SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 13, 2001
CITIZENS COMMUNICATIONS COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 001-11001 06-0619596
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
3 High Ridge Park
Stamford, Connecticut 06905
(Address of Principal Executive Offices) (Zip Code)
(203) 614-5600
(Registrant's Telephone Number, Including Area Code)
No Change Since Last Report
----------------------------------------------
(Former name or former address, if changed since last report)
Item 5. Other Events.
From May 27, 1999 through July 12, 2000, we entered into several agreements to
acquire telephone access lines. These transactions have been accounted for using
the purchase method of accounting. The results of operations of the acquired
properties have been included in our financial statements from the dates of
acquisition of each property. These agreements are described as follows:
Verizon Acquisition
-------------------
Between May and December 1999, we announced 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. During 2000, we closed on approximately 317,500
telephone access lines. On December 17, 2001, we terminated pending
agreements with Verizon to acquire approximately 63,000 telephone access
lines in Arizona and California.
Qwest Acquisition - termination
-------------------------------
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. On October 31, 2000, we closed on the
purchase of approximately 17,000 telephone access lines in North Dakota for
approximately $38.0 million in cash. On July 20, 2001, we notified Qwest
that we were terminating eight acquisition agreements with Qwest relating
to telephone exchanges in Arizona, Colorado, Idaho/Washington, Iowa,
Minnesota, Montana, Nebraska and Wyoming. Qwest subsequently filed a notice
of claim for arbitration in Denver, Colorado under the rules of the
American Arbitration Association with respect to the terminated acquisition
agreements. Qwest asserts that we wrongfully terminated these agreements
and is seeking approximately $64.0 million, which is the aggregate of
liquidation damages under letters of credit established in the terminated
acquisition agreements. We have filed a notice of claim in the same
arbitration proceeding, contesting Qwest's asserted claims and asserting
substantial claims against Qwest for material breaches of representations,
warranties and covenants in the terminated acquisition agreements and in
the acquisition agreement relating to North Dakota assets that we purchased
from Qwest.
Frontier Acquisition
--------------------
On June 29, 2001, we purchased from Global Crossing Ltd. (Global) 100% of
the stock of Frontier Corp.'s (Frontier) local exchange carrier
subsidiaries, which owned approximately 1,096,700 telephone access lines
(as of December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana,
Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and
Wisconsin, for approximately $3,370.0 million in cash, subject to final
purchase price adjustment.
Divestitures
------------
On August 24, 1999, our Board of Directors approved a plan of divestiture for
our public utilities services businesses, which include gas, electric and water
and wastewater businesses. Currently, we have agreements to sell all our water
and wastewater operations and one of our electric operations. We have sold two
of our natural gas operations. These agreements and the status of each
transaction are described as follows:
Water and Wastewater
--------------------
On October 18, 1999, we announced the agreement to sell our water and
wastewater operations 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 first quarter of 2002.
Electric
--------
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations. The Arizona and Vermont electric divisions were under
contract to be sold to Cap Rock Energy Corp. (Cap Rock). The agreement with
Cap Rock was terminated on March 7, 2001. We intend to pursue the
disposition of the Vermont and Arizona electric divisions with alternative
buyers. In August 2000, the Hawaii Public Utilities Commission denied the
initial 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 discussing a
reduction of the purchase price and other options. Our agreement for the
sale of this division may be terminated if regulatory approval is not
received before February 2002.
Gas
---
On July 2, 2001, we completed the sale of our Louisiana Gas operations to
Atmos Energy Corporation for $363.4 million in cash.
In July 2001, an agreement was signed to sell the Colorado Gas division to
Kinder Morgan. This transaction closed on November 30, 2001. We received
approximately $8,899,000, after purchase price adjustment.
Item 7. Financial Statements, Exhibits
(a) Financial Statements of Business Acquired.
Previously filed.
