermediary and requesting that the purchase
contract agent instruct the collateral agent to release the related
treasury security.
Upon receiving instructions from the purchase contract agent and
confirmation of receipt of the senior notes by the securities intermediary, the
collateral agent will cause the securities intermediary to release the related
treasury security from the pledge and deliver it to the purchase contract agent,
on behalf of the holder, free and clear of our security interest. The purchase
contract agent then will:
- cancel the 40 Treasury Equity Units;
- transfer the related treasury security to the holder; and
- deliver 40 Equity Units to the holder.
The substituted senior notes or the applicable ownership interest in the
treasury portfolio will be pledged with the collateral agent to secure the
Equity Unit holder's obligation to purchase our common stock under the related
purchase contracts.
S-32
CURRENT PAYMENTS
The payments on the Equity Units will consist of cash interests payable on
the senior notes or amounts payable in respect of the treasury portfolio, as
applicable, payable at the rate of 6 3/4% of the stated principal amount per
year, payable quarterly in arrears on February 17, May 17, August 17 and
November 17, starting August 17, 2001. In addition, the senior notes generally
will be issued with original issue discount and generally will be subject to the
contingent payment rules. Consequently, you generally will be required to accrue
original issue discount (including by treating all stated interest as original
issue discount) on the senior notes as discussed under "Material United States
Federal Income Tax Consequences."
If a holder of Equity Units creates Treasury Equity Units by substituting a
treasury security for the senior notes, such holder will not receive any
distributions on the Treasury Equity Units. If a Treasury Equity Unit holder
continues to hold the senior note that has been separated from the Equity Unit,
such holders will continue to receive distributions on the senior note.
LISTING OF THE EQUITY UNITS AND THE TREASURY EQUITY UNITS
The Equity Units have been approved for listing on The New York Stock
Exchange under the symbol "CZB," subject to official notice of issuance. If
Treasury Equity Units are created and then traded to a sufficient extent that
applicable exchange listing requirements are met, we will try to list them on
the national securities exchanges or associations on which the Equity Units are
then listed or quoted, but we have no obligation to do so. We do not intend to
list the senior notes on any securities exchange.
REPURCHASE OF THE EQUITY UNITS
We may purchase from time to time any of the Equity Units offered by this
prospectus supplement and the accompanying prospectus that are then outstanding
by tender, in the open market, by private agreement or otherwise.
S-33
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
The following description is a summary of some of the terms of the warrants
which are also referred to herein as purchase contracts. It supplements the
description of purchase contracts in the accompanying prospectus and, to the
extent it is inconsistent, replaces the description in the accompanying
prospectus. The purchase contracts will be issued pursuant to the warrant
agreement between us and The Chase Manhattan Bank, as warrant agent, also
referred to herein as the purchase contract agreement and the purchase contract
agent, respectively. The description of the purchase contracts and the purchase
contract agreement in this prospectus supplement and the accompanying prospectus
contain a summary of their material terms but do not purport to be complete, and
reference is hereby made to the form of the warrant agreement also referred to
herein as a purchase contract agreement, that is filed as an exhibit or
incorporated by reference to the registration statement.
On the business day immediately preceding August 17, 2004, unless:
- a holder of Equity Units or Treasury Equity Units has settled the related
purchase contracts prior to or on the fifth business day or second
business day, respectively, preceding August 17, 2004 through the early
delivery of cash to the purchase contract agent in the manner described
under "-Early Settlement":
- a holder of Equity Units that include senior notes has settled the related
purchase contracts with separate cash prior to or on the fourth business
day immediately preceding August 17, 2004 pursuant to prior notice given
in the manner described under "-Notice to Settle with Cash";
- a holder of Equity Units has had the senior notes related to the holder's
purchase contracts successfully remarketed in the manner described under
"Description of the Senior Notes-Remarketing" below;
- a holder of Equity Units has delivered the treasury portfolio to the
remarketing agent in the manner described under "Description of the Senior
Notes-Remarketing" below, or
- an event described under "-Termination" below has occurred,
then,
- in the case of Equity Units, unless the treasury portfolio has replaced
the senior notes as a component of the Equity Units as the result of a
successful initial remarketing of the senior notes as described under
"-Remarketing" below or a tax event redemption, we will exercise our
rights as a secured party to dispose of the senior notes in accordance
with applicable law; and
- in the case of Treasury Equity Units or, in the event that the treasury
portfolio has replaced the senior notes as a component of the Equity Units
as the result of a successful initial remarketing of the senior notes or a
tax event redemption, in the case of Equity Units, the principal amount of
the related treasury securities, or the appropriate applicable ownership
interest of the treasury portfolio, as applicable, when paid at maturity,
will automatically be applied to satisfy in full the holder's obligation
to purchase common stock under the related purchase contracts.
The common stock will then be issued and delivered to the holder or the
holder's designee, upon presentation and surrender of the certificate evidencing
the Equity Units or Treasury Equity Units and payment by the holder of any
transfer or similar taxes payable in connection with the issuance of the common
stock to any person other than the holder.
Each purchase contract that is a part of an Equity Unit or a Treasury Equity
Unit will obligate its holder to purchase, and Citizens to sell, on the purchase
contract settlement date (unless the purchase contract terminates prior to that
date or is settled early at the holder's option), a number of shares of our
common stock equal to the settlement rate, for $25 in cash. The number of shares
of our common stock issuable upon settlement of each purchase contract on the
purchase contract settlement date
S-34
(which we refer to as the "settlement rate") will be determined as follows,
subject to adjustment as described under "-Anti-Dilution Adjustments" below:
- if the average of the closing prices of our common stock on the 20 trading
days ending on the third trading day prior to the purchase contract
settlement date is equal to or greater than $14.52, the "threshold
appreciation price," then each purchase contract will be settled for
1.7218 shares;
- if the average of the closing prices of our common stock on the 20 trading
days ending on the third trading day prior to the purchase contract
settlement date, is less than $14.52 but greater than the closing price of
our common stock on the date of this prospectus supplement, the "reference
price," then each purchase contract will be settled for a number of shares
having a value, based on such 20 trading day average, equal to $25; and
- if the average of the closing prices of our common stock on the 20 trading
days ending on the third trading day prior to the purchase contract
settlement date is less than or equal to the reference price, then each
purchase contract will be settled for 2.0661 shares.
Except under the limited circumstances described under "-Anti-Dilution
Adjustments" below, if you elect to settle your purchase contract early, the
number of shares of our common stock issuable upon settlement of such purchase
contract will be 1.7218 shares.
FOR ILLUSTRATIVE PURPOSES ONLY, THE FOLLOWING TABLE SHOWS THE FRACTION OF A
SHARE OF OUR COMMON STOCK ISSUABLE UPON SETTLEMENT OF EACH PURCHASE CONTRACT AT
VARIOUS ASSUMED VALUES FOR THE AVERAGE OF THE CLOSING PRICES OF OUR COMMON STOCK
ON THE 20 TRADING DAYS ENDING ON THE THIRD TRADING DAY PRIOR TO THE PURCHASE
CONTRACT SETTLEMENT DATE, THE "APPLICABLE MARKET VALUE." The $14.52 threshold
appreciation price represents an appreciation of 20% above the reference price
of $12.10. The table assumes that there will be no adjustments to the settlement
rate described under "-Anti-Dilution Adjustments" below. We cannot assure you
that the actual applicable market value will be within the range set forth
below. A holder of an Equity Unit or a Treasury Equity Unit will receive on the
purchase contract settlement date, in settlement of each purchase contract, the
following fractions of a share of our common stock at the following assumed
applicable market values:
ASSUMED APPLICABLE FRACTION OF A SHARE OF
MARKET VALUE OUR COMMON STOCK
------------------ ----------------------
$6........................................................ 2.0661
$8........................................................ 2.0661
$10....................................................... 2.0661
$12....................................................... 2.0661
$14....................................................... 1.7857
$16....................................................... 1.7218
$18....................................................... 1.7218
$20....................................................... 1.7218
$22....................................................... 1.7218
$24....................................................... 1.7218
As the above table illustrates, if, on the purchase contract settlement
date, the applicable market value of a share of our common stock is greater than
or equal to the threshold appreciation price of $14.52, we would be obligated to
deliver 1.7218 shares of our common stock for each purchase contract. As a
result, the holder would receive 83.3% of the appreciation in the market value
of the shares of our common stock underlying each purchase contract above
$14.52. If, on the purchase contract settlement date, the applicable market
value of a share of our common stock is less than the threshold appreciation
price of $14.52 but greater than the reference price of $12.10, we would be
obligated to deliver a number of shares of our common stock having a value,
based on the applicable market value, equal to $25 and we would retain all
appreciation in the market value of the shares of
S-35
our common stock underlying each purchase contract for that period. If, on the
purchase contract settlement date, the applicable market value of a share of our
common stock is less than or equal to the reference price of $12.10, we would be
obligated to deliver in settlement of the purchase contract 2.0661 shares of our
common stock for each purchase contract, regardless of the market price of the
shares of our common stock. As a result, the holder would realize the entire
loss on the decline in market value of the shares of our common stock underlying
each purchase contract for that period.
The term "closing price" of shares of our common stock means, on any date of
determination (1) the closing sale price (or, if no closing sale price is
reported, the reported last sale price) of shares of our common stock on The New
York Stock Exchange on such date or, if shares of our common stock are not
listed for trading on The New York Stock Exchange on any such date as reported
in the composite transactions for the principal United States securities
exchange on which the shares of our common stock are so listed, or if shares of
our common stock are not so listed on a United States national or regional
securities exchange, as reported by the Nasdaq National Market or (2) if shares
of our common stock are not so reported, the last quoted bid price for the
shares of our common stock in the over-the-counter market as reported by the
National Quotation Bureau or a similar organization, or, if such bid price is
not available, the average of the mid-point of the last bid and ask prices of
shares of our common stock on such date from at least three nationally
recognized independent investment banking firms retained for this purpose by us.
The term "trading day" means a day on which the shares of our common stock
(1) are not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of business and
(2) has traded at least once on the national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of the shares of our common stock.
We will not issue any fractional shares of our common stock upon settlement
of a purchase contract. Instead of a fractional share, the holder will receive
an amount of cash equal to such fraction multiplied by the applicable market
value. If, however, a holder surrenders for settlement at one time more than one
purchase contract, then the number of shares of our common stock issuable
pursuant to such purchase contract will be computed based upon the aggregate
number of purchase contracts surrendered.
Prior to the settlement of a purchase contract, the shares of our common
stock underlying each purchase contract will not be outstanding, and the holder
of the purchase contract will not have any voting rights, rights to dividends or
other distributions or other rights of a holder of our common stock by virtue of
holding such purchase contract.
By purchasing an Equity Unit or a Treasury Equity Unit, a holder will be
deemed to have, among other things:
- irrevocably authorized the purchase contract agent as its attorney-in-fact
to enter into and perform that holder's obligations under the related
purchase contract and pledge agreement on behalf of such holder;
- agreed to be bound by the terms and provisions of the related purchase
contract;
- agreed to be bound by the pledge arrangement contained in the related
pledge agreement; and
- agreed to treat itself as the owner of the related senior note, treasury
security or applicable ownership interest of the treasury portfolio, as
the case may be, and to treat the senior notes as indebtedness and the
purchase contracts as forward purchase contracts for our common stock for
United States federal, state and local income and franchise tax purposes.
EARLY SETTLEMENT
Unless the treasury portfolio has replaced the senior notes as a component
of the Equity Units as a result of a successful initial remarketing or a tax
event redemption, a holder of Equity Units may
S-36
settle the related purchase contract at any time on or prior to 5:00 p.m., New
York City time, on the fifth business day immediately preceding August 17, 2004
by delivering to the purchase contract agent (1) a completed "Election to Settle
Early" form and (2) a cash payment in the form of a wire transfer of immediately
available funds payable to, or upon the order of Citizens in an amount equal to
$25 times the number of purchase contracts being settled.
If you are a Treasury Equity Unit holder you may settle your purchase
contracts early only in integral multiples of 40 purchase contracts at any time
on or prior to the second business day immediately preceding August 17, 2004 by
delivering to the purchase contract agent (1) a completed "Election to Settle
Early" form and (2) a cash payment in immediately available funds of an amount
equal to $25 times the number of purchase contracts being settled.
Upon early settlement, we will sell, and the holder will be entitled to buy,
1.7218 shares of our common stock for each purchase contract being settled
(regardless of the market price of one share of our common stock on the date of
early settlement), subject to adjustment under the circumstances described under
"-Anti-Dilution Adjustments" below. We will cause (1) the shares of our common
stock to be delivered and (2) the related senior note or treasury security, as
the case may be, securing such purchase contract to be released from the pledge
under the pledge agreement, and, within three business days following the
settlement date, each will be transferred to the purchase contract agent for
delivery to the holder.
If the purchase contract agent receives a completed "Election to Settle
Early" and payment of $25 for each purchase contract being settled earlier than
5:00 p.m., New York City time, on any business day, then that day will be
considered the settlement date. If the purchase contract agent receives the
foregoing on or after 5:00 p.m., New York City time, on any business day or at
any time on a day that is not a business day, then the next business day will be
considered the settlement date. As long as the Equity Units or Treasury Equity
Units as applicable, are evidenced by one or more global Equity Unit or Treasury
Equity Unit certificates deposited with The Depository Trust Company, or DTC,
procedures for early settlement also will be governed by standing arrangements
between DTC and the purchase contract agent.
NOTICE TO SETTLE WITH CASH
Unless the treasury portfolio has replaced the senior notes as a component
of Equity Units as a result of a successful initial remarketing of the senior
notes or a tax event redemption, a holder of Equity Units may settle the related
purchase contract with cash on the fourth business day immediately preceding
August 17, 2004. A holder of an Equity Unit wishing to settle the related
purchase contract with cash must notify the purchase contract agent by
delivering the Equity Unit certificate evidencing the Equity Unit at the offices
of the purchase contract agent with the "Notice to Settle with Cash" prior to
5:00 p.m. New York City time, on the fourth business day preceding August 17,
2004. If you hold a Treasury Equity Unit, you have until 5:00 p.m. New York City
time, on the second business day preceding August 17, 2004 to deliver your
"Notice to Settle with Cash." A Treasury Equity Unit holder may only settle its
purchase contracts in integral multiples of 40 purchase contracts.
The holder must also deliver to the securities intermediary a cash payment
in the form of a wire transfer of immediately available funds payable to, or
upon the order of the securities intermediary. Such payment must be delivered,
in the case of Equity Units, prior to 5:00 p.m., New York City time, on the
fourth business day preceding August 17, 2004. If you hold a Treasury Equity
Unit, you have until 5:00 p.m., New York City time, on the business day
immediately preceding August 17, 2004 to deliver your payment.
Upon receipt of the cash payment, the related senior note or treasury
security, as the case may be, will be released from the pledge arrangement and
transferred to the purchase contract agent for distribution to the holder of the
related Equity Unit. The holder of the Equity Unit will then receive the
applicable number of shares of our common stock on the purchase contract
settlement date.
S-37
If a holder that has given notice of its intention to settle with cash fails
to deliver the cash by the applicable time and date specified above, such
holder's senior note will automatically be remarketed if a successful
remarketing has not taken place. Otherwise, we will exercise our right as a
secured party to dispose of, in accordance with applicable law, the related
senior notes, and such disposition will be deemed to satisfy in full the
holder's obligation to purchase common stock under the related purchase
contracts.
Any cash received by the securities intermediary upon cash settlement will
be invested promptly in permitted investments and paid to us on the purchase
contract settlement date. Any funds received by the securities intermediary in
excess of the funds necessary to settle the purchase contracts in respect of the
investment earnings from such investments will be distributed to the purchase
contract agent for payment to the holders who settled with cash.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the settlement rate will be adjusted if certain
events occur, including:
- the payment of dividends (and other distributions) on our common stock
made in our common stock;
- the issuance to all holders of our common stock of rights, purchase
contracts or options entitling them, for a period of up to 45 days, to
subscribe for or purchase our common stock at less than the "current
market price," as defined below, of our common stock;
- subdivisions, splits or combinations of our common stock;
- distributions to all holders of our common stock of evidences of Citizens
indebtedness, shares of capital stock, securities, cash or property
(excluding any dividend or distribution covered by the first and second
bullets above and any dividend or distribution paid exclusively in cash);
- distributions consisting exclusively of cash to all holders of our common
stock, excluding any quarterly cash dividend on our common stock to the
extent that the aggregate cash dividend per share of our common stock in
any fiscal quarter does not exceed 3.75% of the average of the last
reported sales price of our common stock during the ten trading days
immediately prior to the date of declaration of the dividend (the
"Permitted Amount") and excluding any dividend or distribution in
connection with a liquidation, dissolution or termination of Citizens (if
an adjustment is required to be made as set forth in this clause as a
result of a distribution (1) that is a quarterly dividend, such an
adjustment would be based on the amount by which such dividend exceeds the
Permitted Amount or (2) that is not a quarterly dividend, such an
adjustment would be based on the full amount of such distribution); and
- the successful completion of a tender or exchange offer made by Citizens
or any of its subsidiaries for its common stock that involves an aggregate
consideration having a fair market value that, when combined with (a) any
cash and the fair market value of other consideration payable in respect
of any tender or exchange offer by Citizens or any of its subsidiaries for
its common stock concluded within the preceding 12 months and (b) the
aggregate amount of any all-cash distributions to all holders of our
common stock made within the preceding 12 months exceeds 15% of Citizens's
aggregate market capitalization on the expiration of such tender or
exchange offer.
The term "current market price" per share of our common stock on any day
means the average of the daily closing prices for the five consecutive trading
days selected by us commencing not more than 30 trading days before, and ending
not later than, the earlier of the day in question and the day before the "ex
date" with respect to the issuance or distribution requiring such computation.
For purposes of this paragraph, the term "ex date," when used with respect to
any issuance or distribution, will mean
S-38
the first date on which the shares of our common stock trade on the applicable
exchange or in the applicable market without the right to receive such issuance
or distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which our common stock is
converted into the right to receive other securities, cash or property, each
purchase contract then outstanding would become, without the consent of the
holder of the related Equity Unit or Treasury Equity Unit, as the case may be, a
contract to purchase only the kind and amount of securities, cash and other
property receivable upon consummation of the transaction by a holder of the
number of shares that would have been received by the holder of the related
Equity Unit or Treasury Equity Unit if the purchase contract settlement date had
occurred immediately prior to the date of consummation of such transaction.
In the case of Citizens's consolidation with or merger into any other
person, any merger of another person into Citizens (other than a merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of our common stock) in which 30% or more of the total
consideration paid to Citizens's shareholders consists of cash or cash
equivalents, you may settle your purchase contract with cash during the one-week
period beginning on the twenty-third trading day following the closing date of
the merger at the applicable settlement rate. For this purpose, the twenty-
third trading day after the closing date of the merger will be deemed to be the
"purchase contract settlement date" for the purpose of determining the
"applicable market value."
If at any time Citizens makes a distribution of property to holders of its
common stock that would be taxable to such shareholders as a dividend for United
States federal income tax purposes (i.e., distributions of evidences of
Citizens's indebtedness or assets, but generally not stock dividends or rights
to subscribe for capital stock) and, pursuant to the settlement rate adjustment
provisions of the purchase contract agreement, the settlement rate is increased,
such increase may give rise to a taxable dividend to holders of the Equity Units
and Treasury Equity Units. See "Material United States Federal Income Tax
Consequences-Purchase Contracts-Adjustment to Settlement Rate" in this
prospectus supplement.
In addition, we may make such increases in the settlement rate as we deem
advisable in order to avoid or diminish any income tax to holders of our common
stock resulting from any dividend or distribution of our common stock (or rights
to acquire our common stock) or from any event treated as such for income tax
purposes or for any other reason.
Adjustments to the settlement rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the settlement rate will be required
unless such adjustment would require an increase or decrease of at least 1% in
the settlement rate; provided that any adjustments not made by reason of the
foregoing will be carried forward and taken into account in any subsequent
adjustment.
Whenever the settlement rate is adjusted, Citizens must deliver to the
purchase contract agent a certificate setting forth the settlement rate,
detailing the calculation of the settlement rate and describing the facts upon
which the adjustment is based. In addition, Citizens must notify the holders of
the Equity Units and Treasury Equity Units of the adjustment within ten business
days of any event requiring such adjustment and describe in reasonable detail
the method by which the settlement rate was adjusted.
Each adjustment to the settlement rate will result in a corresponding
adjustment to the number of shares of our common stock issuable upon early
settlement of a purchase contract.
If an adjustment is made to the settlement rate, an adjustment also will be
made to the applicable market value solely to determine which settlement rate
will be applicable on the purchase contract settlement date.
S-39
TERMINATION
The purchase contracts and the obligations and rights of Citizens and of the
holders of the Equity Units and Treasury Equity Units thereunder (including the
holders' obligation and right to purchase and receive shares of our common
stock) will terminate automatically upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to Citizens. Upon such
termination, the collateral agent will release the related senior notes,
applicable ownership interests of the treasury portfolio or treasury securities,
as the case may be, from the pledge arrangement and cause the securities
intermediary to transfer such senior notes, applicable ownership interests of
the treasury portfolio or treasury securities to the purchase contract agent for
distribution to the holders of the Equity Units and Treasury Equity Units
subject, in the case of the applicable ownership interest of the treasury
portfolio, to the purchase contract agent's disposition of the subject
securities for cash and the payment of such cash to the holders to the extent
that the holders otherwise would have been entitled to receive less than $1,000
of any such security. Upon such termination, however, such release and
distribution may be subject to a delay. In the event that Citizens becomes the
subject of a case under the Bankruptcy Code, such delay may occur as a result of
the automatic stay under the Bankruptcy Code and continue until such automatic
stay has been lifted. We expect any such delay to be limited.
PLEDGED SECURITIES AND PLEDGE
The principal portion of the senior notes that are a part of the Equity
Units (or the applicable ownership interests of the treasury portfolio that are
a part of the Equity Units, if a successful initial remarketing or a tax event
redemption has occurred) or, if substituted, the treasury securities that are a
part of the Treasury Equity Units (collectively, the "pledged securities") will
be pledged to the collateral agent for our benefit pursuant to the pledge
agreement to secure your obligation to purchase shares of our common stock under
the related purchase contracts. The rights of the holders of the Equity Units
and Treasury Equity Units with respect to such pledged securities will be
subject to Citizens's security interest therein. No holder of Equity Units or
Treasury Equity Units will be permitted to withdraw the pledged securities
related to such Equity Units or Treasury Equity Units from the pledge
arrangement except:
- in the case of an Equity Unit, to substitute a treasury security for the
related senior note;
- in the case of a Treasury Equity Unit, to substitute senior notes for the
related treasury security (for this bullet point and the one above, as
provided for under "Description of the Equity Units-Creating Treasury
Equity Units by Substituting a Treasury Security for Senior Notes" and "-
Recreating Equity Units" in this prospectus supplement); and
- upon early settlement, settlement for cash or termination of the related
purchase contracts.
Subject to Citizens' security interest and the terms of the purchase
contract agreement and the pledge agreement, each holder of Equity Units (unless
the treasury portfolio has replaced the senior notes as a component of Equity
Units as a result of a successful remarketing or a tax event redemption) will be
entitled, through the purchase contract agent and the collateral agent, to all
of the proportional rights and preferences of the related senior notes
(including interest payments, voting, redemption, repayment and liquidation
rights), and each holder of Treasury Equity Units or Equity Units (if the
treasury portfolio has replaced the senior notes as a component of Equity Units
as a result of a successful initial remarketing or a tax event redemption) will
retain beneficial ownership of the related treasury securities or applicable
ownership interest of the treasury portfolio, as applicable, pledged in respect
of the related purchase contracts. Citizens will have no interest in the pledged
securities other than its security interest.
Upon receipt of interest payments on the pledged securities, the purchase
contract agent will distribute those payments to the holders in whose names the
Equity Units or Treasury Equity Units are registered at the close of business on
the record date preceding the date of such interest payment.
S-40
CERTAIN PROVISIONS OF THE PURCHASE CONTRACTS, THE
PURCHASE CONTRACT AGREEMENT AND THE PLEDGE AGREEMENT
GENERAL
Payments on the Equity Units and Treasury Equity Units will be payable, the
purchase contracts will be settled and transfers of the Equity Units and
Treasury Equity Units will be registrable at the office of the purchase contract
agent in the Borough of Manhattan, New York City. In addition, if the Equity
Units or Treasury Equity Units do not remain in book-entry form, we have the
option to make payments on the Equity Units and Treasury Equity Units by check
mailed to the address of the person entitled thereto as shown on the security
register.
No service charge will be made for any registration of transfer or exchange
of the Equity Units or Treasury Equity Units, except for any tax or other
governmental charge that may be imposed in connection therewith.
MODIFICATION
Subject to certain limited exceptions, we and the purchase contract agent
may not modify the terms of the purchase contracts or the purchase contract
agreement without the consent of the holders of not less than a majority of the
outstanding purchase contracts, except that no such modification may, without
the consent of the holder of each outstanding purchase contract affected
thereby:
- change any payment date;
- change the amount or type of collateral required to be pledged to secure a
holder's obligations under the purchase contract, impair the right of the
holder of any purchase contract to receive distributions on such
collateral, or otherwise adversely affect the holder's rights in or to
such collateral;
- change the place or currency of payment;
- impair the right to institute suit for the enforcement of a purchase
contract;
- reduce the number of shares of our common stock purchasable under a
purchase contract, increase the purchase price of the shares of our common
stock on settlement of any purchase contract, change the purchase contract
settlement date or otherwise adversely affect the holder's rights under a
purchase contract; or
- reduce the above-stated percentage of outstanding purchase contracts whose
holders' consent is required for the modification or amendment of the
provisions of the purchase contracts, the purchase contract agreement or
the pledge agreement;
PROVIDED that if any amendment or proposal would adversely affect only the
Equity Units or only the Treasury Equity Units, then only the affected voting
group of holders will be entitled to vote on such amendment or proposal, and
such amendment or proposal will not be effective except with the consent of the
holders of not less than a majority of such voting group or, if referred to in
the first through sixth bullets above, all of the holders of such voting group.
Subject to certain limited exceptions, we, the collateral agent, the
securities intermediary and the purchase contract agent may not modify the terms
of the pledge agreement without the consent of the holders of not less than a
majority of the outstanding purchase contracts, except that no such modification
may, without the consent of the holder of each outstanding purchase contract
affected thereby:
- change the amount or type of collateral required to be pledged to secure a
holder's obligations under the purchase contract, impair the right of the
holder of any purchase contract to receive interest payments on such
collateral or otherwise adversely affect the holder's rights in or to such
collateral;
S-41
- otherwise effect any action that under the purchase contract agreement
would require the consent of the holders of each outstanding purchase
contract affected thereby; or
- reduce the above-stated percentage of outstanding purchase contracts whose
holders' consent is required for the modification or amendment;
PROVIDED that if any amendment or proposal would adversely affect only the
Equity Units or only the Treasury Equity Units, then only the affected voting
group of holders will be entitled to vote on such amendment or proposal, and
such amendment or proposal will not be effective except with the consent of the
holders of not less than a majority of such voting group or, if referred to in
the first through third bullets above, all of the holders of such voting group.
NO CONSENT TO ASSUMPTION
Each holder of an Equity Unit or a Treasury Equity Unit will be deemed under
the terms of the purchase contract agreement, by the purchase of such Equity
Unit or Treasury Equity Unit, to have expressly withheld any consent to the
assumption (i.e., affirmance) of the related purchase contracts by Citizens, its
receiver, liquidator or trustee in the event that Citizens becomes the subject
of a case under the Bankruptcy Code or other similar state or federal law
providing for reorganization or liquidation.
MERGER, SALE OR LEASE
Citizens will covenant in the purchase contract agreement that it will not
consolidate or merge with or into, or sell, lease or convey all or substantially
all of its assets in any one transaction or series of transactions to any other
corporation, unless:
(1) the resulting, surviving or transferee corporation (the "successor") is
either Citizens or is a corporation organized under the laws of the
United States, any state or the District of Columbia and expressly
assumes by supplemental indenture all of Citizens' obligations under the
indenture and the senior notes; and
(2) immediately after giving effect to the transaction no default or event
which with notice or lapse of time would be a default has occurred and is
continuing.
The successor will be substituted for Citizens in the purchase contract
agreement with the same effect as if it had been an original party to the
purchase contract agreement. Thereafter, the successor may exercise the rights
and powers of Citizens under the purchase contract agreement. This provision
does not apply to the disposition of any or all of the assets that are
identified in our March 31, 2001 financial statements as discontinued operations
or assets held for sale or of Electric Lightwave, Inc.
