CITIZENS COMMUNICATIONS COMPANY
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
--------------
or
--
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to__________
Commission file number: 001-11001
---------
CITIZENS COMMUNICATIONS COMPANY
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0619596
------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 High Ridge Park
Stamford, Connecticut 06905
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(203) 614-5600
--------------------------------------------------
(Registrant's telephone number, including area code)
N/A
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
The number of shares outstanding of the registrant's Common Stock as of April
28, 2006 was 324,961,334.
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information (Unaudited)
Financial Statements
Consolidated Balance Sheets at March 31, 2006 and December 31, 2005 2
Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 3
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 2005 and the three months ended March 31, 2006 4
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2006 and 2005 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Quantitative and Qualitative Disclosures about Market Risk 29
Controls and Procedures 30
Part II. Other Information
Legal Proceedings 31
Risk Factors 31
Unregistered Sales of Equity Securities and Use of Proceeds, Issuer Purchases of Equity
Securities 31
Exhibits 32
Signature 33
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
March 31, 2006 December 31, 2005
------------------ -------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 284,437 $ 268,917
Accounts receivable, less allowances of $33,332 and $31,631, respectively 190,268 213,434
Other current assets 43,340 40,200
Assets of discontinued operations 159,868 162,716
------------------ -------------------
Total current assets 677,913 685,267
Property, plant and equipment, net 3,011,649 3,058,312
Goodwill, net 1,921,465 1,921,465
Other intangibles, net 527,138 558,733
Investments 15,529 15,999
Other assets 190,422 192,959
------------------ -------------------
Total assets $ 6,344,116 $ 6,432,735
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Long-term debt due within one year $ 227,695 $ 227,693
Accounts payable and other current liabilities 321,099 372,968
Liabilities of discontinued operations 43,065 46,266
------------------ -------------------
Total current liabilities 591,859 646,927
Deferred income taxes 353,220 325,084
Other liabilities 429,682 423,785
Long-term debt 3,975,470 3,995,130
Stockholders' equity:
Common stock, $0.25 par value (600,000,000 authorized shares; 327,860,000
and 328,168,000 outstanding, respectively, and 343,956,000 issued at
March 31, 2006 and December 31, 2005) 85,989 85,989
Additional paid-in capital 1,280,906 1,374,610
Accumulated deficit (34,861) (85,344)
Accumulated other comprehensive loss, net of tax (123,234) (123,242)
Treasury stock (214,915) (210,204)
------------------ -------------------
Total stockholders' equity 993,885 1,041,809
------------------ -------------------
Total liabilities and stockholders' equity $ 6,344,116 $ 6,432,735
================== ===================
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
2
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
($ in thousands, except per-share amounts)
(Unaudited)
2006 2005
--------------- --------------
Revenue $ 506,861 $ 502,334
Operating expenses:
Cost of services (exclusive of depreciation and amortization) 40,218 39,722
Other operating expenses 187,301 184,037
Depreciation and amortization 122,004 134,094
--------------- --------------
Total operating expenses 349,523 357,853
--------------- --------------
Operating income 157,338 144,481
Investment and other income (loss), net (1,351) 3,968
Interest expense 85,393 83,725
--------------- --------------
Income from continuing operations before income taxes 70,594 64,724
Income tax expense 26,607 25,216
--------------- --------------
Income from continuing operations 43,987 39,508
Discontinued operations (see Note 5):
Income from operations of discontinued CLEC business 10,458 1,376
Income from operations of discontinued conferencing business
(including gain on disposal of $14,061) - 15,550
Income tax expense 3,962 13,800
--------------- --------------
Income from discontinued operations 6,496 3,126
--------------- --------------
Net income available to common stockholders $ 50,483 $ 42,634
=============== ==============
Basic income per common share:
Income from continuing operations $ 0.13 $ 0.12
Income from discontinued operations 0.02 0.01
--------------- --------------
Net income available to common stockholders $ 0.15 $ 0.13
=============== ==============
Diluted income per common share:
Income from continuing operations $ 0.13 $ 0.11
Income from discontinued operations 0.02 0.01
--------------- --------------
Net income available to common stockholders $ 0.15 $ 0.12
=============== ==============
The accompanying Notes are an integral part of these
Consolidated Financial Statements.
3
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2005 AND THE THREE MONTHS ENDED MARCH 31, 2006
($ in thousands)
(Unaudited)
Accumulated
Common Stock Additional Other Treasury Stock Total
------------------ Paid-In Accumulated Comprehensive ------------------- Stockholders'
Shares Amount Capital Deficit Loss Shares Amount Equity
-------- --------- ----------- ------------ ------------ ------- ----------- -----------
Balance January 1, 2005 339,635 $84,909 $1,664,627 $ (287,719) $ (99,569) (2) $ (8) $1,362,240
Stock plans 2,096 524 24,039 - - 2,598 34,689 59,252
Conversion of EPPICS 2,225 556 24,308 - - 391 5,115 29,979
Dividends on common stock of
$1.00 per share - - (338,364) - - - - (338,364)
Shares repurchased - - - - - (18,775) (250,000) (250,000)
Net income - - - 202,375 - - - 202,375
Other comprehensive loss, net of
tax and reclassifications
adjustments - - - - (23,673) - - (23,673)
-------- --------- ----------- ------------ ------------ -------- ----------- -----------
Balance December 31, 2005 343,956 85,989 1,374,610 (85,344) (123,242) (15,788) (210,204) 1,041,809
Stock plans - - (8,953) - - 1,350 17,957 9,004
Conversion of EPPICS - - (2,118) - - 1,145 15,248 13,130
Dividends on common stock of
$0.25 per share - - (82,633) - - - - (82,633)
Shares repurchased - - - - - (2,803) (37,916) (37,916)
Net income - - - 50,483 - - - 50,483
Other comprehensive income, net
of tax and reclassifications
adjustments - - - - 8 - - 8
-------- --------- ----------- ------------ ------------ -------- ----------- -----------
Balance March 31, 2006 343,956 $85,989 $1,280,906 $ (34,861) $(123,234) (16,096) $ (214,915) $ 993,885
======== ========= =========== ============ ============ ======== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
($ in thousands)
(Unaudited)
For the three months ended March 31,
---------------------------------------
2006 2005
------------------- ------------------
Net income $ 50,483 $ 42,634
Other comprehensive income (loss), net
of tax and reclassifications adjustments* 8 (807)
------------------- ------------------
Total comprehensive income $ 50,491 $ 41,827
=================== ==================
* Consists of unrealized holding (losses)/gains of
marketable securities and for 2005 realized gains taken to
income as a result of the sale of securities.
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
4
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
($ in thousands)
(Unaudited)
2006 2005
--------------- ---------------
Cash flows provided by (used in) operating activities:
Net income $ 50,483 $ 42,634
Deduct: Gain on sale of discontinued operations - (1,167)
Income from discontinued operations (6,496) (1,959)
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation and amortization expense 122,004 134,094
Gain on expiration/settlement of customer advances - (80)
Stock based compensation expense 2,677 2,265
Investment gain - (493)
Other non-cash adjustments 4,362 872
Deferred income taxes 24,163 25,109
Change in accounts receivable 23,166 26,034
Change in accounts payable and other liabilities (52,606) (31,796)
Change in other current assets (3,140) 1,083
--------------- ---------------
Net cash provided by continuing operating activities 164,613 196,596
Cash flows from investing activities:
Proceeds from sale of discontinued operations - 43,565
Securities sold - 1,112
Capital expenditures (43,765) (49,414)
Other assets (purchased) distributions received, net 324 (1,103)
--------------- ---------------
Net cash used by investing activities (43,441) (5,840)
Cash flows from financing activities:
Repayment of customer advances for
construction and contributions in aid of construction (473) (1,237)
Long-term debt payments (240) (259)
Debt issuance costs - (385)
Issuance of common stock 9,452 5,552
Common stock repurchased (37,916) -
Dividends paid (82,633) (85,081)
--------------- ---------------
Net cash used by financing activities (111,810) (81,410)
Cash flows of discontinued operations (revised - see Note 5):
Operating cash flows 8,580 8,458
Investing cash flows (2,422) (2,776)
Financing cash flows - (48)
--------------- ---------------
6,158 5,634
Increase in cash and cash equivalents 15,520 114,980
Cash and cash equivalents at January 1, 268,917 171,797
--------------- ---------------
Cash and cash equivalents at March 31, $ 284,437 $ 286,777
=============== ===============
Cash paid during the period for:
Interest $ 95,079 $ 71,336
Income taxes (refunds) $ (133) $ (1,859)
Non-cash investing and financing activities:
Change in fair value of interest rate swaps $ (8,811) $ (11,992)
Conversion of EPPICS $ 13,130 $ 1,543
Debt-for-debt exchange, net $ (70) $ -
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
5
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
(1) Summary of Significant Accounting Policies:
-------------------------------------------
(a) Basis of Presentation and Use of Estimates:
-------------------------------------------
Citizens Communications Company and its subsidiaries are referred
to as "we," "us," "our," or the "Company" in this report. Our
unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP) and should be read in conjunction
with the consolidated financial statements and notes included in
our Annual Report on Form 10-K for the year ended December 31,
2005. Certain reclassifications of balances previously reported
have been made to conform to the current presentation. All
significant intercompany balances and transactions have been
eliminated in consolidation. These unaudited consolidated
financial statements include all adjustments, which consist of
normal recurring accruals necessary to present fairly the results
for the interim periods shown.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions which
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ
from those estimates. Estimates and judgments are used when
accounting for allowance for doubtful accounts, impairment of
long-lived assets, intangible assets, depreciation and
amortization, employee benefit plans, income taxes, contingencies
and pension and postretirement benefits expenses among others.
Certain information and footnote disclosures have been excluded
and/or condensed pursuant to Securities and Exchange Commission
rules and regulations. The results of the interim periods are not
necessarily indicative of the results for the full year.
(b) Cash Equivalents:
-----------------
We consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) Revenue Recognition:
--------------------
Revenue is recognized when services are provided or when products
are delivered to customers. Revenue that is billed in advance
includes: monthly recurring network access services, special
access services and monthly recurring local line charges. The
unearned portion of this revenue is initially deferred as a
component of other liabilities on our consolidated balance sheet
and recognized in revenue over the period that the services are
provided. Revenue that is billed in arrears includes:
non-recurring network access services, switched access services,
non-recurring local services and long-distance services. The
earned but unbilled portion of this revenue is recognized in
revenue in our statement of operations and accrued in accounts
receivable in the period that the services are provided. Excise
taxes are recognized as a liability when billed. Installation
fees and their related direct and incremental costs are initially
deferred and recognized as revenue and expense over the average
term of a customer relationship. We recognize as current period
expense the portion of installation costs that exceeds
installation fee revenue.
(d) Property, Plant and Equipment:
------------------------------
Property, plant and equipment are stated at original cost or fair
market value for our acquired properties, including capitalized
interest. Maintenance and repairs are charged to operating
expenses as incurred. The gross book value, of routine property,
plant and equipment retired is charged against accumulated
depreciation.
(e) Goodwill and Other Intangibles:
-------------------------------
Intangibles represent the excess of purchase price over the fair
value of identifiable tangible assets acquired. We undertake
studies to determine the fair values of assets and liabilities
acquired and allocate purchase prices to assets and liabilities,
including property, plant and equipment, goodwill and other
identifiable intangibles. We annually (during the fourth quarter)
examine the carrying value of our goodwill and trade name to
determine whether there are any impairment losses.
Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," requires that intangible
6
assets (primarily customer base) with estimated useful lives be
amortized over those lives and be reviewed for impairment in
accordance with SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" to determine whether any changes
to these lives are required. We periodically reassess the useful
life of our intangible assets with estimated useful lives to
determine whether any changes to those lives are required.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be
-----------------------------------------------------------------
Disposed of:
------------
We review long-lived assets to be held and used and long-lived
assets to be disposed of, including intangible assets with
estimated useful lives, for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and
used is measured by comparing the carrying amount of the asset to
the future undiscounted net cash flows expected to be generated
by the asset. Recoverability of assets held for sale is measured
by comparing the carrying amount of the assets to their estimated
fair market value. If any assets are considered to be impaired,
the impairment is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value.
(g) Derivative Instruments and Hedging Activities:
----------------------------------------------
We account for derivative instruments and hedging activities in
accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended,
requires that all derivative instruments, such as interest rate
swaps, be recognized in the financial statements and measured at
fair value regardless of the purpose or intent of holding them.
We have interest rate swap arrangements related to a portion of
our fixed rate debt. These hedge strategies satisfy the fair
value hedging requirements of SFAS No. 133, as amended. As a
result, the fair value of the hedges is carried on the balance
sheet in other liabilities and the related underlying liabilities
are also adjusted to fair value by the same amount.
(h) Stock Plans:
------------
We have various employee stock-based compensation plans. Awards
under these plans are granted to eligible officers, management
employees, non-management employees and non-employee directors.
Awards may be made in the form of incentive stock options,
non-qualified stock options, stock appreciation rights,
restricted stock or other stock-based awards. We have no awards
with market or performance conditions. Our general policy is to
issue shares upon the grant of restricted shares and exercise of
options from treasury.
On January 1, 2006, we adopted the provisions of SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123R") and
elected to use the modified prospective transition method. The
modified prospective transition method requires that compensation
cost be recognized in the financial statements for all awards
granted after the date of adoption as well as for existing awards
for which the requisite service has not been rendered as of the
date of adoption. Estimated compensation cost for awards that are
outstanding at the effective date will be recognized over the
remaining service period using the compensation cost calculated
for pro forma disclosure purposes. Prior periods have not been
restated.
On November 10, 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position No. FAS 123R-3, "Transition
Election Related to Accounting for Tax Effects of Share-Based
Payment Awards." We elected to adopt the alternative transition
method provided for calculating the tax effects of share-based
compensation pursuant to FAS 123R. The alternative transition
method includes a simplified method to establish the beginning
balance of the additional paid-in capital pool (APIC pool)
related to the tax effects of employee share-based compensation,
which is available to absorb tax deficiencies recognized
subsequent to the adoption of FAS 123R.
In accordance with the adoption of SFAS 123R, we recorded
stock-based compensation expense for the cost of stock options,
restricted shares and stock units issued under our stock plans
(together, "Stock-Based Awards"). Stock-based compensation
expense for the first quarter of 2006 was $2,677,000 ($1,673,000
after tax, or $0.01 per basic and diluted share of common stock).
The compensation cost recognized is based on awards ultimately
expected to vest. FAS 123R requires forfeitures to be estimated
and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
7
Prior to the adoption of SFAS No. 123R, we applied Accounting
Principles Board Opinions (APB) No. 25 and related
interpretations to account for our stock plans resulting in the
use of the intrinsic-value based method to value the stock. Under
APB 25, we were not required to recognize compensation expense
for the cost of stock options issued under the Management Equity
Incentive Plan (MEIP), 1996 Equity Incentive Plan (EIP) and the
Amended and Restated 2000 EIP stock plans.
In the past, we provided pro forma net income and pro forma net
income per share of common stock disclosures for employee and
non-employee director stock option grants based on the fair value
of the options at the date of grant. For purposes of presenting
pro forma information, the fair value of options granted is
computed using the Black-Scholes option-pricing model.
Had we determined compensation cost based on the fair value at
the grant date for the MEIP, EIP, Employee Stock Purchase Plan
(ESPP) and Non-Employee Directors' Deferred Fee Equity Plan, our
pro forma net income and net income per share of common stock
available for common stockholders would have been as follows:
Three Months Ended March 31,
2005
-----------------------------
($ in thousands)
Net income available
for common stockholders As reported $ 42,634
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects 1,416
Deduct: Total stock-based
employee compensation expense
determined under fair
value based method for all
awards, net of related tax
effects (2,361)
----------
Pro forma $ 41,689
==========
Net income per share of common
stock available for common
stockholders As reported:
Basic $ 0.13
Diluted 0.12
Pro forma:
Basic $ 0.12
Diluted 0.12
(i) Net Income Per Share of Common Stock Available for Common
-----------------------------------------------------------------
Stockholders:
-------------
Basic net income per share of common stock is computed using the
weighted average number of shares of common stock outstanding
during the period being reported on. Except when the effect would
be antidilutive, diluted net income per share of common stock
reflects the dilutive effect of the assumed exercise of stock
options using the treasury stock method at the beginning of the
period being reported on as well as shares of common stock that
would result from the conversion of convertible preferred stock
(EPPICS). In addition, the related interest on debt (net of tax)
is added back to income since it would not be paid if the debt
was converted to common stock.
(2) Recent Accounting Literature and Changes in Accounting Principles:
------------------------------------------------------------------
Accounting for Conditional Asset Retirement Obligations
-------------------------------------------------------
In March 2005, the FASB issued FIN 47, "Accounting for Conditional
Asset Retirement Obligations," an interpretation of FASB No. 143. FIN
47 clarifies that the term conditional asset retirement obligation as
used in FASB No. 143 refers to a legal obligation to perform an asset
retirement activity in which the timing or method of settlement are
conditional on a future event that may or may not be within the
8
control of the entity. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an
asset retirement obligation. Although a liability exists for the
removal of poles and asbestos, sufficient information is not available
currently to estimate our liability, as the range of time over which
we may settle these obligations is unknown or cannot be reasonably
estimated. The adoption of FIN 47 during the fourth quarter of 2005
had no impact on our financial position, results of operations or cash
flows.
Partnerships
------------
In June 2005, the FASB issued EITF No. 04-5, "Determining Whether a
General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have
Certain Rights," which provides new guidance on how general partners
in a limited partnership should determine whether they control a
limited partnership. EITF No. 04-5 is effective for fiscal periods
beginning after December 15, 2005.
The Company has applied the provisions of EITF No. 04-5 and
consolidated the Mohave Cellular Limited Partnership (Mohave)
effective January 1, 2006. As permitted, we elected to apply EITF No.
04-5 retrospectively from the date of adoption. Revenues, depreciation
and operating income for Mohave were $3,698,000, $511,000 and
$696,000, respectively, for the three months ended March 31, 2005 and
$4,443,000, $516,000 and $1,229,000, respectively, for the three
months ended March 31, 2006.
(3) Accounts Receivable:
--------------------
The components of accounts receivable, net at March 31, 2006 and
December 31, 2005 are as follows:
($ in thousands) March 31, 2006 December 31, 2005
----------------- --------------------
End user $ 194,132 $ 210,470
Other 29,468 34,595
Less: Allowance for doubtful accounts (33,332) (31,631)
----------------- --------------------
Accounts receivable, net $ 190,268 $ 213,434
================= ====================
The Company maintains an allowance for estimated bad debts based on
its estimate of collectibility of its accounts receivables. Bad debt
expense, which is recorded as a reduction of revenue, was $4,373,000
and $2,922,000 for the three months ended March 31, 2006 and 2005,
respectively.
(4) Property, Plant and Equipment, Net:
-----------------------------------
Property, plant and equipment at March 31, 2006 and December 31, 2005
is as follows:
($ in thousands) March 31, 2006 December 31, 2005
-------------------- ---------------------
Property, plant and equipment $ 6,468,652 $ 6,433,119
Less: accumulated depreciation (3,457,003) (3,374,807)
-------------------- ---------------------
Property, plant and equipment, net $ 3,011,649 $ 3,058,312
==================== =====================
Depreciation expense is principally based on the composite group
method. Depreciation expense was $90,409,000 and $102,499,000 for the
three months ended March 31, 2006 and 2005, respectively.
(5) Discontinued Operations:
------------------------
In accordance with SFAS No. 144, any component of our business that we
dispose of or classify as held for sale that has operations and cash
flows clearly distinguishable from operations and for financial
reporting purposes, and that will be eliminated from the ongoing
operations, should be classified as discontinued operations.
Accordingly, we have classified the results of operations of Electric
Lightwave, LLC (ELI) and Conference-Call USA, LLC (CCUSA) as
discontinued operations in our consolidated statement of operations.
All prior periods have been restated. In addition, our statement of
cash flows for the three months ended March 31, 2005 has been revised
to separately disclose the operating, investing and financing portions
of the cash flows attributable to our discontinued operations, which
in prior periods were reported on a combined basis as a single amount.
9
ELI
---
In February 2006, we entered into a definitive agreement to sell all
of the outstanding membership interests in ELI, our competitive local
exchange carrier business, to Integra Telecom Holdings, Inc.
(Integra), for $247,000,000, including $243,000,000 in cash plus the
assumption of approximately $4,000,000 in capital lease obligations,
subject to customary adjustments under the terms of the agreement.
This transaction is expected to close during the third quarter of 2006
and is subject to regulatory and other customary approvals and
conditions, as well as the funding of Integra's fully committed
financing. We expect to recognize a pre-tax gain on the sale of ELI of
approximately $115,000,000 - $120,000,000.
ELI had revenues of approximately $159,200,000 and operating income of
approximately $21,300,000 for the year ended December 31, 2005. At
December 31, 2005, ELI's net assets totaled approximately
$116,500,000. We ceased to record depreciation expense effective
February 1, 2006.
Summarized financial information for ELI is set forth below:
March 31, December 31,
($ in thousands) 2006 2005
---------------- ----------------
Current assets $ 21,776 $ 24,986
Net property, plant and equipment 138,092 137,730
---------------- ----------------
Total assets held for sale $159,868 $162,716
================ ================
Current liabilities $ 18,654 $ 21,605
Long-term debt 4,187 4,246
Other liabilities 20,224 20,415
---------------- ----------------
Total liabilities related to assets held for sale $ 43,065 $ 46,266
================ ================
For the three months ended March 31,
--------------------------------------------
($ in thousands) 2006 2005
-------------------- ---------------------
Revenue $ 42,494 $ 37,980
Operating income 10,458 1,376
Income taxes 3,962 457
Net income 6,496 919
CCUSA
-----
In February 2005, we entered into a definitive agreement to sell
CCUSA, our conferencing services business. On March 15, 2005, we
completed the sale for $43,565,000 in cash, subject to adjustments
under the terms of the agreement. The pre-tax gain on the sale of
CCUSA was $14,061,000. Our after-tax gain was approximately
$1,167,000. The book income taxes recorded upon sale are primarily
attributable to a low tax basis in the assets sold.
We had no outstanding debt specifically identified with CCUSA and
therefore no interest expense was allocated to discontinued
operations. In addition, we ceased to record depreciation expense
effective February 16, 2005.
Summarized financial information for CCUSA is set forth below:
For the three months ended March 31,
--------------------------------------------
($ in thousands) 2006 2005
-------------------- ---------------------
Revenue $ - $ 4,607
Operating income - 1,489
Income taxes - 449
Net income - 1,040
Gain on disposal of CCUSA, net of tax - 1,167
10
(6) Other Intangibles:
------------------
Other intangibles at March 31, 2006 and December 31, 2005 are as
follows:
($ in thousands) March 31, 2006 December 31, 2005
------------------------ ---------------------
Customer base - amortizable over 96 months $ 994,605 $ 994,605
Trade name - non-amortizable 122,058 122,058
------------------------ ---------------------
Other intangibles 1,116,663 1,116,663
Accumulated amortization (589,525) (557,930)
------------------------ ---------------------
Total other intangibles, net $ 527,138 $ 558,733
======================== =====================
Amortization expense was $31,595,000 for the three months ended March
31, 2006 and 2005. Amortization expense, based on our estimate of
useful lives, is estimated to be $126,380,000 per year through 2008
and $57,533,000 in 2009, at which point these assets will have been
fully amortized.