(b) Pro forma Financial Information
Pro forma Balance Sheet as of September 30, 2001 and Pro forma Income
Statements for the nine months ended September 30, 2001 and the year ended
December 31, 2000.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS COMMUNICATIONS COMPANY
-------------------------------
(Registrant)
By: /s/ Robert J. Larson
-----------------------
Robert J. Larson
Vice President and Chief Accounting Officer
Date: January 14, 2002
Proforma Financial Information
From May 27, 1999 through July 12, 2000, we entered into several agreements to
acquire telephone access lines. These transactions have been accounted for using
the purchase method of accounting. The results of operations of the acquired
properties have been included in our financial statements from the dates of
acquisition of each property. These agreements are described as follows:
Verizon Acquisition
-------------------
Between May and December 1999, we announced 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. During 2000, we closed on approximately 317,500
telephone access lines. On December 17, 2001, we terminated pending
agreements with Verizon to acquire approximately 63,000 telephone access
lines in Arizona and California.
Qwest Acquisition - termination
-------------------------------
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. On October 31, 2000, we closed on the
purchase of approximately 17,000 telephone access lines in North Dakota for
approximately $38.0 million in cash. On July 20, 2001, we notified Qwest
that we were terminating eight acquisition agreements with Qwest relating
to telephone exchanges in Arizona, Colorado, Idaho/Washington, Iowa,
Minnesota, Montana, Nebraska and Wyoming. Qwest subsequently filed a notice
of claim for arbitration in Denver, Colorado under the rules of the
American Arbitration Association with respect to the terminated acquisition
agreements. Qwest asserts that we wrongfully terminated these agreements
and is seeking approximately $64.0 million, which is the aggregate of
liquidation damages under letters of credit established in the terminated
acquisition agreements. We have filed a notice of claim in the same
arbitration proceeding, contesting Qwest's asserted claims and asserting
substantial claims against Qwest for material breaches of representations,
warranties and covenants in the terminated acquisition agreements and in
the acquisition agreement relating to North Dakota assets that we purchased
from Qwest.
Frontier Acquisition
--------------------
On June 29, 2001, we purchased from Global Crossing Ltd. (Global) 100% of
the stock of Frontier Corp.'s (Frontier) local exchange carrier
subsidiaries, which owned approximately 1,096,700 telephone access lines
(as of December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana,
Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and
Wisconsin, for approximately $3,370.0 million in cash, subject to
final purchase price adjustment.
Divestitures
------------
On August 24, 1999, our Board of Directors approved a plan of divestiture for
our public utilities services businesses, which include gas, electric and water
and wastewater businesses. Currently, we have agreements to sell all our water
and wastewater operations and one of our electric operations. We have sold two
of our natural gas operations. These agreements and the status of each
transaction are described as follows:
Water and Wastewater
--------------------
On October 18, 1999, we announced the agreement to sell our water and
wastewater operations 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 first quarter of 2002.
Electric
--------
On February 15, 2000, we announced that we had agreed to sell our electric
utility operations. The Arizona and Vermont electric divisions were under
contract to be sold to Cap Rock Energy Corp. (Cap Rock). The agreement with
Cap Rock was terminated on March 7, 2001. We intend to pursue the
disposition of the Vermont and Arizona electric divisions with alternative
buyers. In August 2000, the Hawaii Public Utilities Commission denied the
initial 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 discussing a
reduction of the purchase price and other options. Our agreement for the
sale of this division may be terminated if regulatory approval is not
received before February 2002.
Gas
---
On July 2, 2001, we completed the sale of our Louisiana Gas operations to
Atmos Energy Corporation for $363.4 million in cash. The pre-tax gain on
the sale recognized in the third quarter was approximately $139.3 million.
In July 2001, an agreement was signed to sell the Colorado Gas division to
Kinder Morgan. This transaction closed on November 30, 2001. We received
approximately $8,899,000, after purchase price adjustment.
The GTE businesses acquired, the U S WEST North Dakota Acquisition and the
Frontier ILEC Acquisition are collectively referred to as the Acquisitions. All
of the public utilities services dispositions (including those not yet sold) are
collectively referred to as the Dispositions. The following unaudited pro forma
condensed combined statements of income information has been prepared to
illustrate the effects of the Acquisitions and related financings and the
Dispositions had these transactions been completed at the beginning of the
periods presented. Cash proceeds from the Dispositions that have not yet been
sold have been estimated using the actual contract price for properties where we
have signed a definitive contract to sell and using net book value for
properties not yet under contract. The following unaudited pro forma condensed
balance sheet information as of September 30, 2001 has been prepared assuming
the Dispositions not consummated by September 30, 2001 had been completed at
that date.