GOVERNING LAW
The purchase contracts, the purchase contract agreement and the pledge
agreement will be governed by, and construed in accordance with, the laws of the
State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
The Chase Manhattan Bank will be the purchase contract agent. The purchase
contract agent will act as the agent for the holders of the Equity Units and
Treasury Equity Units. The purchase contract agent will not be obligated to take
any discretionary action in connection with a default under the terms of the
Equity Units, the Treasury Equity Units or the purchase contract agreement.
The purchase contract agreement will contain provisions limiting the
liability of the purchase contract agent. The purchase contract agreement also
will contain provisions under which the purchase contract agent may resign or be
replaced. Such resignation or replacement will be effective upon the appointment
of a successor.
S-42
INFORMATION CONCERNING THE COLLATERAL AGENT
The Bank of New York will be the collateral agent. The collateral agent will
act solely as our agent and will not assume any obligation or relationship of
agency or trust for or with any of the holders of the Equity Units and the
Treasury Equity Units except for the obligations owed by a pledge of property to
the owner thereof under the pledge agreement and applicable law.
The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement also will contain provisions under which
the collateral agent may resign or be replaced. Such resignation or replacement
will be effective upon the appointment of a successor.
INFORMATION CONCERNING THE SECURITIES INTERMEDIARY
The Bank of New York will be the securities intermediary. All property
delivered to the securities intermediary pursuant to the purchase contract
agreement or the pledge agreement will be credited to a collateral account
established by the securities intermediary for the collateral agent. The
securities intermediary will treat the purchase contract agent as entitled to
exercise all rights relating to any financial asset credited to such collateral
account, subject to the provisions of the pledge agreement.
MISCELLANEOUS
The purchase contract agreement will provide that we will pay all fees and
expenses related to (1) the retention of the collateral agent and the securities
intermediary and (2) the enforcement by the purchase contract agent of the
rights of the holders of the Equity Units and Treasury Equity Units. Holders who
elect to substitute the related pledged securities, thereby creating Treasury
Equity Units or recreating Equity Units however, will be responsible for any
fees or expenses payable in connection with such substitution, as well as for
any commissions, fees or other expenses incurred in acquiring the pledged
securities to be substituted. We will not be responsible for any such fees or
expenses.
S-43
DESCRIPTION OF THE SENIOR NOTES
The following description is a summary of the terms of the senior notes. It
supplements the description of the debt securities in the accompanying
prospectus and, to the extent it is inconsistent with the accompanying
prospectus, replaces the description in the accompanying prospectus. The senior
notes will be issued under a senior indenture dated as of May 23, 2001, as
supplemented by a second supplemental indenture relating to the senior notes
between us and The Chase Manhattan Bank, as indenture trustee.
The descriptions in this prospectus supplement and the accompanying
prospectus contain a description of certain terms of the senior notes and the
indenture but do not purport to be complete, and reference is hereby made to the
indenture, the supplemental indenture, and the form of note that are or will be
filed as exhibits or incorporated by reference to the registration statement and
to the Trust Indenture Act.
GENERAL
The senior notes will be direct, unsecured obligations and will rank without
preference or priority among themselves and equally with all of Citizens
existing and future unsecured and senior indebtedness. The senior notes
initially will be issued in an aggregate principal amount equal to $400,000,000,
such amount being the sum of the aggregate principal amounts of the senior
notes. If the over-allotment option is exercised in full by the underwriters an
additional $60,000,000 of the senior notes will be issued.
The senior notes will not be subject to a sinking fund provision. Unless a
tax event redemption occurs, the entire principal amount of the senior notes
will mature and become due and payable, together with any accrued and unpaid
interest thereon, on August 17, 2006.
The indenture does not contain provisions that afford holders of the senior
notes protection in the event we are involved in a highly leveraged transaction
or other similar transaction that may adversely affect such holders.
INTEREST
Each senior note will bear interest initially at the rate of 6 3/4% per year
from the original issuance date, payable quarterly in arrears on February 17,
May 17, August 17, and November 17, of each year, commencing August 17, 2001.
Interest will be payable by check mailed to the person in whose name the senior
note is registered at the close of business on the first day of the month in
which the interest payment date falls. In addition, if the senior notes are
subject to the contingent payment rules, original issue discount (OID) would
accrue on the senior notes.
The applicable interest rate on the senior notes will be reset on the third
business day immediately preceding May 17, 2004 or on the date of any additional
remarketing thereafter, to the reset rate described below under "--Interest Rate
Reset," which reset rate is also applicable for the senior notes unless the
remarketing of the senior notes on any such date fails. The reset rate will
become effective on the reset effective date, which is three business days
immediately following any remarketing date. If the initial remarketing of the
senior notes on any such date fails, the interest rate on the senior notes will
not be reset at that time. However, in these circumstances, the interest rate on
the senior notes outstanding on and after August 17, 2004 will be reset on the
third business day immediately preceding August 17, 2004 to the reset rate
described below under "--Interest Rate Reset" in the case of a successful final
remarketing or to the reset rate described below under "--Failed Final
Remarketing" in the case of a failed final remarketing.
The amount of interest payable on the senior notes for any period will be
computed (1) for any full quarterly period on the basis of a 360-day year of
twelve 30-day months and (2) for any period
S-44
shorter than a full quarterly period, on the basis of a 30-day month and, for
any period less than a month, on the basis of the actual number of days elapsed
per 30-day month. If any date on which interest is payable on the senior notes
is not a business day, then payment of the interest payable on such date will be
made on the next day that is a business day (and without any interest or other
payment in respect of any such delay), except that, if such business day is in
the next calendar year, then such payment will be made on the preceding business
day.
COVENANTS OF CITIZENS
Citizens will covenant that during the continuance of an event of default,
it will not declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any Citizens
capital stock.
However, Citizens may:
- declare a dividend in connection with the implementation of a
stockholders' rights plan or the redemption or repurchase of any such
rights pursuant thereto;
- reclassify Citizens' capital stock or exchange or convert one class or
series of Citizens' capital stock for another class or series of
Citizens' capital stock;
- purchase fractional interests in shares of Citizens' capital stock
pursuant to the conversion or exchange provisions of such capital stock
or the security being converted or exchanged; and
- declare dividends or distributions in Citizens' capital stock.
The indenture provides that Citizens may not consolidate or merge with or
into, or sell, lease or convey all or substantially all of its assets in any one
transaction or series of transactions to any other corporation, unless:
(1) the resulting, surviving or transferee corporation (the "successor") is
either Citizens or is a corporation organized under the laws of the
United States, any state or the District of Columbia and expressly
assumes by supplemental indenture all of Citizens' obligations under the
indenture and the senior notes; and
(2) immediately after giving effect to the transaction no event of default
or event which with notice or lapse of time would be an event of default
has occurred and is continuing.
The successor will be substituted for Citizens in the indenture with the
same effect as if it had been an original party to the indenture. Thereafter,
the successor may exercise the rights and powers of Citizens under the
indenture. This provision does not apply to the disposition of any or all of the
assets that are identified in our March 31, 2001 financial statements as
discontinued operations or assets held for sale or of Electric Lightwave, Inc.
INTEREST RATE RESET
The applicable quarterly interest rate on the senior notes will be reset to
equal the sum of the reset spread and the rate of interest on the applicable
benchmark treasury, as defined below, in effect on the third business day
immediately preceding the reset effective date, and will be determined by the
reset agent. In the case of a successful initial remarketing as described under
"--Remarketing" below, the reset rate will be the rate determined by the reset
agent as the rate the senior notes should bear in order for the senior notes
included in the Equity Units to have an approximate aggregate market value on
the reset date of 100.25% of the treasury portfolio purchase price. In the case
of a successful final remarketing, the reset rate will be the rate determined by
the reset agent as the rate the senior notes should bear in order for each
senior note to have an approximate market value on the reset date of
S-45
100.25% of the principal amount of the senior note. In the case of a failed
initial remarketing followed by a failed final remarketing, the reset rate will
be determined pursuant to a formula as described under "--Failed Final
Remarketing" below. The reset rate will in no event exceed the maximum rate
permitted by applicable law.
The "applicable benchmark treasury" means direct obligations of the United
States as agreed upon by us and the reset agent (which may be obligations
treated on a when-issued basis only), having a maturity comparable to the
remaining term to maturity of the senior notes. The rate for the applicable
benchmark treasury will be the bid side rate displayed at 10:00 a.m., New York
City time, on the third business day immediately preceding the reset effective
date, in the Telerate system (or if the Telerate system is no longer available
on that date, or, in the opinion of the reset agent (after consultation with
us), is no longer an appropriate system from which to obtain the rate, such
other nationally recognized quotation system as, in the opinion of the reset
agent (after consultation with us), is appropriate. If this rate is not so
displayed, the rate for the applicable benchmark treasury shall be, as
calculated by the reset agent, the yield to maturity for the applicable
benchmark treasury, expressed as a bond equivalent on the basis of a year of 365
or 366 days, as applicable, and applied on a daily basis, and computed by taking
the arithmetic mean of final market bid rates, as of 10:30 a.m., New York City
time, on the third business day immediately preceding the reset effective date,
as applicable of three leading United States government securities dealers
selected by the reset agent (after consultation with us) (which may include the
reset agent or an affiliate thereof). It is currently anticipated that Morgan
Stanley & Co. Incorporated will be the reset agent.
The reset rate to be determined in connection with the first remarketing on
the third business day prior to May 17, 2004 or the final remarketing on the
third business day prior to August 17, 2004 will be determined in accordance
with the following procedures: on the seventh business day immediately preceding
the applicable remarketing date, the applicable benchmark treasury to be used to
determine the reset rate on the third business day prior to the reset effective
date, which is the date of the remarketing, will be selected, and the reset
spread to be added to the rate of interest on the applicable benchmark treasury
in effect on the third business day immediately preceding the reset effective
date will be established by the reset agent. The reset spread and the applicable
benchmark treasury will be announced by us on the third business day prior to
the applicable reset effective date (the "reset announcement date"). We will
cause a notice of the reset spread and the applicable benchmark treasury to be
published on the business day following the reset announcement date by
publication in a daily newspaper in the English language of general circulation
in New York City which is expected to be The Wall Street Journal. We will also
request, not later than seven nor more than 15 calendar days prior to the reset
announcement date, that the securities depositary for the senior notes notify
its participants holding senior notes, and that the securities depositary for
the Equity Units and Treasury Equity Units notify its participants holding
Equity Units or Treasury Equity Units of the reset announcement date and, in the
case of a final remarketing to be conducted on the third business day
immediately preceding August 17, 2004, if any, of the procedures that must be
followed if any owner of Equity Units wishes to settle the related purchase
contract with cash on the business day immediately preceding August 17, 2004.
The reset rate to be determined in connection with any additional
remarketing subsequent to the first remarketing on the third business day
preceding May 17, 2004 and prior to the tenth business day preceding August 17,
2004 will be determined in accordance with the same procedures as set forth
above, except that the applicable benchmark treasury to be used to determine the
reset rate on the date of the remarketing will be selected on the third business
day immediately preceding the date on which the senior notes will be remarketed,
which will be the reset announcement date for the additional remarketing. In
addition, we will request as soon as practical after we have been notified of an
additional remarketing by the remarketing agent that the securities depositary
for the senior notes and the Equity Units and Treasury Equity Units notify its
participants of the reset announcement date.
S-46
REMARKETING
Pursuant to the remarketing agreement among the remarketing agent, the
purchase contract agent and Citizens and, subject to the terms of the
supplemental remarketing agreement among the remarketing agent, the purchase
contract agent and Citizens, unless a tax event redemption has occurred you have
settled your purchase contract early, settled with cash or or you deliver the
treasury portfolio to the remarketing agent or its designated entity prior to or
on the fifth business day preceding May 17, 2004, your senior notes will be
remarketed on the third business day immediately preceding May 17, 2004.
Following a failed attempt to remarket on this date, the remarketing agent will
use its reasonable efforts in its discretion to remarket all of the senior notes
from time to time prior to the tenth business day preceding August 17, 2004.
Instead of participating in an additional remarketing, you can deliver the
treasury portfolio to the remarketing agent or its designated entity on the
second business day immediately preceding any additional remarketing to purchase
the treasury portfolio on your behalf. We refer to any such additional
remarketing as an "additional remarketing," and, collectively with the first
remarketing on the third business day preceding May 17, 2004, as the "initial
remarketing." In addition, we refer to any initial remarketing that is
successful as the "successful initial remarketing."
The remarketing agent will notify Citizens, the securities intermediary and
the purchase contract agent of any additional remarketing that it plans to
conduct as soon as practical, but no less than three business days in advance of
the additional remarketing. Any holder of senior notes that have been separated
from Equity Units may elect to participate in an additional remarketing as
described under "--Optional Remarketing" below.
The remarketing agent will use its reasonable efforts in any initial
remarketing to remarket these senior notes at an aggregate price of
approximately 100.25% of the treasury portfolio price described below. The
portion of proceeds from the remarketing equal to the treasury portfolio
purchase price will be applied to purchase a treasury portfolio consisting of:
- zero-coupon interest or principal strips of U.S. Treasury securities that
mature on or prior to August 16, 2004 in an aggregate amount equal to the
principal amount of the senior notes included in Equity Units; and
- zero-coupon interest or principal strips of U.S. Treasury securities that
mature on or prior to August 16, 2004 in an aggregate amount equal to the
aggregate distribution payment that would be due on that date on the
stated principal amount of the senior notes included in Equity Units if
the interest rate on the senior notes were not reset as described under
"--Interest Rate Reset" above.
The treasury portfolio will be substituted for the senior notes and will be
pledged to the collateral agent to secure the Equity Unit holders' obligation to
purchase our common stock under the purchase contract.
In addition, the remarketing agent may deduct, as a remarketing fee, an
amount not exceeding 25 basis points (.25%) of the treasury portfolio purchase
price from any amount of the proceeds in excess of the treasury portfolio
purchase price. The remarketing agent will then remit any remaining portion of
the proceeds to the purchase contract agent for prompt payment to the holders.
Equity Unit holders whose senior notes are remarketed will not otherwise be
responsible for the payment of any remarketing fee in connection with the
remarketing.
As used in this context, "treasury portfolio purchase price" means the
lowest aggregate price quoted by a primary U.S. government securities dealer in
New York City to the quotation agent on the third business day immediately
preceding May 17, 2004, or from time to time thereafter on the date of any
successful initial remarketing, for the purchase of the treasury portfolio
described above for
S-47
settlement on May 17, 2004, or from time to time thereafter on the third
business day following the date of an additional remarketing that is successful.
"Quotation agent" means any primary U.S. government securities dealer in New
York City selected by us. It is currently anticipated that Morgan
Stanley & Co. Incorporated will be the quotation agent.
If (1) despite using its reasonable efforts, the remarketing agent cannot
remarket the related senior notes, other than to Citizens, at a price equal to
or greater than 100% of the treasury portfolio purchase price, or (2) the
remarketing has not occurred because a condition precedent to the remarketing
has not been fulfilled, in each case resulting in a failed initial remarketing,
the senior notes will continue to be a component of Equity Units, and another
remarketing may be attempted as described below.
If the initial remarketing has failed, and unless a tax event redemption has
occurred, Equity Unit holders have the option to notify the purchase contract
agent on or prior to the fifth business day immediately preceding August 17,
2004 of their intention to settle the related purchase contracts with separate
cash and provide such cash on or prior to the fourth business day preceding
August 17, 2004. The senior notes of any holder who has failed to give this
notice and deliver such cash will be remarketed on the third business day
immediately preceding August 17, 2004, which we refer to as the "final
remarketing."'
The remarketing agent will then use its reasonable efforts to remarket these
senior notes at a price of approximately 100.25% of the aggregate stated
principal amount. The portion of the proceeds from this final remarketing equal
to the aggregate principal amount of the senior notes will be automatically
applied to satisfy in full the Equity Unit holders' obligations to purchase our
common stock.
In addition, the remarketing agent may deduct, as a remarketing fee, an
amount not exceeding 25 basis points (.25%) of the aggregate principal amount of
the remarketed senior notes from any amount of the proceeds in excess of the
aggregate principal amount of the remarketed senior notes. The remarketing agent
will then remit any remaining portion of the proceeds for the benefit of the
holders. Equity Unit holders whose senior notes are remarketed will not
otherwise be responsible for the payment of any remarketing fee in connection
with the remarketing.
If (1) despite using its reasonable efforts, the remarketing agent cannot
remarket the related senior notes in the final remarketing, other than to
Citizens, at a price equal to or greater than 100% of the aggregate stated
principal amount of the senior notes, or (2) the remarketing has not occurred
because a condition precedent to the remarketing has not been fulfilled, in each
case resulting in a failed final remarketing, we will exercise our rights as a
secured party to dispose of the senior notes in accordance with applicable law
and such disposition will be deemed to satisfy in full each holder's obligation
to purchase our common stock under the related purchase contracts.
We will cause a notice of any failed remarketing to be published on the
business day immediately following the date of a failed initial or final
remarketing, by publication in a daily newspaper in the English language of
general circulation in The City of New York, which is expected to be The Wall
Street Journal. In addition, Citizens will request in the case of the initial
remarketing on the third business day preceding May 17, 2004 and in the case of
the final remarketing on the third business day preceding August 17, 2004, as
applicable, not later than seven nor more than 15 calendar days prior to a
remarketing date, that the depositary notify its participants holding senior
notes, Equity Units and Treasury Equity Units of the remarketing. In the case of
any additional remarketing subsequent to May 17, 2004, such request will be made
as soon as practical after Citizens is notified of an additional remarketing by
the remarketing agent. If required, we will endeavor to ensure that a
registration statement with regard to the full amount of the senior notes to be
remarketed will be effective in a form that will enable the remarketing agent to
rely on it in connection with the remarketing process.
S-48
REMARKETING AGENT
It is currently anticipated that the remarketing agent will be Morgan
Stanley & Co. Incorporated. Citizens and the remarketing agent will enter into
the remarketing agreement which provides, among other things, that Morgan
Stanley & Co. Incorporated will act as the exclusive remarketing agent and will
use reasonable efforts to remarket senior notes tendered. Under certain
circumstances, some portion of the senior notes tendered in the remarketing may
be purchased by the remarketing agent.
The remarketing agreement provides that the remarketing agent will incur no
liability to Citizens or to any holder of Equity Units and/or senior notes in
its individual capacity or as remarketing agent for any action or failure to act
in connection with a remarketing or otherwise, except as a result of the
negligence or willful misconduct on its part.
We have agreed to indemnify the remarketing agent against certain
liabilities, including liabilities under the Securities Act of 1933, arising out
of or in connection with its duties under the remarketing agreement.
The remarketing agreement also will provide that the remarketing agent may
resign and be discharged from its duties and obligations under the remarketing
agreement. No such resignation, however, will become effective unless a
nationally recognized broker-dealer has been appointed by us as successor
remarketing agent and that successor remarketing agent has entered into a
remarketing agreement with us. In such case, we will use reasonable efforts to
appoint a successor remarketing agent and enter into a remarketing agreement
with such person as soon as reasonably practicable.
OPTIONAL REMARKETING
On or prior to the second business day immediately preceding the remarketing
date (except as described below for any additional remarketing), but no earlier
than the interest payment date immediately preceding the remarketing date,
holders of senior notes that are not part of Equity Units may elect to have
their senior notes remarketed in the same manner as senior notes that are a part
of Equity Units by delivering their senior notes along with a notice of this
election to the custodial agent designated by us. The custodial agent will hold
the senior notes in an account separate from the collateral account in which the
pledged senior notes are held. Holders of senior notes electing to have their
senior notes remarketed will also have the right to withdraw their election on
or prior to the second business day immediately preceding the remarketing date.
If the remarketing on the third business day preceding May 17, 2004 fails,
and if the remarketing agent in its discretion proceeds with any additional
remarketing as described under "--Remarketing" above, then, the remarketing
agent shall notify all holders of senior notes that are not part of Equity Units
of the date of such additional remarketing as soon as practical, but no later
than three business days immediately preceding the remarketing date. Holders who
wish to participate in any additional remarketing have to deliver their senior
notes together with the notice of election to the custodial agent no later than
two business days following the notification by the remarketing agent. As a
consequence of the shorter notice period for any additional remarketing, it may
be more difficult for a holder of separate senior notes to participate in an
additional remarketing.
The proceeds of the remarketing of senior notes that are not part of Equity
Units will be paid to the holders in cash after deduction, to the extent
permissible, of the remarketing fee.
FAILED FINAL REMARKETING
If, by 4:00 p.m., New York City time, on the third business day immediately
preceding August 17, 2004, the remarketing agent is unable to remarket all the
senior notes tendered or deemed tendered for purchase in the final remarketing,
a "failed final remarketing" will be deemed to have occurred, and the
remarketing agent will so advise the depositary and us.
S-49
If a failed final remarketing occurs and you are an Equity Unit holder who
has not settled your purchase contract early or has not settled your purchase
contract with cash or has given notice of your election to settle your purchase
contract with cash but failed to do so, we may exercise our rights as a secured
party and take possession of your senior notes. Your obligation to purchase the
shares of our common stock then will be fully satisfied, and you will receive
the appropriate number of shares of our common stock.
If a failed final remarketing occurs, and you are a holder of senior notes
that are not part of an Equity Unit, you will retain possession of your senior
notes and the reset rate will be equal to (1) the two-year benchmark treasury
rate, as defined below, plus (2) the applicable spread, as defined below,
provided that the reset rate will not be below the initial rate.
The term "two-year benchmark treasury rate" means the bid side rate
displayed at 10:00 a.m., New York City time, on the third business day prior to
the purchase contract settlement date for direct obligations of the United
Stales having a maturity comparable to the remaining term to maturity of the
senior notes, as agreed upon by us and the remarketing agent. This rate will be
as displayed in the Telerate system or, if the Telerate system is no longer
available or, in the opinion of the remarketing agent (after consultation with
us), no longer an appropriate system from which to obtain such rule, such other
nationally recognized quotation system as, in the opinion of the remarketing
agent (after consultation with us) is appropriate. If this rate is not so
displayed, the two-year benchmark treasury rate will be calculated by the
remarketing agent as tire yield to maturity of the senior notes, expressed as
bond equivalent on the basis of a year of 365 or 366 days, as applicable, and
applied on a daily basis, and computed by taking the arithmetic mean of the
secondary market bid rates, as of 10:30 a.m., New York City time, on the third
business day prior to the purchase contract settlement date of three leading
United States government securities dealers selected by the remarketing agent
(after consultation with us) (which may include the remarketing agent or an
affiliate thereof).
The term "applicable spread" means the spread determined as set forth below,
based on the prevailing rating, as defined below, of our senior notes in effect
at the close of business on the business day immediately preceding the date of a
failed final remarketing:
PREVAILING RATING ON OUR SENIOR NOTES SPREAD
------------------------------------- --------
AA/"Aa"..................................................... 3.00%
A/"a"....................................................... 4.00%
BBB/"Baa"................................................... 5.00%
Below BBB/"Baa"............................................. 7.00%
You should know that we are using the rating on our senior notes as a
convenient benchmark to ascertain the "applicable spread" and that if a rating
were given to your senior notes by a nationally recognized rating agency, it may
or may not be the same as the rating on our senior notes.
For purposes of this definition, the "prevailing rating" of our senior notes
shall be:
(l) AA/"Aa" if our senior notes have a credit rating of AA- or better by
Standard & Poor's Ratings Service and "Aa3" or better by Moody's Investors
Service, Inc. or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected by the
remarketing agent (after consultation with us);
(2) if not under clause (1) above, then A/"a" if our senior notes have a
credit rating of A or better by S&P and "A3" or better by Moody's or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected by the remarketing agent (after
consultation with us);
(3) if not under clause (1) or (2) above, then BBB/"Baa" if our senior
notes have a credit rating of BBB- or better by S&P and "Baa3" or better by
Moody's or the equivalent of such
S-50
ratings by such agencies or a substitute rating agency or substitute rating
agencies selected by the. remarketing agent (after consultation with us); or
(4) if not under clauses (1) through (3) above, then below BBB/"Baa."
Notwithstanding the foregoing, (A) if (i) the credit rating of our senior
notes by S&P shall be on the "Credit Watch" of S&P with a designation of
"negative implications" or "developing", or (ii) the credit rating of our senior
notes by Moody's shall be on the "Corporate Credit Watch List" of Moody's with a
designation of "downgrade" or "uncertain," or, in each case, on any successor
list of S&P or Moody's with a comparable designation the prevailing ratings of
our senior notes shall be deemed to be within a range one full level lower in
the above table than those actually assigned to our senior notes by Moody's and
S&P and (B) if our senior notes are rated by only one rating agency on or before
the remarketing date, the prevailing rating will at all times be determined
without reference to the rating of any other rating agency; provided that if no
such rating agency shall have in effect a rating of our senior notes and the
remarketing agent is unable to identify a substitute rating agency or rating
agencies, the prevailing rating shall be below BBB/"Baa."
The remarketing agent is not obligated to purchase any senior notes that
would otherwise remain unsold in the remarketing. Neither we nor the remarketing
agent will be obligated in any case to provide funds to make payment upon tender
of senior notes for remarketing. Whether or not there has been a "failed final
remarketing" will be determined in the sole, reasonable discretion of the
remarketing agent.
OPTIONAL REDEMPTION--TAX EVENT
If a tax event, as defined below, occurs and is continuing, we may redeem,
at our option, the senior notes in whole, but not in part, at a price equal to,
for each senior note, the redemption amount, as defined below, plus accrued and
unpaid interest thereon to the date of redemption (the "tax event redemption
date"). If a tax event redemption occurs prior to the purchase contract
settlement date, the redemption price payable in liquidation of the Equity Unit
holders' interests in the senior notes will be distributed to the securities
intermediary, which in turn will apply an amount equal to the redemption amount
of such redemption price to purchase the treasury portfolio on behalf of the
holders of the Equity Units and remit the remaining portion, if any, of such
redemption price to the purchase contract agent for payment to the holders of
the Equity Units. Thereafter, the applicable ownership interest of the treasury
portfolio will be substituted for the senior notes and will be pledged to the
collateral agent to secure the Equity Unit holders' obligations to purchase our
common stock under the related purchase contract. If a tax event redemption
occurs after the purchase contract settlement date, the treasury portfolio will
not be purchased and the proceeds will be distributed to the purchase contract
agent for payment to the holders of the Equity Units. If a tax event redemption
occurs, holders of senior notes that are not part of Equity Units will directly
receive proceeds from the redemption of the senior notes.
"Tax event" means the receipt by Citizens of an opinion of counsel, rendered
by a law firm having a recognized national tax practice, to the effect that, as
a result of any amendment to, change in or announced proposed change in the laws
(or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative decision, pronouncement, judicial decision or action
interpreting or applying such laws or regulations, which amendment or change is
effective or which proposed change, pronouncement, action or decision is
announced on or after the date of issuance of the senior notes, there is more
than an insubstantial increase in the risk that interest payable by us on the
senior notes is not, or within 90 days of the date of such opinion, will not be,
deductible by us, in whole or in part, for United States federal income tax
purposes.
S-51
"Redemption amount" means, prior to the purchase contract settlement date,
for each senior note, the product of the principal amount of such senior note
and a fraction, the numerator of which is the treasury portfolio purchase price,
as defined below, and the denominator of which is the applicable principal
amount, as defined below, and means, after the purchase contract settlement
date, the principal amount of such senior note.
"Treasury portfolio purchase price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City, a "primary
treasury dealer," to the quotation agent, as defined below, on the third
business day preceding the tax event redemption date for the purchase of the
treasury portfolio for settlement on the tax event redemption date.
"Applicable principal amount" means either (1) if the tax event redemption
date occurs prior to the purchase contract settlement date, the aggregate
principal amount of the senior notes that are part of the Equity Units on the
tax event redemption date or (2) if the tax event redemption date occurs on or
after the purchase contract settlement date, the aggregate principal amount of
the senior notes outstanding on the tax event redemption date.
"Treasury portfolio" means, with respect to the applicable principal amount
of senior notes, a portfolio of zero-coupon U.S. treasury securities consisting
of (a) principal or interest strips of U.S. treasury securities that mature on
or prior to August 16, 2004 in an aggregate amount at maturity equal to the
applicable principal amount and (b) with respect to each scheduled interest
payment date on the senior notes that occurs after the tax event redemption
date, principal or interest strips of U.S. treasury securities that mature on or
prior to such date in aggregate amount at maturity equal to the aggregate
interest payment that would be due on the applicable principal amount of the
senior notes on such date.
"Quotation agent" means any primary U.S. government securities dealer
selected by us. It is currently anticipated that Morgan Stanley & Co.
Incorporated will be the quotation agent.
AGREEMENT BY PURCHASERS OF CERTAIN TAX TREATMENT
Each senior note will provide that, by acceptance of the senior note, or a
beneficial interest therein, you intend that the senior note constitutes debt
and you agree to treat it as debt for United States federal, state and local tax
purposes.