(7) Long-Term Debt:
---------------
The activity in our long-term debt from December 31, 2005 to March 31,
2006 is as follows:
Three Months Ended March 31, 2006
--------------------------------------------------------
Interest Rate*
at
December 31, Interest March 31, March 31,
($ in thousands) 2005 Payments Rate Swap Reclassification 2006 2006
----- -------- --------- ---------------- ----- ----
FIXED RATE
Rural Utilities Service Loan
Contacts $ 22,809 $ (240) $ - $ - $ 22,569 6.080%
Senior Unsecured Debt 4,120,781 - (8,811) (70) 4,111,900 8.189%
EPPICS 33,785 - - (13,130) 20,655 5.000%
Industrial Development Revenue
Bonds 58,140 - - - 58,140 5.559%
------------- ---------- ---------- ---------- ----------
TOTAL LONG TERM DEBT $ 4,235,515 $ (240) $(8,811) $(13,200) $4,213,264
------------- ========== ========== ========== ----------
Less: Debt Discount (12,692) (10,099)
Less: Current Portion (227,693) (227,695)
------------- -----------
$ 3,995,130 $3,975,470
============= ===========
* Interest rate includes amortization of debt issuance costs, debt premiums or
discounts. The interest rate for Rural Utilities Service Loan Contracts, Senior
Unsecured Debt, and Industrial Development Revenue Bonds represent a weighted
average of multiple issuances.
In February 2006, our Board of Directors authorized us to repurchase
up to $150,000,000 of our outstanding debt over the following
twelve-month period. These repurchases may require us to pay premiums,
which would result in pre-tax losses to be recorded in investment and
other income (loss).
For the quarter ended March 31, 2006, we retired an aggregate
principal amount of $13,440,000 of debt, including $13,130,000 of 5%
Company Obligated Mandatorily Redeemable Convertible Preferred
Securities due 2036 (EPPICS) that were converted to our common stock.
During the first quarter of 2006, we entered into two debt-for-debt
exchanges of our debt securities. As a result, $47,500,000 of our
7.625% notes due 2008 were exchanged for approximately $47,430,000 of
our 9.00% notes due 2031. The 9.00% notes are callable on the same
general terms and conditions as the 7.625% notes that were exchanged.
No cash was exchanged in these transactions, however a non-cash
pre-tax loss of approximately $2,392,000 was recognized in accordance
with EITF No. 96-19, "Debtor's Accounting for a Modification or
Exchange of Debt Instruments," which is included in other income
(loss), net.
11
As of March 31, 2006, EPPICS representing a total principal amount of
$191,100,000 have been converted into 15,383,117 shares of our common
stock. Approximately $10,150,000 of EPPICS, which are convertible into
885,041 shares of our common stock, were outstanding at March 31,
2006.
The total outstanding principal amounts of industrial development
revenue bonds were $58,140,000 at March 31, 2006 and December 31,
2005. The earliest maturity date for these bonds is in August 2015.
Under the terms of our agreements to sell our former gas and electric
operations in Arizona, completed in 2003, we are obligated to call for
redemption, at their first available call dates, three Arizona
industrial development revenue bond series aggregating to
approximately $33,440,000. The first call dates for these bonds are in
2007. We expect to retire all called bonds with cash. In addition,
holders of $11,150,000 principal amount of industrial development
bonds may tender such bonds to us at par and we have the simultaneous
option to call such bonds at par on August 1, 2007. We expect to call
the bonds and retire them with cash.
As of March 31, 2006, we have available lines of credit with financial
institutions in the aggregate amount of $250,000,000. Associated
facility fees vary, depending on our debt leverage ratio, and are
0.375% per annum as of March 31, 2006. The expiration date for the
facility is October 29, 2009. During the term of the facility we may
borrow, repay and reborrow funds. The credit facility is available for
general corporate purposes but may not be used to fund dividend
payments. There have never been any borrowings under the facility.
(8) Net Income Per Share of Common Stock:
-------------------------------------
The reconciliation of the income per share of common stock calculation
for the three months ended March 31, 2006 and 2005, respectively, is
as follows:
($ in thousands, except per-share amounts) For the three months ended March 31,
----------------------------------------
2006 2005
------------------- -------------------
Net income used for basic and diluted earnings
----------------------------------------------
per share of common stock:
--------------------------
Income from continuing operations $ 43,987 $ 39,508
Income from discontinued operations 6,496 3,126
------------------- -------------------
Total basic net income available to common stockholders $ 50,483 $ 42,634
=================== ===================
Effect of conversion of preferred securities - EPPICS 182 418
------------------- -------------------
Total diluted net income available to common stockholders $ 50,665 $ 43,052
=================== ===================
Basic earnings per share of common stock:
-----------------------------------------
Weighted-average common stock outstanding - basic 327,132 338,450
------------------- -------------------
Income from continuing operations $ 0.13 $ 0.12
Income from discontinued operations 0.02 0.01
------------------- -------------------
Net income per share available to common stockholders $ 0.15 $ 0.13
=================== ===================
Diluted earnings per share of common stock:
-------------------------------------------
Weighted-average common stock outstanding 327,132 338,450
Effect of dilutive shares 960 3,910
Effect of conversion of preferred securities - EPPICS 1,458 4,510
------------------- -------------------
Weighted-average common stock outstanding - diluted 329,550 346,870
=================== ===================
Income from continuing operations $ 0.13 $ 0.11
Income from discontinued operations 0.02 0.01
------------------- -------------------
Net income per share available to common stockholders $ 0.15 $ 0.12
=================== ===================
Stock Options
-------------
For the three months ended March 31, 2006 and 2005, options to
purchase 1,960,000 and 2,481,000 shares, respectively, at exercise
prices ranging from $12.82 to $18.46 issuable under employee
compensation plans were excluded from the computation of diluted
earning per share of common stock for those periods because the
exercise prices were greater than the average market price of our
common stock and, therefore, the effect would be antidilutive.
12
In addition, for the three months ended March 31, 2006 and 2005,
restricted stock awards of 1,488,000 and 1,489,000 shares,
respectively, are excluded from our basic weighted average shares of
common stock outstanding and included in our dilutive shares of common
stock until the shares are no longer contingent upon the satisfaction
of all specified conditions.
EPPICS
------
As a result of our July 2004 dividend announcement with respect to our
common stock, our EPPICS began to convert into shares of our common
stock. As of March 31, 2006, approximately 95% of the EPPICS
outstanding, or about $191,100,000 aggregate principal amount of
EPPICS, have converted to 15,383,117 shares of our common stock,
including 2,260,867 shares issued from treasury.
At March 31, 2006, we had 202,991 shares of potentially dilutive
EPPICS, which were convertible into our common stock at a 4.36 to 1
ratio at an exercise price of $11.46 per share. If all remaining
EPPICS are converted we would issue approximately 885,041 shares of
our common stock. These securities have been included in the diluted
income per share of common stock calculation for the period ended
March 31, 2006.
At March 31, 2005, we had 1,034,318 shares of potentially dilutive
EPPICS, which were convertible into our common stock at a 4.36 to 1
ratio at an exercise price of $11.46 per share. These securities have
been included in the diluted income per share of common stock
calculation for the period ended March 31, 2005.
Stock Units
-----------
At March 31, 2006 and 2005, we had 259,320 and 211,759 stock units,
respectively, issuable under our Non-Employee Directors' Deferred Fee
Equity Plan and Non-Employee Directors' Retirement Plan. These
securities have not been included in the diluted income per share of
common stock calculation because their inclusion would have had an
antidilutive effect.
(9) Stock Plans:
------------
At March 31, 2006, we have four stock-based compensation plans, which
are described below. Prior to the adoption of SFAS No. 123R, we
applied APB No. 25 and related interpretations to account for our
stock plans resulting in the use of the intrinsic value to value the
stock. Under APB 25, we were not required to recognize compensation
expense for the cost of stock options. In accordance with the adoption
of SFAS 123R, we recorded stock-based compensation expense for the
cost of stock options, restricted shares and stock units issued
pursuant to the Management Equity Incentive Plan (MEIP), the 1996
Equity Incentive Plan (1996 EIP) and the Amended and Restated 2000
Equity Incentive Plan (2000 EIP). Our general policy is to issue
shares upon the grant of restricted shares and exercise of options
from treasury. At March 31, 2006, there were 30,342,864 shares
authorized for grant under these plans and 3,868,376 shares available
for grant.
Management Equity Incentive Plan
--------------------------------
Under the MEIP, awards of our common stock were granted to eligible
officers, management employees and non-management employees in the
form of incentive stock options, non-qualified stock options, stock
appreciation rights (SARs), restricted stock or other stock-based
awards. The Compensation Committee of the Board of Directors
administered the MEIP.
Since the expiration date of the MEIP plan on June 21, 2000, no awards
can be granted under the MEIP. The exercise price of stock options
issued was equal to or greater than the fair market value of the
underlying common stock on the date of grant. Stock options are not
ordinarily exercisable on the date of grant but vest over a period of
time (generally 4 years). Under the terms of the MEIP, subsequent
stock dividends and stock splits have the effect of increasing the
option shares outstanding, which correspondingly decreases the average
exercise price of outstanding options.
Equity Incentive Plans
----------------------
In May 1996, our stockholders approved the 1996 EIP and in May 2001,
our stockholders approved the 2000 EIP. Under the EIP plans, awards of
our common stock may be granted to eligible officers, management
employees and non-management employees in the form of incentive stock
options, non-qualified stock options, SARs, restricted stock or other
stock-based awards. As discussed under the Non-Employee Directors'
Compensation Plans below directors receive an award of stock options
under the 2000 EIP upon commencement of service. SARs may be granted
under the 1996 EIP. The Compensation Committee of the Board of
Directors administers the EIP plans.
13
At March 31, 2006, there were 27,389,711 shares authorized for grant
under these plans and 3,336,564 shares available for grant, as
adjusted to reflect stock dividends. No awards will be granted more
than 10 years after the effective dates (May 23, 1996 and May 18,
2000) of the EIP plans. The exercise price of stock options and SARs
generally shall be equal to or greater than the fair market value of
the underlying common stock on the date of grant. Stock options are
not ordinarily exercisable on the date of grant but vest over a period
of time (generally 4 years).
Under the terms of the EIP plans, subsequent stock dividends and stock
splits have the effect of increasing the option shares outstanding,
which correspondingly decrease the average exercise price of
outstanding options.
In connection with the payment of the special, non-recurring dividend
of $2.00 per share of common stock on September 2, 2004, the exercise
price and number of all outstanding options was adjusted such that
each option had the same value to the holder after the dividend as it
had before the dividend. In accordance with FASB Interpretation No. 44
(FIN 44), "Accounting for Certain Transactions Involving Stock
Compensation" and EITF 00-23, "Issues Related to the Accounting for
Stock Compensation under APB No. 25 and FIN 44," there is no
accounting consequence for changes made to the exercise price and the
number of shares of a fixed stock option or award as a direct result
of the special, non-recurring dividend.
