UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 29, 2000
CenturyTel, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 1-7784 72-0651161
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (318) 388-9000
ITEM 2. Acquisition or Disposition of Assets
On September 29, 2000, CenturyTel, Inc. ("CenturyTel" or the "Company")
consummated the final two of its four acquisitions of assets from affiliates of
Verizon Communications, Inc. (successor to GTE Corporation). Collectively under
these four acquisitions, the Company acquired over 490,000 access lines for
approximately $1.5 billion in cash. The Company's Current Report on Form 8-K
dated July 31, 2000 describes the first two Verizon acquisitions.
Under the September 29, 2000 transactions:
o The Company purchased approximately 70,500 telephone access lines and
related local exchange assets comprising 42 exchanges throughout
Wisconsin for approximately $194 million in cash.
o Telephone USA of Wisconsin, LLC purchased approximately 62,900
telephone access lines and related local exchange assets comprising 35
exchanges throughout Wisconsin for approximately $170 million in cash.
The Company owns 89% of Telephone USA, which was organized to acquire
and own these Wisconsin properties. At closing, the Company made an
equity investment in Telephone USA of approximately $37.8 million and
financed substantially all of the remainder of the purchase price.
To finance these September 29 acquisitions on a short-term basis,
the Company borrowed $357 million on a floating-rate basis under its new
$1.5 billion credit facility with Bank of America, N.A. and Citibank, N.A.,
as lenders, and Banc of America Securities LLC and Salomon Smith Barney Inc.,
as arrangers.
The purchase price payable in connection with these acquisitions is subject
to various post-closing adjustments to reflect, among other things, the
actual amount of accounts receivable acquired by us. We do not expect the
aggregate effect of these adjustments to be material.
In addition to the continued provision of traditional local exchange
telephone services, the Company intends to provide long distance, Internet
access and other advanced technology services in certain of the acquired
Wisconsin markets. The Company currently offers long distance and Internet
access service in certain of the acquired Wisconsin markets, and plans to offer
high-speed Digital Subscriber Line Internet access service in selected markets.
For additional information regarding all four Verizon acquisitions, please
see the historical financial statements, the pro forma financial information
and the other materials filed herewith under Item 7 below.
Item 5. Other Events.
Third Quarter 2000 Operating Results
On September 29, 2000, the Company announced that it expects third
quarter 2000 earnings per share, excluding one-time items, to equal or exceed
FirstCall consensus estimates of $0.42 per share and that revenues will likely
range from $470 million to $480 million for the quarter. For additional
information, please see Exhibit 99.1 filed herewith under Item 7 below.
Debt Ratings
On September 19, 2000, Moody's Investors Service lowered CenturyTel's long-
term debt rating to Baa2 (with a stable outlook) from Baa1 and on September 20,
2000, Standard & Poor's affirmed its rating of CenturyTel's long-term debt of
BBB+ (with a negative outlook).
* * * * * * * * * *
Item 7. Financial Statements and Exhibits
(a) Financial statements of properties acquired
1. Report of Independent Public Accountants - GTE Arkansas
Operations.
2. Statements of Selected Assets, Liabilities and Parent Funding as
of June 30, 2000, and December 31, 1999 - GTE Arkansas
Operations.
3. Statements of Income for the six months ended June 30, 2000, and
for the year ended December 31, 1999 - GTE Arkansas Operations.
4. Statements of Cash Flows for the six months ended June 30, 2000,
and for the year ended December 31, 1999 - GTE Arkansas
Operations.
5. Statement of Parent Funding for the year ended December 31, 1999
- GTE Arkansas Operations.
6. Notes to Special Purpose Financial Statements - GTE Arkansas
Operations.
7. Report of Independent Public Accountants - GTE Missouri
Operations.
8. Statements of Selected Assets, Liabilities and Parent Funding as
of June 30, 2000, and December 31, 1999 - GTE Missouri
Operations.
9. Statements of Income for the six months ended June 30, 2000, and
for the year ended December 31, 1999 - GTE Missouri
Operations.
10. Statements of Cash Flows for the six months ended June 30, 2000,
and for the year ended December 31, 1999 - GTE Missouri
Operations.
11. Statement of Parent Funding for the year ended December 31, 1999
- GTE Missouri Operations.
12. Notes to Special Purpose Financial Statements - GTE Missouri
Operations.
13. Report of Independent Public Accountants - Verizon Wisconsin I
Operations.
14. Statements of Selected Assets, Liabilities and Parent Funding as
of June 30, 2000, and December 31, 1999 - Verizon Wisconsin I
Operations.
15. Statements of Income for the six months ended June 30, 2000, and
for the year ended December 31, 1999 - Verizon Wisconsin I
Operations.
16. Statements of Cash Flows for the six months ended June 30, 2000,
and for the year ended December 31, 1999 - Verizon Wisconsin I
Operations.
17. Statement of Parent Funding for the year ended December 31, 1999
- Verizon Wisconsin I Operations.