BOOK-ENTRY ISSUANCE
The senior notes will be issued only as fully-registered securities
registered in the name of Cede & Co., DTC's nominee. The senior notes will be
issued in accordance with the procedures set forth in this prospectus supplement
under "Book-Entry Systems."
S-52
BOOK-ENTRY SYSTEMS
The Depository Trust Company will act as securities depository for the
Equity Units, the Treasury Equity Units, and senior notes that are issued as
global senior notes, as applicable, the "securities." Initially, we will issue
one physical certificate in respect of the senior notes. The physical
certificate will be issued in fully-registered form in the name of the Warrant
Agent who will pledge it, on behalf of the holders of the Equity Units, to the
Collateral Agent on behalf of Citizens, to secure the Equity Units holders'
obligation under the purchase contract to purchase shares of Citizens' common
stock. The securities will be issued in fully-registered form in the name of
Cede & Co. (DTC's partnership nominee). We will issue one or more fully
registered certificates as global securities for each of the securities in their
respective aggregate principal or stated amounts and deposit the certificates
with DTC.
DTC has provided us with the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under
Section 17A of' the Securities Exchange Act of 1934. DTC holds securities that
its participants deposit with DTC. DTC also facilitates the settlement among
direct participants of securities transactions, such as transfers and pledges,
in deposited securities through computerized book-entry changes in direct
participants' accounts. This eliminates the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies clearing corporations, and other organizations.
DTC is owned by a number of its direct participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., and the National Association
of Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a direct participant, either
directly or indirectly. The rules that apply to DTC and its participants are on
file with the SEC.
If you intend to purchase any of the securities in the manner provided by
this prospectus supplement you must do so through the DTC system by or through
direct participants. The participant that you purchase through will receive a
credit for the applicable security on DTC's records. The ownership interest of
each actual purchaser of the applicable security, who we refer to as a
"beneficial owner," is in turn to be received on the participant's records.
Beneficial owners will not receive written confirmation from DTC of their
purchases, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the participant through which the beneficial owner entered into
the transaction. Transfers of ownership interests in the securities are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in the applicable security except in the event that
use of the book-entry system for the securities is discontinued.
To facilitate subsequent transfers, all securities deposited by direct
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of securities with DTC and their registration in the name
of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of
the actual beneficial owners of the securities. DTC's records reflect only the
identity of the direct participants to whose accounts such securities are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by
participants to beneficial owners will be governed by
S-53
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
securities. Under its usual procedures, DTC would mail an Omnibus Proxy to us as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
We will make any payments on the securities to DTC. DTC's practice is to
credit direct participants' accounts on the payable date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on the payable date. Payments by
participants to beneficial owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participant and not of DTC, us or any trustee, subject to
any statutory or regulatory requirements as may be in elect from lime to time.
We or the applicable trustee will be responsible for the payment of all
amounts to DTC. DTC will be responsible for the disbursement of those payments
to its participants, and the participants will be responsible for disbursements
of those payments to beneficial owners.
DTC may discontinue providing its service as securities depository with
respect to the securities at any time by giving reasonable notice to us or the
trustee. Under these circumstances, in the event that a successor securities
depository is not obtained, we will print and deliver to you certificates for
the securities.
Also, in case we decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository) we will print and
deliver to you certificates for the various certificates you may own.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable (including DTC),
but we take no responsibility for its accuracy.
Neither we nor any trustee nor the underwriters will have any responsibility
or obligation to participants, or the persons for whom they act as nominees,
with respect to:
- the accuracy of the records of DTC, its nominee or any participant, any
ownership interest in the securities, or
- any payments to, or the providing of notice, to participants or beneficial
owners.
S-54
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain material United States federal
income tax consequences from the purchase, ownership and disposition of Equity
Units, Treasury Equity Units, senior notes, purchase contracts and our common
stock acquired under the purchase contracts as of the date of this prospectus
supplement.
Except where otherwise stated, this summary deals only with Equity Units,
Treasury Equity Units, senior notes, purchase contracts and Citizens common
stock held as capital assets by a beneficial owner of any of the foregoing
instruments for U.S. federal income tax purposes (a "holder") who:
- is a United States person (as defined below), and
- purchases the Equity Units upon original issuance at their original issue
price.
A "United States person" is a holder who is one of the following:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision of the
United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- as trust that (1) is subject to the primary supervision of a court within
the United States and the control of one or more United States persons, or
(2) has a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
Your tax treatment may vary depending on your particular situation. This
summary does not address all the tax consequences that may be relevant to
holders that are subject to special tax treatment, such as:
- dealers in securities or currencies;
- financial institutions;
- tax-exempt investors;
- traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
- persons liable for alternative minimum tax;
- insurance companies;
- persons holding Equity Units, Treasury Equity Units, senior notes,
purchase contracts or our common stock as part of a hedging, conversion,
integrated, constructive ownership or constructive sale transaction;
- persons holding Equity Unit, Treasury Equity Units, senior notes, purchase
contracts or our common stock as part of a straddle; or
- persons whose functional currency is not the United States dollar.
In addition, if a partnership holds our Equity Units, Treasury Equity Units,
senior notes, purchase contracts or our common stock, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. If you are a partner of a partnership holding the above
instruments, you should consult your tax advisors.
This summary is based on the United States Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury regulations promulgated under the Code and
administrative and judicial
S-55
interpretations. However, these income tax laws, regulations and interpretations
may change at any time. Any change could be retroactive to the issuance date of
the Equity Units.
The authorities on which this summary is based are subject to various
interpretations, and any views expressed within this summary are not binding on
the Internal Revenue Service (which we refer to as the "IRS") or the courts.
Either the IRS or the courts could disagree with the explanations or conclusions
contained in this summary. No statutory, administrative or judicial authority
directly addresses the treatment of Equity Units or instruments similar to
Equity Units for United States federal income tax purposes. As a result, no
assurance can be given that the IRS or the courts will agree with the tax
consequences described herein. You should consult your own tax advisor regarding
the tax consequences to you of the purchase, ownership and disposition of the
Equity Units, Treasury Equity Units, senior notes, purchase contracts and our
common stock, including the tax consequences under state, local, foreign and
other tax laws. We specifically do not address the U.S. estate tax consequences
of holding the Equity Units. For a discussion of the possible redemption of the
senior notes upon a tax event, see "Description of the Senior Notes--Optional
Redemption--Tax Event" in this prospectus supplement.
EQUITY UNITS
ALLOCATION OF PURCHASE PRICE
Your acquisition generally will be treated as an acquisition of the senior
note and the purchase contract constituting the Equity Unit. The purchase price
of each Equity Unit will be allocated between the senior note and the purchase
contract in proportion to their respective fair market values at the time of
purchase. Such allocation will establish your initial tax basis in the senior
note and the purchase contract. We will report the fair market value of each
senior note as $0.27 and the fair market value of each purchase contract as
$24.73. This position will be binding on you (but not on the IRS) unless you
explicitly disclose a contrary position on a statement attached to your timely
filed United States federal income tax return for the taxable year in which an
Equity Unit is acquired. Thus, absent such disclosure, you should allocate the
purchase price for an Equity Unit in accordance with the foregoing. The
remainder of this discussion assumes that this allocation of the purchase price
will be respected for United States federal income tax purposes.
SENIOR NOTES
CLASSIFICATION OF THE SENIOR NOTES
We believe that the senior notes will be classified as indebtedness for
United States federal income tax purposes and will file our U.S. federal income
tax returns consistent with this belief. We and (by your acceptance of a
beneficial ownership interest in a senior note) you agree to treat the senior
notes as indebtedness for all United States tax purposes. The remainder of this
discussion assumes that the senior notes will be classified as indebtedness of
Citizens.
ACCRUAL OF INTEREST INCOME/ORIGINAL ISSUE DISCOUNT
Because a portion of the $25 purchase price of the Equity Units will be
allocated to the purchase contracts, the senior notes will be issued at a
discount from their stated redemption price at maturity. For U.S. federal income
tax purposes, the excess of the $25 stated redemption price at maturity of each
senior note over its "issue price" constitutes original issue discount. The
issue price of the senior notes will equal this portion of the $25 purchase
price (at which the senior notes are sold to the public) that is allocated to
the senior notes.
Further, because of the manner in which the interest rate on the senior
notes is reset, the senior notes generally will be classified as contingent
payment debt obligations. Consequently, the Treasury regulations that apply to
contingent payment debt obligations will apply to the senior notes. All
S-56
payments on the senior notes including stated interest will be taken into
account under these Treasury regulations and actual cash payments of interest on
the senior notes will not be reported separately as taxable income. As discussed
more fully below, the effect of these Treasury regulations would be to:
- require you, regardless of your usual method of tax accounting, to use the
accrual method with respect to the senior notes;
- possibly result in the accrual of original issue discount by you in excess
of stated interest payments actually received by you; and
- generally result in ordinary rather than capital treatment of any gain,
and to some extent loss, on the sale, exchange, repurchase or redemption
of the senior notes.
Under the contingent payment debt rules, you will be required to include
original issue discount in income each year, regardless of your usual method of
tax accounting, based on the comparable yield of the senior notes. In order to
determine your income, these rules require that we determine, as of the issue
date, the comparable yield for the senior notes. The comparable yield of the
senior notes will generally be the rate at which Citizens would issue a fixed
rate debt instrument for the portion of the $25 purchase price for the Equity
Units that is allocated to the senior notes and with terms and conditions
similar to the senior notes. We will be required to provide the comparable yield
to you and, solely for tax purposes, will also be required to provide a
projected payment schedule that includes the actual interest payments on the
senior notes and estimates the amount and timing of contingent payments on the
senior notes.
We have determined that under the contingent payment debt rules the
comparable yield is an annual rate of 7.63%, compounded quarterly. Based on the
comparable yield, the projected payment schedule per senior note is $0.28 for
the period ending on August 17, 2001, $0.42 for each subsequent quarter ending
on or prior to the remarketing date, $0.56 for each quarter ending after the
remarketing date and prior to the maturity date and $25.56 on the maturity date,
which includes the final interest payment. Under the second supplemental
indenture governing the senior notes, we will agree, and as a holder of the
senior notes, you will be deemed to have agreed, for United States federal
income tax purposes, to be bound by our determination of the comparable yield
and projected payment schedule. THE COMPARABLE YIELD AND THE PROJECTED PAYMENT
SCHEDULE ARE NOT PROVIDED FOR ANY PURPOSE OTHER THAN THE DETERMINATION OF YOUR
INTEREST ACCRUALS AND ADJUSTMENTS THEREOF IN RESPECT OF THE SENIOR NOTES AS
CONTINGENT PAYMENT DEBT OBLIGATIONS AND DO NOT CONSTITUTE A REPRESENTATION
REGARDING THE ACTUAL AMOUNT OF THE PAYMENT ON A SENIOR NOTE.
The amount of original issue discount on a senior note for each accrual
period under the contingent payment debt rule is determined by multiplying the
comparable yield of the senior note, adjusted for the length of the accrual
period, by the senior note's adjusted issue price at the beginning of the
accrual period, determined in accordance with the rules set forth in the
contingent payment debt regulations. The adjusted issue price of each senior
note at the beginning of each accrual period will equal the portion of the $25
purchase price for each Equity Unit that is allocated to the senior notes,
increased by any original issue discount previously accrued on the senior note
and decreased by the fixed payments and by the contingent payment projected to
be made on the senior note. The amount of original issue discount so determined
is allocated on a ratable basis to each day in the accrual period that you held
the note. We will be required to provide information returns stating the amount
of original issue discount accrued on senior notes held of record by persons
other than corporations and other exempt owners.
If after the remarketing date the remaining amounts of principal and
interest payable on the senior notes differ from the payments set forth on the
foregoing projected payment schedule, then under the contingent payment debt
rules negative or positive adjustments reflecting such differences should be
taken into account by you as adjustments to interest income in a reasonable
manner over the period to which they relate.
S-57
TREASURY EQUITY UNITS
SUBSTITUTION OF TREASURY SECURITY TO CREATE TREASURY EQUITY UNITS
If you deliver a treasury security to the collateral agent in substitution
for the senior note, you generally will not recognize gain or loss upon the
delivery of the treasury security or the release of the senior note. You
generally will continue to include in income any interest with respect to the
senior notes and treasury security, and your tax basis in the senior notes,
treasury security and the purchase contract generally will not be affected by
the delivery and release.
OWNERSHIP OF TREASURY SECURITIES
You generally will be treated as owning the treasury security that is part
of the Treasury Equity Units. We and, by acquiring Equity Units, you agree to
treat yourself as the owner, for United States federal, state and local income
and franchise tax purposes, of the treasury security that is a part of the
Treasury Equity Units beneficially owned by you. Your initial tax basis in the
treasury security that is a part of the Treasury Equity Units generally will be
equal to the amount paid for the treasury security. You generally will include
in income any original issue discount or acquisition discount otherwise
includible with respect to the treasury security. In general, you will be
required to include in income each year that you hold a treasury security the
portion of the original issue discount or acquisition discount that accrues on
the treasury security in such year.
SUBSTITUTION OF SENIOR NOTES TO RECREATE EQUITY UNITS
If you deliver senior notes to the collateral agent to recreate Equity
Units, you generally will not recognize gain or loss upon the delivery of the
senior notes or the release of the treasury security. You generally will
continue to take into account items of income or deduction otherwise includible
or deductible, respectively, with respect to the treasury security and the
senior notes, and your tax basis in the senior notes, the treasury security and
the purchase contract generally will not be affected by the delivery and
release.
PURCHASE CONTRACTS
CLASSIFICATION
Although described as a "warrant," for federal income tax purposes, the
purchase contracts should be treated as forward purchase contracts for Citizens
common stock. We and (by your acceptance of a beneficial ownership interest in a
purchase contract) you agree to treat the purchase contracts for all United
States tax purposes as forward purchase contracts for Citizens common stock.
This discussion assumes that the purchase contracts will be classified as
forward purchase contracts for Citizens common stock.
ACQUISITION OF COMMON STOCK UNDER A PURCHASE CONTRACT
You generally will not recognize gain or loss on the completion of the
purchase of common stock under a purchase contract, except with respect to any
cash paid in lieu of a fractional share of common stock. Subject to the
following discussion, your aggregate initial tax basis in the common stock
received under a purchase contract generally will equal (a) the purchase price
paid for such common stock, plus (b) your tax basis in the purchase contract (if
any), less (c) the portion of such purchase price and tax basis allocable to the
fractional share. The holding period for common stock received under a purchase
contract generally will commence on the date acquired.
EARLY SETTLEMENT OF A PURCHASE CONTRACT
You generally will not recognize gain or loss on the receipt of your
proportionate share of the senior notes or treasury securities upon early
settlement of a purchase contract and you generally will
S-58
have the same tax basis in such senior notes or treasury securities, as the case
may be, as before such early settlement.
TERMINATION OF A PURCHASE CONTRACT
If a purchase contract terminates, you generally will recognize gain or loss
equal to the difference between your amount realized (if any) upon such
termination and your adjusted tax basis in the purchase contract at the time of
such termination. Capital gains of individuals derived in respect of capital
assets held for more than one year are taxed at a maximum rate of 20%. The
deductibility of capital losses is subject to limitations.
You generally will not recognize gain or loss on the receipt of your
proportionate share of the senior notes or treasury securities upon termination
of the purchase contract and you generally will have the same tax basis in such
senior notes or treasury securities, as the case may be, as before such
termination. If the termination of the purchase contract occurs when the
purchase contract has a negative value, see "--Sale or Disposition of Equity
Units or Treasury Equity Units." You should consult your own tax advisor
regarding the termination of the purchase contract when the purchase contract
has a negative value.
ADJUSTMENT TO SETTLEMENT RATE
You might be treated as receiving a constructive distribution from Citizens
if (i) the settlement rate is adjusted and as a result of such adjustment your
proportionate interest in the assets or earnings and profits of Citizens is
increased and (ii) the adjustment is not made pursuant to a bona fide,
reasonable anti-dilution formula. An adjustment in the settlement rate would not
be considered made pursuant to such a formula if the adjustment were made to
compensate you for certain taxable distributions with respect to the common
stock. Thus under certain circumstances, an increase in the settlement rate
might give rise to a taxable dividend to you even though you would not receive
any cash related thereto.
SALE OR DISPOSITION OF EQUITY UNITS OR TREASURY EQUITY UNITS
Upon the disposition of an Equity Unit or Treasury Equity Unit, you
generally will be treated as having sold, exchanged or disposed of the purchase
contract and the senior note or treasury securities, as the case may be, that
constitute such Equity Unit or Treasury Equity Unit. You generally will have
gain or loss equal to the difference between the portion of your proceeds
allocable to the purchase contract and the senior note or treasury securities,
as the case may be, and your respective adjusted tax bases in the purchase
contract and the senior note or treasury securities. For purposes of determining
gain or loss, your proceeds will not include an amount equal to accrued and
unpaid interest (including original issue discount) on the senior note or
treasury security not previously included in income, which will be treated as
ordinary interest income.
In the case of the purchase contracts and the treasury securities, such gain
or loss generally will be capital gain or loss. Capital gains of individuals
derived in respect of capital assets held for more than one year are taxed at a
maximum rate of 20%. The deductibility of capital losses is subject to
limitations. If the disposition of an Equity Unit or Treasury Equity Unit occurs
when the purchase contract has a negative value, you should be considered to
have received additional consideration for the senior notes or treasury
securities in an amount equal to such negative value, and to have paid such
amount to be released from your obligation under the purchase contract. You
should consult your tax advisor regarding a disposition of an Equity Unit or
Treasury Equity Unit at a time when the purchase contract has a negative value.
Gain on the sale, exchange or other disposition of a senior note prior to
and including the remarketing date generally will be treated as ordinary income.
Loss from the disposition of a senior note prior to and including the
remarketing date generally will be treated as ordinary loss to the extent
S-59
of your prior net interest inclusions. Any loss in excess of such amount
generally will be treated as capital loss. Gain recognized on the sale, exchange
or other disposition of a senior note after the remarketing date generally will
be ordinary income to the extent attributable to the excess, if any, of the
present value of the total remaining principal and interest payments due on the
senior note over the present value of the total remaining payments set forth on
the projected payment schedule for such senior note. Further, any gain
recognized in excess of such amount and any loss recognized on such sale,
exchange or other disposition generally will be treated as capital gain or loss.
Capital gain of individuals derived in respect of capital assets held for more
than one year are generally subject to tax at a maximum rate of 20%. The
deductibility of capital losses is subject to limitations.
Special rules apply in determining the tax basis of a senior note under the
contingent payment obligation Treasury regulations. Your basis in a note is
generally increased by original issue discount you previously accrued on the
senior note, and reduced by the fixed payments and by the contingent payments
projected to be made.
REMARKETING AND TAX EVENT REDEMPTION OF SENIOR NOTES
A remarketing or tax event redemption of the senior notes will be a taxable
event for holders of senior notes which will be subject to tax in the manner
described above under "--Sale or Disposition of Equity Units or Treasury Equity
Units."
OWNERSHIP OF THE TREASURY PORTFOLIO
You generally will be treated as owning the treasury portfolio that is a
part of the Equity Units. We and, by acquiring Equity Units, you agree to treat
yourself as the owner, for United States tax purposes, of the treasury portfolio
that is a part of the Equity Units beneficially owned by you. Your initial tax
basis in your applicable ownership interest of the treasury portfolio generally
will equal your pro rata portion of the amount paid by the collateral agent for
the treasury portfolio. Your adjusted tax basis in the treasury portfolio
generally will be increased by the amount of original issue discount included in
income with respect thereto and decreased by the amount of cash received in
respect of the treasury portfolio.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
The Treasury portfolio will consist of stripped U.S. Treasury securities.
Following a remarketing of the senior notes or a tax event redemption prior to
the purchase contract settlement date, a holder of Equity Units generally will
be required to treat its pro rata portion of each U.S. Treasury security in the
Treasury portfolio as a bond that was originally issued on the date the
collateral agent acquired the relevant U.S. Treasury securities and that has
original issue discount equal to the holder's pro rata portion of the excess of
the amounts payable on such U.S. Treasury securities over the amount paid for
the U.S. Treasury securities at the time the collateral agent acquires them on
behalf of holders of Equity Units. A holder, whether on the cash or accrual
method of tax accounting, generally will be required to include original issue
discount (other than original issue discount on short-term U.S. Treasury
securities as defined below) in income for United States federal income tax
purposes as it accrues on a constant yield to maturity basis. The amount of such
excess will constitute only a portion of the total amounts payable in respect of
the Treasury portfolio. Consequently, a portion of each scheduled payment to you
generally will be treated as a return of your investment in the Treasury
portfolio and generally will not be considered current income for United States
federal income tax purposes.
In the case of any U.S. Treasury security with a maturity of one year or
less from the date of its issue (a "short-term U.S. Treasury Security"), in
general only accrual basis taxpayers will be required to include original issue
discount in income as it accrues. Unless such accrual basis holder elects to
accrue
S-60
the original issue discount on a short-term U.S. Treasury Security on a constant
yield to maturity basis, such original issue discount will be accrued on a
straight-line basis.
NON-UNITED STATES HOLDERS
The following discussion only applies to Non-United States Holders. You are
a "Non-United States Holder" if you are not a United States person. Special
rules not discussed in this summary may apply to you if you are a "controlled
foreign corporation", "passive foreign investment company," "expatriate",
corporation that accumulates earnings to avoid U.S. federal income tax or
"foreign personal holding company."
UNITED STATES FEDERAL WITHHOLDING TAX
The 30% United States federal withholding tax generally will not apply to
any payment of principal or interest (including original issue discount) on the
senior notes or treasury securities provided that:
- you do not actually (or constructively) own 10% or more of the total
combined voting power of all classes of our voting stock within the
meaning of the Code and the Treasury regulations;
- you are not a controlled foreign corporation that is related to us through
stock ownership;
- you are not a bank whose receipt of interest on the senior notes or
treasury securities is described in section 881 (c) (3) (A) of the Code;
and
- (a) you provide your name and address on an IRS Form W-8BEN (or other
applicable form), and certify, under penalty of perjury, that you are not
a United States person, or (b) if you hold your Equity Units, Treasury
Equity Units, senior notes or treasury securities through certain foreign
intermediaries, you must satisfy the certification requirements of
applicable United States Treasury regulations. Special certification
requirements apply to certain Non-United States Holders that are
"pass-through" entities rather than individuals.
If you cannot satisfy the requirements described above, payments of premium,
if any, and interest (including original issue discount) made to you will be
subject to the 30%, United States federal withholding tax, unless you provide us
with a properly executed (1) IRS Form W-8BEN (or other applicable form) claiming
an exemption from, or reduction in the rate of, withholding under the benefit of
an applicable tax treaty or (2) IRS Form W-8ECI stating that interest paid on
the senior notes or treasury securities is not subject to withholding tax
because it is effectively connected with your conduct of a trade or business in
the United States.
The 30% United States federal withholding tax generally will not apply to
any gain that you realize on the sale, exchange, or other disposition of the
Equity Units, Treasury Equity Units, senior notes, purchase contracts, treasury
securities, and Citizens common stock acquired under the purchase contract.
We will generally withhold a 30% United States federal withholding tax on
dividends paid on our common stock acquired under a purchase contract, or upon
receipt of the proper certification, such lower rate as may be specified by an
applicable income tax treaty. However, dividends that are effectively connected
with the conduct of a trade or business by the Non-United States Holder within
the United States and, where a tax treaty applies, are attributable to a United
States permanent establishment of the Non-United States Holder are not subject
to the withholding tax upon receipt of the proper certification, but instead are
subject to United States federal income tax, as described below.
A Non-United States Holder of our common stock who wishes to claim the
benefit of an applicable treaty rate (and avoid back-up withholding as discussed
below) for dividends will be required to satisfy certain certification and
disclosure requirements described in the fourth bullet point above.
S-61
A Non-United States Holder eligible for a reduced rate of United States
withholding tax on payments pursuant to an income tax treaty may obtain a refund
of any excess amounts withheld by filing an appropriate claim for refund with
the IRS.
UNITED STATES FEDERAL INCOME TAX
If you are engaged in a trade or business in the United States and interest
(including original issue discount) on the senior notes or treasury securities
or dividends on the Citizens common stock are effectively connected with the
conduct of that trade or business, you will be subject to United States federal
income tax on that interest or dividends on a net income basis (although exempt
from the 30% withholding tax), in the same manner as if you were a United States
person as defined under the Code. Certain certification and disclosure
requirements must be complied with in order for effectively connected income to
be exempt from withholding. In addition, if you are a foreign corporation, you
may be subject to a branch profits tax equal to 30% (or lower applicable treaty
rate) of your earnings and profits for the taxable year, subject to adjustments,
that are effectively connected with the conduct by you of a trade or business in
the United States. For this purpose, interest on the senior notes or treasury
securities and dividends on the common stock will be included in earnings and
profits.
Any gain realized on the disposition of a senior note, treasury security,
purchase contract or share of Citizens common stock generally will not be
subject to United States federal income tax unless (1) that gain or income is
effectively connected with the conduct of a trade or business by you in the
United States or (2) you are an individual who is present in the United States
for 183 days or more in the taxable year of that disposition, and certain other
conditions are met or (3) in the case of Equity Units, Treasury Equity Units,
purchase contracts or Citizens common stock, Citizens is or has been a "United
States real property holding corporation" for United States federal income tax
purposes.
An individual Non-United States Holder described in clause (l) above will be
subject to tax on the net gain derived from the sale under regular graduated
United States federal income tax rates. An individual Non-United States Holder
described in clause (2) above will be subject to a flat 30% tax on the gain
derived from the sale, which may be offset by United States source capital
losses (even though the individual is not considered a resident of the United
States). If a Non-U.S. Holder that is a foreign corporation falls under
clause (1) above, it will be subject to tax on its gain under regular graduated
United States federal income tax rates and, in addition, may be subject to the
branch profits tax equal to 30% of its effectively connected earnings and
profits or at such lower rate as may be specified by an applicable income tax
treaty.
For purposes of clause (3) above, we have not determined whether we are a
"United States real property holding corporation" ("USRPHC") for United States
federal income tax purposes. If Citizens is or becomes a USRPHC, so long as
Citizens common stock continues to be regularly traded on an established
securities market, you will not be subject to United States federal income tax
on the disposition of our common stock if you hold or held directly, indirectly
or by application of prescribed stock attribution rules (at any time during the
shorter of the five year period preceding the date of disposition or your
holding period) less than or equal to five percent of the total outstanding
Citizens common stock. Further, if Citizens is or becomes a USRPHC, so long as
both the purchase contracts (as part of the Equity Units) and our common stock
continue to be regularly traded on an established securities market, you will
not be subject to United States federal income tax on the disposition of the
purchase contracts if you hold or held directly, indirectly or by application of
the prescribed stock attribution rules (at any time during the shorter of the
five-year period preceding the date of disposition or your holding period) less
than or equal to five percent of the purchase contracts. If Citizens is or
becomes a USRPHC, if the purchase contracts are not, but our common stock is,
regularly traded on an established securities market, then you will not be
subject to United States federal income tax on the disposition of the purchase
contract if on the day you acquired the purchase contracts the purchase
contracts had a fair market value less than or equal to five percent of our
S-62
common stock. If however, Citizens is a USRPHC and the Citizens common stock
ceases to be regularly traded on an established securities market you will be
subject to United States federal income tax on the taxable disposition of the
common stock or the purchase contract. Finally, if Citizens is or becomes a
USRPHC and you dispose of a senior note, you will not be subject to United
States federal income tax, under clause (3) above, on such disposition of the
senior note unless it is determined that the senior note has been separated from
the purchase contract for the principal purpose of avoiding the provisions of
the Code addressing the disposition by foreign persons of U.S. real property
interests. In no event should clause (3) apply to a disposition of the senior
note if the senior note carries arm's length interest and repayment terms, which
we believe to be the case.
INFORMATION REPORTING AND BACKUP WITHHOLDING
UNITED STATES HOLDERS
In general, information reporting requirements will apply to payments on the
Equity Units, Treasury Equity Units, senior notes, treasury securities, and our
common stock made to you and to the proceeds of the sale or other disposition of
such instruments, unless you are an exempt recipient such as a corporation. A
31% backup withholding tax will apply to such payments if you fail to provide a
taxpayer identification number, a certification of exempt status, or fail to
report in full interest or dividend income.
NON-UNITED STATES HOLDERS
In general, no information reporting or backup withholding will be required
regarding payments on the Equity Units, Treasury Equity Units, senior notes,
treasury securities, purchase contracts and Citizens common stock that we make
to you provided that we do not have actual knowledge that you are a United
States person and we have received from you the certification described above
under "--United States Federal Withholding Tax." However, we must report
annually to the IRS and to you the amount of dividends paid to, and the tax
withheld with respect to, each Non-United States Holder.