The following summary presents information regarding outstanding stock
options as of March 31, 2006 and changes during the three months then
ended with regard to options under the MEIP and EIP plans:
Weighted Weighted Aggregate
Shares Average Average Intrinsic
Subject to Option Price Remaining Value at
Option Per Share Life in Years March 31, 2006
--------------------------------------------- -------------- --------------- -------------- -----------------
Balance at January 1, 2006 7,985,000 $11.52
Options granted - -
Options exercised (968,000) 9.74 $ 3,146,000
Options canceled, forfeited or lapsed (44,000) 9.90
--------------------------------------------- --------------
Balance at March 31, 2006 6,973,000 11.78 5.21 $16,683,000
============================================= ==============
Exercisable at March 31, 2006 5,587,000 $12.29 4.79 $11,783,000
============================================= ==============
There were no option grants made during the first quarter of 2006.
Cash received upon the exercise of options during the first quarter of
2006 totaled approximately $9,452,000. Total remaining unrecognized
compensation cost associated with unvested stock options at March 31,
2006 was $2,263,000 and the weighted average period over which this
cost is expected to be recognized is approximately one year.
The total intrinsic value of stock options exercised during the first
quarter of 2005 was $1,968,000. The total intrinsic value of stock
options outstanding and exercisable at March 31, 2005 was $27,211,000
and $17,914,000, respectively. The weighted average grant-date fair
value of options granted during the three months ended March 31, 2005
was $3.01. Options granted during the first three months of 2005
totaled 30,000. Cash received upon the exercise of options during the
first quarter of 2005 totaled approximately $5,552,000.
For purposes of determining compensation expense, the fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model which requires the use of various
assumptions including: expected life of the option; expected dividend
rate; expected volatility; and risk-free interest rate. The expected
life (estimated period of time outstanding) of stock options granted
was estimated using the historical exercise behavior of employees. The
risk free interest rate is based on the U.S. Treasury yield curve in
effect at the time of the grant. Expected volatility is based on
historical volatility for a period equal to the stock option's
expected life, calculated on a monthly basis.
14
The following table presents the weighted average assumptions used for
grants in fiscal 2005:
2005
---------------------------- --------------
Dividend yield 7.72%
Expected volatility 46%
Risk-free interest rate 4.16%
Expected life 6 years
---------------------------- --------------
The following summary presents information regarding unvested
restricted stock as of March 31, 2006 and changes during the three
months then ended with regard to restricted stock under the MEIP and
EIP plans:
Weighted
Average Aggregate
Number of Grant Date Fair Value at
Shares Fair Value March 31, 2006
---------------------------------- -------------- ------------------ ----------------
Unvested at January 1, 2006 1,456,000 $12.47
Granted 680,000 12.83 $ 9,027,000
Vested (522,000) 12.37 $ 6,923,000
Forfeited (126,000) 12.27
---------------------------------- --------------
Unvested at March 31, 2006 1,488,000 $12.68 $19,752,000
================================== ==============
For purposes of determining compensation expense, the fair value of
each restricted stock grant is estimated based on the average of the
high and low market price of a share of our common stock on the date
of grant. Total remaining unrecognized compensation cost associated
with unvested restricted stock awards at March 31, 2006 was
$17,435,000 and the weighted average period over which this cost is
expected to be recognized is approximately three years.
The total fair value of shares granted and vested during the three
months ended March 31, 2005 was approximately $4,050,000 and
$5,794,000, respectively. The total fair value of unvested restricted
stock at March 31, 2005 was $19,267,000. The weighted average
grant-date fair value of restricted shares granted during the three
months ended March 31, 2005 was $13.10. Shares granted during the
first three months of 2005 totaled 313,000.
Non-Employee Directors' Compensation Plans
-------------------------------------------
Upon commencement of his or her service on the Board of Directors,
each non-employee director receives a grant of 10,000 stock options,
which is awarded under our 2000 EIP. The price of these options, which
are exercisable six months after the grant date, is set at the average
of the high and low market prices of our common stock on the effective
date of the director's initial election to the Board of Directors.
Annually, each non-employee director also receives a grant of 3,500
stock units under our Non-Employee Directors' Deferred Fee Equity Plan
(the "Deferred Fee Plan"), which commenced in 1997 and continues
through May 22, 2007. Prior to April 20, 2004, each non-employee
director received an award of 5,000 stock options. The exercise price
of the options granted under the Deferred Fee Plan was set at 100% of
the average of the high and low market prices of our common stock on
the third, fourth, fifth, and sixth trading days of the year in which
the options were granted. The options became exercisable six months
after the grant date and remain exercisable for ten years after the
grant date. In addition, on September 1, 1996, each non-employee
director received a grant, under the Formula Plan, of options to
purchase 2,500 shares of common stock. The options granted under the
Deferred Fee Plan became exercisable six months after the grant date
and remain exercisable for ten years after the grant date.
Effective April 2004, the Deferred Fee Plan was amended to replace the
annual grant of stock options with an annual grant of 3,500 stock
units. The stock units are awarded on the first business day of each
calendar year. Each non-employee director must elect, by December 31
of the preceding year, whether the stock units awarded under the
Deferred Fee Plan will be redeemed in cash or stock upon the
director's termination of service.
15
In addition, each non-employee director is also entitled to annually
receive a retainer, meeting fees, and, when applicable, fees for
serving as a committee chair or as Lead Director, which are awarded
under the Non-Employee Directors' Deferred Fee Equity Plan. For 2006,
each non-employee director had to elect, by December 31, 2005, to
receive $40,000 cash or 5,760 stock units as an annual retainer.
Directors making a stock unit election must also elect to convert the
units to either common stock (convertible on a one-to-one basis) or
cash upon retirement or death. Prior to June 30, 2003, a director
could elect to receive 20,000 stock options as an annual retainer in
lieu of cash or stock units. The exercise price of the stock options
was set at the average of the high and low market prices of our common
stock on the date of grant. The options were exercisable six months
after the date of grant and had a 10-year term.
The number of shares of common stock authorized for issuance under the
Deferred Fee Plan is one percent (1%) of the total outstanding shares
of our common stock as of June 30, 2003, or 2,953,153 shares, subject
to adjustment in the event of changes in our corporate structure
affecting capital stock. At March 31, 2006, there were 531,812 shares
available for grant. There were 11 directors participating in the
Deferred Fee Plan during the first quarter of 2006. In the first
quarter of 2006, the total plan units earned was 52,690. At March 31,
2006, 454,032 options were exercisable at a weighted average exercise
price of $9.85.
In 2006, each non-employee director will receive fees of $2,000 for
each Board of Directors and committee meeting attended ($1,000 for
telephonic meetings). The chairs of the Audit, Compensation,
Nominating and Corporate Governance and Retirement Plan Committees
were paid an additional annual stipend of $25,000, $15,000, $7,500,
and $5,000, respectively. In addition, the Lead Director, who heads
the ad hoc committee of non-employee directors, received an additional
annual stipend of $15,000. A director must elect, by December 31 of
the preceding year, to receive meeting and other fees in cash, stock
units, or a combination of both. All fees paid to the non-employee
directors in 2006 are paid quarterly. If the director elects stock
units, the number of units credited to the director's account is
determined as follows: the total cash value of the fees payable to the
director are divided by 85% of the average of the high and low market
prices of our common stock on the first trading day of the year the
election is in effect. Units are credited to the director's account
quarterly.
We account for the Deferred Fee Plan in accordance with SFAS No. 123R.
If cash is elected, it is considered a liability-based award. If stock
units are elected, they are considered equity-based awards.
Compensation expense for stock units is based on the market value of
our common stock at the date of grant. For awards granted prior to
1999, a director could elect to be paid in stock options. Generally,
compensation cost was not recorded because the options were granted at
the fair market value of our common stock on the grant date under APB
No. 25 and related interpretations.
We had also maintained a Non-Employee Directors' Retirement Plan
providing for the payment of specified sums annually to our
non-employee directors, or their designated beneficiaries, starting at
the director's retirement, death or termination of directorship. In
1999, we terminated this Plan. The vested benefit of each non-employee
director, as of May 31, 1999, was credited to the director's account
in the form of stock units. Such benefit will be payable to each
director upon retirement, death or termination of directorship. Each
participant had until July 15, 1999 to elect whether the value of the
stock units awarded would be payable in our common stock (convertible
on a one-for-one basis) or in cash. As of March 31, 2006, the
liability for such payments was approximately $644,000 all of which
will be payable in stock (based on the July 15, 1999 stock price).
(10) Segment Information:
--------------------
As of January 1, 2006, we operate in a single segment, Frontier.
Frontier provides both regulated and unregulated communications
services to residential, business and wholesale customers and is
typically the incumbent provider in its service areas.
As permitted by SFAS No. 131, we have utilized the aggregation
criteria in combining our markets because all of the Company's
Frontier properties share similar economic characteristics: they
provide the same products and services to similar customers using
comparable technologies in all the states we operate. The regulatory
structure is generally similar. Differences in the regulatory regime
of a particular state do not materially impact the economic
characteristics or operating results of a particular property.
16
(11) Derivative Instruments and Hedging Activities:
----------------------------------------------
Interest rate swap agreements are used to hedge a portion of our debt
that is subject to fixed interest rates. Under our interest rate swap
agreements, we agree to pay an amount equal to a specified variable
rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified fixed rate of interest times the
same notional principal amount. The notional amounts of the contracts
are not exchanged. No other cash payments are made unless the
agreement is terminated prior to maturity, in which case the amount
paid or received in settlement is established by agreement at the time
of termination and represents the market value, at the then current
rate of interest, of the remaining obligations to exchange payments
under the terms of the contracts.
The interest rate swap contracts are reflected at fair value in our
consolidated balance sheet and the related portion of fixed-rate debt
being hedged is reflected at an amount equal to the sum of its book
value and an amount representing the change in fair value of the debt
obligations attributable to the interest rate risk being hedged. The
notional amounts of fixed-rate indebtedness hedged as of March 31,
2006 and December 31, 2005 was $550,000,000 and $500,000,000,
respectively. Such contracts require us to pay variable rates of
interest (estimated average pay rates of approximately 8.76% as of
March 31, 2006 and approximately 8.60% as of December 31, 2005) and
receive fixed rates of interest (average receive rates of 8.26% as of
March 31, 2006 and 8.46% as of December 31, 2005, respectively). The
fair value of these derivatives is reflected in other liabilities as
of March 31, 2006 and December 31, 2005, in the amount of $17,538,000
and $8,727,000, respectively. The related underlying debt has been
decreased by a like amount. The amounts paid during the three months
ended March 31, 2006 as a result of these contracts amounted to
$534,000 and are included as interest expense.
During September 2005, we entered into a series of separate forward
rate agreements with our swap counter-parties that fixed the
underlying variable rate component of some of our swaps at the market
rate as of the date of execution for certain future rate-setting
dates. At March 31, 2006 and December 31, 2005, the rates obtained
under these forward rate agreements were below market rates. The fair
value of these derivatives is reflected in other current assets as of
March 31, 2006 and December 31, 2005, in the amount of $822,000 and
$1,129,000, respectively. A gain for the changes in the fair value of
these forward rate agreements of $384,000 is included in other income
(loss), net for the three months ended March 31, 2006.
We do not anticipate any nonperformance by counterparties to our
derivative contracts as all counterparties have investment grade
credit ratings.