18. Notes to Special Purpose Financial Statements - Verizon Wisconsin
I Operations.
19. Report of Independent Public Accountants - Verizon Wisconsin II
Operations.
20. Statements of Selected Assets, Liabilities and Parent Funding as
of June 30, 2000, and December 31, 1999 - Verizon Wisconsin II
Operations.
21. Statements of Income for the six months ended June 30, 2000, and
for the year ended December 31, 1999 - Verizon Wisconsin II
Operations.
22. Statements of Cash Flows for the six months ended June 30, 2000,
and for the year ended December 31, 1999 - Verizon Wisconsin II
Operations.
23. Statement of Parent Funding for the year ended December 31, 1999
- Verizon Wisconsin II Operations.
24. Notes to Special Purpose Financial Statements - Verizon Wisconsin
II Operations.
(b) Unaudited Pro Forma Consolidated Condensed Financial Information
1. Introduction.
2. Pro Forma Consolidated Condensed Balance Sheet as of
June 30, 2000.
3. Pro Forma Consolidated Condensed Statement of Income
for the six months ended June 30, 2000.
4. Pro Forma Consolidated Condensed Statement of Income
for the year ended December 31, 1999.
5. Notes to Unaudited Pro Forma Consolidated Condensed Financial
Information.
(c) Exhibits
2.1 Amended and Restated Asset Purchase Agreement by and among GTE
Arkansas Incorporated, GTE Midwest Incorporated, GTE Southwest
Incorporated and CenturyTel, Inc. dated as of June 29, 1999
(incorporated by reference to Exhibit 99 to our Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999).
2.2 Asset Purchase Agreement by and between GTE Midwest Incorporated
and Spectra Communications Group, LLC dated as of July 8, 1999
(incorporated by reference to Exhibit 2.2 of our Current Report
on Form 8-K dated July 31, 2000).
2.3 Asset Purchase Agreement by and between GTE North Incorporated
and Telephone USA of Wisconsin, LLC dated as of August 19, 1999.
2.4 Asset Purchase Agreement by and between GTE North Incorporated
and CenturyTel, Inc. dated as of October 11, 1999.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen LLP.
99.1 Press release announcing (i) certain third quarter 2000 results
and (ii) closing of Verizon properties in Wisconsin.
GTE Arkansas Operations
Special Purpose Financial Statements
As of June 30, 2000, and December 31, 1999
Together with Report of Independent Public Accountants
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
CenturyTel Incorporated,
GTE Arkansas Incorporated,
GTE Midwest Incorporated,
and GTE Southwest Incorporated:
We have audited the accompanying special purpose financial statements of
selected assets, liabilities, and parent funding of GTE Arkansas Operations (the
"Company") as of December 31, 1999, and the related statements of income, parent
funding and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the special purpose financial statements referred to above
present fairly, in all material respects, the selected assets, liabilities, and
parent funding of the Company as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Dallas, Texas,
September 13, 2000
The accompanying notes are an integral part of these special purpose financial
statements.
GTE Arkansas Operations
(As Described in Note 1)
Statements of Selected Assets, Liabilities, and Parent Funding
As of June 30, 2000, and December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(unaudited) (audited)
<S> <C> <C>
SELECTED ASSETS
---------------
CURRENT ASSETS:
Receivables, less allowance of $6,483
and $4,608 $ 23,762 $ 31,014
Inventories and supplies 583 592
Prepaid insurance and other 360 1,714
--------------------------------------------------------------------------------
Total current assets 24,705 33,320
--------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT, net 195,531 202,862
EMPLOYEE BENEFIT PLANS 19,428 15,529
OTHER ASSETS 192 224
--------------------------------------------------------------------------------
Total assets $ 239,856 $ 251,935
================================================================================
SELECTED LIABILITIES AND PARENT FUNDING
---------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 7,364 $ 4,960
Advance billings and customer deposits 3,982 3,887
Accrued payroll costs 2,276 2,108
Other 1,172 557
--------------------------------------------------------------------------------
Total current liabilities 14,794 11,512
--------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS 7,840 7,828
OTHER LIABILITIES 78 91
--------------------------------------------------------------------------------
Total liabilities 22,712 19,431
--------------------------------------------------------------------------------
PARENT FUNDING 217,144 232,504
--------------------------------------------------------------------------------
Total liabilities and parent funding $ 239,856 $ 251,935
================================================================================
</TABLE>
GTE Arkansas Operations
(As Described in Note 1)
Statements of Income
For the Six Months Ended June 30, 2000,
And for the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(unaudited) (audited)
<S> <C> <C>
REVENUES AND SALES:
Local services $ 28,878 $ 55,267
Network access services 35,446 73,249
Toll services 9,633 19,762
Other services and sales 9,063 20,541
--------------------------------------------------------------------------------
Total revenues and sales 83,020 168,819
--------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of services and sales 35,691 70,776
Selling, general, and administrative 9,737 24,819
Depreciation and amortization 19,642 38,078
--------------------------------------------------------------------------------
Total operating costs and expenses 65,070 133,673
--------------------------------------------------------------------------------
OPERATING INCOME 17,950 35,146
INTEREST EXPENSE, net 3,817 8,292
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14,133 26,854
INCOME TAXES 5,491 10,427
--------------------------------------------------------------------------------