In addition, no information reporting or backup withholding will be required
regarding the proceeds of the sale of Equity Units, Treasury Equity Units,
senior notes, treasury securities, and Citizens common stock made within the
United States or conducted through certain United States financial
intermediaries if the payor receives the certification described above and does
not have actual knowledge that you are a United States person or you otherwise
establish an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the IRS.
S-63
CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
purchase of the Equity Units by employee benefit plans that are subject to
Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended
("ERISA"), plans, individual retirement accounts and other arrangements that are
subject to Section 4975 of the Code or provisions under any federal, state,
local, non-U.S. or other laws or regulations that are similar to such provisions
of the Code or ERISA (collectively, "Similar Laws"), and entities whose
underlying assets are considered to include "plan assets" of such plans,
accounts and arrangements (each, a "Plan").
GENERAL FIDUCIARY MATTERS.
ERISA and the Code impose certain duties on persons who are fiduciaries of a
Plan subject to Title I of ERISA or Section 4975 of the Code (an "ERISA Plan")
and prohibit certain transactions involving the assets of an ERISA Plan and its
fiduciaries or other interested parties. Under ERISA and the Code, any person
who exercises any discretionary authority or control over the administration of
such an ERISA Plan or the management or disposition of the assets of such an
ERISA Plan, or who renders investment advice for a fee or other compensation to
such a Plan, is generally considered to be a fiduciary of the ERISA Plan.
In considering an investment in the Equity Units of a portion of the assets
of any Plan, a fiduciary should determine whether the investment is in
accordance with the documents and instruments governing the Plan and the
applicable provisions of ERISA, the Code or any Similar Law relating to a
fiduciary's duties to the Plan including, without limitation, the prudence,
diversification, delegation of control and prohibited transaction provisions of
ERISA, the Code and any other applicable Similar Laws.
Any insurance company proposing to invest assets of its general account in
the Equity Units should consider the extent that such investment would be
subject to the requirements of ERISA in light of the U.S. Supreme Court's
decision in JOHN HANCOCK MUTUAL LIFE INSURANCE CO. V. HARRIS TRUST AND SAVINGS
BANK and under any subsequent legislation or other guidance that has or may
become available relating to that decision, including the enactment of
Section 401(c) of ERISA by the Small Business Job Protection Act of 1996 and the
regulations promulgated thereunder.
PROHIBITED TRANSACTION ISSUES
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from
engaging in specified transactions involving plan assets with persons or
entities who are "parties in interest," within the meaning of ERISA, or
"disqualified persons," within the meaning of Section 4975 of the Code, unless
an exemption is available. A party in interest or disqualified person who
engaged in a non-exempt prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code. In addition, the
fiduciary of the ERISA Plan that engaged in such a non-exempt prohibited
transaction may be subject to penalties and liabilities under ERISA and the
Code.
Whether or not the underlying assets of Citizens were deemed to include
"plan assets," as described below, the acquisition and/or holding of the Equity
Units by an ERISA Plan with respect to which Citizens or the Underwriters is
considered a party in interest or a disqualified person may constitute or result
in a direct or indirect prohibited transaction under Section 406 of ERISA and/or
Section 4975 of the Code, unless the investment is acquired and is held in
accordance with an applicable statutory, class or individual prohibited
transaction exemption. In this regard, the U.S. Department of Labor (the "DOL")
has issued prohibited transaction class exemptions, or "PTCEs," that may apply
to the acquisition and holding of the Equity Units. These class exemptions
include, without limitation, PTCE 84-14 respecting transactions determined by
independent qualified professional asset managers, PTCE 90-1 respecting
insurance company pooled separate accounts, PTCE
S-64
91-38 respecting bank collective investment trust funds, PTCE 95-60 respecting
life insurance company general accounts and PTCE 96-23 respecting transactions
determined by in-house asset managers, although there can be no assurance that
all of the conditions of any such exemptions will be satisfied.
PLAN ASSET ISSUES
Regulations (the "Plan Asset Regulations") promulgated under ERISA by the
DOL generally provide that when an ERISA Plan acquires an equity interest in an
entity, the ERISA Plan's assets include both the equity interest and an
undivided interest in each of the underlying assets of the entity unless an
exception applies. In the absence of such an exception, this would result, among
other things, in the application of the prudence and other fiduciary
responsibility standards of ERISA to investments made by Citizens and the
possibility that certain transactions Citizens might seek to engage in could
constitute "prohibited transactions" under ERISA and the Code. Equity interests
that are not subject to this general rule include among others, (i) an equity
interest issued by an "operating company" (i.e., an entity that is primarily
engaged directly or through majority owned subsidiaries in the production or
sale of a product or service other than the investment of capital) and (ii) an
equity interest that constitutes a "publicly offered security" (as defined in
the Plan Asset Regulations). It is anticipated that Citizens will qualify as an
"operating company" and/or that the Equity Units will qualify as "publicly
offered securities," and that accordingly the foregoing general rule of the Plan
Asset Regulations will not apply.
REPRESENTATION
Accordingly, by acceptance of the Equity Units, each purchaser and
subsequent transferee of the Equity Units will be deemed to have represented and
warranted that either (i) no portion of the assets used by such purchaser or
transferee to acquire the Equity Units constitutes assets of any Plan or
(ii) the purchase and holding of the Equity Units by such purchaser or
transferee will not constitute a non-exempt prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code or similar violation under any
applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be
all-inclusive. Due to the complexity of these rules and the penalties that may
be imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries, or other persons considering purchasing
the Equity Units on behalf of, or with the assets of, any Plan, consult with
their counsel regarding the potential applicability of ERISA, Section 4975 of
the Code and any Similar Laws to such investment and whether an exemption would
be applicable to the purchase and holding of the Equity Units.
S-65
INCORPORATION OF DOCUMENTS BY REFERENCE
Some of the information that you may want to consider in deciding whether to
invest in the Equity Units is not included in this prospectus supplement but
rather is incorporated by reference to specific reports that we have filed with
the SEC. This allows us to disclose important information to you by referring
you to those documents rather than repeating them in full in this prospectus
supplement or the accompanying prospectus supplement. The information
incorporated by reference in this prospectus supplement contains important
business and financial information. In addition, information that we file with
the SEC after the date of this prospectus supplement automatically updates and
supersedes the information contained in this prospectus supplement and
incorporated filings. We have previously filed the following documents with the
SEC (File No. 001-11001) and are incorporating them by reference into this
prospectus supplement:
- Quarterly Report on Form 10-Q for the three-month period ended March 31,
2001 of Citizens Communications Company filed with the SEC on May 10,
2001;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on May 10, 2001 in respect of our earnings announcement for the
quarter ended May 31, 2001;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on May 16, 2001 in respect of our offering of up to
$1,000 million in senior unsecured debt;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on May 24, 2001 in respect of our May 18, 2001 issuance of
$1,750 million in aggregate principal amount of notes;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on June 4, 2001 in respect of the announcement of this offering
and the concurrent offering of our common stock; and
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on June 12, 2001.
We also incorporate by reference all documents subsequently filed by us
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
after the date of this prospectus supplement until our offering is completed.
In addition, you should refer to section entitled "Incorporation of
Documents by Reference" in the accompanying prospectus for a list of documents
previously incorporated by reference into the prospectus.
We will provide you, upon written or oral request, with a copy of any of
these documents, at no cost. You should direct your request, either in writing
or by telephone, to
Citizens Communications Company
3 High Ridge Park, Stamford, Connecticut 06905
Attn.: Office of the Secretary
Telephone 203-614-5600
S-66
UNDERWRITERS
Under the terms and subject to the conditions set forth in an underwriting
agreement dated the date of this prospectus supplement, the underwriters named
below, for whom Morgan Stanley & Co. Incorporated and J.P. Morgan Securities
Inc. are acting as representatives, have severally agreed to purchase, and
Citizens Communications Company has agreed to sell to the underwriters,
severally, the number of Equity Units indicated below:
NUMBER OF
NAME SHARES
---- ----------
Morgan Stanley & Co. Incorporated........................... 3,175,600
J.P. Morgan Securities Inc. ................................ 3,175,600
Banc of America Securities LLC.............................. 3,175,600
Salomon Smith Barney Inc.................................... 3,175,600
Lehman Brothers Inc......................................... 844,800
The Buckingham Research Group Incorporated.................. 169,600
Dain Rauscher Incorporated.................................. 211,200
First Union Securities, Inc. ............................... 846,400
Legg Mason Wood Walker, Incorporated........................ 169,600
Mizuho International plc.................................... 211,200
Robertson Stephens, Inc. ................................... 422,400
TD Securities (USA) Inc. ................................... 422,400
----------
Total................................................... 16,000,000
==========
The underwriters are offering the Equity Units subject to their acceptance
of the Equity Units from Citizens Communications Company and subject to prior
sale. The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the Equity Units offered by this
prospectus supplement are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The underwriters are obligated to
take and pay for all of the Equity Units offered by this prospectus supplement,
other than those covered by the over-allotment option described below, if any
such Equity Units are taken.
The per Equity Unit price of any Equity Unit sold by the underwriters shall
be the public offering price listed on the cover page of this prospectus
supplement, in United States dollars, less an amount not greater than the per
Equity Unit amount of the concession to dealers described below.
The underwriters initially propose to offer part of the Equity Units
directly to the public at the public offering price listed on the cover page of
this prospectus supplement and part to certain dealers at a price that
represents a concession not in excess of $0.4875 per Equity Unit. After the
initial offering of the Equity Units, the offering price and other selling terms
may from time to time be varied by the representative.
Citizens Communications Company has granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus supplement, to purchase
up to an additional 2,400,000 Equity Units at the public offering price listed
on the cover page of this prospectus supplement, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with this offering. To the
extent the option is exercised, each underwriter will become obligated to
purchase approximately the same percentage of the additional Equity Units as the
number set forth next to that underwriter's name in the preceding table bears to
the total number of Equity Units set forth next to the names of all the
underwriters in the preceding table. If the underwriters' over-allotment option
is exercised in full, the total price to the public would be $460,000,000, the
total underwriting discounts and commissions would be $13,800,000 and the net
proceeds would be $446,200,000.
S-67
Prior to this offering, there has been no public market for the Equity
Units. We intend to apply to have the Equity Units listed on The New York Stock
Exchange under the symbol "CZB." In order to meet one of the requirements for
listing on The New York Stock Exchange, the underwriters have undertaken to sell
the Equity Units to a minimum of 400 beneficial owners.
Citizens has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated and J.P. Morgan Securities Inc., on behalf of the
underwriters, it will not, during the period ending 90 days after the date of
this prospectus supplement:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of directly
or indirectly, any Equity Units, purchase contracts or shares of our
common stock or any securities convertible into or exercisable or
exchangeable for Equity Units, purchase contracts or shares of Citizens
common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of Equity
Units, purchase contracts or shares of Citizens common stock;
whether any transaction described above is to be settled by delivery of Equity
Units, purchase contracts or shares of Citizens common stock or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to, among other things:
- the sale of shares or Equity Units to the underwriters;
- the issuance of shares of common stock in Citizens' anticipated concurrent
common stock offering;
- the issuance by Citizens of shares of common stock upon the exercise of an
option outstanding on the date of this prospectus supplement or with
respect to awards under Citizens executive stock incentive plan
outstanding on the date of this prospectus supplement;
- the grant of options or awards pursuant to Citizens employee benefit
plans, provided that such options or awards do not vest prior to the
termination of the lock-up period; or
- the issuance of shares of our common stock or securities convertible into
or exchangeable or exercisable for any shares of our common stock by us in
a private sale in which each recipient of such securities agrees to be
bound by the same restrictions as those described in the following
paragraph.
Our executive officers and directors have agreed that, for a period of
90 days after the date of this prospectus supplement, they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction that
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions is to be
settled by delivery of our common stock or other securities, in cash or
otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, or to enter into any such transaction, swap, hedge or
other arrangement, without, in each case, the prior written consent of Morgan
Stanley & Co. Incorporated and J.P. Morgan Securities Inc.
In order to facilitate the offering of the Equity Units, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Equity Units. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the Equity Units for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Equity Units, the underwriters may bid for, and purchase, Equity
Units in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Equity Units in the offering, if the syndicate repurchases previously
distributed Equity Units in
S-68
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the Equity Units above independent market levels. The underwriters are not
required to engage in these activities and may end any of these activities at
any time.
Concurrently with this offering, we are also offering 21,875,000 shares of
our common stock, with an over-allotment option of 3,281,250 shares of common
stock, for which certain underwriters of this offering are also acting as
underwriters under a separate underwriting agreement. The two offerings are not
conditioned on each other.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
From time to time, some of the underwriters and their affiliates have
provided, and continue to provide, investment banking and commercial banking
services to Citizens.
Citizens has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Equity Units will be passed upon
for Citizens by Winston & Strawn, New York, New York and by Simpson Thacher &
Bartlett, New York, New York for the underwriters.
S-69
PRO FORMA COMBINED FINANCIAL STATEMENTS
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 (GTE) 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 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. The
remainder of the Qwest acquisitions, covering 539,800 access lines, are subject
to the satisfaction of certain closing conditions, including, without
limitation, financial representations and warranties and the receipt of
governmental consents. We have already received all required state regulatory
approvals other than from Minnesota. Subject to satisfaction of the required
closing conditions, we anticipate closing the acquisitions on a state-by-state
basis. We cannot assure that all required closing conditions will be satisfied.
We are currently in discussions with Qwest, relating to the satisfaction of
closing conditions. We do not believe that the failure to close any or all of
the remaining Qwest acquisitions will have a material adverse effect on us,
including our ability to implement our telecommunications strategies.
GLOBAL CROSSING ACQUISITION
On July 12, 2000, we announced a definitive agreement to purchase from
Global Crossing Ltd. (Global) 100% of the stock of the Frontier Incumbent Local
Exchange Carrier business, which owns approximately 1.1 million 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.
P-1
The GTE Acquisitions, the Qwest 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 statement of operations. 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 Qwest Acquisitions on the pro forma balance sheet
represent the assets to be acquired from GTE and Qwest 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 Qwest 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 telecommunications 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
does not present the Acquisitions completed and to be completed as if they were
accounted for under SFAS 71 pending the outcome of our evaluation.
The pro forma information, presented in this prospectus supplement with
regard to our pending acquisitions, 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. The unaudited pro forma information does
not reflect the impact of any joint venture we may enter into as a financing
vehicle. If we enter into a joint venture, we expect our results and financial
condition would materially differ from our pro forma results.
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 Current Reports on Form 8-K filed by us on
November 14, 2000, March 29, 2001 and May 7, 2001 and the historical financial
statements of Citizens Communications Company.
P-2
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
PRO FORMA BALANCE SHEET DATA
AS OF DECEMBER 31, 2000
(UNAUDITED)
PRO FORMA
CITIZENS FRONTIER GTE AND QWEST ----------------------------
COMMUNICATIONS ACQUISITION ACQUISITIONS ADJUSTMENTS ADJUSTED
-------------- ----------- --------------- ----------- -----------
(AMOUNTS IN THOUSANDS)
ASSETS
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 633,268 1,521,250 1,230,529 1,223,500 (2) 4,608,547
acquired...........................
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
========== ========== ========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
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 190,496 -- (190,496)(1) --
operations.........................
---------- ---------- ---------- ----------- -----------
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 108,321 148,232 (29,552)(2) 227,001
liabilities........................
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
(4,401,476)(2)
1,100,000 (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 Combined Financial Statements.
P-3
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS DATA
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
GTE ACQUISITIONS
--------------------
GTE
CITIZENS GTE COMBINED QWEST FRONTIER TOTAL
COMMUNICATIONS MINNESOTA ENTITIES ACQUISTION ACQUISITION ACQUISITIONS
-------------- --------- -------- ---------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 GAS PRO FORMA
AND ELECTRIC ----------------------------
OPERATIONS (1) ADJUSTMENTS ADJUSTED
------------------ ----------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Revenue.................. $597,823 $ -- $2,464,209
Operating expenses....... 526,472 9,000 (3) 1,361,517
Depreciation and
amortization........... 47,857 228,953 (4) 899,957
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) 445,339
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.....
Weighted average shares
outstanding--Diluted...
Loss from continuing
operations per basic
share..................
Loss from continuing
operations per diluted
share..................
See Notes to Pro Forma Combined Financial Statements
P-4
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENT
(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 pro forma statement of
operations data.
(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
Qwest Acquisitions. Such acquisitions are assumed to be funded through the
cash proceeds, net of tax, from the assumed sale of the public utilities
services 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 of the
Frontier Acquisition and the net equity in assets acquired
and to be acquired of the GTE and Qwest Acquisitions...... $(4,401,476)
Elimination of related party balances of Frontier, net
(a)....................................................... 289,276
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
-----------
$ 1,223,500
===========
(a) The Frontier related party balances are included in accounts receivable,
net, other assets, accounts payable and other liabilities. Upon
acquisition by Citizens, certain related party balances are settled by
Frontier's parent. The remaining amounts, representing a net receivable
of $289.3 million, are assumed by Citizens. All of these related party
balances are eliminated as part of the pro forma adjustments with the
amount assumed by Citizens resulting in an increase to "Excess cost over
net assets acquired."
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 Qwest purchase price allocations) at their
historical carrying values and have reflected the excess cost over such
amounts as excess 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 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.
P-5
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 cost over net assets acquired in
the Acquisitions using the straight-line method over a 15-year period.
Should the allocation of purchase price 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 purchase price was allocated to
Frontier Corporation and its subsidiaries based upon their fair market
values 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 Qwest 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.
P-6
$3,800,000,000
CITIZENS COMMUNICATIONS COMPANY
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
DEBT SECURITIES
WARRANTS
CITIZENS COMMUNICATIONS CAPITAL TRUST I
TRUST PREFERRED SECURITIES
GUARANTEED, TO THE EXTENT DESCRIBED HEREIN, BY
CITIZENS COMMUNICATIONS COMPANY
---------------------
Citizens Communications Company intends to offer from time to time common
stock, preferred stock, depositary shares, debt securities, and warrants to
purchase these types of securities. In addition, Citizens Communications Company
has established Citizens Communications Capital Trust I, or the Trust, as a
Delaware statutory business trust. The Trust intends to offer trust preferred
securities. The trust preferred securities will be guaranteed to the extent
described herein by Citizens Communications Company. We may sell any combination
of these securities in one or more offerings up to a total dollar amount of
$3,800,000,000. We will provide specific terms of these securities in
supplements to this prospectus. You should read this prospectus and any
prospectus supplement carefully before you invest.
In this prospectus, references to "Citizens" are to Citizens Communications
Company and do not include its subsidiaries. References to the "Trust" are to
Citizens Communications Capital Trust I and do not include Citizens. References
to the "Company," "we," "us" and "our" do include Citizens, the Trust and its
other subsidiaries.
We may sell the securities directly or to or through underwriters or
dealers, and also to other purchasers or through agents. The names of any
underwriters or agents that are included in a sale of securities to you, and any
applicable commissions or discounts, will be stated in an accompanying
prospectus supplement.
This prospectus also relates to approximately 9,139,900 shares, or the
Resale Shares, of common stock of Citizens that may, from time to time, be sold
by the person named in this prospectus under the caption "Selling Stockholder."
The selling stockholder may from time to time sell the Resale Shares on the
New York Stock Exchange or on any other national securities exchange on which
our common stock may be listed or traded, in negotiated transactions or
otherwise, at prices then prevailing or related to the then current market price
or at negotiated prices. The Resale Shares may be sold directly or through
brokers or dealers. See "Plan of Distribution."
We will receive no part of the proceeds of any sales of the Resale Shares
made hereunder. See "Use of Proceeds." All expenses of registration of the
Resale Shares incurred in connection with the offering, as well as all selling
and other expenses incurred by the selling stockholder, are being borne by us.
A brief description of the securities we, or the selling stockholder, may
offer can be found in this prospectus.
Our common stock is quoted on the New York Stock Exchange under the symbol
"CZN." The closing price of our common stock on the New York Stock Exchange on
May 4, 2001 was $12.56. None of the other securities that we may offer under
this prospectus is currently publicly traded.
------------------------
SEE "RISK FACTORS" ON PAGE 4 FOR A DISCUSSION OF MATTERS
THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THESE SECURITIES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this prospectus is May 9, 2001
TABLE OF CONTENTS
PAGE
--------
About This Prospectus....................................... 3
Risk Factors................................................ 4
Forward-Looking Statements.................................. 9
Use of Proceeds............................................. 10
Ratio of Earnings to Fixed Charges.......................... 10
Citizens Communications Company............................. 11
Citizens Communications Capital Trust I..................... 25
Accounting Treatment........................................ 25
Selling Stockholder......................................... 26
Description of Debt Securities.............................. 27
Description of Capital Stock................................ 35
Description of Warrants..................................... 37
Description of Depositary Shares............................ 39
Description of Trust Preferred Securities................... 42
Description of Guarantee.................................... 43
Plan of Distribution........................................ 46
Where You Can Find More Information......................... 48
Incorporation of Documents by Reference..................... 48
Legal Matters............................................... 49
Experts..................................................... 49
2
ABOUT THIS PROSPECTUS
This document is called a prospectus and is part of a registration statement
that we filed with the Securities and Exchange Commission using a "shelf"
registration or continuous offering process. Under this shelf process, we may
from time to time sell any combination of the securities described in this
prospectus.
This prospectus provides you with a description of our business, certain
risk factors and a general description of the securities we may offer. Each time
we sell securities, we will provide a prospectus supplement containing specific
information about the terms of the securities being offered. That prospectus
supplement will include a detailed and current discussion of any risk factors or
other special considerations applicable to those securities. The prospectus
supplement may also add, update or change information in this prospectus. If
there is any inconsistency between the information in this prospectus together
with additional information described under the heading "Where You Can Find More
Information" and any prospectus supplement, you should rely on the information
in that prospectus supplement.
You should rely on the information provided in this prospectus and in any
prospectus supplement, including the information incorporated by reference.
Neither we nor any underwriters or agents have authorized anyone to provide you
with different information. We are not offering the securities in any state
where the offer is prohibited. You should not assume that the information in
this prospectus, any prospectus supplement, or any document incorporated by
reference, is truthful or complete at any date other than the date mentioned on
the cover page of those documents.
3
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THESE RISK FACTORS TOGETHER WITH ALL OF THE
INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR IN ANY
PROSPECTUS SUPPLEMENT BEFORE YOU DECIDE TO PURCHASE SECURITIES OFFERED BY THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. IN ADDITION, YOU SHOULD NOTE THAT THE
PROSPECTUS SUPPLEMENT THAT WILL ACCOMPANY THIS PROSPECTUS WILL INCLUDE ANY
ADDITIONAL RISK FACTORS THAT MAY SPECIFICALLY APPLY TO THE TYPE OF SECURITY THAT
WE WILL OFFER UNDER THE PROSPECTUS SUPPLEMENT OR THAT MAY OTHERWISE APPLY.
WE MAY BE UNABLE TO OBTAIN NEW FINANCING AND ANY NEW FINANCING WE DO OBTAIN
MAY BE ON UNFAVORABLE TERMS.
Since March 1999, we have contracted to purchase 2,034,700 telephone access
lines for an aggregate purchase price of $6,321.0 million. As of March 31, 2001,
we have closed on the purchase of 334,500 telephone access lines for an
aggregate purchase price of $985.3 million, which was financed with drawings
under our bank credit facilities, the sale of our commercial paper and the sale
of marketable securities held by us. We will require $5,334.8 million to close
on the remaining purchases. Our remaining available credit facilities of
$5,553.6 million as of March 31, 2001, together with cash flows, are sufficient
to fund these acquisitions as they close.
Our ability to draw on our $5,700.0 million credit facility will end on
October 26, 2001 and the debt outstanding under this facility will mature on
October 25, 2002. Accordingly, prior to October 25, 2002, we will need to
establish a permanent capital structure consisting of a combination of
replacement credit facilities and issuances of long-term debt and equity. We may
not be able to obtain sufficient long-term debt financing and equity financing
on favorable terms. Our ability to accomplish these objectives is subject to
market conditions, relevant regulatory approvals, and our ability to maintain a
favorable credit rating. We may only be able to obtain long-term debt financing
at higher interest rates than we currently pay or with onerous covenants that
could restrict our operating flexibility or adversely affect our overall
financial results.
WE WILL NEED TO TAKE ACTION IF WE ARE TO MAINTAIN OUR CREDIT RATINGS.
It is our intention to maintain investment grade credit ratings for our
senior unsecured indebtedness. In order to do so, we expect to take action to
preserve the strength of our balance sheet. More specifically, we expect that we
may issue equity or securities that the rating agencies deem to have equity
characteristics, refinance our credit facility indebtedness, sell our public
utility assets and perhaps raise capital through one or more joint ventures
which we expect we would operate and to which we would sell some significant
assets. The consummation of any and/or all of these transactions is dependent
upon a number of conditions affecting our operations and the capital markets
generally, including the receipt of any necessary regulatory approvals,
favorable market reception to our issuance of long-term debt and equity
securities and our continued success in operating our businesses. Failure to
preserve the strength of our balance sheet through some combination of these
transactions could result in a downgrading of the ratings applicable to our
indebtedness. In addition, if we undertake any further acquisitions, such
acquisitions might have a detrimental effect on our credit ratings.
WE MAY BE UNABLE TO SUCCESSFULLY DIVEST OUR PUBLIC UTILITIES SERVICES
SEGMENTS IN A TIMELY MANNER WHICH MAY ADVERSELY AFFECT OUR FINANCING PLANS.
A key component of our business strategy involves the divestiture of our
public utilities services segments. Failure to sell our public utilities
services segments on acceptable terms or to complete agreed sales within agreed
time periods may adversely affect our ability to obtain new financing on
acceptable terms to continue to expand our telecommunications business
internally and to meet competitive challenges. Sales of our public utilities
services segments require regulatory approval and in some cases contain
financing conditions. We cannot be sure that we will receive the necessary
regulatory approvals or financing prior to the expirations of closing deadlines
contained in our sale agreements. Therefore, the planned sale of our public
utilities services segments may not occur within
4
the anticipated time periods. Examples of delays or factors which may affect our
proposed transactions include:
- Our agreements to sell our Arizona and Vermont electric divisions have
been terminated due to the failure of the proposed purchaser to obtain
financing.
- The California electricity generation crisis has stretched the resources
of California utility regulators and may result in delays in approving the
sale of our water and wastewater assets. Our agreement for the sale of
this business may be terminated if regulatory approval is not received
before September 30, 2001.
- The Hawaii Public Utility Commission has denied the initial application
requesting approval of the proposed sale of our Kauai electric division to
Kauai Island Electric Co-op. Our agreement for the sale of this division
may be terminated if regulatory approval is not received before
February 2002.
Our failure to consummate these divestitures at the expected prices could
adversely affect our financing plans, credit ratings and internal expansion.
UNTIL WE DIVEST OUR PUBLIC UTILITIES SERVICES SEGMENTS WE WILL BE SUBJECT TO
THE RISKS OF THE PUBLIC UTILITIES BUSINESS.
We intend to divest our public utilities services segments in order to focus
on the telecommunications sector. Until we complete our divestitures on
acceptable terms, we remain subject to continuing risks of the public utilities
business. These risks include exposure to rapidly fluctuating prices for gas and
electricity in a regulated or partially regulated environment and financial
instability in the public utilities industry in certain states. For example:
- In Arizona, we are disputing what we believe to be excessive power costs
charged by our power supplier in the amount of $57.0 million through
December 31, 2000. We have deferred charging these costs to consumers and
have recorded them as a regulatory asset on our balance sheet in
anticipation of recovering certain amounts through renegotiation with the
power supplier.
- In Vermont, we belong to a Vermont utility consortium that purchases power
from a Canadian power generation facility. Two participants in the
consortium, representing an aggregate of 83% of the purchase commitment,
have experienced financial difficulties. If they default on their purchase
commitments, we, as a 10% participant, and other members of the consortium
will be obligated to purchase the defaulting parties' share of power on a
pro rata basis. We will be exposed to any price differential between the
price that we pay for the power and the market price for the power.
- The market for energy has become more unstable recently, particularly in
states such as California. Continued market instability in California or
in other jurisdictions may have an adverse effect upon the energy market
generally and our operations specifically.
WE HAVE SUBSTANTIAL EXISTING INDEBTEDNESS AND WILL INCUR SUBSTANTIAL
ADDITIONAL OBLIGATIONS.
As of March 31, 2001, we had outstanding long-term indebtedness of
approximately $2,981.5 million. This amount includes indebtedness of our
85%-owned subsidiary, Electric Lightwave, Inc., or ELI. We have credit
facilities of $6,350.0 million of which $5,553.6 million was available as of
March 31, 2001 to fund our currently contracted for acquisitions. Through
March 31, 2002, we expect $181.2 million of this indebtedness to mature.