The purchase prices for each of our acquisitions is final with the exception of
Frontier which is subject to reduction based upon routine purchase price
adjustments. There are no other contingencies on any of our acquisitions. We
have accounted for our acquisitions using the purchase method of accounting. We
expect to achieve economies of scale with the acquired properties that will both
expedite our ability to provide an expanded menu of telecommunications services
and make those services incrementally more profitable but can provide no
assurance that such economies of scale 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.
The following table presents, as of the dates of acquisitions, the total
purchase price by each type of consideration paid and the allocation of purchase
price to the assets and liabilities acquired, including the status of appraisals
for the allocation of purchase price to assets and liabilities acquired.
Citizens Communications
Summary of Acquisition Transactions
For the years ended December 31, 2000 and 2001
GTE 2001 Total
GTE GTE Qwest Illinois/ Total 2000 Acquisition Acquisitions from
(Dollars in thousands) Nebraska Minnesota North Dakota Wisconsin Acquisitions Frontier January 1, 2000
----------- ----------- ------------ ------------ ------------- ----------- -----------------
Acquisition date 6/30/2000 8/31/2000 10/31/2000 11/30/2000 6/29/2001
Assets acquired:
Net plant $ 51,903 $ 137,391 $ 13,910 $ 105,446 $ 308,650 $ 1,127,314 $ 1,435,964
Current assets - 4,960 - - 4,960 124,037 128,997
Excess of purchase price
over net assets acquired - - - - - 2,405,791 2,405,791
Goodwill 107,883 173,597 16,619 163,460 461,559 - 461,559
Customer base 46,060 120,742 7,466 34,565 208,833 - 208,833
Assembled workforce 292 650 - 446 1,388 - 1,388
Other assets - 1,557 - - 1,557 264,398 265,955
---------- --------- -------- --------- --------- --------- ---------
Total assets acquired 206,138 438,897 37,995 303,917 986,947 3,921,540 4,908,487
========== ========= ======== ========= ========= ========= =========
Liabilities assumed:
Debt - - - - - 74,415 74,415
Other liabilities 734 - - - 734 476,609 477,343
---------- --------- -------- --------- --------- --------- ---------
Total liabilities assumed 734 - - - 734 551,024 551,758
---------- --------- -------- --------- --------- --------- ---------
Cash paid $ 205,404 $ 438,897 $ 37,995 $ 303,917 $ 986,213 $ 3,370,516 $ 4,356,729
========== ========= ======== ========= ========= ========= =========
Acquisition costs
included above $ 1,636 $ 3,602 $ 0 $ 2,749 $ 7,987 $ 999 $ 8,986
========== ========= ======== ========= ========= ========= =========
Status of appraisal
valuation Final Final Final Final Preliminary
The following table represents the sources of our primary permanent funding of the above Acquisitions.
Funding of Acquisitions Net proceeds
----------------------- ------------
(in thousands)
Senior Notes issued May 18, 2001 $ 1,726,000
6-3/4% Equity Units issued June 13, 2001 446,200
Common Stock Offering June 13, 2001 289,561
Senior Notes issued August 13, 2001 1,728,900
------------
Total net proceeds after underwriting discounts and commissions and before offering expenses $ 4,190,661
============
Our acquisitions were made in order for us to execute upon our business
strategy. Our strategy is to focus exclusively on providing telecommunications
services, primarily in rural, 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. For both our existing
ILEC operations and those we have recently acquired, we are the dominant
provider of independent local exchange carrier services in each of the markets
in which we operate. We believe that our operations in these areas will provide
us with steady revenue growth and margin enhancement opportunities. To reach our
objectives, we intend to (among other strategies) continue to achieve economies
of scale through clustering and increasing operational efficiencies. In
following our strategy, we selectively pursue acquisitions that we believe will
enhance shareholder value through increased revenue growth and operational
efficiencies consistent with our corporate strategy and objectives.