NET INCOME $ 8,642 $ 16,427
================================================================================
</TABLE>
GTE Arkansas Operations
(As Described in Note 1)
Statements of Cash Flows
For the Six Months Ended June 30, 2000,
And for the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(unaudited) (audited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,642 $ 16,427
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation 19,003 37,320
Employee pension plans (3,887) (5,599)
Provision for uncollectible accounts 2,716 6,946
Change in current assets and current
liabilities-
Receivables 4,536 (7,164)
Other current assets 1,363 1,536
Other current liabilities 3,282 (13,956)
Other, net 18 (3,731)
--------------------------------------------------------------------------------
Net cash provided by operating activities 35,673 31,779
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,671) (24,541)
--------------------------------------------------------------------------------
Net cash used in investing activities (11,671) (24,541)
--------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net transfers to GTE Corporation (24,002) (7,238)
--------------------------------------------------------------------------------
Net cash used in financing activities (24,002) (7,238)
--------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS:
Beginning of year - -
--------------------------------------------------------------------------------
End of year $ - $ -
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
GTE Arkansas Operations
(As Described in Note 1)
Statement of Parent Funding
For the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
<S> <C>
BALANCE, December 31, 1998 $ 223,315
Net income 16,427
Net transfers to GTE Corporation (7,238)
--------------------------------------------------------------------------------
BALANCE, December 31, 1999 $ 232,504
================================================================================
</TABLE>
GTE Arkansas Operations
(As Described in Note 1)
Notes to Special Purpose Financial Statements
1. Description of Business:
The selected local telephone exchanges included in these special purpose
financial statements (the "Exchanges") serve approximately 231,000 switched
access lines in the state of Arkansas. The Exchanges represent 100% of the
assets of GTE Arkansas Incorporated ("GTE Arkansas") and a small percentage of
the assets of GTE Midwest Incorporated ("GTE Midwest") and GTE Southwest
Incorporated ("GTE Southwest"). GTE Arkansas, GTE Midwest, and GTE Southwest
(collectively, the "Company") are wholly owned subsidiaries of GTE Corporation
(GTE), which is a wholly owned subsidiary of Bell Atlantic Corporation ("Bell
Atlantic"), d/b/a Verizon Communications ("Verizon") (see Note 11). Verizon
provides a wide variety of communications services ranging from local telephone
service for the home and office to highly complex voice and data services for
various industries.
On June 29, 1999, the Company entered into a purchase agreement with CenturyTel
Incorporated ("CenturyTel") to sell approximately 231,000 switched access lines
in the state of Arkansas to CenturyTel. The sale was completed on July 31, 2000.
2. Basis of Presentation:
The accompanying special purpose financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
using exchange specific information where available (e.g., most revenue and
property, plant, and equipment (PP&E) related accounts) and allocations where
data is not maintained on an exchange specific basis within the company's books
and records (e.g., most operating expenses, assets other than PP&E, liabilities,
and capital accounts). Because of the significant amount of allocations and
estimates used to prepare these special purpose financial statements, they may
not reflect the financial position and results of operations of the Exchanges
after the acquisition by CenturyTel.
The accompanying special purpose financial statements include only those assets,
liabilities, and related operations of the Exchanges as historically incurred by
the Company and exclude all other assets, liabilities, and related operations of
Verizon and its subsidiaries, specifically cash, accrued interest, and
tax-related balance sheet accounts. These special purpose financial statements
also include expenses related to employees who support the Exchanges, some of
which are expected to remain employees of the Company.
Receivables related to end-user billings were identified by exchange using
billing system data. Customer Advances and Deposits were allocated to the
Exchanges based on total revenue. Receivables related to carrier and other
miscellaneous billings were allocated to the Exchanges in proportion to carrier
revenues.
Accounts payable were allocated based on operating expenses and capital
expenditures. Accrued payroll costs were allocated based on employee head count.
Other current liabilities and other liabilities were allocated based on line
count.
The Exchanges' operating expenses include both amounts incurred within its
operating territories that relate directly to its exchanges (the "Direct
Expenses") and amounts incurred in centralized Verizon service centers that
support multiple Verizon companies (the "Indirect Expenses"). The Direct
Expenses correspond roughly with locally performed functions which will transfer
to a buyer of the Exchanges. The Indirect Expenses correspond to substantial
back-office, support, and overhead functions which will not transfer to the
buyer, but that the buyer will need to replace in some form in order to operate
the Exchanges. The Indirect Expenses have been allocated to the Company, and
further to specific exchanges within the Company (including the Exchanges),
based on estimates of usage, or benefits received from such services. The level
of allocated Indirect Expenses may not be representative of a buyer's ongoing
expenses for these functions. Depreciation and amortization were calculated by
exchange using property, plant, and equipment data.