As of March 31, 2001, ELI had outstanding long-term indebtedness of
approximately $885.9 million. ELI has borrowed $400.0 million under a revolving
line of credit with commercial banks that expires on November 21, 2002 and has
issued $325.0 million in indebtedness that matures on May 14, 2004. In addition,
ELI has entered into leases for telecommunication facilities, including one with
a final purchase option due on April 30, 2002 in the amount of $110.0 million.
We have guaranteed $911.1 million of indebtedness and other obligations of ELI.
We do not expect that ELI will
5
have sufficient resources from internally generated funds to make all of these
required payments. Therefore, ELI must rely upon the financial markets and us to
refinance all or a portion of this indebtedness. There can be no assurance that
ELI will be successful in refinancing this indebtedness. We have committed to
continue to finance ELI's cash requirements through a revolving credit facility
to ELI in the amount of $450.0 million that matures on October 30, 2005. As of
March 31, 2001, $58.0 million principal amount was outstanding under this
facility.
We must use a portion of our future cash flow from operations to pay the
principal and interest on our indebtedness, which will reduce the funds
available for our operations, including capital investments and business
expenses. This could hinder our ability to adjust to changing market and
economic conditions. If we incur significant additional indebtedness, our credit
ratings could be adversely affected. As a result, our borrowing costs could
increase and our access to capital may be adversely affected.
WE MAY BE UNABLE TO ACHIEVE IMPROVED OPERATING RESULTS FROM OUR NEWLY
ACQUIRED OPERATIONS AND EFFICIENTLY INTEGRATE THESE OPERATIONS INTO OUR
EXISTING BUSINESS.
In order to accomplish growth in profitability, we will need to increase our
revenues per customer through enhanced products and services as well as attract
new customers while retaining our existing customer revenue base. In addition,
we need to integrate our newly acquired operations into our existing business.
Our strategy is premised, in part, on our ability to timely consummate our
pending telecommunications acquisitions and to improve operating results in our
existing and to-be-acquired telecommunications businesses by introducing new
communications products and services, expanding the penetration of existing
services and improving operating efficiencies.
The rapid growth in the size of our telecommunications business though our
acquisitions and our ongoing transformation into a telecommunications company
poses challenges for us to monitor our operations, costs, regulatory compliance,
and service quality and to maintain other necessary internal controls. If we are
not able to meet these challenges effectively, our results of operations may be
harmed.
OUR ACTUAL OPERATING RESULTS WILL DIFFER FROM THE RESULTS INDICATED IN THE
PRO FORMA FINANCIAL STATEMENTS AND THIS COULD ADVERSELY AFFECT THE VALUE OF
THE SECURITIES.
The pro forma information incorporated by reference in this prospectus with
regard to our pending acquisitions, 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 and businesses
been combined throughout these periods and performance might have been
different. 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 and businesses will
experience after completion of these transactions.
In addition, we may enter transactions that would affect our financial
condition and the value of the securities. Our pro forma financial statements do
not reflect what would be the effect of any transaction, including joint
ventures we may enter into.
THE ACCESS CHARGE REVENUES WE RECEIVE MAY BE REDUCED AT ANY TIME.
A significant portion of our revenues comes or is derived from access
charges paid by interexchange carriers, or IXCs, for services we provide in
originating and terminating intrastate and interstate long-distance telephone
calls. The amount of access charge revenues we receive for these services is
regulated by the Federal Communications Commission, or FCC, and state regulatory
agencies. Recent rulings regarding access charges have lowered the amount of
revenue we receive from this source. Additional actions by these agencies could
further reduce the amount of access revenues we receive. In addition, a portion
of our access revenues is received from state and federal universal
6
service funds based upon the high cost of providing telephone service to certain
rural areas. In the future, there may be proposals by state or federal
regulatory agencies to eliminate or reduce these revenues. A material reduction
in the revenues we receive from these funds would adversely affect our financial
results.
WE FACE COMPETITION, WHICH COULD ADVERSELY AFFECT US.
The telecommunications industry is a competitive industry. The traditional
dividing lines between long distance, local, wireless, cable and internet
services are becoming increasingly blurred. Through mergers and various service
integration strategies, services providers are striving to provide integrated
solutions both within and across geographic markets. As a diversified full
service incumbent local exchange carrier, or ILEC, our competitors are
competitive local exchange carriers, or CLECs, and other providers (or potential
providers) of services, such as internet service providers, or ISPs, satellite
companies, neighboring ILECs and cable companies that may provide services
competitive with ours or services that we intend to introduce. We cannot assure
you that we will be able to compete effectively with these industry participants
in all of our operations.
In addition, wireless providers currently compete in territories of all of
our rural telephone exchange subsidiaries. Increased competition from these
wireless providers is expected. We cannot predict the effects of greater
competition from wireless providers. Furthermore, regions served by access lines
that have not had substantial upgrading over the last several years are
particularly vulnerable to competition. Until we complete the upgrade of our
access lines, the services we provide in the areas served by these access lines
are vulnerable to competition from operators of more updated systems.
We expect competition to intensify as a result of the entrance of new
competitors and the development of new technologies, products and services. We
cannot predict which of many possible future technologies, products or services
will be important to maintain our competitive position or what expenditures will
be required to develop and provide these technologies, products or services. Our
ability to compete successfully will depend on marketing and on our ability to
anticipate and respond to various competitive factors affecting the industry,
including a changing regulatory environment that may affect our competitors and
us differently, new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors.
ELI FACES SUBSTANTIAL COMPETITION FOR ITS TELECOMMUNICATIONS SERVICES FROM
LARGER COMPANIES.
ELI's competitors for telecommunications services are primarily larger
ILECs, CLECs and IXCs. Because it is not an incumbent provider, ELI's ability to
succeed in the telecommunications services market depends to a large extent on
its ability to build tailored, value-added network services for business
customers and to maintain its customer base and develop additional business
customers in its core geographic areas in light of changing technologies.
We anticipate that general pricing competition and pressures will increase
significantly. We have not obtained significant market share in any of the areas
where we offer our CLEC services, nor do we expect to do so given the size of
our telecommunications services markets, the intense competition therein and the
diversity of customer requirements. There can be no assurance that we will be
able to compete effectively in any of our markets. Furthermore, the recent
bankruptcies and weakened financial position of a number of CLECs have resulted
in a more demanding operating environment for CLECs, as both customers and
suppliers are more concerned about each CLEC's creditworthiness.
MANY OF OUR COMPETITORS HAVE SUPERIOR RESOURCES, WHICH MAY PLACE US AT A
COST AND PRICE DISADVANTAGE.
Many of our current and potential competitors have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours. In addition, some of our
competitors can raise capital at a lower cost than we can. Consequently, some
competitors may be able to develop and expand their communications and network
infrastructures
7
more quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily and devote greater resources to the marketing and sale of their
products and services than we can. Also, the greater brand name recognition of
some competitors may require us to price our services at lower levels in order
to win business. Finally, the cost advantages of some competitors may give them
the ability to reduce their prices for an extended period of time if they so
choose.
OUR COMPANY AND INDUSTRY ARE HIGHLY REGULATED, IMPOSING SUBSTANTIAL
COMPLIANCE COSTS AND RESTRICTING OUR ABILITY TO COMPETE IN OUR TARGET
MARKETS.
As an ILEC, we are subject to significant regulation from federal, state and
local authorities. This regulation restricts our ability to raise our rates,
especially in our basic services, and imposes substantial compliance costs on
us. Regulation restricts our ability to compete and, in some jurisdictions, it
may restrict our ability to expand our services. In addition, changes to the
regulations that govern us may have an adverse effect upon our business by
reducing the allowable fees that we may charge, imposing additional compliance
costs, or otherwise changing the nature of our operations and the competiton in
our industry.
IN THE FUTURE AS COMPETITION ENTERS OUR MARKETS, WE MAY BE UNABLE TO MEET
THE TECHNOLOGICAL NEEDS OR EXPECTATIONS OF OUR CUSTOMERS.
The telecommunications industry is subject to significant changes in
technology. If we do not replace or upgrade technology and equipment that
becomes obsolete, we will be unable to compete effectively because we will not
be able to meet the needs or expectations of our customers. Replacing or
upgrading our infrastructure could result in significant capital expenditures.
DETERIORATING ECONOMIC CONDITIONS COULD HARM OUR BUSINESS.
Demand for communications products and services may be adversely affected by
a downturn in the United States economy as well as changes in the global
economy. Key United States economic indicators have recently signaled a
softening of the United States economy. As a result, we may experience decreased
demand for our communications products and services. A decline in the demand for
and usage of communications products and services could have an adverse effect
on our results of operations and financial condition.
Many of ELI's customers are in various internet-related businesses,
including internet service providers, some of which have been adversely affected
by recent business trends in that sector. To the extent the credit quality of
these customers deteriorates or these customers seek bankruptcy protection,
ELI's ability to collect receivables, and ultimately its operating results, may
be adversely affected.
AS A HOLDING COMPANY WITH RESPECT TO TELECOMMUNICATIONS ASSETS, WE WILL
REQUIRE DIVIDENDS FROM SUBSIDIARIES TO MEET CASH REQUIREMENTS OR PAY
DIVIDENDS.
Citizens conducts all its telecommunications business operations through its
subsidiaries and may arrange for certain telecommunications assets to be held in
special purpose legal entities with separate financing. Accordingly, following
the divestiture of our public utilities services segments, Citizens' only source
of cash to pay dividends or make other distributions on its capital stock or to
pay interest and principal on its outstanding indebtedness will be distributions
relating to its ownership interest in its telecommunications subsidiaries and
affiliates from the net earnings and cash flow generated by such subsidiaries.
We cannot be sure that Citizens' telecommunications subsidiaries will generate
sufficient cash flow to pay or distribute such dividends or funds, or that
applicable state law, regulatory action, and contractual restrictions, including
negative covenants contained in any debt instruments of such subsidiaries and
affiliates, would permit such dividends, distributions or payments.
8
FORWARD-LOOKING STATEMENTS
Our forward-looking statements are subject to a variety of factors that
could cause actual results to differ significantly from current beliefs.
Some statements and information contained in this prospectus and in the
documents incorporated by reference into this prospectus are not historical
facts, but are "forward-looking statements," as such term is defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "plans," "may," "will," "would," "could," "should," or
"anticipates" or the negative of these words or other variations of these words
or other comparable words, or by discussions of strategy that involve risks and
uncertainties. Forward-looking statements may differ from actual future results
due to, but not limited to, those factors referenced under "Risk Factors" and/or
any of the following possibilities:
- changes in economic conditions;
- changes in the capital markets;
- changes in industry conditions;
- changes in our credit rating; and
- changes in accounting policies or practices adopted voluntarily or as
required by regulations or generally accepted accounting principles.
You should consider these important factors as well as those referenced
under "Risk Factors" in evaluating any statement in this prospectus or otherwise
made by us or on our behalf. We have no obligation to update or revise these
forward-looking statements.
9
USE OF PROCEEDS
Except as otherwise described in an accompanying prospectus supplement, we
plan to use substantially all of the net proceeds from the sale of any
securities sold by us, together with internally generated funds and possible
future borrowings, to refinance bank borrowings and other extensions of credit,
to expand our networks, service offerings and related infrastructure, to fund
working capital and pending as well as future acquisitions, to make further
investments in related telecommunications businesses as well as for general
corporate purposes. Until we use the proceeds of sales by us of any securities
covered by this prospectus or any prospectus supplement in this manner, we may
temporarily use them to make short-term investments or to reduce short-term
borrowings.
All of the Resale Shares offered hereby are being offered by the selling
stockholder. We will not receive any of the proceeds of any sales of Resales
Shares made hereunder.
The proceeds from the sale of trust preferred securities by the Trust will
be invested in junior subordinated notes issued by Citizens. Except as we may
otherwise describe in a prospectus supplement, Citizens expects to use the net
proceeds from the sale of the junior subordinated notes to the Trust for the
purposes set forth above.
RATIO OF EARNINGS TO FIXED CHARGES
The following table shows our consolidated ratio of earnings to fixed
charges and our consolidated ratio of earnings to combined fixed charges and
preferred dividends. Earnings consist of income (loss) before income taxes plus
fixed charges and preferred dividends. Fixed charges consist of interest charges
and an amount representing the interest factor included in rentals (assumed to
be one-third) and preference security dividend requirements.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999(1) 2000
-------- -------- -------- -------- --------
Consolidated ratio of earnings to fixed charges......... 3.44 .98 1.28 2.22 .62
Consolidated ratio of earnings to combined fixed charges
and preferred dividends............................... 3.22 .98 1.26 2.14 .64
------------------------
(1) In 1999, we recorded pre-tax non-operating gains of approximately
$221.0 million related to the sale of our investments in Centennial Cellular
Corp., Century Communications Corp. ("Century") and our interest in a cable
television joint venture with a subsidiary of Century. Excluding such
pre-tax non-operating gains, the ratio of earnings to fixed charges for 1999
is 0.67 and the ratio of earnings to combined fixed charges and preferred
dividends for 1999 is 0.69.
10
CITIZENS COMMUNICATIONS COMPANY
INTRODUCTION
We are a telecommunications-focused company providing wireline
communications services primarily to rural areas and small and medium-sized
towns and cities as an incumbent local exchange carrier, or ILEC. In addition,
we provide competitive local exchange carrier, or CLEC, service to business
customers and to other communications carriers in certain metropolitan areas in
the western United States through Electric Lightwave, Inc., our 85%-owned
subsidiary. We also provide public utility services including natural gas
transmission and distribution, electric transmission and distribution and water
distribution and wastewater treatment services to primarily rural and suburban
customers throughout the United States.
With approximately 1.4 million telephone access lines in 17 states we were
the eighth largest local access wireline telephone provider in the United States
as of December 31, 2000. Upon consummation of telephone access line acquisitions
contracted for during 1999 and 2000, we expect to be the sixth largest ILEC in
the United States with approximately 3.1 million telephone access lines in 27
states. In fiscal years 1999 and 2000 revenues from our ILEC services segment
were $903.2 million and $963.7 million, respectively, and our adjusted EBITDA,
operating income plus depreciation and amortization, was $327.1 million and
$434.1 million, respectively. Revenues in fiscal years 1999 and 2000 from our
CLEC services segment were $187.0 million and $244.0 million, respectively, and
adjusted EBITDA was $(57.6) million and $1.8 million respectively.
In 1999, we announced plans to divest our public utilities services
segments. Consistent with this effort, we have contracted to sell our water and
wastewater utility services segments and portions of our gas and electric
properties and are presently engaged in the sale of, or are seeking buyers for,
our gas and electric properties. Pending these divestitures, we continue to
provide gas and electric utility services and water and wastewater services.
We are incorporated in Delaware, and the address of our principal executive
offices is 3 High Ridge Park, Stamford, Connecticut 06905. Our telephone number
is (203) 614-5600.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
The telecommunications industry involves the transmission of voice, data and
video communications from the point of origination to the point of termination.
The industry has been undergoing rapid change due to deregulation, the
construction of additional infrastructure and the introduction of new
technologies, which has resulted in increased competition and demand for
telecommunications services.
ILECs provide local, toll, access and resale services, sell, install and
maintain customer premises equipment and provide directory services. In our
primary markets we are the incumbent provider of local exchange service. As a
result, we are subject to greater regulation than CLECs and other non-incumbent
carriers.
ILECs establish their local market position because they are the primary
provider of wire access to users of services in their areas. With these
connections to customers, ILECs may provide local network services, network
access services, long distance and data services and other related services. The
basic "dial-tone" service is subject to substantial regulation, and the other
services are subject to various levels of regulation. ILECs compete with other
service providers through pricing, customer service, network quality and
valued-added services, with the ILECs having an initial advantage as the
existing provider of basic telephone services. We believe that we maintain this
advantage in a number of the markets in which we operate as an ILEC.
Currently, the five largest ILECs in the United States are Verizon, Qwest,
SBC, BellSouth and Sprint and each of them is substantially larger than we are.
The structure of the domestic telecommunications industry was strongly
influenced by a 1982 court decree that required the divestiture by AT&T of its
seven regional Bell operating companies, or RBOCs, and divided the
11
country into approximately 200 local access transport areas, or LATAs, that
range in size from metropolitan areas to entire states. The original RBOCs were
initially limited to providing local telephone service, access to long distance
carriers and "in-region" long distance service, service within a LATA. The right
to provide inter-LATA service was initially ceded to AT&T and other long
distance carriers, as well as to ILECs other than the RBOCs. However, under the
Telecommunications Act of 1996, or the 1996 Act, the RBOCs are permitted to
provide inter-LATA long distance service, subject to certain conditions. We, as
an ILEC, provide access to long distance services for our ILEC services segment
customers.
For each long distance call, the originating and terminating ILECs charge
the long distance carrier an access fee to carry the call across their local
networks. The long distance carrier charges the customer a fee for its
transmission of the call, a portion of which consists of the access fees charged
by the originating and terminating ILECs. To encourage the development of
competition in the long distance market, the ILECs are required to provide all
long distance carriers with access to local exchange service that is "equal in
type, quality and price" to that provided to AT&T.
These "equal access" and related provisions were intended to prevent
preferential treatment of AT&T and to require that the ILECs charge the same
access fees to all long distance carriers, regardless of their volume of
traffic. We derive a significant portion of our revenues from these access fees.
Continuing developments in multimedia applications are bringing new entrants
to the telecommunications market. Internet service providers and cable
television, satellite, entertainment and data transmission companies, for
instance, are potential customers for voice, data and video communications over
high bandwidth networks.
BUSINESS STRATEGY
We are transforming ourselves into a company that focuses exclusively on
providing telecommunication services. We primarily operate in rural areas and
small and medium-sized towns where we believe we have a competitive advantage
due to our relatively larger size, greater resources, and local focus and lower
levels of competition. We believe that our operations in these areas will
provide us with steady revenue flow and margin enhancement opportunities. To
reach our objective we intend to:
TARGET TELECOMMUNICATIONS NEEDS OF RURAL AREAS AND SMALL AND MEDIUM-SIZED
TOWNS AND CITIES.
Following the consummation of our pending acquisitions, we expect to be the
among the largest ILECs in the United States (the largest after Verizon, Qwest,
SBC, BellSouth and Sprint) and, we believe, the largest ILEC that focuses
primarily on serving rural areas and small and medium-sized towns and cities.
Apart from the RBOCs, smaller, often family-owned ILECs have traditionally
provided wireline telephone services in rural areas. As newer services such as
data services, the internet and digital subscriber networks have created a
catalyst for growth and consolidation in the telecommunications market, the
larger telecommunications companies appear to be focusing their efforts on
providing new services to urban markets and are in the process of divesting
parts of their rural telephone access lines and exchanges. Many smaller ILECs,
on the other hand, lack the resources to improve their networks to provide these
enhanced services to their consumers. We believe that, following the
consummation of our pending acquisitions, our position as the largest ILEC
focusing on rural and smaller markets will enable us to compete effectively
against larger competitors because of our market focus and against smaller
competitors because of our additional resources and economies of scale.
CONTINUE TO ACHIEVE ECONOMIES OF SCALE THROUGH CLUSTERING AND INCREASE
OPERATIONAL EFFICIENCIES.
We continually seek the advantages and efficiencies of operating large local
and regional telecommunications clusters. When we have completed our currently
planned acquisitions, approximately two-thirds of our customers will be located
in four states. In addition, a key part of our
12
growth strategy is the acquisition on an opportunistic basis of access lines and
exchanges contiguous to our existing network. Locally and regionally-clustered
systems enable us to reduce expenses through the consolidation of marketing and
support functions and to place more experienced managers at the system level who
are better equipped to meet the new competitive and regulatory challenges of
today's telecommunications industry. Local and regional clusters will also
increase the speed and effectiveness of our product and services deployment,
enhancing our ability to increase both customers and revenues.
INCREASE PENETRATION RATES OF THE SERVICES OFFERED TO OUR MARKETS.
We intend to increase the penetration of existing value-added services such
as second lines and enhanced services, such as call forwarding, conference
calling, caller identification, internet, voicemail and call waiting, to our
ILEC services segment including our current markets and to-be-acquired markets.
At present, the penetration rates for enhanced services in our ILEC services
segment in rural areas and small and medium-sized towns and cities are below
industry averages. We believe that increased sales of value-added and enhanced
services in existing ILEC markets will produce revenue with higher operating
margins due to the relatively low marginal operating costs necessary to offer
value-added and enhanced services in markets we already serve. We believe that
our ability to integrate value-added and enhanced services with our core ILEC
services will provide us with the opportunity to capture an increased percentage
of our customers' telecommunications expenditures.
RETAIN EXISTING CUSTOMERS AND ATTRACT NEW CUSTOMERS THROUGH THE INTRODUCTION
OF NEW TECHNOLOGY AND IMPROVED MARKETING AND CUSTOMER SERVICES.
Recent improvements in telecommunications technology as well as improvements
to our network will allow us to offer new services such as digital subscriber
network lines and other high-speed premium-priced data services to our existing
and future customer base. We have sought to ensure that our network employs
technologically current switching software and is positioned to support network
growth. For example, we are gradually deploying digital subscriber line, or DSL,
service in parts of our markets to provide broadband access where it is
economically feasible. We believe that technological improvements in our
existing and future markets will enable us to offer additional services for a
low marginal increased operating cost.
STRENGTHEN AND BUILD STRATEGIC PARTNERSHIPS AS A MEMBER OF THE LOCAL
COMMUNITIES.
We intend to continue to strengthen and build our relationships with local
and community groups. Our relationships with such groups assist us in
determining the range of features and services that consumers in our markets
want. Much of our marketing and advertising efforts are directed to sponsoring
local events and activities rather than mass media advertising. We believe that
our local and community-based approach helps us build customer loyalty and brand
awareness in the areas we serve. In addition, we intend to leverage our assets
through strategic partnerships with appropriate partners.
INCREASE UTILIZATION OF OUR CLEC'S HIGH-CAPACITY, INSTALLED, FIBER-OPTIC
INFRASTRUCTURE.
ELI is a CLEC that focuses on medium to large markets in the western United
States. We presently provide financial support to ELI. ELI's primary focus in
2001 is increasing new and existing customer usage of its high-capacity,
installed, fiber-optic infrastructure in its seven major cities and surrounding
areas by increasing the penetration of existing on-net buildings and sales to
customers that are connected to the network. We intend to continue to grow ELI's
business so that it can operate profitably on a stand-alone basis.
DIVEST OUR PUBLIC UTILITIES SERVICES SEGMENT'S BUSINESS AND ASSETS.
As part of our strategy to transform our business focus entirely to that of
a telecommunications services provider, we are in the process of monetizing our
public utilities services segment's assets. We have entered into agreements to
sell all of our water and wastewater treatment businesses, our Louisiana natural
gas business and our Hawaii electric business and seek to dispose of the
remainder of our public utilities services business and assets. Successful
implementation of this divestiture program will allow us to focus on our core
telecommunications business while simultaneously providing us with an internal
source for a portion of the financing necessary for enlarging our telephone
access line network.
13
TELECOMMUNICATIONS SERVICES
Our telecommunications services are principally ILEC services and also
include CLEC services delivered through ELI. As of December 31, 2000, we
operated ILECs in 17 states, serving approximately 1.4 million access lines. Our
ILEC services segment is presently marketed under the Citizens name but we
intend to market these services under the Frontier name following the closing of
the Frontier acquisition. Our CLEC services segment is marketed under the
Electric Lightwave name and provides a variety of integrated telecommunications
products designed to meet the customer's total communications needs.
ILEC SERVICES
Our ILEC services segment accounted for $963.7 million, or 53.5%, of our
revenues in fiscal year 2000. In fiscal year 2000, approximately 56% of our ILEC
services segment revenues came from federal and state universal service charges
through the federal and local governments and regulated access charges paid by
long distance operators and CLECs. Between 1990 and 2000 the population in our
service areas grew overall by approximately 6%. In 1999 and 2000 the number of
telephone access lines in our historic telephone systems increased by 4.8% and
4.0%, respectively.
Our ILEC services business is primarily with retail customers and, to a
lesser extent, business customers. Our ILEC services segment provides:
- local network services,
- enhanced services,
- network access services,
- long distance and data services, and
- directory services.
LOCAL NETWORK SERVICES. We provide telephone wireline access services in
our service areas primarily to residential customers. We are the incumbent
provider of basic telephone services in our service areas. Our present service
areas are generally less densely populated than what we believe to be the
primary service areas of the five largest ILECs.
ENHANCED SERVICES. We offer our ILEC customers the following enhanced
service features: call forwarding, conference calling, caller identification,
voicemail and call waiting. We recently introduced Citizens Select and Citizens
Select Plus as branded bundles of telecommunications services directed at our
retail customer base in a majority of our markets. These plans permit customers
to bundle their residential line with custom local area signaling services, or
CLASS, and custom calling features for a single flat rate. Citizens Select
allows customers to choose up to seven features with their residential line
while Citizens Select Plus allows customers to bundle with their residential
line as many features as desired plus voicemail. In connection with the pending
Frontier acquisition, we may rebrand some or all of these services.
NETWORK ACCESS SERVICES. We provide network access services to long
distance carriers and other customers in connection with the use of our
facilities to originate and terminate interstate and intrastate long distance
telephone calls. We provide originating and switched terminating services to
long distance carriers through switched services network. Such services are
generally offered on a month-to-month basis and the service is billed on a
minutes-of-use basis. Access charges to long distance carriers and other
customers are based on access rates filed with the FCC for interstate services
and with the respective state regulatory agency for intrastate services.
LONG DISTANCE AND DATA SERVICES. Long distance network service to and from
points outside of a telephone company's operating and data territories is
provided by interconnection with the facilities of interexchange carriers, or
IXCs. We believe that many customers prefer the convenience of obtaining their
long distance service through their local telephone company and receiving a
single bill.
We also offer data services including internet dial up service, digital
subscriber lines, frame relay and asynchronous transfer mode, or ATM, switching.
As part of our integration strategy, we offer a
14
solution whereby other ILEC companies resell our integrated services. We offer
this integrated solution to most of our customers.
DIRECTORY SERVICES. Directory services involves the provision of
residential and business directories. We provide this service through a third
party contractor who pays us a percentage of its revenues realized from the
directories.
ILEC ASSET ACQUISITIONS
We continually evaluate the possibility of acquiring additional
telecommunications assets. Over the past few years, the number and size of
available telecommunications assets has increased substantially. Although our
primary focus will continue to be the acquisition of telephone access lines,
exchange and operators that are proximate to our existing systems or that serve
a customer base large enough for us to operate efficiently, we may also acquire
other telecommunications interests.
The following table sets forth certain information with respect to our
telephone access lines as of December 31, 2000 and the additional lines we
intend to acquire upon the expected closing of each of the referenced
acquisitions.
VERIZON(2) QWEST(2) FRONTIER(2)
STATE CITIZENS(1) ACQUISITION ACQUISITION ACQUISITION TOTAL
----- ----------- ----------- ----------- ----------- ---------
New York........................ 339,100 -- -- 698,200 1,037,300
Minnesota....................... 142,400 -- 187,100 129,600 459,100
Arizona......................... 163,000 8,600 171,500 -- 343,100
California...................... 145,600 55,100 -- -- 200,700
West Virginia................... 153,200 -- -- -- 153,200
Illinois........................ 112,200 -- -- 20,100 132,300
Iowa............................ -- -- 53,200 60,400 113,600
Tennessee....................... 102,500 -- -- -- 102,500
Nebraska........................ 62,200 -- 14,900 -- 77,100
Wisconsin....................... 27,800 -- -- 44,800 72,600
Idaho........................... 21,700 -- 33,900 -- 55,600
Colorado........................ -- -- 51,400 -- 51,400
Pennsylvania.................... 1,500 -- -- 42,900 44,400
Georgia......................... -- -- -- 29,000 29,000
Nevada.......................... 28,300 -- -- -- 28,300
Alabama......................... -- -- -- 27,700 27,700
Michigan........................ -- -- -- 27,200 27,200
Utah............................ 23,700 -- -- -- 23,700
Montana......................... 9,000 -- 11,900 -- 20,900
North Dakota.................... 17,000 -- -- -- 17,000
Oregon.......................... 15,100 -- -- -- 15,100
Washington...................... -- -- 10,000 -- 10,000
New Mexico...................... 6,900 -- -- -- 6,900
Mississippi..................... -- -- -- 6,500 6,500
Wyoming......................... -- -- 5,900 -- 5,900
Indiana......................... -- -- -- 5,700 5,700
Florida......................... -- -- -- 4,600 4,600
--------- ------ ------- --------- ---------
Total........................... 1,371,200 63,700 539,800 1,096,700 3,071,400
========= ====== ======= ========= =========
------------------------
(1) Represents telephone access lines owned or acquired through December 31,
2000 from Verizon (Nebraska, Minnesota and Illinois/Wisconsin) and Qwest
(North Dakota).
(2) Represents telephone access lines in acquisitions pending as of
December 31, 2000.
We intend to fully integrate our acquisitions with existing core telephone
access line holdings by the end of the first half of 2002. We are acquiring
telephone access lines on a state-by-state basis from each of Verizon and Qwest.