(12) Investment and Other Income (Loss), Net:
----------------------------------------
The components of investment and other income (loss), net are as
follows:
For the three months ended March 31,
-----------------------------------------
($ in thousands) 2006 2005
------------------ -------------------
Investment income $ 3,827 $ 1,987
Loss on exchange of debt (2,392) -
Investment gain - 493
Other, net (2,786) 1,488
------------------ -------------------
Total investment and other income (loss), net $ (1,351) $ 3,968
================== ===================
(13) Company Obligated Mandatorily Redeemable Convertible Preferred
---------------------------------------------------------------------
Securities:
------------
In 1996, our consolidated wholly owned subsidiary, Citizens Utilities
Trust (the Trust), issued, in an underwritten public offering,
4,025,000 shares of EPPICS, representing preferred undivided interests
in the assets of the Trust, with a liquidation preference of $50 per
security (for a total liquidation amount of $201,250,000). These
securities have an adjusted conversion price of $11.46 per share of
our common stock. The conversion price was reduced from $13.30 to
$11.46 during the third quarter of 2004 as a result of the $2.00 per
share of common stock special, non-recurring dividend. The proceeds
from the issuance of the Trust Convertible Preferred Securities and a
Company capital contribution were used to purchase $207,475,000
aggregate liquidation amount of 5% Partnership Convertible Preferred
Securities due 2036 from another wholly owned subsidiary, Citizens
Utilities Capital L.P. (the Partnership). The proceeds from the
issuance of the Partnership Convertible Preferred Securities and a
17
Company capital contribution were used to purchase from us
$211,756,000 aggregate principal amount of 5% Convertible Subordinated
Debentures due 2036. The sole assets of the Trust are the Partnership
Convertible Preferred Securities, and our Convertible Subordinated
Debentures are substantially all the assets of the Partnership. Our
obligations under the agreements related to the issuances of such
securities, taken together, constitute a full and unconditional
guarantee by us of the Trust's obligations relating to the Trust
Convertible Preferred Securities and the Partnership's obligations
relating to the Partnership Convertible Preferred Securities.
In accordance with the terms of the issuances, we paid the annual 5%
interest in quarterly installments on the Convertible Subordinated
Debentures in the first quarter of 2006 and the four quarters of 2005.
Only cash was paid (net of investment returns) to the Partnership in
payment of the interest on the Convertible Subordinated Debentures.
The cash was then distributed by the Partnership to the Trust and then
by the Trust to the holders of the EPPICS.
As of March 31, 2006, EPPICS representing a total principal amount of
$191,100,000 have been converted into 15,383,117 shares of our common
stock. A total of $10,150,000 of EPPICS is outstanding as of March 31,
2006 and if all outstanding EPPICS were converted, 885,041 shares of
our common stock would be issued upon such conversion.
(14) Retirement Plans:
-----------------
The following table provides the components of net periodic benefit
cost:
For three months ended March 31,
--------------------------------------------------------------
2006 2005 2006 2005
------------- ------------- -------------- ---------------
Pension Benefits Other Postretirement Benefits
---------------------------- -------------------------------
($ in thousands)
Components of net periodic benefit cost
---------------------------------------
Service cost $ 1,759 $ 1,495 $ 174 $ 282
Interest cost on projected benefit obligation 11,504 11,764 2,211 3,177
Return on plan assets (15,126) (14,390) (245) (565)
Amortization of prior service cost and unrecognized
net obligation (61) (61) (1,026) (51)
Amortization of unrecognized loss 3,085 2,527 1,513 1,311
------------- ------------- -------------- ---------------
Net periodic benefit cost $ 1,161 $ 1,335 $ 2,627 $ 4,154
============= ============= ============== ===============
We expect that our pension and other postretirement benefit expenses
for 2006 will be $15,000,000 - $18,000,000 (down from $19,000,000 in
2005) and no contribution will be required to be made by us to the
pension plan in 2006.
(15) Commitments and Contingencies:
------------------------------
We anticipate capital expenditures of approximately $270,000,000 -
$280,000,000 for 2006. Although we from time to time make short-term
purchasing commitments to vendors with respect to these expenditures,
we generally do not enter into firm, written contracts for such
activities.
The City of Bangor, Maine, filed suit against us on November 22, 2002,
in the U.S. District Court for the District of Maine (City of Bangor
v. Citizens Communications Company, Civ. Action No. 02-183-B-S). The
City has alleged, among other things, that we are responsible for the
costs of cleaning up environmental contamination alleged to have
resulted from the operation of a manufactured gas plant owned by
Bangor Gas Company from 1852 - 1948, and by us from 1948-1963. In
acquiring the operation in 1948 we acquired the stock of Bangor Gas
Company and merged it into the Company. The City alleged the existence
of extensive contamination of the Penobscot River and asserted that
money damages and other relief at issue in the lawsuit could exceed
$50,000,000. The City also requested that punitive damages be assessed
against us. We filed an answer denying liability to the City, and
asserted a number of counterclaims against the City. In addition, we
identified a number of other potentially responsible parties that may
be liable for the damages alleged by the City and joined them as
parties to the lawsuit. These additional parties include Honeywell
Corporation, Guilford Transportation (operating as Maine Central
Railroad), UGI Utilities, Inc., and Centerpoint Energy Resources
Corporation. The Court dismissed all but two of the City's claims
including its claims for joint and several liability under the
Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA), and the claim against us for punitive damages. Trial was
conducted in September and October 2005 for the first (liability)
phase of the case. A decision from the court has not yet been
rendered. We intend to continue to defend ourselves vigorously against
the City's lawsuit.
18
We have demanded that various of our insurance carriers defend and
indemnify us with respect to the City's lawsuit, and on December 26,
2002, we filed a declaratory judgment action against those insurance
carriers in the Superior Court of Penobscot County, Maine, for the
purpose of establishing their obligations to us with respect to the
City's lawsuit. We intend to vigorously pursue this lawsuit to obtain
from our insurance carriers indemnification for any damages that may
be assessed against us in the City's lawsuit as well as to recover the
costs of our defense of that lawsuit.
On June 7, 2004, representatives of Robert A. Katz Technology
Licensing, LP, contacted us regarding possible infringement of several
patents held by that firm. The patents cover a wide range of
operations in which telephony is supported by computers, including
obtaining information from databases via telephone, interactive
telephone transactions, and customer and technical support
applications. We were cooperating with the patent holder to determine
if we are currently using any of the processes that are protected by
its patents but we have not had any communication with them on this
issue since mid-2004. If we determine that we are utilizing the patent
holder's intellectual property, we expect to commence negotiations on
a license agreement.
On June 24, 2004, one of our subsidiaries, Frontier Subsidiary Telco
Inc., received a "Notice of Indemnity Claim" from Citibank, N.A., that
is related to a complaint pending against Citibank and others in the
U.S. Bankruptcy Court for the Southern District of New York as part of
the Global Crossing bankruptcy proceeding. Citibank bases its claim
for indemnity on the provisions of a credit agreement that was entered
into in October 2000 between Citibank and our subsidiary. We purchased
Frontier Subsidiary Telco, Inc., in June 2001 as part of our
acquisition of the Frontier telephone companies. The complaint against
Citibank, for which it seeks indemnification, alleges that the seller
improperly used a portion of the proceeds from the Frontier
transaction to pay off the Citibank credit agreement, thereby
defrauding certain debt holders of Global Crossing North America Inc.
Although the credit agreement was paid off at the closing of the
Frontier transaction, Citibank claims the indemnification obligation
survives. Damages sought against Citibank and its co-defendants could
exceed $1,000,000,000. In August 2004 we notified Citibank by letter
that we believe its claims for indemnification are invalid and are not
supported by applicable law. We have received no further
communications from Citibank since our August 2004 letter.
We are party to other legal proceedings arising in the normal course
of our business. The outcome of individual matters is not predictable.
However, we believe that the ultimate resolution of all such matters,
after considering insurance coverage, will not have a material adverse
effect on our financial position, results of operations, or our cash
flows.
The Company sold all of its utility businesses as of April 1, 2004.
However, we have retained a potential payment obligation associated
with our previous electric utility activities in the state of Vermont.
The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities,
including us, entered into a purchase power agreement with
Hydro-Quebec in 1987. The agreement contains "step-up" provisions that
state that if any VJO member defaults on its purchase obligation under
the contract to purchase power from Hydro-Quebec the other VJO
participants will assume responsibility for the defaulting party's
share on a pro-rata basis. Our pro-rata share of the purchase power
obligation is 10%. If any member of the VJO defaults on its
obligations under the Hydro-Quebec agreement, then the remaining
members of the VJO, including us, may be required to pay for a
substantially larger share of the VJO's total power purchase
obligation for the remainder of the agreement (which runs through
2015). Paragraph 13 of FIN 45 requires that we disclose, "the maximum
potential amount of future payments (undiscounted) the guarantor could
be required to make under the guarantee." Paragraph 13 also states
that we must make such disclosure "... even if the likelihood of the
guarantor's having to make any payments under the guarantee is
remote...". As noted above, our obligation only arises as a result of
default by another VJO member such as upon bankruptcy. Therefore, to
satisfy the "maximum potential amount" disclosure requirement we must
assume that all members of the VJO simultaneously default, a highly
unlikely scenario given that the two members of the VJO that have the
largest potential payment obligations are publicly traded with
investment grade credit ratings, and that all VJO members are
regulated utility providers with regulated cost recovery. Regardless,
despite the remote chance that such an event could occur, or that the
State of Vermont could or would allow such an event, assuming that all
the members of the VJO defaulted on January 1, 2007 and remained in
19
default for the duration of the contract (another 10 years), we
estimate that our undiscounted purchase obligation for 2007 through
2015 would be approximately $1,264,000,000. In such a scenario the
Company would then own the power and could seek to recover its costs.
We would do this by seeking to recover our costs from the defaulting
members and/or reselling the power to other utility providers or the
northeast power grid. There is an active market for the sale of power.
We could potentially lose money if we were unable to sell the power at
cost. We caution that we cannot predict with any degree of certainty
any potential outcome.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Forward-Looking Statements
--------------------------
This quarterly report on Form 10-Q contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the statements. Statements that
are not historical facts are forward-looking statements made pursuant to the
Safe Harbor Provisions of the Litigation Reform Act of 1995. Words such as
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements (including oral
representations) are only predictions or statements of current plans, which we
review continuously. Forward-looking statements may differ from actual future
results due to, but not limited to, and our future results may be materially
affected by, any of the following possibilities:
* Changes in the number of our revenue generating units, which
consists of access lines plus high-speed internet subscribers;
* The effects of competition from wireless, other wireline carriers
(through voice over internet protocol (VOIP) or otherwise), high
speed cable modems and cable telephony;
* The effects of general and local economic and employment
conditions on our revenues;
* Our ability to effectively manage our operations, costs, capital
spending, regulatory compliance and service quality;
* Our ability to successfully introduce new product offerings
including our ability to offer bundled service packages on terms
that are both profitable to us and attractive to our customers;
* Our ability to sell enhanced and data services in order to offset
ongoing declines in revenue from local services, switched access
services and subsidies;
* Our ability to comply with Section 404 of the Sarbanes-Oxley Act
of 2002, which requires management to assess its internal control
systems and disclose whether the internal control systems are
effective, and the identification of any material weaknesses in
our internal control over financial reporting;
* Changes in accounting policies or practices adopted voluntarily
or as required by generally accepted accounting principles or
regulators;
* The effects of changes in regulation in the communications
industry as a result of federal and state legislation and
regulation, including potential changes in access charges and
subsidy payments, and regulatory network upgrade and reliability
requirements;
* Our ability to comply with federal and state regulation
(including state rate of return limitations on our earnings) and
our ability to successfully renegotiate state regulatory plans as
they expire or come up for renewal from time to time;
* Our ability to manage our operating expenses, capital
expenditures, pay dividends and reduce or refinance our debt;
* Adverse changes in the ratings given to our debt securities by
nationally accredited ratings organizations, which could limit or
restrict the availability, and/or increase the cost of financing;
* The effects of greater than anticipated competition requiring new
pricing, marketing strategies or new product offerings and the
risk that we will not respond on a timely or profitable basis;
20
* The effects of bankruptcies in the telecommunications industry
which could result in more price competition and potential bad
debts;
* The effects of technological changes and competition on our
capital expenditures and product and service offerings, including
the lack of assurance that our ongoing network improvements will
be sufficient to meet or exceed the capabilities and quality of
competing networks;
* The effects of increased medical, retiree and pension expenses
and related funding requirements;
* Changes in income tax rates, tax laws, regulations or rulings,
and/or federal or state tax assessments;
* The effect of changes in the communications market, including
significantly increased price and service competition;
* The effects of state regulatory cash management policies on our
ability to transfer cash among our subsidiaries and to the parent
company;
* Our ability to successfully renegotiate expiring union contracts
covering approximately 1,300 employees that are scheduled to
expire during the remainder of 2006;
* Our ability to pay a $1.00 per common share dividend annually may
be affected by our cash flow from operations, amount of capital
expenditures, debt service requirements, cash paid for income
taxes (which will increase in the future) and our liquidity;
* The effects of any future liabilities or compliance costs in
connection with worker health and safety matters;
* The effects of any unfavorable outcome with respect to any of our
current or future legal, governmental, or regulatory proceedings,
audits or disputes; and
* The effects of more general factors, including changes in
economic, business and industry conditions.