3. Summary of Significant Accounting Policies and Other Disclosures:
The notes which follow contain limited disclosure data where it can be
reasonably estimated for the Exchanges.
Revenue Recognition
Revenues are recognized when earned. This is generally based on usage of
local-exchange networks or facilities. For other products and services, revenues
are generally recognized when services are rendered or products are delivered to
customers.
Verizon maintains its accounting records for revenues at the Federal
Communications Commission (FCC) study area levels. The Exchanges being sold
represent all operations in GTE's Arkansas study areas. Certain revenues that
relate to intra-company activity or activity to be retained by Verizon are not
included in the accompanying special purpose financial statements.
Depreciation and Amortization
Assets are depreciated using the remaining life methodology and straight-line
depreciation rates. This method depreciates the remaining net investment in
telephone plant, less anticipated net salvage value, over remaining economic
asset lives. This method requires the periodic review and revision of
depreciation rates.
The economic asset lives used are as follows:
Average lives (in years)
------------------------
Fiber-optic cable 20
Copper wire 15
Switching equipment 10
Circuit equipment 8
When depreciable telephone plant is retired in the normal course of business,
the amount of such plant is deducted from the respective plant and accumulated
depreciation accounts. Gains or losses on dispositions are amortized with the
remaining net investment in telephone plant.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses associated with employee separations are recognized when the pension
obligations are settled and the gain or loss is determinable.
Valuation of Assets
The impairment of tangible or intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
the Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination
of impairment, if any, is made based on estimated future cash flows, salvage
value, or expected net sales proceeds depending on the circumstances. Asset
impairment losses, and any subsequent adjustments to such losses as initially
recorded, as well as net gains or losses on sales of assets are recorded as a
component of operating income.
Income Taxes
The Company's results are included in Verizon's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with Verizon and
remits tax payments to Verizon based on its tax liability on a separate company
basis.
The Exchanges are not a taxable entity. The Exchanges' operating results are
included with the Company for income tax purposes. Although the Exchanges
contribute significant plant-related temporary differences (including investment
tax credits) to the Company's deferred tax balances, the Company does not
allocate income tax expense, income tax payables, or deferred income taxes to
the Exchanges. As the buyer will most likely have a different tax scenario, no
deferred tax assets or liabilities are presented within these special purpose
financial statements. The provision for income taxes included in the
accompanying special purpose financial statements for 1999 was calculated based
on the income of the Exchanges and the Company's effective tax rate adjusted for
permanent differences not attributable to the Exchanges.
Inventories and Supplies
Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.
Software
Software costs are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which became effective in January 1999. The Company capitalizes
costs associated with externally acquired software (including right-to-use fees)
for internal use. Capitalized software is generally amortized on a straight-line
basis over its useful life, not to exceed five years for non-network software or
three years for network software.
Comprehensive Income
The Company had no comprehensive income components for the year ended December
31, 1999; therefore, comprehensive income is the same as net income for each of
the periods.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, as amended, which is effective January 1, 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides additional guidance on revenue recognition as
well as criteria for when revenue is generally realized and earned and also
requires the deferral of incremental direct selling costs. This bulletin
currently must be adopted by December 31, 2000, and will require the Company to
determine the effect of the accounting change as of January 1, 2000. The Company
is currently assessing the impact of SAB No. 101.
4. Employee Benefit Plans:
Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," certain disclosures including components of pension
credits, postretirement benefit costs and the funded status of the plans,
including the actuarial present value of accumulated plan benefits, accumulated
or projected benefit obligation and the fair value of plan assets have not been
presented because the structure of the Verizon plans does not permit the plans'
data to be readily disaggregated.
Pension Plans
The Company participates in noncontributory defined benefit pension plans
sponsored by Verizon covering substantially all employees. The benefits to be
paid under these plans are generally based on years of credited service and
average final earnings. Verizon's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The assets of the
plans consist primarily of corporate equities, government securities, and
corporate debt securities.
The significant weighted-average assumptions used by Verizon for the pension
measurements were as follows at December 31:
1999
------
Discount rate 8.00%
Rate of compensation increase 5.50%
Expected return on plan assets 9.00%
The Company's net periodic benefit credit was $106 million for 1999. The Verizon
plans are currently funded at levels significantly in excess of projected
benefit obligations. Included in the net periodic benefit credit for 1999 was a
net pension gain of $58.8 million, comprised of one-time costs for special
termination benefits provided under voluntary and involuntary separation
programs, curtailment losses, and settlement gains. These curtailment losses and
settlement gains are a result of the separation programs, as well as the
required settlement gain or loss recognition due to the fact that in 1999, the
Company's lump sum pension distributions surpassed the settlement threshold
equal to the sum of the service cost and interest cost components of net
periodic pension cost. Allocated on the basis of headcount, the Exchanges' net
periodic benefit credit, including non-recurring settlement gains, was
approximately $2.69 million for 1999 and $1.6 million (unaudited) for the six
months ended June 30, 2000.