As of December 31, 2000, we have acquired assets in several Verizon states,
including Nebraska (62,200 access lines), Minnesota (142,400 access lines),
Illinois/Wisconsin
15
(112,900 access lines), and one Qwest state, North Dakota (17,000 access lines).
We expect the Frontier acquisition to close as a single transaction during the
first half of 2001.
Unlike the Verizon and Qwest acquisitions, which consist of exchanges only,
the Frontier acquisition includes the operations, in addition to the assets, of
Frontier Corp.'s ILEC businesses. Approximately one-half of the Frontier access
lines are in the Rochester, New York metropolitan area and will give us
substantially all of the wireline market share in Rochester. Rochester will be
our sole metropolitan area telephone system at this time.
ILEC TECHNOLOGY
In 1999 we entered into a three-year agreement to outsource central office
engineering of our ILEC switching facilities. This agreement provides for
provisioning of current technology for our switching facilities, deploying the
latest switch software throughout our network, provisioning of switch capacity
to support network growth, integrating acquired properties onto a common network
platform and providing other project management and service support resources.
These improvements to our network will allow us to continue to offer enhanced
services and other high-speed data services to our existing and future customer
base.
In addition, as we upgrade and extend our physical plant and operations over
the next several years, the installation of digital switches and related
software will continue to be an important component of our business strategy, as
these features enhance our ability to offer additional services. We are in the
process of installing advanced digital switching platforms in parts of our
switching network. We expect to achieve cost reductions through the elimination
of duplicative services and procedures and the consolidation of administrative
functions. We believe that additional cost reductions may be obtainable from
advanced switching platforms and outside plant delivery systems. We intend to
pursue additional gains in productivity by investing in these technologies where
feasible and by reengineering customer service processes.
CLEC SERVICES
ELI provides a broad range of wireline communications products and services
to businesses in the western United States. ELI accounted for $240.8 million, or
13.4%, of our revenues in fiscal year 2000.
ELI's facilities-based network consists of optical fiber plus voice and data
switches. ELI has a national internet and data network with switches and routers
in key cities, linked by leased transport facilities. As of December 31, 2000,
ELI had 5,924 local and long-haul route miles of fiber-optic cable in service.
During 2000, ELI completed construction of its long-haul fiber-optic Synchronous
Optical Network, or SONET, network. ELI provides a full range of its services in
the following seven cities and their surrounding areas: Boise, Idaho; Portland,
Oregon; Salt Lake City, Utah; Seattle, Washington; Spokane, Washington; Phoenix,
Arizona and Sacramento, California. This network spans more than 3,200 miles,
crosses seven states and is one of the largest OC-192 SONET systems in the
western United States. The network will include Dense Wave Division
Multiplexing, or DWDM, equipment and will support voice and data traffic at
speeds up to OC-192. DWDM is a technique for transmitting 16 or more different
light-wave frequencies at speeds up to OC-192 on a single fiber to increase
transmission capacity.
DESCRIPTION OF CLEC SERVICES BUSINESS
ELI offers switched service, including local dial tone, from eight Nortel
DMS 500 switches in the seven metropolitan areas that ELI serves. This permits
ELI to offer both voice and data services in these areas. ELI also has
transmission equipment collocated with switches of the relevant ILEC operators
at 55 locations.
ELI has broadband points of presence in the following cities: Atlanta,
Georgia; Austin, Texas; Chicago, Illinois; Cleveland, Ohio; Dallas, Texas;
Denver, Colorado; Houston, Texas; Las Vegas, Nevada; Los Angeles, California;
New York, New York; Philadelphia, Pennsylvania; San Diego,
16
California; San Francisco, California and Washington, D.C. This permits ELI to
offer high-capacity data services in these areas.
ELI has developed an internet backbone network that provides internet
connectivity in each of its markets, including presence at all major network
access points, and offers peering arrangements with other internet backbone
service providers. A peering arrangement is an agreement where internet backbone
service providers agree to allow each other direct access to internet data
contained on their networks. ELI's broadband network consists of frame relay
switches, ATM switches and network-to-network interfaces. ELI provides national
and international coverage to its customers through strategic relationships with
other communications providers.
ELI owns or leases broadband, long-haul fiber-optic network connections
between major cities in the western United States and within strategic markets
across the nation. ELI seeks to maximize utilization of its network facilities
and minimize network access costs and other interconnection costs.
In the development of its long-haul facilities, ELI has formed strategic
relationships with utility companies that enable it to use existing
rights-of-way and fiber-optic facilities, use the construction expertise and
local permitting experience of such companies and minimize its near-term cash
requirements. These relationships allow ELI to extend its network infrastructure
more quickly and economically.
In 1999, ELI entered into a fiber-swap agreement to exchange unused fiber on
its network for unused fiber on another carrier's network. This fiber-swap
agreement will provide ELI with a fiber route from Salt Lake City to Dallas,
routed through Denver.
REGULATORY ENVIRONMENT
ILEC SERVICES REGULATION
The 1996 Act dramatically changed the landscape of the telecommunications
industry. The main thrust of the 1996 Act was to open local telecommunications
marketplaces to competition while enhancing universal service. We expect the
1996 Act, subsequent state and federal regulatory rulings and technological
changes to lead to an overall reduction in the level of regulation for the
telecommunications industry. Although the majority of our operations continues
to be regulated extensively by various state regulatory agencies, often called
public service commissions, and the FCC, we may experience reductions in the
level of regulation for some of our ILEC operations in the future. However, upon
the anticipated closing of the Frontier acquisition and of the remaining Qwest
acquisitions, certain of our systems may be subject to a higher degree of
scrutiny from the FCC and the applicable public service commissions. In any
event, we are currently unable to determine the ultimate degree of reduction or
increase in regulation in our operating territories.
The 1996 Act preempts state and local laws to the extent that they prevent
competitive entry into the provision of any communications service. Under the
1996 Act, however, states retain authority to impose requirements on carriers
necessary to preserve universal service, protect public safety and welfare,
ensure quality of service and protect consumers. States are also responsible for
mediating and arbitrating interconnection agreements between CLECs and ILECs if
voluntary negotiations fail.
In order to create an environment in which local competition is a practical
possibility, the 1996 Act imposes a number of access and interconnection
requirements on all local communications providers. All local carriers must
interconnect with other carriers, permit resale of their services, provide local
telephone number portability and dialing parity, provide access to poles, ducts,
conduits, and rights-of-way, and complete calls originated by competing carriers
under reciprocal compensation or mutual termination arrangements.
Many of our properties continue to be regulated under a regime that sets
prices for a specific property based on its level of earnings. As a result of
recent legislation enabling regulators to reduce the level of regulation in
certain states and at the federal level, we have elected incentive regulation
plans under which prices are capped in return for the elimination or relaxation
of earnings oversight. Some states also allow us flexibility in price changes
for optional services and relaxed reporting
17
requirements. The goal of these incentive regulation plans is to provide
incentives to improve efficiencies and increase pricing flexibility for
competitive services while ensuring that customers receive reasonable rates for
basic services that continue to be deemed part of a monopoly while allowing us
to continue to recover our costs in rates.
Approximately 85% of our ILEC services segment revenue is subject to
regulation including incentive regulation. The FCC regulates approximately 34%
of this revenue, while various state regulatory agencies regulate approximately
51% of this revenue. We expect state lawmakers to continue to review the
statutes governing the level and type of regulation for telecommunications
services. Over the next few years, legislative and regulatory actions are
expected to provide opportunities to restructure rates, introduce more flexible
incentive regulation programs and possibly reduce the overall level of
regulation. While we still believe that such actions will nonetheless allow us
to recover our costs in revenues, we expect the election of incentive regulation
plans and the expected reduction in the overall level of regulation to allow us
to introduce new services more expeditiously than in the past.
For interstate services regulated by the FCC, we have elected a form of
incentive regulation known as price caps. Under price caps, interstate access
rates are capped and adjusted annually by the difference between the level of
inflation and a productivity factor. Most recently the productivity factor was
set at 6.5%. Given the relatively low inflation rate in recent years, interstate
access rates have been adjusted downward annually. In May 2000, the FCC adopted
a revised methodology for regulating the interstate access rates of price cap
companies through May 2005. The new program, known as the Coalition for
Affordable Local and Long Distance Services, or CALLs plan, establishes a price
floor for interstate-switched access services and phases out many of the
subsidies in interstate access rates. Though the end-user charges and an
expanded universal service program will continue to benefit rural service
providers such as our ILEC services segment, we believe we will be able to
offset some of the reduction in interstate access rates. Annual adjustments
based on the difference between inflation and the 6.5% productivity factor will
continue for several years until the price floor for interstate switched access
services is reached.
We believe that the CALLs plan has potential benefits for us in the long
term. Although some of the required rate reductions are front loaded, the price
floor provides a degree of certainty that rate reductions will be curtailed in
the future. We were successful in negotiating a price floor that recognized the
unique cost characteristics of rural telecommunications providers as opposed to
being forced into a one size fits all program designed for larger companies.
Under the CALLs plan, for many of our properties, the price floor is higher than
the rate level that would have been required over time under the previous rate
programs. In addition, shifting revenue from interstate access services to end
user customers and universal service programs provides us more control over
future revenue as access customers seek alternatives to switched access
services.
In 1998, the FCC determined that the federal universal service fund, or USF,
for non-rural companies would be based on a forward-looking cost methodology,
but chartered a Rural Task Force, or RTF, to develop a recommendation for the
funding methodology for rural companies. Since many of our current properties
are classified as rural, our federal USF will be driven by the rural methodology
that is still under development. In October 2000, the RTF recommended the use of
embedded cost instead of forward-looking costs to determine the USF for rural
companies. In addition, the RTF suggested the FCC should adjust the caps on the
USF to recognize inflation and allow rural companies the opportunity to recover
some of the costs associated with incremental investment.
The FCC has historically required an acquiring company to cap its federal
USF for acquired exchanges at the level of the selling company. Since the seller
often includes the acquired exchanges in a much larger USF study area, the
amount of USF is often negligible. In addition, the purchasing company is not
able to include its new investment in the USF calculation. The RTF concluded
that this cap might deter investment in acquired properties. In addition, the
FCC has historically capped certain corporate expenses. The RTF recommended this
expense cap be indexed to reflect inflation. In December 2000, the Federal/State
Universal Service Joint Board recommended that the FCC adopt the
18
RTF recommendations. Although the final FCC decision is still uncertain, if the
FCC agrees with the Joint Board, the combination of the embedded cost
methodology and some relief on the caps should provide rural providers like us
with a more stable source of USF money over the next few years.
Another goal of the 1996 Act was to remove implicit subsidies from the rates
charged by local telecommunications companies. The CALLs plan addressed this
requirement for interstate services. State legislatures and regulatory agencies
are beginning to reduce the implicit subsidies in intrastate rates. The most
common subsidies are in access rates that historically have been priced above
their costs to allow basic local rates to be priced below cost. Legislation has
been considered in several states to require regulators to eliminate these
subsidies and implement state universal service programs where necessary to
maintain reasonable basic local rates. However, not all the reductions in access
charges are fully offset. In Tennessee for example, as a result of such
legislation, we will be reducing intrastate access rates by $1 million per year
for three years beginning in 2001. We anticipate additional state legislative
and regulatory pressure to lower intrastate access rates in the near future.
However, regulators are cognizant of the potential impact on basic local rates
and are moving cautiously. Many states are embracing the need for state
universal service funds to ensure protection for customers while ensuring that
local telecommunications companies continue to have the incentive to recover in
rates their investment in their networks and new services.
State legislatures and regulators are also examining the provision of
telecommunications services to previously unserved areas. Since many unserved
areas are located in rural markets, we may be required to expand our service
territory into some of these areas. Given the start-up costs involved with
territory expansion, we expect legislatures and regulators to continue to move
cautiously and provide some means of recovery for the costs associated with
serving these new areas.
CLEC SERVICES REGULATION
The 1996 Act dramatically changed the national public policy framework for
telecommunications. A central focus of this sweeping policy reform was to open
local communications markets to competition. One result of the 1996 Act has been
the development of CLECs which compete for business with the existing carriers.
As a CLEC, ELI is subject to federal, state and local regulation. However, the
level of regulation is typically less than an ILEC. The FCC exercises
jurisdiction over all interstate communications services. State commissions
retain jurisdiction over all intrastate communications services. Local
governments may require ELI to obtain licenses or franchises regulating the use
of public rights-of-way necessary to install and operate its networks.
The FCC exercises regulatory jurisdiction over all facilities of, and
services offered by, communications common carriers to the extent those
facilities are used to provide, originate or terminate interstate
communications. The FCC has established different levels of regulation for
"dominant" carriers and "nondominant" carriers. The FCC regulates many of the
rates, charges and services of dominant carriers to a greater degree than those
of nondominant carriers. As a nondominant carrier, ELI may install and operate
facilities for domestic interstate communications without prior FCC
authorization. ELI is no longer required to maintain tariffs for domestic
interstate long distance services. As a provider of international long distance
services, ELI obtained FCC operating authority and maintains an international
tariff. However, the FCC is also eliminating the requirement for international
tariffs. ELI is also required to submit certain periodic reports to the FCC and
pay regulatory fees.
RBOCs had been barred from participating in the market for inter-LATA
services, which is primarily long-distance traffic, in their service territories
since the break up of the Bell System in 1984. The 1996 Act provides a mechanism
for an RBOC and/or any successors to enter in-region inter-LATA markets. Full
entry by the companies into inter-LATA markets will increase the level of
competition faced by our long distance services. Before an RBOC or its
successors can enter an inter-LATA market it must first meet specific criteria
set out by section 271 of the 1996 Act. These criteria are commonly referred to
as the "14 point checklist". The checklist is meant to ensure that these
companies have opened up their local markets to competition before they compete
in the long-distance markets in their regions. Verizon
19
and SBC Communications have both successfully filed inter-LATA applications with
the FCC for some of their states.
LOCAL GOVERNMENT AUTHORIZATIONS
ELI has various interconnection agreements in the states in which it
operates. These agreements govern reciprocal compensation relating to the
transport and termination of traffic between the ILEC's and ELI's networks. On
February 25, 1999, the FCC issued a Declaratory Ruling and Notice of Proposed
Rulemaking that categorized calls terminated to internet service providers, or
ISPs, as "largely" interstate in nature, which could have the effect of
precluding these calls from reciprocal compensation charges. However, the ruling
stated that the existing interconnection agreements and the state decisions that
have defined them bind ILECs. The FCC gave the states authority to interpret
existing interconnection agreements. Since this FCC order, five states in which
we operate, Oregon, Washington, California, Utah and Arizona, have ruled that
calls terminated to ISPs should be included in the calculation to determine
reciprocal compensation. However, the FCC is expected to readdress this issue in
2001.
Most state public service commissions require competitive communications
providers, such as ELI, to obtain operating authority prior to initiating
intrastate services. Most states also require the filing of tariffs or price
lists and customer-specific contracts. ELI is not currently subject to
rate-of-return or price regulation. However, ELI is subject to state-specific
quality of service, universal service, periodic reporting and other regulatory
requirements, although the extent of these requirements is generally less than
those applicable to ILECs.
COMPETITION
ILEC SERVICES COMPETITION
The 1996 Act and subsequent FCC interconnection decisions have established
the relationships between ILECs and CLECs and the mechanisms for competitive
market entry. Though carriers like us, who serve predominantly rural markets,
did receive a qualified exemption from some of the technical requirements
imposed upon all ILECs for interconnection arrangements, we did not receive an
exemption from interconnection or local exchange competition in general. The
exemption, known as the rural telephone company exemption, continues until a
bona fide request for interconnection is received from a CLEC and a state public
services commission with jurisdiction determines that discontinuance of the
exemption is warranted. The state commission must determine that discontinuing
the exemption will not adversely impact the availability of universal service in
the state nor impose an undue economic hardship on us and that the requested
interconnection is technically feasible.
Though much of the initial competition in local telecommunications has been
in more densely populated urban areas, we have begun to experience competition
in some of our suburban and rural markets. These competitors mainly serve
internet service providers and a few large business customers, but competition
for residential customers is present in isolated areas.
Under the 1996 Act and subsequent FCC and state rules, CLECs can compete
using one or more of three mechanisms:
- Construction of its own local exchange facilities, in which case the
ILEC's sole obligation is interconnection for purposes of traffic
interchange.
- Purchase unbundled network elements, or UNEs, at cost from the ILEC and
assemble them into local exchange services and/or supplement the
facilities it already owns.
- Resale of the ILEC's retail services purchased at wholesale rates from the
ILEC.
Some competitors have taken advantage of an ILEC's requirement to pay the
CLEC reciprocal compensation for traffic delivered to the CLEC. The increase of
traffic over the Internet has provided CLECs with an immediate mechanism to
build traffic and reciprocal compensation revenues. In 2000, our ILECs paid
$1.9 million in reciprocal compensation. While our ILECs are reciprocal
compensation payors, ELI is a reciprocal compensation receiver. We expect the
spread of Digital Subscriber Line and
20
other high speed network services that give customers a dedicated link to the
internet, as well as the rural nature of our markets and expected actions by the
FCC and the United States Congress to limit the future growth of reciprocal
compensation.
Beginning in late 1999, the FCC expanded the availability of UNEs by
requiring ILECs to offer subloop unbundling, expanded extended loops, or EELs,
and line sharing. Pursuant to this FCC decision, CLECs can purchase a portion of
the ILECs' loop facilities at cost-based rates as opposed to the entire loop.
EELs allow CLECs to purchase links to customer premises located outside the
exchange where the CLEC is physically located at cost-based rates. Line sharing
allows ILECs to purchase just the high frequency portion of the loop that
permits the CLEC to offer high-speed data services more profitably, but leave
the lower margin voice services for the same customer with the ILEC. In addition
to expanding the availability of UNEs, in August 2000, the FCC expanded
collocation requirements to include cageless collocation in ILEC facilities.
These FCC decisions increase the CLECs' opportunities to reach customers
economically thereby increasing their ability to compete.
Under the 1996 Act, the RBOCs and their successors were precluded from
competing in most long-distance markets until they satisfied the state
regulatory authority and the FCC that their markets had been sufficiently opened
to local exchange competition. Beginning in 1999, state regulators and the FCC
began to allow the RBOCs and their successors to enter the long-distance market
in some states. By the end of February 2001, RBOC long-distance entry was only
allowed in New York, Texas, Oklahoma and Kansas. However, we expect additional
states to follow suit in the near future. Because we currently offer
long-distance service in New York and other states, it is possible that the
entry of the RBOCs and their successors into this market could adversely impact
our operations.
Though much of the initial competition in local telecommunications has been
in more densely populated urban areas, we have begun to experience competition
in some of our suburban and rural markets.
As of December 31, 2000, we had entered into 88 interconnection agreements.
These agreements allow CLECs to connect with some of our ILEC networks and
compete in our ILEC markets. In addition, in some markets, our ILEC services
provide reciprocal compensation payments and local number portability. These
competitors are mainly serving large business customers and internet service
providers. Competition for residential customers is present in isolated areas.
CLEC SERVICES COMPETITION
ELI faces significant competition from ILECs in each of its facilities-based
markets. Principal ILEC competitors include Qwest, SBC and Verizon.
Facility and non-facility based CLEC competitors in ELI's markets include,
among others: AT&T Local Services, Time Warner Telecom, MCI WorldCom and XO
Communications. In each of the markets in which ELI operates, at least one other
CLEC, and in some cases several other CLECs, offer many of the same local
communications services that ELI provides, generally at similar prices.
Potential and actual new market entrants in the local communications
services business include RBOCs and their successors entering new geographic
markets, IXCs, cable television companies, electric utilities, international
carriers, satellite carriers, teleports, microwave carriers, wireless telephone
system operators and private networks built by large end users. In addition, the
current trend of business combinations and alliances in the communications
industry, including mergers between RBOCs and their successors, may increase
competition for ELI. With the passage of the 1996 Act and the entry of RBOCs and
their successors into the long distance market, IXCs may be motivated to
construct their own local facilities or otherwise acquire the right to use local
facilities and/or resell the local services of ELI's competitors.
21
Competition for network services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. As a point of differentiation from the ILECs, ELI's
fiber-optic networks provide both diverse access routing and redundant
electronics, design features not widely deployed within the ILEC's networks.
ELI's competitors for high-speed data services include major IXCs, other
CLECs and various providers of niche services, such as internet access
providers, router management services and systems integrators. The
interconnectivity of ELI's markets may create additional competitive advantages
over other data service providers that must obtain local access from the ILEC or
another CLEC in each market or that cannot obtain intercity transport rates on
terms as favorable as those available to ELI.
The market for internet access and related services in the United States is
extremely competitive, with barriers to entry related to capital costs,
bandwidth capacity and internal provisioning and operations processes. We expect
that competition will intensify as existing services and network providers and
new entrants compete for customers. In addition, new enhanced internet services
such as managed router service and web hosting are constantly under development
in the market and we expect additional innovation in this market by a range of
competitors. ELI's current and future competitors include communications
companies, including the RBOCs and their successors, IXCs, CLECs and cable
television companies and other internet access providers.
Many of these competitors have greater market presence and greater
financial, technical, marketing and human resources, more extensive
infrastructure and stronger customer and strategic relationships than are
available to us.
PUBLIC UTILITIES SERVICES
We have historically provided public utilities services including natural
gas transmission and distribution, electric transmission and distribution, water
distribution and wastewater treatment services to primarily rural and suburban
customers throughout the United States. In May 1998, we announced a plan of
divestiture for our public utilities services properties. In 1999, we initially
accounted for the planned divestiture of our public utilities services segments
as discontinued operations. Because we have not yet entered into agreements to
sell our entire gas and electric segments, we reclassified all our gas and
electric assets and their related liabilities in the second half of 2000 as "net
assets held for sale." As a result, our discontinued operations only reflect the
assets and related liabilities of the water and wastewater businesses.
NATURAL GAS
Our natural gas segment provides natural gas transmission and distribution
services in Louisiana, Arizona and Colorado, as well as synthetic natural gas
and propane service in Hawaii to 473,500 primarily residential customers. Our
natural gas segment accounted for $374.8 million, or 20.8%, of our revenues in
fiscal year 2000.
Natural gas services and/or rates charged are subject to the jurisdiction of
federal and state regulatory agencies, except for the non-regulated propane
rates charged to customers in Hawaii. We purchase the gas supply we need, except
for our production of synthetic natural gas in Hawaii. We believe our natural
gas supply is adequate to meet current demands and to provide for additional
sales to new customers. The natural gas industry is subject to seasonal demand,
except in Hawaii, with the peak demand occurring during the heating season of
November 1 through March 31. Our natural gas segment experiences third-party
competition from fuel oil, propane and other gas suppliers for most of our large
consumption customers, of which there are few, and from electric suppliers for
all of our customer base. The competitive position of gas at any given time
depends primarily on the relative prices of gas and these other energy sources.
22
ELECTRIC
Our electric segment provides electric transmission and distribution
services in Arizona, Hawaii and Vermont to 123,500 primarily residential
customers. Our electric segment accounted for $223.1 million, or 12.4%, of our
revenues in fiscal year 2000.
Electric services and/or rates charged are subject to the jurisdiction of
federal and state regulatory agencies. We purchase approximately 81% of the
electric energy needed to provide services to our customers. We believe our
supply is adequate to meet current demands and to provide for additional sales
to new customers. The majority of our generating facilities are on Kauai,
Hawaii. We also have generating facilities in Arizona and Vermont, which are
used mainly for back-up power supply. Generally, our electric segment does not
experience material seasonal fluctuations.
The electric utility industry in the United States is undergoing fundamental
changes. For many years electric utilities have been vertically integrated
entities with the responsibility for the generation, transmission and
distribution of electric power in a franchise territory. In return for monopoly
status, electric utilities have been subject to comprehensive regulation at the
state and federal level. The industry is now shifting toward electric customers
being able to choose their energy provider much like telephone customers are
able to choose their long distance provider. Generally, this involves splitting
apart the generation and transmission of power from the remainder of the
business, and having generators compete with one another in the sale of power
directly to retail customers. The interconnected regional transmission grids
will be operated independently, continuing as a federally regulated monopoly.
Local transmission and distribution facilities would continue as state-regulated
monopolies. This change in the industry is in various stages of development
around the United States. The pace and degree of regulation vary from state to
state.
During the past year power supply costs have increased substantially,
forcing distribution companies to incur higher costs to operate their electric
businesses. As a result, companies have employed several varied tactics to try
to control or offset these costs. These tactics include renegotiating prices
with power suppliers and attempting to pass increased power costs on to
customers through automatic adjustment mechanisms or rate proceedings.
Regulators have resisted these efforts in an attempt to avoid a sudden, steep
increase in electric rates, known as "rate shock." Pending final resolution of
these issues, we will, where appropriate, seek authority to defer these costs in
hopes of being allowed to recover them in the future. In addition, distribution
companies have disputed past charges from their power suppliers. In Arizona, we
are currently disputing with our power supplier the amount of what we believe
are excessive power costs charged by our power supplier which, through
December 31, 2000, total approximately $57.0 million.
Our Vermont Electric Division is a member of the Vermont Joint Owners, a
consortium of 14 Vermont utilities that has entered into a purchase power
agreement with a Canadian power generation facility. The agreement provides for
up to 450 MW of power and associated energy to be delivered to Vermont, in
varying amounts, between 1990 and 2020. If any member of the consortium defaults
on its share of power under the agreement, the remaining members of the
consortium are required by "step-up" provisions of the agreement to assume
responsibility for a defaulting member's share on a pro-rata basis. Currently
the agreement's pricing exceeds market levels, and the Vermont Public Service
Board has been unwilling to allow all members of the consortium full recovery
through rates of power costs associated with the contract. The Vermont Board's
decision has put at least one of the members of the consortium in a precarious
financial condition. If the Vermont Board persists in its refusal and thereby
forces one or more members of the consortium to default on their obligations
under the contract, such default could shift significant additional cost burdens
to our Vermont electric division.
On February 15, 2000, we announced that we had agreed to sell our electric
services segment. Our Arizona and Vermont electric divisions were under contract
to be sold, but the parties terminated the agreement on March 7, 2001 due to the
failure of the proposed purchaser to raise the required financing
23
and obtain the required regulatory approval necessary to meet its obligations
under the contract for sale. We intend to pursue the disposition of the Vermont
and Arizona electric divisions with alternative buyers.
In August 2000, the Hawaii Public Utility Commission, or HPUC, denied the
application requesting approval of the purchase of our Kauai electric division
by the Kauai Island Electric Co-op for $270.0 million in cash including the
assumption of certain liabilities. We are considering a variety of options,
including the filing of a request for reconsideration of the decision or the
filing of a new application. Our agreement for the sale of this division may be
terminated if regulatory approval is not received before February 2002.
In Kauai, historically, we received approximately 13% of our power from a
third-party provider. As of January 2001, this third-party provider will no
longer provide power due to the closure of their sugar operations. In order to
avoid power outages, we have completed negotiations with a new-third party
provider for a new purchase power agreement. This agreement is subject to
approval by the HPUC. Current forecasts report that Kauai will require
additional electrical generating capacity in 2002. As a result, we have entered
into a 25-year purchase power agreement with Kauai Power Partners, an
independent power producer, to provide firm power by July 2002. This agreement
was recently approved by the HPUC.
WATER AND WASTEWATER
Through subsidiaries, we provide water distribution, wholesale water
transmission, wastewater treatment, public works consulting and marketing and
billing services to approximately 322,200 primarily residential customers in,
Arizona, Illinois, California, Pennsylvania, Ohio, and Indiana.
On October 18, 1999, we announced the agreement to sell our water and
wastewater segment to American Water Works, Inc. for $745.0 million in cash and
$90.0 million of assumed debt. This transaction is expected to close in the
second half of 2001 following the receipt of regulatory approvals. However, our
agreement for the sale of this business may be terminated if regulatory approval
is not received before September 30, 2001.
PROPERTIES
Our principal offices are located in leased premises in Stamford,
Connecticut.
The operations support office for our ILEC segment is located in Plano,
Texas. This facility, which we own, accommodates approximately 1,100 employees
and has the acreage necessary for phased expansion up to 750,000 square feet. In
addition, our ILEC segment leases and owns office space in various markets
throughout the United States.
The operations support office for our CLEC segment is located in Vancouver,
Washington. This building, which we own, is fully occupied. In addition, our
CLEC segment leases local office space in various markets throughout the United
States, and also maintains a warehouse facility in Portland, Oregon. Our CLEC
segment also leases network hub and network equipment installation sites in
various locations throughout the areas in which it provides services.
Our ILEC and CLEC services segments own telephone properties which include:
connecting lines between customers' premises and the central offices; central
office switching equipment; fiber-optic and microwave radio facilities,
buildings and land; and customer premise equipment. The connecting lines,
including aerial and underground cable, conduit, poles, wires and microwave
equipment, are located on public streets and highways or on privately owned
land. We have permission to use these lands pursuant to local governmental
consent or lease, permit, franchise, easement or other agreement.