Any of the foregoing events, or other events, could cause financial information
to vary from management's forward-looking statements included in this report.
You should consider these important factors, as well as the risks set forth
under Item 1A. "Risk Factors," in evaluating any statement in this Form 10-Q or
otherwise made by us or on our behalf. The following information is unaudited
and should be read in conjunction with the consolidated financial statements and
related notes included in this report. We have no obligation to update or revise
these forward-looking statements.
Overview
--------
We are a communications company providing services to rural areas and small and
medium-sized towns and cities as an incumbent local exchange carrier, or ILEC.
We offer our ILEC services under the "Frontier" name. In February 2006 we
entered into a definitive agreement to sell our competitive local exchange
carrier (CLEC), Electric Lightwave, LLC (ELI). We are accounting for ELI as a
discontinued operation in our consolidated statements of operations. The sale is
expected to close in the third quarter of 2006.
Competition in the telecommunications industry is intense and increasing. We
experience competition from many telecommunications service providers including
cable operators, wireless carriers, voice over internet protocol (VOIP)
providers, long distance providers, competitive local exchange carriers,
internet providers and other wireline carriers. We believe that competition will
continue to intensify in 2006 across all products and in all of our markets. Our
Frontier business experienced erosion in access lines and switched access
minutes in 2006 as a result of competition. Competition in our markets could
result in reduced revenues in 2006.
The communications industry is undergoing significant changes. The market is
extremely competitive, resulting in lower prices. These trends are likely to
continue and result in a challenging revenue environment. These factors could
also result in more bankruptcies in the sector and therefore affect our ability
to collect money owed to us by carriers.
21
Revenues from data and internet services such as high-speed internet continue to
increase as a percentage of our total revenues and revenues from high margin
services such as local line and access charges and subsidies are decreasing as a
percentage of our revenues. These factors, along with the potential for
increasing operating costs, could cause our profitability and our cash generated
by operations to decrease.
(a) Liquidity and Capital Resources
-------------------------------
For the three months ended March 31, 2006, we used cash flow from continuing
operations and cash and cash equivalents to fund capital expenditures,
dividends, interest payments, debt repayments and stock repurchases. As of March
31, 2006, we had cash and cash equivalents aggregating $284.4 million.
For the three months ended March 31, 2006, our capital expenditures were $43.8
million. We continue to closely scrutinize all of our capital projects,
emphasize return on investment and focus our capital expenditures on areas and
services that have the greatest opportunities with respect to revenue growth and
cost reduction. We anticipate capital expenditures of approximately $270.0 -
280.0 million for 2006.
Increasing competition, offering new services such as wireless and VOIP, and
improving the capabilities or reducing the maintenance costs of our plant may
cause our capital expenditures to increase in the future.
As of March 31, 2006, we had available lines of credit with financial
institutions in the aggregate amount of $250.0 million. Associated facility fees
vary, depending on our debt leverage ratio, and are 0.375% per annum as of March
31, 2006. The expiration date for the facility is October 29, 2009. During the
term of the facility we may borrow, repay and reborrow funds. The credit
facility is available for general corporate purposes but may not be used to fund
dividend payments. We have never borrowed any money under the facility.
Our ongoing annual dividends of $1.00 per share of common stock under our
current policy utilize a significant portion of our cash generated by operations
and therefore could limit our operating and financial flexibility. While we
believe that the amount of our dividends will allow for adequate amounts of cash
flow for other purposes, any reduction in cash generated by operations and any
increases in capital expenditures, interest expense or cash taxes would reduce
the amount of cash generated in excess of dividends. Losses of access lines,
increases in competition, lower subsidy and access revenues and the other
factors described above are expected to reduce our cash generated by operations
and may require us to increase capital expenditures. The downgrades in our
credit ratings in July 2004 to below investment grade may make it more difficult
and expensive to refinance our maturing debt. We have in recent years paid
relatively low amounts of cash taxes. We expect that over the next several years
our cash taxes will increase substantially.
We believe our operating cash flows, existing cash balances, and credit facility
will be adequate to finance our working capital requirements, fund capital
expenditures, make required debt payments through 2007, pay taxes, pay dividends
to our stockholders in accordance with our dividend policy and support our
short-term and long-term operating strategies. We have approximately $227.7
million, $37.8 million and $653.4 million of debt maturing in 2006, 2007 and
2008, respectively.
Share Repurchase Programs
-------------------------
On May 25, 2005, our Board of Directors authorized us to repurchase up to $250.0
million of our common stock. This share repurchase program commenced on June 13,
2005. As of December 31, 2005, we completed the repurchase program and had
repurchased a total of 18,775,156 shares of our common stock at an aggregate
cost of $250.0 million.
In February 2006, our Board of Directors authorized us to repurchase up to
$300.0 million of our common stock in public or private transactions over the
following twelve-month period. This share repurchase program commenced on March
6, 2006. As of March 31, 2006, we had committed to repurchase 3,402,900 shares
of our common stock at an aggregate cost of approximately $45.9 million. Of that
amount, 2,802,900 shares had settled by March 31, 2006, at a cash cost of
approximately $37.9 million. We may in the future purchase additional shares of
our common stock.
22
Debt Reduction and Debt Exchanges
---------------------------------
For the quarter ended March 31, 2006, we retired an aggregate principal amount
of $13.4 million of debt, including $13.1 million of 5% Company Obligated
Mandatorily Redeemable Convertible Preferred Securities due 2006 (EPPICS) that
were converted into our common stock. During the first quarter of 2006, we
entered into two debt-for-debt exchanges of our debt securities. As a result,
$47.5 million of our 7.625% notes due 2008 were exchanged for approximately
$47.4 million of our 9.00% notes due 2031. The 9.00% notes are callable on the
same general terms and conditions as the 7.625% notes exchanged. No cash was
exchanged in these transactions, however a non-cash pre-tax loss of
approximately $2.4 million was recognized in accordance with EITF No. 96-19,
"Debtor's Accounting for a Modification or Exchange of Debt Instruments," which
is included in other income (loss), net.
In February 2006, our Board of Directors authorized us to repurchase up to
$150.0 million of our outstanding debt over the following twelve-month period.
These repurchases may require us to pay premiums, which would result in pre-tax
losses to be recorded in investment and other income (loss).
We may from time to time repurchase our debt in the open market, through tender
offers, exchanges of debt securities or privately negotiated transactions. We
may also exchange existing debt for newly issued debt obligations.
Interest Rate Management
------------------------
In order to manage our interest expense, we have entered into interest swap
agreements. Under the terms of these agreements, we make semi-annual, floating
rate interest payments based on six month LIBOR and receive a fixed rate on the
notional amount. The underlying variable rate on these swaps is set either in
advance, in arrears or based on each period's daily average six-month LIBOR.
The notional amounts of fixed-rate indebtedness hedged as of March 31, 2006 and
December 31, 2005 were $550.0 million and $500.0 million, respectively. Such
contracts require us to pay variable rates of interest (estimated average pay
rates of approximately 8.76% as of March 31, 2006 and approximately 8.60% as of
December 31, 2005) and receive fixed rates of interest (average receive rate of
8.26% as of March 31, 2006 and 8.46% as of December 31, 2005). All swaps are
accounted for under SFAS No. 133 (as amended) as fair value hedges. For the
three months ended March 31, 2006, the interest expense resulting from these
interest rate swaps totaled approximately $0.5 million.
Sale of Non-Strategic Investments
---------------------------------
On February 1, 2005, we sold 20,672 shares of Prudential Financial, Inc. for
approximately $1.1 million in cash.
On March 15, 2005, we completed the sale of our conferencing business, CCUSA for
approximately $43.6 million in cash.
Off-Balance Sheet Arrangements
------------------------------
We do not maintain any off-balance sheet arrangements, transactions, obligations
or other relationships with unconsolidated entities that would be expected to
have a material current or future effect upon our financial statements.
EPPICS
------
In 1996, our consolidated wholly owned subsidiary, Citizens Utilities Trust (the
Trust), issued, in an underwritten public offering, 4,025,000 shares of 5%
Company Obligated Mandatorily Redeemable Convertible Preferred Securities due
2036 (Trust Convertible Preferred Securities or EPPICS), representing preferred
undivided interests in the assets of the Trust, with a liquidation preference of
$50 per security (for a total liquidation amount of $201.3 million). These
securities have an adjusted conversion price of $11.46 per share of our common
stock. The conversion price was reduced from $13.30 to $11.46 during the third
quarter of 2004 as a result of the $2.00 per share of common stock special,
non-recurring dividend. The proceeds from the issuance of the Trust Convertible
Preferred Securities and a Company capital contribution were used to purchase
$207.5 million aggregate liquidation amount of 5% Partnership Convertible
Preferred Securities due 2036 from another wholly owned consolidated subsidiary,
Citizens Utilities Capital L.P. (the Partnership). The proceeds from the
issuance of the Partnership Convertible Preferred Securities and a Company
capital contribution were used to purchase from us $211.8 million aggregate
principal amount of 5% Convertible Subordinated Debentures due 2036. The sole
assets of the Trust are the Partnership Convertible Preferred Securities, and
our Convertible Subordinated Debentures are substantially all the assets of the
Partnership. Our obligations under the agreements related to the issuances of
such securities, taken together, constitute a full and unconditional guarantee
by us of the Trust's obligations relating to the Trust Convertible Preferred
Securities and the Partnership's obligations relating to the Partnership
Convertible Preferred Securities.
23
In accordance with the terms of the issuances, we paid the annual 5% interest in
quarterly installments on the Convertible Subordinated Debentures in the first
quarter of 2006 and the four quarters of 2005. Only cash was paid (net of
investment returns) to the Partnership in payment of the interest on the
Convertible Subordinated Debentures. The cash was then distributed by the
Partnership to the Trust and then by the Trust to the holders of the EPPICS.
As of March 31, 2006, EPPICS representing a total principal amount of $191.1
million have been converted into 15,383,117 shares of our common stock, and a
total of $10.2 million remains outstanding to third parties. Our long-term debt
footnote indicates $20.7 million of EPPICS outstanding at March 31, 2006 of
which $10.5 million is intercompany debt of related parties.
Covenants
---------
The terms and conditions contained in our indentures and credit facilities
agreements include the timely payment of principal and interest when due, the
maintenance of our corporate existence, keeping proper books and records in
accordance with GAAP, restrictions on the allowance of liens on our assets, and
restrictions on asset sales and transfers, mergers and other changes in
corporate control. We currently have no restrictions on the payment of dividends
either by contract, rule or regulation.