Postretirement Benefits Other than Pensions
Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by Verizon. The
determination of benefit cost for postretirement health plans is generally based
on comprehensive hospital, medical, and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.
The weighted-average assumptions used by Verizon in the actuarial computations
for postretirement benefits were as follows at December 31:
1999
------
Discount rate 8.00%
Expected return on plan assets 8.00%
The Company's postretirement benefit cost was $44.3 million for 1999. Allocated
on the basis of headcount, the Exchanges' postretirement cost was approximately
$1.92 million for 1999.
Savings Plans
The Company sponsors employee savings plans under section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time employees. Under the
plans, the Company provides matching contributions in Verizon common stock based
on qualified employee contributions up to a certain predefined limit. Matching
contributions attributable to the Exchanges' employees were included in these
special purpose financial statements and may or may not correspond to the
matching benefits provided to the employees of the buyer.
5. Property, Plant, and Equipment:
The company maintains continuing property records which identify specific
property, plant, and equipment (PP&E) balances, depreciation reserves, and
annual capital expenditure amounts for the Exchanges. The balances in the
accompanying statements are based on these exchange specific amounts, and do not
include any allocations of common assets utilized in providing the centralized
services described in Note 2.
PP&E is summarized as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Land $ 957
Buildings 23,317
Plant and equipment 549,147
Other 19,943
-----------
Total 593,364
Less- Accumulated depreciation (390,502)
-----------
Total property, plant, and equipment, net $ 202,862
===========
</TABLE>
6. Parent Funding and Interest Expense:
For purposes of these statements, all funding requirements have been summarized
as "Parent Funding," without regard to whether the funding represents debt or
equity. No specific debt instruments can be directly associated with the
Exchanges, nor are separate equity accounts maintained. As such, interest
expense of the Company was allocated to the Exchanges based on the relative
percentage of the Exchanges gross property, plant, and equipment balance to the
gross property, plant and equipment balance for the Company.
7. Transactions with Affiliates:
Historically, extensive transactions have occurred between the Exchanges and
affiliate entities. These transactions have included construction and
maintenance services, data processing and management services, financing, and
directories agreements.
Verizon Supply (100% owned by Verizon) provides construction and maintenance
equipment, supplies, and electronic repair services to the Exchanges. Such
purchases and services are recorded at the lower of cost, including a return or
fair market value.
The Exchanges are billed for data processing services and equipment rentals, and
receive management, consulting, research and development, and pension management
services from other affiliated companies. The Exchanges' special purpose
financial statements also include allocated expenses resulting from the sharing
of certain executive, administrative, financial, accounting, marketing,
personnel, engineering, and other support services being performed at
consolidated work centers within Verizon. The amounts charged for these
affiliated transactions are based on proportional cost allocation methodologies.
GTE Funding Incorporated (an affiliate of the Company) provides short-term
financing and investment vehicles and cash management services. GTE Midwest and
GTE Southwest are contractually obligated to repay all amounts borrowed on its
behalf by GTE Funding Incorporated.
The Company has an agreement with Verizon Directories Corporation (Directories)
(100% owned by Verizon), whereby the Company provides its subscriber lists,
billing and collection, and other services to Directories. In addition, when
Directories sells Yellow Page directory advertising to customers within the
Company's franchise area, the Company records a portion of the sale as revenue.
Also, the Company is billed for certain printing and other costs associated with
telephone directories, including the cost of customer contact information pages
which are included in the Company's White Pages directories.
8. Regulatory and Competitive Matters:
The Company's intrastate business is regulated by the state regulatory
commission in Arkansas. The Company is also subject to regulation by the FCC for
its interstate business operations.
During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(the "Telecommunications Act"). Along with promoting competition in all segments
of the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.
Significant Customer
The largest volume of the Company's services are provided to AT&T Corp. ("AT&T")
and include amounts for access, billing, and collection. The Company's revenues
from services provided to AT&T were 10% of total revenues for 1999. These
concentrations may or may not correspond with the concentrations of the
Exchanges.
9. Commitments and Contingencies:
The Exchanges have noncancelable operating leases covering certain buildings,
office space, and equipment. The Exchanges' rental expense was $3.7 million in
1999. Minimum rental commitments under these noncancelable leases are
approximately $62,512, $16,411, $3,450, and $2,550 for the years 2000-2003,
respectively, and $10,300 in 2004 and thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions, and environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the results of operations or the financial position of the Company.
10. Segment Reporting:
The Exchanges do not have separate reportable segments of their own. The
Exchanges are part of GTE Arkansas, GTE Midwest, and GTE Southwest. These
entities are part of the Domestic Wireline segment of Verizon's National
Operations. The Domestic Wireline segment provides wireline communication
services within franchised areas. These services include local telephone service
and toll calls, as well as access services that enable long-distance carriers to
complete calls to or from locations outside of the Exchanges' operating areas.
This segment also provides complex voice and data services to businesses,
billing and collection, and operator assistance services to other
telecommunications companies and receives revenues in the form of a publication
right from an affiliate that publishes telephone directories in its operating
areas.