Our public utilities services segments are administered locally in the
principal states in which they operate. Pending the sale of our public utilities
services segments, we own:
- gas production, transmission and distribution facilities; electric
generation, transmission and distribution facilities;
- water production, treatment, storage, transmission and distribution
facilities; and
- wastewater treatment, transmission, collection and discharge facilities.
24
CITIZENS COMMUNICATIONS CAPITAL TRUST I
Citizens created the Trust as a statutory business trust under Delaware law.
The Trust's business is defined in a trust agreement executed by Citizens, as
depositor, and Chase Manhattan Bank USA, National Association, as the Delaware
trustee. That trust agreement will be amended when the trust preferred
securities are issued. The amended trust agreement will be in substantially the
form filed with the Securities and Exchange Commission, or SEC, as an exhibit to
the registration statement, of which the prospectus is a part. The amended trust
agreement is called the "Trust Agreement" in this prospectus.
The Trust exists for the purposes of (1) issuing the trust preferred
securities to the public, (2) issuing common securities of the Trust to Citizens
and (3) using the proceeds from the issuance of the trust preferred securities
and the common securities of the Trust to purchase junior subordinated notes of
Citizens. The Trust may engage in only those other activities as are necessary,
appropriate, convenient or incidental to those purposes. The preferred
securities and the common securities of the Trust together are sometimes called
the "Trust Securities" in this prospectus.
The securities trustees--the administrative trustees, the property trustee
and the Delaware trustee--will conduct the Trust's business and affairs.
Citizens, as the holder of the common securities of the Trust, will appoint the
securities trustees. Two of Citizens' officers initially will serve as
administrative trustees. The Chase Manhattan Bank will serve as property
trustee. Chase Manhattan Bank USA, National Association will serve as Delaware
trustee. Citizens, as the holder of all the common securities of the Trust, will
have the right to appoint, remove or replace any of the securities trustees,
subject to the right of the holders of a majority of the trust preferred
securities to appoint a substitute property trustee and Delaware trustee if an
event of default with respect to the junior subordinated notes occurs.
No separate financial statements of the Trust are included in this
prospectus. Citizens believes that those statements would not be material to
holders of the trust preferred securities because the Trust has no independent
operations and the sole purpose of the Trust is investing the proceeds of the
sale of its Trust Securities in the junior subordinated notes. Citizens does not
expect that the Trust will be filing annual, quarterly or special reports with
the SEC.
The Trust's office address in the State of Delaware is c/o Chase Manhattan
Bank USA, National Association, 1201 Market Street, Wilmington, Delaware 19801.
The principal place of business of the Trust will be c/o Citizens, 3 High Ridge
Park, Stamford, Connecticut 06905. The Trust's telephone number is
(203) 614-5600.
ACCOUNTING TREATMENT
The Trust will be treated as a subsidiary of Citizens for financial
reporting purposes. Accordingly, Citizens' consolidated financial statements
will include the accounts of the Trust. The trust preferred securities, along
with other trust preferred securities that Citizens guarantees on an equivalent
basis, will be presented as a separate line item in Citizens' consolidated
balance sheets, entitled "Guaranteed Preferred Beneficial Interests in
Subordinated Notes of Citizens or Subsidiaries" or under a similar description.
Citizens will record distributions that the Trust pays on the trust preferred
securities as an expense in its consolidated statement of income.
25
SELLING STOCKHOLDER
This prospectus also relates to approximately 9,139,900 shares, or the
Resale Shares, of common stock of Citizens that may from time to time be sold by
the entity set forth below. An affiliate of Citibank, N.A. purchased shares of
common stock in the public markets in connection with an equity repurchase
transaction between Citibank, N.A. and us. The shares of common stock were
subsequently transferred to Salomon Smith Barney Inc., the selling stockholder
and an affiliate of Citibank, N.A.
The following table states the number of shares of our outstanding common
stock that the selling stockholder owns and the number of shares of common stock
that may be sold from the account of the selling stockholder in connection with
the settlement of the equity repurchase transaction.
NUMBER OF SHARES
NAME AND ADDRESS NUMBER OF SHARES OWNED NUMBER OF SHARES THAT MAY OWNED AFTER THE
OF STOCKHOLDER PRIOR TO THE OFFERING BE SOLD IN THE OFFERING OFFERING
---------------- ---------------------- ------------------------- -----------------
Salomon Smith Barney Inc. 9,909,066 9,139,900 769,166*
390 Greenwich Street
New York, NY 10013
------------------------------
* This assumes that all shares that may be sold in the offering by the selling
stockholder are sold in the offering.
We will pay all expenses in connection with the registration of the Resale
Shares, including brokerage commissions allocable to the sales of the Resale
Shares and fees and disbursements of counsel and other representatives of the
selling stockholder. We have also agreed to indemnify the selling stockholder
and its affiliates for certain matters.
The selling stockholder and its affiliates have performed investment banking
and advisory services for us from time to time for which they have received
customary fees and expenses. The selling stockholder and its affiliates may,
from time to time, engage in transactions with and perform services for us in
the ordinary course of their business.
26
DESCRIPTION OF DEBT SECURITIES
The following is a summary of the general terms of the debt securities. We
will file a prospectus supplement that may contain additional terms when we
issue debt securities. The terms presented here, together with the terms in a
related prospectus supplement, which could be different from the terms described
below, will be a description of the material terms of the debt securities. You
should also read the indenture governing the applicable class of our debt
securities. We have filed two forms of indentures, one each for senior debt
securities and for subordinated debt securities, with the SEC as exhibits to the
registration statement of which this prospectus is a part. All capitalized terms
have the meanings specified in the indentures. The terms and provisions of the
debt securities described below will most likely be modified by the documents
that set forth the specific terms of the debt securities issued.
We may issue, from time to time, debt securities, in one or more series,
that will consist of either our senior debt or our subordinated debt. Each
series of debt securities we offer will be issued under an indenture between us
and a trustee. Debt securities, whether senior or subordinated, may be issued as
convertible debt securities or exchangeable debt securities. Unless otherwise
provided for in the applicable prospectus supplement, the indenture governing
our subordinated debt securities will be substantially similar to the indenture
governing our senior debt securities other than as to subordination terms.
GENERAL TERMS OF THE INDENTURES
The indentures do not limit the amount of debt securities that we may issue.
Each indenture provides that we may issue debt securities up to the principal
amount that we may authorize and may be in any currency or currency unit that we
may designate. The terms of the indentures do not contain any covenants or other
provisions designed to give holders of any debt securities protection against
changes in our operations, financial condition or transactions involving us, but
these types of provisions may be included in the documents that set forth the
specific terms of the debt securities. We may issue the debt securities issued
under either indenture as "discount securities," which means they may be sold at
a discount below their stated principal amount. These debt securities, as well
as other debt securities that are not issued at a discount, may, for United
States federal income tax purposes, be treated as if they were issued with
"original issue discount" because of interest payment and other characteristics.
Special United States federal income tax considerations applicable to debt
securities issued with original issue discount will be described in more detail
in any applicable prospectus supplement.
The applicable prospectus supplement for a series of debt securities that we
issue will describe, among other things, the following terms of the offered debt
securities:
- the title;
- any limit on the aggregate principal amount;
- whether issued in fully registered form without coupons or in a form
registered as to principal only with coupons or in bearer form with
coupons;
- whether issued in the form of one or more global securities and whether
all or a portion of the principal amount of the debt securities is
represented by a global security;
- the price or prices at which the debt securities will be issued;
- the date or dates on which principal is payable;
- the place or places where and the manner in which principal, premium or
interest will be payable and the place or places where the debt securities
may be presented for transfer and, if applicable, conversion or exchange;
27
- interest rates, and the dates from which interest, if any, will accrue,
and the dates when interest is payable and the maturity;
- the right, if any, to extend the interest payment periods and the duration
of the extensions;
- our rights or obligations to redeem or purchase the debt securities;
- any sinking fund provisions;
- conversion or exchange provisions, if any, including conversion or
exchange prices or rates and adjustments to conversion or exchange prices
or rates;
- the currency or currencies of payment of principal or interest;
- the terms applicable to any debt securities issued at a discount from
their stated principal amount;
- the terms, if any, under which any debt securities will rank junior to any
of our other debt;
- if the amount of payments of principal or interest is to be determined by
reference to an index or formula, or based on a coin or currency other
than that in which the debt securities are stated to be payable, the
manner in which these amounts are determined and the calculation agent, if
any, with respect thereto;
- if other than the entire principal amount of the debt securities when
issued, the portion of the principal amount payable upon acceleration of
maturity as a result of a default on our obligations;
- if applicable, covenants affording holders of debt protection against
changes in our operations, financial condition or transactions involving
us; and
- any other specific terms of any debt securities.
The applicable prospectus supplement will present United States federal income
tax considerations for holders of any debt securities and the securities
exchange or quotation system on which any debt securities are listed or quoted.
SENIOR DEBT SECURITIES
Senior debt securities will be issued under the senior indenture. Payment of
the principal of, premium, if any, and interest on senior debt securities will
rank on a parity with all of our other unsecured and unsubordinated debt.
SUBORDINATED DEBT SECURITIES
GENERALLY
Subordinated debt securities will be issued under the subordinated
indenture. Payment of the principal of, premium, if any, and interest on
subordinated debt securities will be subordinated and junior in right of payment
to the prior payment in full of all of our senior debt. We will state in the
applicable prospectus supplement relating to any subordinated debt securities
the subordination terms of the securities as well as the aggregate amount of
outstanding indebtedness, as of the most recent practicable date, that by its
terms would be senior to the subordinated debt securities. We will also state in
the prospectus supplement limitations, if any, on issuance of additional senior
indebtedness.
JUNIOR SUBORDINATED NOTES
In connection with the issuance of any trust preferred securities by the
Trust, Citizens will issue to the Trust a series of junior subordinated notes.
Citizens will also provide a guarantee of obligations of the Trust as described
under "Description of the Guarantee". The junior subordinated notes are expected
to rank subordinate and junior in right of payment to all of Citizens'
indebtedness, which may
28
include other subordinated notes, unless that indebtedness is expressly
subordinated to or ranks on a parity with the junior subordinated notes.
Specific terms of any junior subordinated notes issued in connection with the
issuance of any trust preferred securities will be set forth in a prospectus
supplement describing these issuances.
CONVERSION OR EXCHANGE RIGHTS
Debt securities may be convertible into or exchangeable for shares of our
equity securities or equity securities of our subsidiaries or affiliates. The
terms and conditions of conversion or exchange will be stated in the applicable
prospectus supplement. The terms will include, among others, the following:
- the conversion or exchange price;
- the conversion or exchange period;
- provisions regarding the convertibility or exchangeability of the debt
securities, including who may convert or exchange;
- events requiring adjustment to the conversion or exchange price;
- provisions affecting conversion or exchange in the event of our redemption
of the debt securities; and
- any anti-dilution provisions, if applicable.
EVENTS OF DEFAULT
Unless otherwise provided for in the applicable prospectus supplement, the
term "Event of Default," when used in either indenture, unless otherwise
indicated, means any of the following:
- failure to pay interest for 60 days after the date payment is due and
payable; provided that if we extend an interest payment period in
accordance with the terms of the debt securities, the extension will not
be a failure to pay interest;
- failure to pay principal or premium, if any, on any debt security when
due, either at maturity, upon any redemption, by declaration or otherwise;
- failure to make sinking fund payments when due;
- failure to perform other covenants for 90 days after notice that
performance was required;
- events in bankruptcy, insolvency or reorganization of our company; or
- any other Event of Default provided in the applicable resolution of our
Board or supplemental indenture under which we issue a series of debt
securities.
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities issued under an indenture. If an Event of Default relating to the
payment of interest, principal or any sinking fund installment involving any
series of debt securities has occurred and is continuing, the trustee or the
holders of not less than 25% in aggregate principal amount of the debt
securities of each affected series may declare the entire principal of all the
debt securities of that series to be due and payable immediately.
If an Event of Default relating to the performance of other covenants occurs
and is continuing for a period of 60 days after notice of that event, or if any
other Event of Default occurs and is continuing involving all of the series of
senior debt securities, then the trustee or the holders of not less than 25% in
aggregate principal amount of all of the series of senior debt securities may
declare the entire principal amount of all of the series of senior debt
securities due and payable immediately.
Similarly, if an Event of Default relating to the performance of other
covenants occurs and is continuing for a period of 60 days after notice of that
event, or if any other Event of Default occurs and is continuing involving all
of the series of subordinated securities, then the trustee or the holders of
29
not less than 25% in aggregate principal amount of all of the series of
subordinated securities may declare the entire principal amount of all of the
series of subordinated securities due and payable immediately.
If, however, the Event of Default relating to the performance of other
covenants or any other Event of Default that has occurred and is continuing is
for less than all of the series of senior debt securities or subordinated
securities, as the case may be, then, the trustee or the holders of not less
than 25% in aggregate principal amount of each affected series of the senior
debt securities or the subordinated securities, as the case may be, may declare
the entire principal amount of all debt securities of the affected series due
and payable immediately. The holders of not less than a majority, or any
applicable supermajority, in aggregate principal amount of the debt securities
of a series may, after satisfying conditions, rescind and annul any of the
above-described declarations and consequences involving the series.
If an Event of Default relating to events in bankruptcy, insolvency or
reorganization of our company occurs and is continuing, then the principal
amount of all of the debt securities outstanding, and any accrued interest, will
automatically become due and payable immediately, without any declaration or
other act by the trustee or any holder.
The indentures impose limitations on suits brought by holders of debt
securities against us. Except for actions for payment of overdue principal or
interest, no holder of debt securities of any series may institute any action
against us under the relevant indenture unless:
- the holder has previously given to the trustee written notice of default
and continuance of such default;
- the holders of at least 25% in principal amount of the outstanding debt
securities of the affected series have requested that the trustee
institute the action;
- the requesting holders have offered the trustee reasonable indemnity for
expenses and liabilities that may be incurred by bringing the action;
- the trustee has not instituted the action within 60 days of the request;
and
- the trustee has not received inconsistent direction by the holders of a
majority in principal amount of the outstanding debt securities of the
series.
We will be required to file annually with each trustee a certificate, signed
by an officer of our company, stating whether or not the officer knows of any
default by us in the performance, observance or fulfillment of any condition or
covenant of the relevant indenture.
REGISTERED GLOBAL SECURITIES
We may issue the debt securities of a series in whole or in part in the form
of one or more fully registered global securities. We will deposit any
registered global securities with a depositary or with a nominee for a
depositary identified in the applicable prospectus supplement and registered in
the name of the depositary or nominee. In that case, we will issue one or more
registered global securities denominated in an amount equal to the aggregate
principal amount of all of the debt securities of the series to be issued and
represented by the registered global security or securities.
Unless and until it is exchanged in whole or in part for debt securities in
definitive registered form, a registered global security may not be transferred
except as a whole:
- by the depositary for such registered global security to its nominee;
- by a nominee of the depositary to the depositary or another nominee of the
depositary; or
- by the depositary or its nominee to a successor of the depositary or a
nominee of the successor.
30
The prospectus supplement relating to a series of debt securities will
describe the specific terms of the depositary arrangement involving any portion
of the series represented by a registered global security.
We anticipate that the following provisions will apply to all depositary
arrangements for debt securities:
- ownership of beneficial interests in a registered global security will be
limited to persons that have accounts with the depositary for such
registered global security, these persons being referred to as
"participants," or persons that may hold interests through participants;
- upon the issuance of a registered global security, the depositary for the
registered global security will credit, on its book-entry registration and
transfer system, the participants' accounts with the respective principal
amounts of the debt securities represented by the registered global
security beneficially owned by the participants;
- any dealers, underwriters, or agents participating in the distribution of
the debt securities will designate the accounts to be credited; and
- ownership of beneficial interest in such registered global security will
be shown on, and the transfer of such ownership interest will be effected
only through, records maintained by the depositary for such registered
global security for interests of participants, and on the records of
participants for interests of persons holding through participants.
The laws of some states may require that specified purchasers of securities
take physical delivery of the securities in definitive form. These laws may
limit the ability of those persons to own, transfer or pledge beneficial
interests in registered global securities.
So long as the depositary for a registered global security, or its nominee,
is the registered owner of the registered global security, the depositary or
nominee, as the case may be, will be considered the sole owner or holder of the
debt securities represented by the registered global security for all purposes
under the relevant indenture. Except as stated below, owners of beneficial
interests in a registered global security:
- will not be entitled to have the debt securities represented by a
registered global security registered in their names;
- will not receive or be entitled to receive physical delivery of the debt
securities in the definitive form; and
- will not be considered the owners or holders of the debt securities under
the relevant indenture.
Accordingly, each person owning a beneficial interest in a registered global
security must rely on the procedures of the depositary for the registered global
security and, if the person is not a participant, on the procedures of a
participant through which the person owns its interest, to exercise any rights
of a holder under the relevant indenture.
We understand that under existing industry practices, if we request any
action of holders or if an owner of a beneficial interest in a registered global
security desires to give or take any action that a holder is entitled to give or
take under the relevant indenture, the depositary for the registered global
security would authorize the participants holding the relevant beneficial
interests to give or take the action, and the participants would authorize
beneficial owners owning through the participants to give or take the action or
would otherwise act upon the instructions of beneficial owners holding through
them.
We will make payments of principal and premium, if any, and interest, if
any, on debt securities represented by a registered global security registered
in the name of a depositary or its nominee to the depositary or its nominee, as
the case may be, as the registered owners of the registered global security.
None of our company, the trustee or any other agent of our company or the
trustee will be responsible or liable for any aspect of the records relating to,
or payments made on account of, beneficial
31
ownership interests in the registered global security or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
We expect that the depositary for any debt securities represented by a
registered global security, upon receipt of any payments of principal and
premium, if any, and interest, if any, in respect of the registered global
security, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the registered
global security as shown on the records of the depositary. We also expect that
standing customer instructions and customary practices will govern payments by
participants to owners of beneficial interests in the registered global security
held through the participants, as is now the case with the securities held for
the accounts of customers in bearer form or registered in "street name." We also
expect that any of these payments will be the responsibility of the
participants.
If the depositary for any debt securities represented by a registered global
security is at any time unwilling or unable to continue as depositary or stops
being a clearing agency registered under the Securities Exchange Act of 1934, we
will appoint an eligible successor depositary. If we fail to appoint an eligible
successor depositary within 90 days, we will issue the debt securities in
definitive form in exchange for the registered global security. In addition, we
may at any time and in our sole discretion decide not to have any of the debt
securities of a series represented by one or more registered global securities.
In that event, we will issue debt securities of the series in a definitive form
in exchange for all of the registered global securities representing the debt
securities. The trustee will register any debt securities issued in definitive
form in exchange for a registered global security in the name or names as the
depositary, based upon instructions from its participants, shall instruct the
trustee.
We may also issue bearer debt securities of a series in the form of one or
more global securities, referred to as "bearer global securities." We will
deposit these securities with a common depositary for Euroclear System and
Clearstream Banking, or with a nominee for the depositary identified in the
prospectus supplement relating to the series. The prospectus supplement relating
to a series of debt securities represented by a bearer global security will
describe the applicable terms and procedures. These will include the specific
terms of the depositary arrangement and any specific procedures for the issuance
of debt securities in definitive form in exchange for a bearer global security,
in proportion to the series represented by a bearer global security.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
We can discharge or defease our obligations under either indenture or both
indentures as stated below or as provided in the applicable prospectus
supplement.
Unless otherwise provided in the applicable prospectus supplement, we may
discharge obligations to holders of any series of debt securities that have not
already been delivered to the relevant trustee for cancellation and that have
either become due and payable or are by their terms to become due and payable,
or are scheduled for redemption, within one year. We may effect a discharge by
irrevocably depositing with the trustee cash or United States government
obligations, as trust funds, in an amount certified to be enough to pay when
due, whether at maturity, upon redemption or otherwise, the principal of,
premium, if any, and interest on the debt securities and any mandatory sinking
fund payments.
Unless otherwise provided in the applicable prospectus supplement, we may
also discharge any and all of our obligations to holders of any series of debt
securities at any time, referred to as "defeasance." We may also be released
from the obligations imposed by any covenants of any outstanding series of debt
securities and provisions of the relevant indenture, and we may omit to comply
with those covenants without creating an event of default under the relevant
indenture, referred
32
to as "covenant defeasance." We may effect defeasance and covenant defeasance
only if, among other things:
- we irrevocably deposit with the trustee cash or United States government
obligations, as trust funds, in an amount certified to be enough to pay at
maturity, or upon redemption, the principal, premium, if any, and interest
on all outstanding debt securities of the series;
- we deliver to the trustee an opinion of counsel from a nationally
recognized law firm to the effect that (i) in the case of covenant
defeasance, the holders of the series of debt securities will not
recognize income, gain or loss for United States federal income tax
purposes as a result of such defeasance, and will be subject to tax in the
same manner and at the same times as if no covenant defeasance had
occurred and (ii) in the case of defeasance, either we have received from,
or there has been published by, the Internal Revenue Service a ruling or
there has been a change in applicable United States federal income tax
law, and based thereon, the holders of the series of debt securities will
not recognize income, gain or loss for United States federal income tax
purposes as a result of such defeasance, and will be subject to tax in the
same manner as if no defeasance had occurred; and
- in the case of subordinated debt securities, no event or condition shall
exist that, based on the subordination provisions applicable to the
series, would prevent us from making payments of principal of, premium, if
any, and interest on any of the applicable subordinated debt securities at
the date of the irrevocable deposit referred to above or at any time
during the period ending on the 91st day after the deposit date.
Although we may discharge or decrease our obligations under an indenture as
described in the two preceding paragraphs, we may not avoid, among other things,
our duty to register the transfer or exchange of any series of debt securities,
to replace any temporary, mutilated, destroyed, lost or stolen series of debt
securities or to maintain an office or agency in respect of any series of debt
securities.
MODIFICATION OF THE INDENTURES
Except as provided in the applicable prospectus supplement, each indenture
provides that we and the trustee may enter into supplemental indentures without
the consent of the holders of debt securities to:
- secure any debt securities;
- evidence the assumption by a successor corporation of our obligations;
- add covenants for the protection of the holders of debt securities;
- cure any ambiguity or correct any inconsistency in the relevant indenture;
- establish the forms or terms of debt securities of any series; and
- evidence and provide for the acceptance of appointment by a successor
trustee.
The indentures also provide that we and the trustee may, with the consent of
the holders of not less than a majority in aggregate principal amount of debt
securities of all series of senior debt securities or of subordinated
securities, as the case may be, then outstanding and affected, voting as one
class, add any provisions to, or change in any manner, eliminate or modify in
any way the provisions of, the relevant indenture or modify in any manner the
rights of the holders of the debt securities. We and the trustee may not,
however, without the consent of the holder of each outstanding debt security
affected thereby:
- extend the final maturity of any debt security;
- reduce the principal amount or premium, if any;
- reduce the rate or extend the time of payment of interest;
- reduce any amount payable on redemption;
33
- change the currency in which the principal, unless otherwise provided for
a series, premium, if any, or interest is payable;
- reduce the amount of the principal of any debt security issued with an
original issue discount that is payable upon acceleration or provable in
bankruptcy;
- impair the right to institute suit for the enforcement of any payment on
any debt security when due; or
- reduce the percentage of holders of debt securities of any series whose
consent is required for any modification of the relevant indenture.
CONCERNING THE TRUSTEE
The indentures provide that there may be more than one trustee under each
indenture, each for one or more series of debt securities. If there are
different trustees for different series of debt securities under an indenture,
each trustee will be a trustee under the relevant indenture separate and apart
from the trust administered by any other trustee under the same indenture or any
other indenture. Except as otherwise indicated in this prospectus or any
prospectus supplement, any action permitted to be taken by a trustee may be
taken by that trustee only on the one or more series of debt securities for
which it is the trustee under the relevant indenture. Any trustee under the
relevant indenture may resign or be removed from one or more series of debt
securities. All payments of principal of, premium, if any, and interest on, and
all registration, transfer, exchange, authentication and delivery of, the debt
securities of a series will be effected by the relevant trustee for such series
at an office designated by such trustee in New York, New York.
If any trustee becomes a creditor of our company, each indenture places
limitations on the right of the trustee to obtain payment of claims or to
realize on property received in respect of any such claim as security otherwise.
Any trustee may engage in other transactions. If it acquires any conflicting
interest relating to any duties concerning the debt securities, however, it must
eliminate the conflict or resign as trustee.
The holders of a majority in aggregate principal amount of any series of
debt securities then outstanding will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the relevant trustee concerning the applicable series of debt securities,
provided that the direction:
- would not conflict with any rule of law or with the relevant indenture;
- would not be unduly prejudicial to the rights of another holder of the
debt securities; and
- would not involve any trustee in personal liability.
The indentures provide that in case an Event of Default shall occur, not be
cured and be known to any trustee, the relevant trustee must use the same degree
of care as a prudent person would use in the conduct of his or her own affairs
in the exercise of the trustee's power. No trustee will be under any obligation
to exercise any of its rights or powers under an indenture at the request of any
of the holders of the debt securities, unless the holders shall have offered to
the trustee security and indemnity satisfactory to that trustee.
NO INDIVIDUAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS OR DIRECTORS
The indentures provide that no incorporator and no past, present or future
shareholder, officer or director of our company or any successor corporation in
their capacity as such shall have any individual liability for any of our
obligations, covenants or agreements under the debt securities or the relevant
indenture.
GOVERNING LAW
The indentures and the debt securities will be governed by, and construed in
accordance with, the laws of the State of New York.
34
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 600,000,000 shares of common stock,
par value $.25 per share, and 50,000,000 shares of preferred stock, par value
$.01 per share. As of March 31, 2001, there were 266,485,914 shares of common
stock outstanding, and no shares of preferred stock outstanding.
COMMON STOCK
VOTING RIGHTS
The holders of common stock are entitled to one vote per share and are
entitled to vote upon all matters that come before the stockholders, including
the election of directors.
Only those holders of our common stock that, as of any relevant date, would
be entitled to elect a director at the next annual meeting of stockholders, may
remove a director. Our directors may be removed, with or without cause.
Vacancies in a directorship may be filled by:
- the majority of directors then in office, except in vacancies resulting
from the removal of directors by stockholders; or
- the vote of the holders of the common stock, as of the date such vacancy
is filled, entitled to elect such director at the next annual meeting of
stockholders.
DIVIDENDS
Holders of common stock are entitled to receive dividends at the same rate
if, as and when such dividends are declared by our board out of assets legally
available therefor after payment of dividends required to be paid on shares of
outstanding preferred stock. We may not make any dividend or distribution to any
holder of common stock unless simultaneously with the dividend or distribution
we make the same dividend or distribution with respect to each outstanding share
of common stock.
LIQUIDATION
In the event of our liquidation, after payment of our debts and other
liabilities and after making provision for the holders of preferred stock, if
any, our remaining assets will be distributable ratably among the holders of
common stock.
OTHER PROVISIONS
The holders of our common stock are not entitled to preemptive rights. All
outstanding shares of common stock are, and all shares of common stock offered
hereby when issued will be upon payment therefor, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Our board of directors has the authority, without any further action by our
stockholders to issue from time to time shares of preferred stock in one or more
series and to fix the designations, preferences, rights, qualifications,
limitations and restrictions thereof, including voting rights, dividend rights,
dividend rates, conversion rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series. The
issuance of preferred stock with voting rights could have an adverse effect on
the voting power of holders of common stock by increasing the number of
outstanding shares having voting rights. In addition, if our board of directors
authorizes preferred stock with conversion rights, the number of shares of
common stock outstanding could potentially be increased up to the authorized
amount. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock. Any such
issuance could also have the effect of delaying, deterring or preventing a
change in control of us and may adversely affect the rights of holders of our
common stock.
35
GENERAL
CERTIFICATE OF INCORPORATION AND BY-LAWS
Stockholders' rights and related matters are governed by the Delaware
General Corporation Law and our certificate of incorporation and by-laws. The
terms of our restated certificate of incorporation and our by-laws are more
detailed than the general information provided in connection with the
description of our capital stock or otherwise in this prospectus. Therefore, you
should carefully consider the actual provisions of these documents.
LIMITATION OF DIRECTORS' LIABILITY
Our certificate of incorporation provides that none of our directors will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions will be to eliminate our rights and our
stockholders' rights, through stockholders' derivatives suits on our behalf, to
recover monetary damages against a director for breach of fiduciary duty as a
director, including breaches resulting from grossly negligent behavior, except
in the situations described above. These provisions will not limit the liability
of directors under federal securities laws and will not affect the availability
of equitable remedies such as an injunction or rescission based upon a
director's breach of his or her duty of care.