We have paid more than the net book values (of the seller) of each of the
businesses acquired in 2000 and 2001. We based our purchase prices on estimates
of future earnings and future cash flows of the businesses acquired. The
"premium" to book value paid, including the allocation to goodwill for each
respective properties, reflects the value created by all of the tangible and
intangible operating assets (existing and acquired) of our businesses coming
together to produce earnings, including, without limitation, the fact that, in
each acquisition, we were able to immediately commence operations as the
dominant local exchange carrier in the applicable operating area. Additionally,
the premiums paid were impacted by the fact that our purchase price was accepted
by the sellers after a competitive bidding and negotiation process.
The Company was willing to pay a premium (i.e., goodwill) over the fair value of
the tangible and identifiable intangible assets acquired less liabilities
assumed in order to obtain product cross-selling opportunities, economies of
scale (e.g., cost savings opportunities), entree into markets from which the
Company could expand into new markets, and the potential benefit resident in
expected population/demographic trends.
Through the second quarter 2001, we had historically applied SFAS 71 in the
preparation of our financial statements because our incumbent local exchange
telephone properties (properties we owned prior to the 2000 and 2001
acquisitions of the Verizon, Qwest and Frontier properties) were predominantly
regulated in the past following a cost of service/rate of return approach.
Beginning in the third quarter of 2001, these properties no longer met the
criteria for application of SFAS 71 due to the continuing process of
deregulation and the introduction of competition to our existing rural local
exchange telephone properties, and our expectation that these trends will
continue for all our properties.
The pro forma information, while helpful in illustrating the financial
characteristics of the combined company, does not attempt to predict or suggest
future results. The pro forma information also does not attempt to show how the
combined company would actually have performed had the companies been combined
at the beginning of the periods presented. If the companies had actually been
combined at the beginning of the periods presented, these companies and
businesses might have performed differently. You should not rely on pro forma
financial information as an indication of the results that would have been
achieved if the Acquisitions had taken place earlier or the future results that
the companies will experience.
These unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical financial statements of the Acquisitions and
the historical financial statements of Citizens Communications Company.
Citizens Communications Company and Subsidiaries
Pro Forma Balance Sheet Data
As of September 30, 2001
(unaudited)
Citizens Pro Forma for Acquisitions
Communications ------------------------------------
(Amounts in thousands) 9/30/2001 Adjustments Adjusted
-----------------------------------------------------
Cash $ 38,922 $ 1,789,336 (1) $ 1,828,258
Accounts receivable, net 339,382 - 339,382
Short-term investments 141,496 - 141,496
Other current assets 42,844 - 42,844
Assets held for sale 1,093,939 (1,093,939) (1) -
Assets of discontinued operations 743,238 (743,238) (1) -
--------------------------------- ----------------
Total current assets 2,399,821 (47,841) 2,351,980
Net property, plant & equipment 4,537,291 - 4,537,291
Goodwill 490,012 - 490,012
Customer Lists and other 195,243 - 195,243
Excess cost over net assets acquired 2,179,199 (4) - 2,179,199
--------------------------------- ----------------
Intangibles 2,864,454 - 2,864,454
Investments 117,124 - 117,124
Deferred debits and other assets 466,441 - 466,441
--------------------------------- ----------------
Total assets $ 10,385,131 $ (47,841) $ 10,337,290
================================= ================
Long-term debt due within one year $ 155,967 $ - $ 155,967
Accounts payable and other current liabilities 516,520 147,691 (1) 664,211
Liabilities related to assets held for sale 214,090 (214,090) (1) -
Liabilities of discontinued operations 219,568 (219,568) (1) -
--------------------------------- ----------------
Total current liabilities 1,106,145 (285,967) 820,178
Deferred income taxes 408,975 - 408,975
Customer advances for construction
and contributions in aid of construction 206,332 - 206,332
Deferred credits and other liabilities 232,702 - 232,702
Equity units 460,000 - 460,000
Long-term debt 5,783,591 5,783,591
--------------------------------- ----------------
Total liabilities 8,197,745 (285,967) 7,911,778
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities * 201,250 - 201,250
Common stock, $.25 par value (600,000,000 authorized shares,
280,036,000 issued shares and 292,344,000 outstanding shares) 73,086 - 73,086
Additional paid-in capital 1,936,607 - 1,936,607
Retained earnings 238,179 238,126 (1) 476,305
Accumulated other comprehensive income (loss) (59,147) - (59,147)
Treasury stock (202,589) - (202,589)
--------------------------------- ----------------
Total shareholders' equity 1,986,136 238,126 2,224,262
--------------------------------- ----------------
Total liabilities and shareholders' equity $ 10,385,131 $ (47,841) $ 10,337,290
================================= ================
*Represents securities of a subsidiary trust, the sole assets of which are
securities of a subsidiary partnership, substantially all the assets of
which are convertible debentures of the Company.