11. Bell Atlantic - GTE Merger:
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE become a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications.
GTE Missouri Operations
Special Purpose Financial Statements
As of June 30, 2000, and December 31, 1999
Together with Report of Independent Public Accountants
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Spectra Communications Group LLC
And GTE Midwest Incorporated:
We have audited the accompanying special purpose financial statements of
selected assets, liabilities and parent funding of GTE Missouri Operations (the
"Company") as of December 31, 1999, and the related statements of income, parent
funding and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the special purpose financial statements referred to above
present fairly, in all material respects, the selected assets, liabilities and
parent funding of the Company as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Dallas, Texas,
September 13, 2000
The accompanying notes are an integral part of these special purpose financial
statements.
GTE Missouri Operations
(As Described in Note 1)
Statements of Selected Assets, Liabilities and Parent Funding
As of June 30, 2000, and December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
SELECTED ASSETS
---------------
CURRENT ASSETS:
Receivables, less allowances of $1,407
and $1,261 $ 12,167 $ 16,938
Inventories and supplies 65 59
Prepaid benefits and other 205 1,028
--------------------------------------------------------------------------------
Total current assets 12,437 18,025
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 129,325 135,532
EMPLOYEE BENEFIT PLANS 5,304 3,984
OTHER ASSETS 207 268
--------------------------------------------------------------------------------
Total assets $ 147,273 $ 157,809
================================================================================
SELECTED LIABILITIES AND PARENT FUNDING
---------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,424 $ 6,493
Advance billings and customer deposits 1,583 1,509
Accrued payroll costs 682 729
Other 1,840 692
--------------------------------------------------------------------------------
Total current liabilities 6,529 9,423
--------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS 2,312 2,247
OTHER LIABILITIES 63 63
--------------------------------------------------------------------------------
Total liabilities 8,904 11,733
--------------------------------------------------------------------------------
PARENT FUNDING 138,369 146,076
--------------------------------------------------------------------------------
Total liabilities and parent funding $ 147,273 $ 157,809
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
GTE Missouri Operations
(As Described In Note 1)
Statements of Income
For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
REVENUES AND SALES:
Local services $ 9,279 $ 17,987
Network access services 28,091 51,717
Toll services 6,137 11,828
Other services and sales 3,279 7,334
--------------------------------------------------------------------------------
Total revenues and sales 46,786 88,866
--------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of services and sales 13,296 27,742
Selling, general and administrative 5,007 14,436
Depreciation and amortization 11,109 20,505
--------------------------------------------------------------------------------
Total operating costs and expenses 29,412 62,683
--------------------------------------------------------------------------------
OPERATING INCOME 17,374 26,183
INTEREST EXPENSE, net 1,812 4,236
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,562 21,947
INCOME TAXES 5,949 8,390
--------------------------------------------------------------------------------
NET INCOME $ 9,613 $ 13,557
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
GTE Missouri Operations
(As Described In Note 1)
Statements of Cash Flows
For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,613 $ 13,557
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation 10,734 19,956
Employee pension plans (1,255) (1,908)
Provision for uncollectible accounts 691 1,671
Change in current assets and current
liabilities-
Receivables 4,080 (9,223)
Other current assets 817 68
Other current liabilities (2,894) 4,212
Other, net 61 1,524
--------------------------------------------------------------------------------
Net cash provided by operating activities 21,847 29,857
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,527) (9,303)
--------------------------------------------------------------------------------
Net cash used in investing activities 4,527) (9,303)
--------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net transfers to GTE Corporation (17,320) (20,554)
--------------------------------------------------------------------------------
Net cash used in financing activities (17,320) (20,554)
--------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS:
Beginning of year - -
--------------------------------------------------------------------------------
End of year $ - $ -
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
GTE Missouri Operations
(As Described In Note 1)
Statement of Parent Funding
(Dollars In Thousands)
<TABLE>
<CAPTION>
<S> <C>
BALANCE, December 31, 1998 $ 153,073
Net income 13,557
Net transfers to GTE Corporation (20,554)
------------
BALANCE, December 31, 1999 $ 146,076
============
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
GTE Missouri Operations
(As Described In Note 1)
Notes to Special Purpose Financial Statements
1. Description of Business:
The selected local telephone exchanges included in these special purpose
financial statements (the "Exchanges") serve approximately 127,000 switched
access lines in the state of Missouri. The Exchanges represent approximately 15%
of the assets of GTE Midwest Incorporated ("GTE Midwest" or the "Company"). GTE
Midwest is a wholly owned subsidiary of GTE Corporation (GTE), which is a wholly
owned subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), d/b/a Verizon
Communications ("Verizon") (see Note 11). Verizon provides a wide variety of
communications services ranging from local telephone service for the home and
office to highly complex voice and data services for various industries.
On July 8, 1999, GTE Midwest entered into a purchase agreement with Spectra
Communications Group LLC ("Spectra") to sell approximately 127,000 switched
access lines in the state of Missouri to Spectra. The sale was completed on July
31, 2000.