TRANSFER AGENT
The Transfer Agent and Registrar for our common stock is the Illinois Stock
Transfer Company.
36
DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of debt securities, preferred stock
or common stock. Warrants may be issued independently or together with debt
securities, preferred stock or common stock offered by any prospectus supplement
and may be attached to or separate from any such offered securities. Each series
of warrants will be issued under a separate warrant agreement to be entered into
between us and a bank or trust company, as warrant agent. The warrant agent will
act solely as our agent in connection with the warrants and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of warrants. The following summary of selected provisions of
the warrants does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the warrant agreement that will
be filed with the SEC in connection with the offering of such warrants.
DEBT WARRANTS
The prospectus supplement relating to a particular issue of debt warrants
will describe the terms of the debt warrants, including the following:
- the title of the debt warrants;
- the offering price for the debt warrants, if any;
- the aggregate number of the debt warrants;
- the designation and terms of the debt securities purchasable upon exercise
of the debt warrants;
- if applicable, the designation and terms of the debt securities with which
the debt warrants are issued and the number of debt warrants issued with
each debt security;
- if applicable, the date from and after which the debt warrants and any
debt securities issued therewith will be separately transferable;
- the principal amount of debt securities purchasable upon exercise of a
debt warrant and the price at which the principal amount of debt
securities may be purchased upon exercise, which price may be payable in
cash, securities, or other property;
- the date on which the right to exercise the debt warrants shall commence
and the date on which the right shall expire;
- if applicable, the minimum or maximum amount of the debt warrants that may
be exercised at any one time;
- whether the debt warrants represented by the debt warrant certificates or
debt securities that may be issued upon exercise of the debt warrants will
be issued in registered or bearer form;
- information with respect to book-entry procedures, if any;
- the currency or currency units in which the offering price, if any, and
the exercise price are payable;
- if applicable, a discussion of material United States federal income tax
considerations;
- the antidilution provisions of the debt warrants, if any;
- the redemption or call provisions, if any, applicable to the debt
warrants; and
- any additional terms of the debt warrants, including terms, procedures,
and limitations relating to the exchange and exercise of the debt
warrants.
37
STOCK WARRANTS
The prospectus supplement relating to any particular issue of preferred
stock warrants or common stock warrants will describe the terms of the warrants,
including the following:
- the title of the warrants;
- the offering price for the warrants, if any;
- the aggregate number of the warrants;
- the designation and terms of the common stock or preferred stock
purchasable upon exercise of the warrants;
- if applicable, the designation and terms of the offered securities with
which the warrants are issued and the number of the warrants issued with
each offered security;
- if applicable, the date from and after which the warrants and any offered
securities issued with them will be separately transferable;
- the number of shares of common stock or preferred stock purchasable upon
exercise of a warrant and the price at which the shares may be purchased
upon exercise;
- the date on which the right to exercise the warrants shall commence and
the date on which the right shall expire;
- if applicable, the minimum or maximum amount of the warrants that may be
exercised at any one time;
- the currency or currency units in which the offering price, if any, and
the exercise price are payable;
- if applicable, a discussion of material United States federal income tax
considerations;
- the antidilution provisions of the warrants, if any;
- the redemption or call provisions, if any, applicable to the warrants; and
- any additional terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants.
38
DESCRIPTION OF DEPOSITARY SHARES
The following information outlines some of the provisions of the deposit
agreement, the depositary shares and the depositary receipts. This information
may not be complete in all respects and is qualified entirely by reference to
the relevant deposit agreement and depositary receipts with respect to the
depositary shares relating to any particular series of preferred stock. The
specific terms of any series of depositary shares will be described in the
relevant prospectus supplement. If so described in the prospectus supplement,
the terms of that series of depositary shares may differ and supersede some or
all of the terms presented below.
GENERAL
We may elect to offer fractional interests in shares of preferred stock
instead of whole shares of preferred stock. If so, we will allow a depositary to
issue depositary shares to the public, each of which will represent a fractional
interest in a share of the relevant series of preferred stock, as described in
the relevant prospectus supplement, of a share of preferred stock.
The shares of the preferred stock underlying any depositary shares will be
deposited under a separate deposit agreement between us and a bank or trust
company acting as depositary with respect to that series. The depositary will
have its principal office in the United States and have a combined capital and
surplus of at least $50,000,000. The relevant prospectus supplement relating to
a series of depositary shares will mention the name and address of the
depositary. Under the relevant deposit agreement, each owner of a depositary
share will be entitled, in proportion to its fractional interest in a share of
the preferred stock underlying that depositary share, to all the rights and
preferences of that preferred stock, including dividend, voting, redemption,
conversion, exchange and liquidation rights.
Depositary shares will be evidenced by one or more depositary receipts
issued under the relevant deposit agreement.
Pending the preparation of definitive engraved depositary receipts, a
depositary may, upon our order, issue temporary depositary receipts
substantially identical to and entitling their holders to all the rights
pertaining to the definitive depositary receipts, but not in definitive form.
Definitive depositary receipts will be prepared without unreasonable delay
and the temporary depositary receipts will be exchangeable for definitive
depositary receipts at our expense.
DIVIDENDS AND OTHER DISTRIBUTIONS
The depositary will distribute all cash dividends or other cash
distributions in respect of the preferred stock to the record depositary
shareholders based on the number of the depositary shares owned by that holder
on the relevant record date. The depositary will distribute only that amount
which can be distributed without attributing to any depositary shareholders a
fraction of one cent, and any balance not so distributed will be added to and
treated as part of the next sum received by the depositary for distribution to
the depositary shareholders of record.
If there is a distribution other than in cash, the depositary will
distribute property to the depositary shareholders of record on a pro rata
basis, unless the depositary determines that it is not feasible to make that
distribution. In that case, the depositary may, with our consultation, adopt a
method it deems equitable and practicable for making that distribution,
including any sale of property and the distribution of the net proceeds from
that sale to the concerned holders.
Each deposit agreement will also contain provisions relating to the manner
in which any subscription or similar rights we offer to preferred stockholders
of the relevant series will be made available to depositary shareholders.
39
WITHDRAWAL OF STOCK
Upon surrender of depositary receipts at the depositary's office, the holder
of the relevant depositary shares will be entitled to the number of whole shares
of the related series of preferred stock and any money or other property those
depositary shares represent. Depositary shareholders will be entitled to receive
whole shares of the related preferred stock series on the basis described in the
relevant prospectus supplement, but holders of those whole preferred stock
shares will not afterward be entitled to receive depositary shares in exchange
for their shares. If the depositary receipts the holder delivers evidence a
depositary share number exceeding the whole share number of the related
preferred stock series to be withdrawn, the depositary will deliver to that
holder a new depositary receipt evidencing the excess depositary share number.
REDEMPTION; LIQUIDATION
The terms on which the depositary shares relating to the preferred stock of
any series may be redeemed and any amounts distributable upon our liquidation,
dissolution or winding up, will be described in the relevant prospectus
supplement.
CONVERSION
The depositary shares, as such, are not convertible or exchangeable into our
common stock or any of our other securities or property. Nevertheless, the
prospectus supplement relating to an offering of depositary shares may provide
that the holders of depositary receipts may surrender their depositary receipts
to the depositary with written instructions to the depositary to instruct us to
cause the conversion or exchange of the preferred stock represented by these
depositary shares.
VOTING
Upon receiving notice of any meeting at which preferred stockholders of any
series of preferred stock underlying the depositary shares are entitled to vote,
the depositary will mail the information contained in that notice to the
depositary shareholders of record relating to that series of preferred stock.
Each depositary shareholder on the record date will be entitled to instruct the
depositary on how to vote the shares of preferred stock underlying that holder's
depositary shares. The depositary will vote the preferred stock shares
underlying those depositary shares according to those instructions, and we will
take actions we deem necessary to enable the depositary to do so. If the
depositary does not receive specific instructions from the depositary
shareholders relating to that series of preferred stock, it will abstain from
voting those preferred stock shares, unless otherwise mentioned in the relevant
prospectus supplement.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The depositary receipt form evidencing the depositary shares and the
relevant deposit agreement may be amended by us and the depositary. However, any
amendment that significantly affects the rights of the depositary shareholders
will not be effective unless a majority of the outstanding depositary
shareholders approve that amendment. We or the depositary may terminate a
deposit agreement only if:
- we have redeemed or reacquired all outstanding depositary shares relating
to the deposit agreement;
- all preferred stock of the relevant series has been withdrawn;
- there has been a final distribution in respect of the relevant series of
preferred stock in connection with our liquidation, dissolution or winding
up and that distribution has been made to the relevant depositary
shareholders;
40
- all outstanding depository shares have been converted into or exchanged
for other securities; or
- upon determination by Citizens to terminate the deposit agreement.
CHARGES OF DEPOSITARY
We will pay all charges of each depositary in connection with the initial
deposit and any redemption of the preferred stock. Depositary shareholders will
be required to pay any other transfer and other taxes and governmental charges
and any other charges expressly provided in the deposit agreement to be for
their accounts.
Each depositary will forward to the relevant depositary shareholders all
reports and communications that we are required to furnish to our preferred
stockholders.
Neither any depositary nor Citizens will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under any deposit agreement. The obligations of each depositary
under any deposit agreement will be limited to performance in good faith of
their duties under that agreement, and they will not be obligated to prosecute
or defend any legal proceeding in respect of any depositary shares or preferred
stock unless they are provided with satisfactory indemnity. They may rely upon
written advice of counsel or accountants, or information provided by persons
presenting preferred stock for deposit, depositary shareholders or other persons
believed to be competent, and on documents believed to be genuine.
TITLE
We, each depositary and any of their agents may treat the registered owner
of any depositary share as the absolute owner of that share, whether or not any
payment for that depositary share is overdue and despite any notice to the
contrary, for any purpose.
RESIGNATION AND REMOVAL OF DEPOSITARY
A depositary may resign at any time by delivering to us notice of its
election to resign, and we may remove a depositary, and resignation or removal
will take effect upon the appointment of a successor depositary and its
acceptance of appointment.
41
DESCRIPTION OF TRUST PREFERRED SECURITIES
The following description of the trust preferred securities is only a
summary and is not intended to be comprehensive.
GENERAL
The Trust Agreement authorizes the administrative trustees to issue the
trust preferred securities and the trust common securities on behalf of the
Trust. For additional information you should refer to the Trust Agreement. The
form of the Trust Agreement is filed with the SEC as an exhibit to the
registration statement, of which this prospectus is a part.
The prospectus supplement describing the trust preferred securities will
disclose the specific terms related to the offering, including the price or
prices at which the trust preferred securities to be offered will be issued.
Those terms will include some or all of the following:
- the number of trust preferred securities;
- the yearly distribution rate, or the method of determining that rate, and
the date or dates on which distributions will be payable;
- the date or dates, or method of determining the date or dates, from which
distributions will be cumulative;
- the amount that will be paid out of the assets of the Trust to the holders
of the trust preferred securities upon the voluntary or involuntary
dissolution, winding-up or termination of the Trust;
- any obligation that the Trust has to purchase or redeem the trust
preferred securities and the price at which, the period within which, and
the terms and conditions upon which the Trust will purchase or redeem
them;
- any voting rights of the trust preferred securities that are in addition
to those legally required, including any right that the holders of the
trust preferred securities have to approve certain actions under or
amendments to the trust agreement;
- any right that the Trust has to defer distributions on the trust preferred
securities in the event that Citizens extends the interest payment period
on the junior subordinated notes;
- any other rights, preferences, privileges, limitations or restrictions
upon the trust preferred securities; and
- Citizens will guarantee the trust preferred securities to the extent
described below under the caption "Description of the Guarantee."
The applicable prospectus supplement will describe any material United States
federal income tax considerations that apply to the trust preferred securities.
42
DESCRIPTION OF GUARANTEE
In connection with the issuance of trust preferred securities by the Trust
and junior subordinated notes to the Trust by Citizens, Citizens will execute
the guarantee for the benefit of the holders of the preferred securities of the
Trust. The Chase Manhattan Bank will act as guarantee trustee. The guarantee
trustee will hold the guarantee for the benefit of the holders of the trust
preferred securities.
The following description of the guarantee is only a summary and is not
intended to be comprehensive. The form of guarantee is filed with the SEC as an
exhibit to the registration statement, of which this prospectus is a part.
GENERAL
Citizens will irrevocably and unconditionally agree under the guarantee to
pay in full the guarantee payments that are defined below, to the extent
specified in the guarantee, to the holders of the trust preferred securities, to
the extent that the guarantee payments are not paid by or on behalf of the
Trust. Citizens is required to pay the guarantee payments to the extent
specified in the guarantee regardless of any defense, right of set-off or
counterclaim that Citizens may have or may assert against any person.
The following payments and distributions on the trust preferred securities
of the Trust are guarantee payments:
- any acquired and unpaid distributions required to be paid on the trust
preferred securities of the Trust, but only to the extent that the Trust
has funds legally and immediately available for those distributions;
- the redemption price for any trust preferred securities that the Trust
calls for redemption, including all accrued and unpaid distributions to
the redemption date, but only to the extent that the Trust has funds
legally and immediately available for the payment; and
- upon a dissolution, winding-up or termination of the Trust, other than in
connection with the distribution of junior subordinated notes to the
holders of trust preferred securities or the redemption of all the trust
preferred securities, the lesser of:
- the sum of the liquidation amount and all accrued and unpaid
distributions on the trust preferred securities of the Trust to the
payment date, to the extent that the Trust has funds legally and
immediately available for the payment; and
- the amount of assets of the Trust remaining available for distribution
to holders of the trust preferred securities of the Trust in
liquidation of the Trust.
Citizens may satisfy its obligation to make a guarantee payment by making
that payment directly to the holders of the trust preferred securities or by
causing the Trust to make the payment to those holders.
The guarantee will be a full and unconditional guarantee, subject to certain
subordination provisions, of the guarantee payments with respect to the trust
preferred securities from the time of issuance of the trust preferred
securities, except that the guarantee will only apply to the payment of
distributions and other payments on the trust preferred securities when the
Trust has sufficient funds legally and immediately available to make those
distributions or other payments.
If Citizens does not make the required payments on the junior subordinated
notes held by the Trust, the Trust will not make the payments on the trust
preferred securities.
43
SUBORDINATION
Citizens' obligations under the guarantee will be unsecured obligations of
Citizens. Those obligations will rank:
- subordinate and junior in right of payment to all of Citizens' other
liabilities, other than obligations or liabilities that rank equal in
priority or subordinate by their terms;
- equal in priority with Citizens' preferred stock and similar guarantees,
and
- senior to Citizens' common stock.
The guarantee will be a guarantee of payment and not of collection. This
means that the guaranteed party may institute a legal proceeding directly
against Citizens, as guarantor, to enforce its rights under the guarantee
without first instituting a legal proceeding against any other person or entity.
The terms of the trust preferred securities are expected to provide that
each holder of the trust preferred securities, by accepting the trust preferred
securities, agrees to the subordination provisions and other terms of the
guarantee.
AMENDMENTS
Citizens may amend the guarantee without the consent of any holder of the
trust preferred securities if the amendment does not materially and adversely
affect the rights of those holders. Citizens may otherwise amend the guarantee
with the approval of 66 2/3% of the outstanding trust preferred securities.
TERMINATION
The guarantee will terminate and be of no further effect when:
- the redemption price of the trust preferred securities is fully paid;
- Citizens distributes the junior subordinated notes to the holders of the
trust preferred securities; or
- the amounts payable upon liquidation of the Trust are fully paid.
The guarantee will remain in effect or will be reinstated if at any time any
holder the trust preferred securities must restore payment of any sums paid to
that holder with respect to the trust preferred securities or under the
guarantee.
EVENTS OF DEFAULT
An event of default will occur under the guarantee if Citizens fails to
perform any of its payment obligations under the guarantee. The holders of a
majority of the trust preferred securities may waive any such event of default
and its consequences on behalf of all of the holders of the trust preferred
securities. The guarantee trustee is obligated to enforce the guarantee for the
benefit of the holders of the trust preferred securities if an event of default
occurs under the guarantee.
The holders of a majority of the trust preferred securities of the guarantee
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the guarantee trustee with respect to the guarantee
or to direct the exercise of any trust or power that the guarantee trustee holds
under the guarantee. Any holder of the trust preferred securities may institute
a legal proceeding directly against Citizens to enforce that holder's rights
under the guarantee without first instituting a legal proceeding against the
guarantee trustee or any other person or entity.
44
THE GUARANTEE TRUSTEE
The Chase Manhattan Bank is the guarantee trustee. It is also the property
trustee, the subordinated indenture trustee, and the senior indenture trustee.
Citizens and certain of its affiliates maintain deposit accounts and banking
relationships with The Chase Manhattan Bank. The Chase Manhattan Bank also
serves as trustee or agent under other indentures and agreements pursuant to
which securities of Citizens and certain of its affiliates are outstanding.
The guarantee trustee will perform only those duties that are specifically
set forth in each guarantee unless an event of default under the guarantee
occurs and is continuing. If an event of default occurs and is continuing, the
guarantee trustee will exercise the same degree of care as a prudent individual
would exercise in the conduct of his or her own affairs. Subject to these
provisions, the guarantee trustee is under no obligation to exercise any of its
powers under the guarantee at the request of any holder of the trust preferred
securities unless that holder offers reasonable indemnity to the guarantee
trustee against the costs, expenses and liabilities which it might incur as a
result.
AGREEMENT AS TO EXPENSES AND LIABILITIES
Citizens will enter into an Agreement as to Expenses and Liabilities under
the Trust Agreement. The Agreement as to Expenses and Liabilities will provide
that Citizens will, with certain exceptions, irrevocably and unconditionally
guarantee the full payment of any indebtedness, expenses or liabilities of the
Trust to each person or entity to whom the Trust becomes indebted or liable. The
exceptions are the obligations of the Trust to pay the holders of the trust
preferred securities or other similar interests in the Trust the amounts due to
the holders under the terms of the trust preferred securities or those similar
interests.
45
PLAN OF DISTRIBUTION
We may sell securities directly to purchasers, through agents, to dealers,
to underwriters or in any combination of these ways. Agents or dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933 and
any discounts or commissions received by them from us and any profit on the
resale of securities by them may be considered underwriting discounts and
commissions under the Securities Act of 1933. Any underwriter or agent will be
identified, and any compensation received from us will be described in the
prospectus supplement relating to those securities.
We may directly solicit offers to purchase securities or designate agents to
do so. Any agent will be named, and any commissions payable by us to such agent,
or the method by which commissions can be determined, will be described, in the
applicable prospectus supplement. If we use underwriters or dealers in a sale,
the securities will be acquired by the underwriters or dealers for their own
account. The underwriters or dealers may resell the securities from time to time
in one or more transactions, including negotiated transactions at a fixed public
offering price or at varying prices determined at the time of sale. The
securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more of
such firms. Unless otherwise indicated in the applicable prospectus supplement,
the obligations of the underwriters to purchase all the securities of the series
offered will be subject to customary conditions and the underwriters will be
obligated to purchase all the securities of the series offered if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
We may authorize underwriters, dealers and agents to solicit offers by
institutional investors to purchase offered securities under contracts providing
for payment and delivery on a future date specified in the prospectus
supplement. The prospectus supplement will also describe the public offering
price for the securities and the commission payable for solicitation of these
delayed delivery contracts. Delayed delivery contracts will contain definite
fixed price and quantity terms. The obligations of a purchaser under these
delayed delivery contracts will be subject to only two conditions:
- that the institution's purchase of the securities at the time of delivery
of the securities is not prohibited under the law of any jurisdiction to
which the institution is subject; and
- that we shall have sold to the underwriters the total principal amount of
the offered securities, less the principal amount covered by the delayed
delivery contracts.
We may have agreements with agents, dealers and underwriters to indemnify
them against specified liabilities, including liabilities under the Securities
Act of 1933, or to contribute to payments they may be required to make in
respect of these liabilities. Agents, dealers or underwriters may engage in
transactions with or perform services for us in the ordinary course of business.
This prospectus also relates to the offer and sale from time to time by the
selling stockholder identified in the section entitled "Selling Stockholder" and
its respective pledgees, donees and other successors in interest of up to
approximately 9,139,900 shares of Citizens common stock in the aggregate. We
refer to such shares as the Resale Shares. The Resale Shares may be sold from
time to time by the selling stockholder. Such sales may be made in underwritten
offerings or in open market or block transactions or otherwise on any national
securities exchange or automated interdealer quotation system on which shares of
Citizens common stock are then listed, including the New York Stock Exchange, in
the over-the-counter market, in private transactions or otherwise at prices
related to prevailing market prices at the time of the sale or at negotiated
prices. Some or all of the Resale Shares may be sold through brokers acting on
behalf of the selling stockholder or to dealers for resale by such dealers. In
connection with such sales, such brokers and dealers may receive compensation in
the form of discounts or commissions from the selling stockholder and may
receive commissions from the purchasers of such Resale Shares for whom they act
as broker or agent, which discounts and commissions are not anticipated to
exceed those customary in the types of transactions involved. The selling
stockholder may offer to sell and may sell shares of our common stock in options
transactions or deliver such shares to cover short sales "against the box." If
necessary, a supplemental or amended
46
prospectus will describe the method of sale in greater detail. In effecting
sales, brokers or dealers engaged by the selling stockholder and/or purchasers
of the Resale Shares may arrange for other brokers or dealers to participate. In
addition, any of the Resale Shares covered by this prospectus that qualify for
sale pursuant to Rule 144 under the Securities Act of 1933 may be sold under
Rule 144 rather than pursuant to this prospectus.
If the Resale Shares are sold in an underwritten offering, the Resale Shares
will be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or prices at the time of the sale
or at negotiated prices. Any initial public offering price and any discounts or
commissions allowed or reallowed or paid to dealers may be changed from time to
time. Underwriters may sell Resale Shares to or through brokers or dealers, and
such brokers and dealers may receive compensation in the form of discounts,
commissions or commissions from the underwriters and may receive commissions
from the purchasers of the Resale Shares for whom they act as broker or agent,
which discounts and commissions are not anticipated to exceed those customary in
the types of transactions involved.
Citizens has agreed to pay all expenses in connection with the registration
of the Resale Shares, including brokerage commissions allocable to the sale of
the Resale Shares and fees and disbursements of counsel and other
representatives of the selling stockholder.
The number of Resale Shares that may be actually sold by the selling
stockholder will be determined by the selling stockholder, and may depend upon a
number of factors, including, among other things, the market price of our common
stock. Because the selling stockholder may offer all, some or none of the Resale
Shares, and because the offering contemplated by this prospectus is currently
not being underwritten, no estimate can be given as to the number of Resale
Shares that will be held by the selling stockholder upon or prior to termination
of this offering. Accordingly, there can be no assurance that the selling
stockholder will sell any or all of the Resale Shares.
47
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and, in accordance therewith, file reports and other information
with the SEC. You may read and copy any document we file at the SEC's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located at 500 West Madison
Street, 14th Floor, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can also be obtained by
mail from the Public Reference Section of the Commission, at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the
prescribed rates. Please call the SEC at 1-800-SEC-0330 for more information on
their public reference rooms and their copy charges, as well as the SEC's Public
Reference Section's charges for mailing copies of the documents we have filed.
The SEC maintains a website at http://www.sec.gov that contains reports, proxy
and information statements and other information on a delayed basis regarding
registrants, including us, that file electronically with the SEC.
Our common stock is listed on the New York Stock Exchange and any reports,
proxy and information statements and other information we file with the SEC may
also be inspected and copied at the offices of the New York Stock Exchange,
Inc., located at 20 Broad Street, New York, New York 10005.
INCORPORATION OF DOCUMENTS BY REFERENCE
Some of the information that you may want to consider in deciding whether to
invest in any of our securities is not included in this prospectus, but rather
is incorporated by reference to specific reports that we have filed with the
SEC. This allows us to disclose important information to you by referring you to
those documents rather than repeating them in full in this prospectus. The
information incorporated by reference in this prospectus contains important
business and financial information. In addition, information that we file with
the SEC after the date of this prospectus automatically updates and supersedes
the information contained in this prospectus and incorporated filings. We have
previously filed the following documents with the SEC (File No. 001-11001) and
are incorporating them by reference into this prospectus:
- Annual Report on Form 10-K of Citizens Communications Company for the year
ended December 31, 2000 and filed with the SEC on March 9, 2001;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on May 7, 2001, including the audited financial statements of the
selected US WEST exchanges and the Frontier ILEC businesses as of
December 31, 2000 and 1999 for each of the years in the three year period
ended December 31, 2000 and pro forma financial information;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on April 27, 2001 including our press release announcing the
approval by the New York Public Service Commission of the purchase of
Global Crossing Ltd.'s local exchange carrier business (the Frontier ILEC
businesses);
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on April 25, 2001, including our press release announcing the
approval by the Louisiana Public Service Commission on April 23, 2001 of
the sale to Atmos Energy Corporation of the LGS Natural Gas Company
Subsidiary and the Louisiana Gas Service Company division;
- Current Report on Form 8-K of Citizens Communication Company filed with
the SEC on April 4, 2001, including our press release announcing the
offering of $3.0 billion worth of debt and equity securities under a shelf
registration statement;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on March 29, 2001, including the audited financial statements of
selected US WEST exchanges and the Frontier ILEC businesses as of
December 31, 1999 and 1998 and for each of the years in the three-year
period ended December 31, 1999 and the unaudited financial statements for
the nine months ended September 30, 2000 and 1999 and pro forma financial
information;
48
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on March 8, 2001, including our press release announcing fourth
quarter results and including our financial and operating data tables;
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on February 13, 2001, including financial statements of the GTE
combined entities as of September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 and financial statements of Contel of
Minnesota, Inc. for the eight months ended August 31, 2000 and 1999, and
pro forma financial information; and
- Current Report on Form 8-K of Citizens Communications Company filed with
the SEC on November 14, 2000, including the audited financial statements
of the GTE combined entities and Contel of Minnesota, Inc. as of
December 31, 1999 and 1998 and for each of the years in the three-year
period ended December 31, 1999 and for the six months ended June 30, 2000
and 1999 and pro forma financial information.
We also incorporate by reference all documents subsequently filed by us
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
after the date of this prospectus until our offering is completed.
We will provide you, upon written or oral request, with a copy of any of
these documents, at no cost. You should direct your request, either in writing
or by telephone, to
Citizens Communications Company
3 High Ridge Park, Stamford, Connecticut 06905
Attn.: Office of the Secretary
Telephone 203-614-5600.
LEGAL MATTERS
The legality of securities issued by Citizens offered hereby will be passed
upon by Winston & Strawn, 200 Park Avenue, New York, New York, counsel for
Citizens and for any underwriters by Simpson Thacher & Bartlett, 425 Lexington
Avenue, New York, New York.
Richards, Layton & Finger, P.A., special Delaware counsel to the Trust, will
issue an opinion concerning certain matters of Delaware law relating to the
validity of the trust preferred securities on behalf of the Trust. In giving
their respective opinions, Winston & Strawn and Simpson Thacher & Bartlett may
rely as to certain matters of Delaware law upon the opinion of Richards, Layton
& Finger, P.A.
EXPERTS
Our consolidated financial statements as of December 31, 2000 and 1999, and
for each of the years in the three-year period ended December 31, 2000,
incorporated by reference in this prospectus from our Annual Report on
Form 10-K, have been so incorporated by reference in reliance upon the report of
KPMG LLP, independent public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of the GTE combined entities as of December 31,
1999 and 1998 and for each of the years in the three-year period ended
December 31, 1999, incorporated by reference in this prospectus from our Current
Report on Form 8-K filed November 14, 2000, have been so incorporated by
reference in reliance upon the report of KPMG LLP, independent public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Contel of Minnesota, Inc. incorporated by
reference in this prospectus and elsewhere in the registration statement to the
extent and for the periods indicated in their reports dated January 27, 2000 and
January 28, 1999 have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
49
The special purpose financial statements of the selected, assets,
liabilities and parent's equity of Qwest Communications International Inc.'s,
formerly US WEST, Inc., selected Qwest exchanges, formerly selected US WEST
exchanges, as of December 31, 2000 and 1999 and the related statements of
revenue and expenses and cash flows for each of the three years in the period
ended December 31, 2000, incorporated by reference in this prospectus from our
Current Report on Form 8-K filed on May 7, 2001, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are so incorporated by reference in reliance upon the
report of said firm, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
The combined financial statements of the Frontier ILEC businesses as of
December 31, 1999 and 2000, for the year ended December 31, 2000, the nine-month
period ended September 30, 1999 and the three-month period ended December 31,
1999, incorporated by reference in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
The combined financial statements of the Frontier Incumbent Local Exchange
Carrier Businesses as of December 31, 1997 and 1998 and for each of the two
years in the period ended December 31, 1998, incorporated in this registration
statement by reference to Citizens Communications Company's Current Report on
Form 8-K of dated March 29, 2001, have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
50
[LOGO]