Our $200.0 million term loan facility with the Rural Telephone Finance
Cooperative (RTFC) contains a maximum leverage ratio covenant. Under the
leverage ratio covenant, we are required to maintain a ratio of (i) total
indebtedness minus cash and cash equivalents in excess of $50.0 million to (ii)
consolidated adjusted EBITDA (as defined in the agreement) over the last four
quarters no greater than 4.00 to 1.
Our $250.0 million credit facility contains a maximum leverage ratio covenant.
Under the leverage ratio covenant, we are required to maintain a ratio of (i)
total indebtedness minus cash and cash equivalents in excess of $50.0 million to
(ii) consolidated adjusted EBITDA (as defined in the agreement) over the last
four quarters no greater than 4.50 to 1. Although the credit facility is
unsecured, it will be equally and ratably secured by certain liens and equally
and ratably guaranteed by certain of our subsidiaries if we issue debt that is
secured or guaranteed.
We are in compliance with all of our debt and credit facility covenants.
Discontinued Operations
-----------------------
In February 2006, we entered into a definitive agreement to sell all of the
outstanding membership interest in ELI, our CLEC business, to Integra Telecom
Holdings, Inc. (Integra), for $247.0 million, including $243.0 million in cash
plus the assumption of approximately $4.0 million in capital lease obligations,
subject to customary adjustments under the terms of the agreement. This
transaction is expected to close during the third quarter of 2006 and is subject
to regulatory and other customary approvals and conditions, as well as the
funding of Integra's fully committed financing. We expect to recognize a pre-tax
gain on the sale of ELI of approximately $115.0 - $120.0 million.
On March 15, 2005, we completed the sale of Conference Call USA, LLC (CCUSA) for
$43.6 million in cash, subject to adjustments under the terms of the agreement.
The pre-tax gain on the sale of CCUSA was $14.1 million. Our after-tax gain was
$1.2 million. The book income taxes recorded upon sale are primarily
attributable to a low tax basis in the assets sold.
Rural Telephone Bank
--------------------
In August 2005, the Board of Directors of the Rural Telephone Bank (RTB) voted
to dissolve the bank. In November 2005, the liquidation and dissolution of the
RTB was initiated with the signing of the 2006 Agricultural Appropriation bill
by President Bush. We received approximately $64.6 million in cash from the
dissolution of the RTB in April 2006, which will result in the recognition of a
pre-tax gain of approximately $62.0 million during the second quarter of 2006.
Critical Accounting Policies and Estimates
------------------------------------------
We review all significant estimates affecting our consolidated financial
statements on a recurring basis and record the effect of any necessary
adjustment prior to their publication. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial
statements; accordingly, it is possible that actual results could differ from
those estimates and changes to estimates could occur in the near term. The
preparation of our financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Estimates and judgments are used when accounting for allowance for
doubtful accounts, impairment of long-lived assets, intangible assets,
depreciation and amortization, employee benefit plans, income taxes,
contingencies, and pension and postretirement benefits expenses among others.
24
Management has discussed the development and selection of these critical
accounting estimates with the Audit Committee of our Board of Directors and our
Audit Committee has reviewed our disclosures relating to them.
There have been no material changes to our critical accounting policies and
estimates from the information provided in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the year ended December 31, 2005.
New Accounting Pronouncements
-----------------------------
Accounting for Conditional Asset Retirement Obligations
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations," an interpretation of FASB No. 143. FIN 47 clarifies
that the term conditional asset retirement obligation as used in FASB No. 143
refers to a legal obligation to perform an asset retirement activity in which
the timing or method of settlement are conditional on a future event that may or
may not be within the control of the entity. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. Although a liability exists for the removal
of poles and asbestos, sufficient information is not available currently to
estimate our liability, as the range of time over which we may settle theses
obligations is unknown or cannot be reasonably estimated. The adoption of FIN 47
during the fourth quarter of 2005 had no impact on our financial position,
results of operations or cash flows.
Partnerships
In June 2005, the FASB issued EITF No. 04-5, "Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights," which provides
new guidance on how general partners in a limited partnership should determine
whether they control a limited partnership. EITF No. 04-5 is effective for
fiscal periods beginning after December 15, 2005.
The Company applied the provisions of EITF No. 04-5 and consolidated the Mohave
Cellular Limited Partnership (Mohave) effective January 1, 2006. As permitted,
we elected to apply EITF No. 04-5 retrospectively from the date of adoption.
Revenues, depreciation and operating income for Mohave were $3.7 million, $0.5
million and $0.7 million, respectively, for the three months ended March 31,
2005 and $4.4 million, $0.5 million and $1.2 million, respectively, for the
three months ended March 31, 2006.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R requires that stock-based employee
compensation be recorded as a charge to earnings. In April 2005, the Securities
and Exchange Commission required adoption of SFAS No. 123R for annual periods
beginning after June 15, 2005. Accordingly, we have adopted SFAS 123R commencing
January 1, 2006 using a modified prospective application, as permitted by SFAS
No. 123R. Accordingly, prior period amounts have not been restated. Under this
application, we are required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS No. 123R, we applied Accounting Principles Board
Opinions (APB) No. 25 and related interpretations to account for our stock plans
resulting in the use of the intrinsic value to value the stock. Under APB 25, we
were not required to recognize compensation expense for the cost of stock
options. In accordance with the adoption of SFAS 123R, we recorded stock-based
compensation expense for the cost of stock options, restricted shares and stock
units issued under our stock plans (together, "Stock-Based Awards"). Stock-based
compensation expense for the first quarter of 2006 was $2.7 million ($1.7
million after tax or $0.01 per basic and diluted share of common stock).
25
(b) Results of Operations
---------------------
REVENUE
Revenue is generated primarily through the provision of local, network access,
long distance, and data and internet services. Such services are provided under
either a monthly recurring fee or based on usage at a tariffed rate and is not
dependent upon significant judgments by management, with the exception of a
determination of a provision for uncollectible amounts.
Consolidated revenue for the three months ended March 31, 2006 increased $4.5
million, or 1%, as compared with the prior year period.
In February 2006, we entered into a definitive agreement to sell ELI to Integra.
As a result, we have classified ELI's results of operations as discontinued
operations in our consolidated statements of operations and restated prior
periods.
On March 15, 2005, we completed the sale of our conferencing service business,
CCUSA. As a result of the sale, we have classified CCUSA's results of operations
as discontinued operations in our consolidated statements of operations and
restated prior periods.
Change in the number of our access lines is important to our revenue and
profitability. We have lost access lines primarily because of competition,
changing consumer behavior, economic conditions, changing technology and by some
customers disconnecting second lines when they add high-speed internet or cable
modem service. We lost approximately 26,300 access lines during the three months
ended March 31, 2006 but added approximately 19,400 high-speed internet
subscribers during this same period. The loss of lines during the first three
months of 2006 was primarily among residential customers. The non-residential
line losses were principally in Rochester, New York, while the residential
losses were throughout our markets. We expect to continue to lose access lines
but to increase high-speed internet subscribers during 2006. A continued loss of
access lines, combined with increased competition and the other factors
discussed in MD&A, may cause our revenues, profitability and cash flows to
decrease in 2006.
TELECOMMUNICATIONS REVENUE
($ in thousands) For the three months ended March 31,
-------------------------------------------------------
2006 2005 $ Change % Change
-------------- ------------- --------------- ----------
Access services $ 160,968 $ 156,824 $ 4,144 3%
Local services 203,566 209,957 (6,391) -3%
Long distance services 39,158 43,750 (4,592) -10%
Data and internet services 50,358 38,609 11,749 30%
Directory services 28,797 27,963 834 3%
Other 24,014 25,231 (1,217) -5%
-------------- ------------- ---------------
$ 506,861 $ 502,334 $ 4,527 1%
============== ============= ===============
Access Services
Access services revenue for the three months ended March 31, 2006 increased $4.1
million or 3%, as compared with the prior year period. Special access revenue
increased $3.6 million primarily due to growth in high-capacity circuits. Access
service revenue includes subsidy payments we receive from federal and state
agencies. Subsidy revenue increased $2.5 million primarily due to significantly
higher recovery of costs. Switched access revenue decreased $2.4 million, as
compared with the prior year period, primarily due to a decline in minutes of
use.
Increases in the number of competitive communications companies (including
wireless companies) receiving federal subsidies may lead to further increases in
the national average cost per loop (NACPL), thereby resulting in decreases in
our subsidy revenue in the future. The FCC and state regulators are currently
considering a number of proposals for changing the manner in which eligibility
for federal subsidies is determined as well as the amounts of such subsidies.
The FCC is also reviewing the mechanism by which subsidies are funded. We cannot
predict when or how these matters will be decided nor the effect on our subsidy
revenues. Future reductions in our subsidy and access revenues are not expected
to be accompanied by proportional decreases in our costs, so any further
reductions in those revenues will directly affect our profitability and cash
flows.
26
Local Services
Local services revenue for the three months ended March 31, 2006 decreased $6.4
million or 3% as compared with the prior year period. Local revenue decreased
$7.9 million primarily due to continued losses of access lines. Enhanced
services revenue increased $1.5 million, as compared with the prior year period,
primarily due to sales of additional feature packages. Economic conditions or
increasing competition could make it more difficult to sell our packages and
bundles and cause us to lower our prices for those products and services, which
would adversely affect our revenues, profitability and cash flow.
Long Distance Services
Long distance services revenue for the three months ended March 31, 2006
decreased $4.6 million or 10%, as compared with the prior period. We have
actively marketed packages of long distance minutes particularly with our
bundled service offerings. The sale of packaged minutes has resulted in an
increase in minutes used by our long distance customers and has had the effect
of lowering our overall average rate per minute billed. Our long distance
minutes of use increased slightly during the first quarter of 2006 compared to
the first quarter of 2005. Our long distance revenues may continue to decrease
in the future due to lower rates and/or minutes of use. Competing services such
as wireless, VOIP, and cable telephony are resulting in a loss of customers,
minutes of use and further declines in the rates we charge our customers. We
expect these factors will continue to adversely affect our long distance
revenues during the remainder of 2006.
Data and Internet Services
Data and internet services revenue for the three months ended March 31, 2006
increased $11.7 million, or 30%, as compared with the prior year primarily due
to growth in data and high-speed internet services.
COST OF SERVICES
($ in thousands) For the three months ended March 31,
------------------------------------------------------
2006 2005 $ Change % Change
-------------- ------------- --------------- ---------
Network access $ 40,218 $ 39,722 $ 496 1%
As we continue to increase our sales of data products such as high-speed
internet and expand the availability of our unlimited long distance calling
plans, our network access expense is likely to increase.
OTHER OPERATING EXPENSES
($ in thousands) For the three months ended March 31,
-------------------------------------------------------
2006 2005 $ Change % Change
-------------- ------------- --------------- ----------
Operating expenses $ 138,246 $ 137,062 $ 1,184 1%
Taxes other than income taxes 25,835 26,432 (597) -2%
Sales and marketing 23,220 20,543 2,677 13%
-------------- ------------- ---------------
$ 187,301 $ 184,037 $ 3,264 2%
============== ============= ===============
Operating expenses for the three months ended March 31, 2006 increased $1.2
million, or 1%, as compared with the prior year period primarily due to $3.7
million of severance payments associated with a voluntary early retirement
program offered to certain employees during the first quarter of 2006. The
program resulted in a reduction of 62 employees. We expect to realize annualized
cost savings of approximately $3.9 million from this headcount reduction. We
routinely review our operations, personnel and facilities to achieve greater
efficiencies. These reviews may result in additional reductions in personnel and
further increases in severance costs.