2. Basis of Presentation:
The accompanying special purpose financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
using exchange specific information where available (e.g., most revenue and
property, plant and equipment (PP&E) related accounts) and allocations where
data is not maintained on an exchange specific basis within the Company's books
and records (e.g., most operating expenses, assets other than PP&E, liabilities,
and capital accounts). Because of the significant amount of allocations and
estimates used to prepare these special purpose financial statements, they may
not reflect the financial position and results of operations of the Exchanges
after the acquisition by Spectra.
The accompanying special purpose financial statements include only those assets,
liabilities, and related operations of the Exchanges as historically incurred by
the Company and exclude all other assets, liabilities, and related operations of
Verizon and its subsidiaries, specifically cash, accrued interest, and
tax-related balance sheet accounts. These special purpose financial statements
also include expenses related to employees who support the Exchanges, some of
which are expected to remain employees of the Company.
Receivables related to end-user billings were identified by exchange using
billing system data. Customer Advances and Deposits were allocated to the
Exchanges based on total revenue. Receivables related to carrier and other
miscellaneous billings were allocated to the Exchanges in proportion to carrier
revenues.
Accounts payable were allocated based on operating expenses and capital
expenditures. Accrued payroll costs were allocated based on employee head count.
Other current liabilities and other liabilities were allocated based on line
count.
The Exchanges' operating expenses include both amounts incurred within its
operating territories that relate directly to its exchanges (the "Direct
Expenses") and amounts incurred in centralized Verizon service centers that
support multiple Verizon companies (the "Indirect Expenses"). The Direct
Expenses correspond roughly with locally performed functions which will transfer
to the buyer of the Exchanges. The Indirect Expenses correspond to substantial
back-office, support and overhead functions which will not transfer to the
buyer, but that the buyer will need to replace in some form in order to operate
the Exchanges. The Indirect Expenses have been allocated to GTE Midwest, and
further to specific exchanges within GTE Midwest (including the Exchanges),
based on estimates of usage, or benefits received from such services. The level
of allocated Indirect Expenses may not be representative of the buyer's ongoing
expenses for these functions. Depreciation and amortization were calculated by
exchange using property, plant, and equipment data.
3. Summary of Significant Accounting Policies and Other Disclosures:
The notes which follow contain limited disclosure data where it can be
reasonably estimated for the Exchanges.
Revenue Recognition
Revenues are recognized when earned. This is generally based on usage of
local-exchange networks or facilities. For other products and services, revenues
are generally recognized when services are rendered or products are delivered to
customers.
Revenues arising from the provision of local exchange services billed to
end-users and revenues from the provision of access services billed to
interexchange carriers are specifically identifiable for the study areas that
encompass GTE Midwest and the Exchanges. Revenues arising from statewide
inter-carrier agreements and settlement processes, and from sales of
non-regulated products and services (collectively, the "Indirect Revenues") are
identifiable to a specific study area, but not to specific exchanges. The
Indirect Revenues have been allocated to the Exchanges based on a number of
ratios. Revenues from non-regulated products, including discounts and related
installation and maintenance agreements were allocated based on business lines.
The revenues from public telephones were allocated based on number of public
telephones. All other Indirect revenues were allocated based on the ratio
between Indirect Revenues and Direct Revenues for the Exchanges.
Depreciation and Amortization
Assets are depreciated using the remaining life methodology and straight-line
depreciation rates. This method depreciates the remaining net investment in
telephone plant, less anticipated net salvage value, over remaining economic
asset lives. This method requires the periodic review and revision of
depreciation rates.
The economic asset lives used are as follows:
Average lives (in years)
------------------------
Fiber-optic cable 20
Copper wire 15
Switching equipment 10
Circuit equipment 8
When depreciable telephone plant is retired in the normal course of business,
the amount of such plant is deducted from the respective plant and accumulated
depreciation accounts. Gains or losses on dispositions are amortized with the
remaining net investment in telephone plant.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses associated with employee separations are recognized when the pension
obligations are settled and the gain or loss is determinable.
Valuation of Assets
The impairment of tangible or intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
the Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination
of impairment, if any, is made based on estimated future cash flows, salvage
value, or expected net sales proceeds depending on the circumstances. Asset
impairment losses, and any subsequent adjustments to such losses as initially
recorded, as well as net gains or losses on sales of assets are recorded as a
component of operating income.
Income Taxes
The Company's results are included in Verizon's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with Verizon and
remits tax payments to Verizon based on its tax liability on a separate company
basis.
The Exchanges are not a taxable entity. The Exchanges' operating results are
included within the Company for income tax purposes. Although the Exchanges
contribute significant plant-related temporary differences (including investment
tax credits) to the Company's deferred tax balances, the Company does not
allocate income tax expense, income tax payables or deferred income taxes to the
Exchanges. As the buyer will most likely have a different tax scenario, no
deferred tax assets or liabilities are presented within these special purpose
financial statements. The provision for income taxes included in the
accompanying special purpose financial statements for 1999 was calculated based
on the income of the Exchanges and the Company's effective tax rate adjusted for
permanent differences not attributable to the Exchanges.