See Notes to Pro Forma Condensed Financial Statements.
Citizens Communications Company and Subsidiaries
Pro Forma Income Statement Data
For the nine months ended September 30, 2001
(unaudited)
Elimination
Pro Forma for Acquisitions of Gas and
Citizens Frontier(2) -------------------------- Electric Total
(Amounts in thousands - except per-share amounts) Communications Acquisition Adjustments Adjusted Operations Pro Forma
---------------------------------------------------------------------------------
Revenue $ 1,791,144 $ 387,796 $ - $ 2,178,940 $ 534,501 $ 1,644,439
Operating expenses 1,140,079 203,920 - 1,343,999 457,089 886,910
Depreciation and amortization 413,734 103,686 50,615 (4) 568,035 6,592 561,443
Restructuring charge 13,002 - - 13,002 - 13,002
Acquisition assimilation expenses 17,665 - - 17,665 - 17,665
---------------------------------------------------------------------------------
Income from operations 206,664 80,190 (50,615) 236,239 70,820 165,419
Investment and other income, net 16,495 (4,990) 50,064 (6) 29,823 2,073 27,750
(31,746) (7)
Gain on sale of Louisiana gas operations 139,304 - - 139,304 - 139,304
Interest expense 258,033 37,482 145,341 (8) 410,131 26,996 383,135
(30,725) (7)
Income tax expense (benefit) 49,183 27,985 (56,238) (9) 20,930 17,120 3,810
Convertible preferred dividends 4,658 4,658 - 4,658
---------------------------------------------------------------------------------
Income (loss) from continuing operations $ 50,589 $ 9,733 $ (90,675) $ (30,353) $ 28,777 $ (59,130)
=================================================================================
Carrying cost of equity forward contracts 13,650 13,650
-------------- -----------
Income (loss) from continuing operations
available to common shareholders $ 36,939 $ (72,780)
============== ===========
Weighted average shares outstanding -Basic 271,346 15,094 286,440
Weighted average shares outstanding -Diluted 278,287 15,094 293,381
Income (loss) from continuing operations
per basic share $ 0.14 $ (.25)
Income (loss) from continuing operations
per diluted share $ 0.13 $ (.25)
See Notes to Pro Forma Condensed Financial Statements.
Citizens Communications Company and Subsidiaries
Pro Forma Income Statement Data
For the year ended December 31, 2000
(unaudited)
Acquisitions (2)
-------------------------------------------------
GTE
Citizens Frontier GTE Nebraska and Pro Forma for Acquisitions
Illinois/ Qwest --------------------------
Communications Acquisition Minnesota Wisconsin North Dakota Adjustments Adjusted
-------------------------------------------------------------------------------- -----------
(Amounts in thousands, except
per-share amounts)
Revenue $ 1,802,358 $ 746,302 $ 56,962 $ 77,570 $ 10,632 $ - $ 2,693,824
Operating expenses 1,292,950 370,893 23,323 27,494 3,058 9,000 (3) 1,726,718
Depreciation and amortization 387,607 200,669 545 17,087 2,270 126,581 (4) 747,285
12,526 (5)
--------------------------------------------------------------------------- -------------
Income from operations 121,801 174,740 33,094 32,989 5,304 (148,107) 219,821
Investment and other income, net 3,350 64,583 - - - (26,323) (6) 28,856
(12,754) (7)
Minority interest 12,222 - - - - - 12,222
Interest expense 187,366 24,067 1,686 1,716 - 301,055 (8) 501,250
(14,640) (7)
Convertible preferred dividends 6,210 - - - - - 6,210
--------------------------------------------------------------------------- -------------
Pre-tax income (56,203) 215,256 31,408 31,273 5,304 (473,599) (246,561)
Income tax expense (benefit) (16,132) 103,417 12,687 12,393 2,007 (199,434) (9) (85,062)
--------------------------------------------------------------------------- -------------
Income (loss) from continuing
operations $ (40,071) $ 111,839 $ 18,721 $ 18,880 $ 3,297 $ (274,165) $ (161,499)
=========================================================================== =============
Weighted average shares outstanding:
Basic 261,744 25,156 (10)
Diluted 266,931 25,156 (10)
Loss from continuing operations per
share:
Basic $ (0.15)
Diluted $ (0.15)
Elimination of
Gas and Electric Total
Operations Proforma
---------------------------
(Amounts in thousands, except
per-share amounts)
Revenue $ 597,823 $ 2,096,001
Operating expenses 526,472 1,200,246
Depreciation and amortization 47,857 699,428
--------------------------
Income from operations 23,494 196,327
Investment and other income, net 5,073 23,783