Included in operating expenses is stock compensation expense. Stock compensation
expense was $2.7 million and $2.3 million for the first three months of 2006 and
2005, respectively. In 2006, we began expensing the cost of the unvested portion
of outstanding stock options pursuant to SFAS No. 123R. We expect to recognize
approximately $2.2 million of incremental stock compensation expense for the
year ended December 31, 2006 assuming no modifications and that actual
forfeitures equal estimated forfeitures.
Included in operating expenses is pension and other postretirement benefit
expenses. In future periods, if the value of our pension assets decline and/or
projected pension and/or postretirement benefit costs increase, we may have
increased pension and/or postretirement expenses. Based on current assumptions
and plan asset values, we estimate that our pension and other postretirement
expenses will decrease from $19.0 million in 2005 to approximately $15.0 million
to $18.0 million in 2006 and that no contribution will be required to be made by
us to the pension plan in 2006.
27
Sales and marketing expenses for the three months ended March 31, 2006 increased
$2.7 million, or 13%, as compared with the prior year period primarily due to
increased marketing and advertising in an increasingly competitive environment
and the launch of new products. As our markets become more competitive and we
launch new products, we expect that our marketing costs will increase. We hope
to shift spending from other expense categories to compensate for sales and
marketing expense increases.
DEPRECIATION AND AMORTIZATION EXPENSE
($ in thousands) For the three months ended March 31,
-------------------------------------------------------
2006 2005 $ Change % Change
-------------- ------------- --------------- ----------
Depreciation expense $ 90,409 $ 102,499 $ (12,090) -12%
Amortization expense 31,595 31,595 - 0%
-------------- ------------- ---------------
$ 122,004 $ 134,094 $ (12,090) -9%
============== ============= ===============
Depreciation expense for the three months ended March 31, 2006 decreased $12.1
million, or 12%, as compared with the prior year period due to a declining asset
base and changes in the remaining useful lives of certain assets. Effective with
the completion of an independent study of the estimated useful lives of our
plant assets, we adopted new lives beginning October 1, 2005. Based on the study
and our planned capital expenditures, we expect that our depreciation expense
will decline in 2006 to approximately $350.0 million or by 11% compared to 2005.
The decrease is due to a declining asset base and the result of extending the
remaining useful lives of our copper facilities from approximately 16 years to a
range of 26 to 30 years. The decrease was partially offset by the shortening of
lives for our switching software assets all in accordance with the independent
study.
INVESTMENT AND OTHER INCOME (LOSS), NET / INTEREST EXPENSE /
INCOME TAX EXPENSE
($ in thousands) For the three months ended March 31,
-------------------------------------------------------
2006 2005 $ Change % Change
-------------- ------------- --------------- ----------
Investment and
other income (loss), net $ (1,351) $ 3,968 $ (5,319) -134%
Interest expense $ 85,393 $ 83,725 $ 1,668 2%
Income tax expense $ 26,607 $ 25,216 $ 1,391 6%
Investment and other income, net for the three months ended March 31, 2006
decreased $5.3 million as compared with the prior year period primarily due to a
$2.4 million loss we incurred on the exchange of debt during the first quarter
of 2006.
Interest expense for the three months ended March 31, 2006 increased $1.7
million, or 2%, as compared with the prior year period. Higher short term
interest rates have caused the amount we pay under our swap agreements ($550.0
million in principal amount is swapped to floating rate at March 31, 2006) to
increase and such increase accounts for all of the increase in interest expense.
Our composite average borrowing rate (including the effect of our swap
agreements) for the three months ended March 31, 2006 as compared with the prior
year period was 23 basis points higher, increasing from 7.84% to 8.07%.
Income taxes for the three months ended March 31, 2006 increased $1.4 million,
or 6%, as compared with the prior year period primarily due to changes in
taxable income. The effective tax rate for the first quarter of 2006 was 37.7%
as compared with 39.0% for the first quarter of 2005.
28
DISCONTINUED OPERATIONS
($ in thousands) For the three months ended March 31,
-------------------------------------------------------
2006 2005 $ Change % Change
-------------- ------------- --------------- ----------
Revenue $ 42,494 $ 42,587 $ (93) 0%
Operating income $ 10,458 $ 2,865 $ 7,593 265%
Income taxes $ 3,962 $ 906 $ 3,056 337%
Net income $ 6,496 $ 1,959 $ 4,537 232%
In February 2006, we entered into a definitive agreement to sell ELI, our CLEC
business, to Integra Telecom Holdings, Inc. (Integra), for $247.0 million,
including $243.0 million in cash plus the assumption of approximately $4.0
million in capital lease obligations, subject to customary adjustments under the
terms of the agreement. This transaction is expected to close during the third
quarter of 2006 and is subject to regulatory and other customary approvals and
conditions, as well as the funding of Integra's fully committed financing. We
expect to recognize a pre-tax gain on the sale of ELI of approximately $115.0
million to $120.0 million.
On March 15, 2005, we completed the sale of CCUSA for $43.6 million in cash,
subject to adjustments under the terms of the agreement. The pre-tax gain on the
sale of CCUSA was $14.1 million. Our after-tax gain was $1.2 million. The book
income taxes recorded upon sale are primarily attributable to a low tax basis in
the assets sold. Revenue, operating income, income taxes and net income of CCUSA
were $4.6 million, $1.5 million, $0.5 million and $1.0 million for the three
months ended March 31, 2005, respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Disclosure of primary market risks and how they are managed
We are exposed to market risk in the normal course of our business operations
due to ongoing investing and funding activities. Market risk refers to the
potential change in fair value of a financial instrument as a result of
fluctuations in interest rates and equity and commodity prices. We do not hold
or issue derivative instruments, derivative commodity instruments or other
financial instruments for trading purposes. As a result, we do not undertake any
specific actions to cover our exposure to market risks and we are not party to
any market risk management agreements other than in the normal course of
business or to hedge long-term interest rate risk. Our primary market risk
exposures are interest rate risk and equity and commodity price risk as follows:
Interest Rate Exposure
Our exposure to market risk for changes in interest rates relates primarily to
the interest-bearing portion of our investment portfolio and interest on our
long-term debt and capital lease obligations. The long term debt and capital
lease obligations include various instruments with various maturities and
weighted average interest rates.
Our objectives in managing our interest rate risk are to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve these objectives, a majority of our borrowings have
fixed interest rates. Consequently, we have limited material future earnings or
cash flow exposures from changes in interest rates on our long-term debt and
capital lease obligations. A hypothetical 10% adverse change in interest rates
would increase the amount that we pay on our variable obligations and could
result in fluctuations in the fair value of our fixed rate obligations. Based
upon our overall interest rate exposure at March 31, 2006, a near-term change in
interest rates would not materially affect our consolidated financial position,
results of operations or cash flows.
In order to manage our interest rate risk exposure, we have entered into
interest rate swap agreements. Under the terms of the agreements, we make
semi-annual, floating interest rate interest payments based on six month LIBOR
and receive a fixed rate on the notional amount.
Sensitivity analysis of interest rate exposure
At March 31, 2006, the fair value of our long-term debt was estimated to be
approximately $4.1 billion, based on our overall weighted average rate of 8.09%
and our overall weighted maturity of 11 years. There has been no material change
in the weighted average maturity applicable to our obligations since December
31, 2005.
29
The overall weighted average interest rate increased approximately 4 basis
points during the first quarter of 2006. A hypothetical increase of 81 basis
points (10% of our overall weighted average borrowing rate) would result in an
approximate $208.8 million decrease in the fair value of our fixed rate
obligations.
Equity Price Exposure
Our exposure to market risks for changes in equity prices as of March 31, 2006
is limited and relates to our investment in Adelphia Communications Corporation
(Adelphia), and our pension assets.
As of March 31, 2006 and December 31, 2005, we owned 3,059,000 shares of
Adelphia common stock. The stock price of Adelphia was $0.04 at March 31, 2006
and December 31, 2005.
Sensitivity analysis of equity price exposure
At March 31, 2006, the fair value of the equity portion of our investment
portfolio was estimated to be $0.1 million. A hypothetical 10% decrease in
quoted market prices would result in an approximate $13,000 decrease in the fair
value of the equity portion of our investment portfolio.
Disclosure of limitations of sensitivity analysis
Certain shortcomings are inherent in the method of analysis presented in the
computation of fair value of financial instruments. Actual values may differ
from those presented should market conditions vary from assumptions used in the
calculation of the fair value. This analysis incorporates only those exposures
that exist as of March 31, 2006. It does not consider those exposures or
positions, which could arise after that date. As a result, our ultimate exposure
with respect to our market risks will depend on the exposures that arise during
the period and the fluctuation of interest rates and quoted market prices.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures
We carried out an evaluation, under the supervision and with the participation
of our management, regarding the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon this evaluation, our
principal executive officer and principal financial officer concluded, as of the
end of the period covered by this report, March 31, 2006, that our disclosure
controls and procedures are effective.
(b) Changes in internal control over financial reporting
We reviewed our internal control over financial reporting at March 31, 2006.
There have been no changes in our internal control over financial reporting
identified in an evaluation thereof that occurred during the first fiscal
quarter of 2006, that materially affected or is reasonably likely to materially
affect our internal control over financial reporting.
30
PART II. OTHER INFORMATION
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
There have been no material changes to our legal proceedings from the
information provided in Item 3. Legal Proceedings included in our Annual Report
on Form 10-K for the year ended December 31, 2005.
We are party to other legal proceedings arising in the normal course of our
business. The outcome of individual matters is not predictable. However, we
believe that the ultimate resolution of all such matters, after considering
insurance coverage, will not have a material adverse effect on our financial
position, results of operations, or our cash flows.
Item 1A. Risk Factors
------------
There have been no material changes to our risk factors from the information
provided in Item 1A. Risk Factors included in our Annual Report on Form 10-K for
the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds, Issuer
---------------------------------------------------------------------
Purchases of Equity Securities
-------------------------------
There were no unregistered sales of equity securities during the quarter ended
March 31, 2006.
(d) Maximum
Approximate
(c) Total Number Dollar Value of
of Shares Shares that
(a) Total Purchased as Part May Yet Be
Number of (b) Average of Publicly Purchased
Shares Price Paid Per Announced Plans Under the Plans
Period Purchased Share or Programs or Programs
------------------------------------------------------------------------------------------------------
January 1, 2006 to January 31, 2006
Share Repurchase Program (1) - $ - - $ -
Employee Transactions (2) 8,499 $ 12.21 - N/A
February 1, 2006 to February 28, 2006
Share Repurchase Program (1) - $ - - $300,000,000
Employee Transactions (2) 13,318 $ 12.83 N/A N/A
March 1, 2006 to March 31, 2006
Share Repurchase Program (1) 2,802,900 $ 13.53 2,802,900 $262,100,000
Employee Transactions (2) 152,001 $ 13.63 N/A N/A
Totals January 1, 2006 to March 31, 2006
Share Repurchase Program (1) 2,802,900 $ 13.53 2,802,900 $262,100,000
Employee Transactions (2) 173,818 $ 13.50 N/A N/A
(1) In February 2006, our Board of Directors authorized us to repurchase up to
$300.0 million of our common stock, in public or private transactions over
the following twelve-month period. This share repurchase program commenced
on March 6, 2006.
(2) Includes restricted shares withheld (under the terms of grants under
employee stock compensation plans) to offset minimum tax withholding
obligations that occur upon the vesting of restricted shares. The Company's
stock compensation plans provide that the value of shares withheld shall be
the average of the high and low price of the Company's common stock on the
date the relevant transaction occurs.
31
Item 6. Exhibits
--------
a) Exhibits:
10.1 Offer of Employment Letter between Citizens Communications
Company and Donald R. Shassian, effective March 7, 2006.
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
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
Senior Vice President and
Chief Accounting Officer
Date: May 5, 2006
33