Minority interest - 12,222
Interest expense 36,056 465,194
Convertible preferred dividends - 6,210
---------------------------
Pre-tax income (7,489) (239,072)
Income tax expense (benefit) (2,417) (82,645)
---------------------------
Income (loss) from continuing
operations $ (5,072) $ (156,427)
===========================
Weighted average shares outstanding:
Basic 286,900
Diluted 292,087
Loss from continuing operations per
share:
Basic $ (0.55)
Diluted $ (0.55)
See Notes to Pro Forma Condensed Financial Statements.
Notes to Pro Forma Condensed Financial Statements
(1) Reflects the effect of the probable sale of our public utilities services
properties, including adjustments for the estimated income taxes due on the
estimated gain. The adjustment to shareholders' equity represents an
increase to retained earnings representing the estimated after tax gain on
the sale.
(2) The columns reflecting the historical results of operations for Frontier,
GTE Minnesota, GTE Nebraska and Illinois and Qwest North Dakota represent
historical results prior to their acquisition by Citizens. The results
after the acquisitions by Citizens are included in Citizens' historical
results.
(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) The purchase prices for each of our acquisitions is final with the
exception of Frontier, which is subject to reduction based upon normal
purchase price adjustments. There are no other contingencies for any of the
acquisitions. The purchase price allocations for GTE and Qwest was
completed by September 30, 2001. The purchase price allocation for our
acquisition of Frontier, which closed on June 29, 2001, is still
preliminary as our appraiser has not completed its work. Through the
appraisal process, the total consideration paid will be allocated to the 35
legal entities acquired and will be compliant with the recently issued
Statements of Financial Accounting Standards No. 141 and 142 (see below).
Due to the magnitude of the Frontier acquisition and the number of
properties acquired, we have not completed all of our work with our
appraiser. We expect that the appraisal will be completed in February 2002.
We paid $3.37 billion for the Frontier properties and, since our
acquisition occurred less than two years after Global acquired Frontier, we
do not expect a material difference in the appraisal between the book value
of plant (approximately $1.1 billion) and the new appraised value. We also
are not anticipating a material valuation difference in the other assets
and liabilities. It is for that reason that we have included the excess of
purchase price over book value of net assets acquired ($2.4 billion at June
30, 2001) as a one-line item to be reallocated primarily to other
intangibles and goodwill once the appraisal is completed. However, there
can be no assurance that the actual allocation will not differ
significantly from the pro forma allocation. For purposes of pro forma
amortization expense, we have assumed a weighted average life of 15 years
for this item.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
141, "Business Combinations." This statement requires that all business
combinations be accounted for under the purchase method of accounting for
business combinations initiated after June 30, 2001 and prohibits the use
of the pooling-of-interests method of accounting. All acquisitions
presented in these pro forma financial statements have been accounted for
using the purchase method.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets." This statement requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. Impairment tests are
required to be performed at least annually. The amortization of goodwill
ceases upon adoption of the statement. The statement is effective for
fiscal years beginning after December 15, 2001 for companies whose annual
reporting period ends on December 31, 2001 and applies to all goodwill and
other intangible assets recognized in the statement of financial position
at that date, regardless of when the assets were initially recognized. We
will cease to recognize amortization of the goodwill portion of intangibles
starting January 1, 2002. Pro forma amortization of intangibles for the
nine months ended September 30, 2001 and the year ended December 31, 2000
was $128.9 million and $144.3 million, respectively. We will be required to
test for impairment of goodwill annually starting January 1, 2002.
The following table details the amortization adjustment for the year ended
December 31, 2000 and the nine months ended September 30, 2001:
($ in thousands) For the year For the nine
ended months ended
December 31, 2000 September 30, 2001
----------------- -------------
Frontier $ 61,230 $ 30,615
Frontier adjustments 40,000 20,000
Acquired GTE Businesses 25,351 -
----------------- -------------
Businesses acquired prior to
June 30, 2001 $ 126,581 $ 50,615
================= =============
Goodwill and excess of cost over net assets acquired for the Acquisitions
are being amortized using the straight-line method over a 15 year period.
The adjustments for the Frontier ILEC and the Acquired GTE businesses in
the table above reflect this amortization. Should the allocation of
Frontier's excess of cost over historical net assets acquired differ
significantly from that described above, amortization expense could be
impacted since the depreciable lives of assets other than goodwill may be
shorter or longer than 15 years.
On September 30, 1999, Global Crossing acquired Frontier Corporation and
all of its subsidiaries (including the businesses that we are acquiring),
in a merger transaction. In accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations", the purchase price was allocated
to Frontier Corporation and its subsidiaries based upon the fair market
value at the date of the acquisition. These amounts were "pushed down" and
recorded on the books of Frontier. Frontier was amortizing the associated
goodwill over a 25-year period. We included this amortization over a
15-year period for the full year 2000 and the nine months ended September
30, 2001 to conform with our policy. The "Frontier adjustments" of
$40,000,000 and $20,000,000 for the year ended December 31, 2000 and the
nine months ended September 30, 2001, respectively, are reflected in the
table above.
(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 classified as held for sale.
(6) Represents the reversal of a foreign exchange gain of $21,900,000 for the
year ended December 31, 2000 and the reversal of a foreign exchange loss of
$50,064,000 for the nine months ended September 30, 2001 recorded by
Frontier related to a note receivable due from an affiliate. Such note is
not part of the assets acquired by Citizens.
The pro forma income statement for the year ended December 31, 2000 also
includes an adjustment to eliminate $4,423,000 of our investment income
related to our bond portfolio sold during 2000 to temporarily fund a
portion of the Acquisitions.
(7) Represents the elimination of intercompany interest income recorded by
Frontier related to a note receivable due from an affiliate of Frontier and
interest expense recorded by Frontier related to a loan facility used to
fund this note receivable. Such note and loan facility are not part of the
assets and liabilities acquired by Citizens.
(8) Represents the increase in interest expense assuming the permanent
financings as described below were utilized at the beginning of the periods
presented to partially fund the Acquisitions. On May 18, 2001, we issued an
aggregate of $1.75 billion of notes consisting of $700 million principal
amount of 8.50% notes, due May 15, 2006 and $1.05 billion principal amount
of 9.25% notes due May 15, 2011. On June 13, 2001, we issued 18,400,000
equity units at $25 per unit for gross proceeds of $460,000,000. Each
equity unit consists of a 6 3/4 % senior note due 2006 and a purchase
contract for our common stock. On August 13, 2001, we issued an aggregate
of $1.75 billion of notes consisting of $300 million principal amount of
6.375% notes due August 15, 2004, $750 million principal amount of 7.625%
notes due August 15, 2008 and $700 million principal amount of 9.0 % notes
due August 15, 2031.
(9) Represents adjustments to income taxes based on income before income taxes
using the applicable incremental income tax rate.
(10) On June 13, 2001, we issued 25,156,250 shares of our common stock at
$12.10. The proceeds from these shares were used to partially and
permanently fund the acquisitions.
In total, we expended $4.356 billion for our acquisitions. The following
summarizes the primary permanent financing for such acquisitions after
underwriting discounts and commissions:
Senior notes issued May 18, 2001 $1,726,000,000
Equity Unites (6 3/4%) issued June 13, 2001 446,200,000
Common stock issued June 13, 2001 289,561,000
Senior Notes issued August 13, 2001 1,728,900,000
--------------
Net proceeds $4,190,661,000
==============
The balance of proceeds for the purchases were provided by short term
borrowings or free cash.