Inventories and Supplies
Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.
Software
Software costs are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which became effective in January 1999. The Company capitalizes
costs associated with externally acquired software (including right-to-use fees)
for internal use. Capitalized software is generally amortized on a straight-line
basis over its useful life, not to exceed five years for non-network software or
three years for network software.
Comprehensive Income
The Company had no comprehensive income components for the year ended December
31, 1999; therefore, comprehensive income is the same as net income for 1999.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS
No.133, as amended, which is effective January 1, 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides additional guidance on revenue recognition as
well as criteria for when revenue is generally realized and earned and also
requires the deferral of incremental direct selling costs. This bulletin
currently must be adopted by December 31, 2000, and will require the Company to
determine the effect of the accounting change as of January 1, 2000. The Company
is currently assessing the impact of SAB No. 101.
4. Employee Benefit Plans:
Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," certain disclosures including components of pension
credits, postretirement benefit costs and the funded status of the plans,
including the actuarial present value of accumulated plan benefits, accumulated
or projected benefit obligation and the fair value of plan assets have not been
presented because the structure of the Verizon plans does not permit the plans'
data to be readily disaggregated.
Pension Plans
The Company participates in noncontributory defined benefit pension plans
sponsored by Verizon covering substantially all employees. The benefits to be
paid under these plans are generally based on years of credited service and
average final earnings. Verizon's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The assets of the
plans consist primarily of corporate equities, government securities and
corporate debt securities.
The significant weighted-average assumptions used by Verizon for the pension
measurements were as follows at December 31:
1999
------
Discount rate 8.00%
Rate of compensation increase 5.50%
Expected return on plan assets 9.00%
The Company's net periodic benefit credit was $18.9 million for 1999. The
Verizon plans are currently funded at levels significantly in excess of
projected benefit obligations. Included in the net periodic benefit credit for
1999 was a net pension gain of $10.4 million, comprised of one-time costs for
special termination benefits provided under voluntary and involuntary separation
programs, curtailment losses and settlement gains. These curtailment losses and
settlement gains are a result of the separation programs, as well as the
required settlement gain or loss recognition due to the fact that in 1999, the
Company's lump sum pension distributions surpassed the settlement threshold
equal to the sum of the service cost and interest cost components of net
periodic pension cost. Allocated on the basis of headcount, the Exchanges' net
periodic benefit credit, including non-recurring settlement gains, was
approximately $1.2 million for 1999 and $1.3 million (unaudited) for the six
months ended June 30, 2000.
Postretirement Benefits Other than Pensions
Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by Verizon. The
determination of benefit cost for postretirement health plans is generally based
on comprehensive hospital, medical and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.
The weighted-average assumptions used by Verizon in the actuarial computations
for postretirement benefits were as follows at December 31:
1999
------
Discount rate 8.00%
Expected return on plan assets 8.00%
The Company's postretirement benefit cost was $8.4 million for 1999. Allocated
on the basis of headcount, the Exchanges' postretirement cost was approximately
$.5 million for 1999.
Savings Plans
GTE Midwest sponsors employee savings plans under section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time employees. Under the
plans, the Company provides matching contributions in Verizon common stock based
on qualified employee contributions up to a certain predefined limit. Matching
contributions attributable to the Exchanges' employees were included in these
special purpose financial statements and may or may not correspond to the
matching benefits provided to the employees of the buyer.
5. Property, Plant and Equipment:
The Company maintains continuing property records which identify specific
property, plant and equipment (PP&E) balances, depreciation reserves and annual
capital expenditure amounts for the Exchanges. The balance in the accompanying
statements is based on these exchange specific amounts and does not include any
allocations of common assets utilized in providing the centralized services
described in Note 2.
PP&E is summarized as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Plant and equipment $ 335,830
Buildings 13,848
Land 613
Other 699
--------------------------------------------------------------------------------
Total 350,990
Less - Accumulated depreciation (215,458)
--------------------------------------------------------------------------------
Total property, plant and equipment, net $ 135,532
================================================================================
</TABLE>
6. Parent Funding and Interest Expense:
For purposes of these statements, all funding requirements have been summarized
as "Parent Funding," without regard to whether the funding represents debt or
equity. No specific debt instruments can be directly associated with the
Exchanges, nor are separate equity accounts maintained. As such, interest
expense of the Company was allocated to the Exchanges based on the relative
percentage of the Exchanges gross PP&E balance to the gross PP&E balance for the
Company.
7. Transactions with Affiliates:
Historically, extensive transactions have occurred between the Exchanges and
affiliate entities. These transactions have included construction and
maintenance services, data processing and management services and financing and
directories agreements.
Verizon Supply (100% owned by Verizon) provides construction and maintenance
equipment, supplies and electronic repair services to the Exchanges. Such
purchases and services are recorded at the lower of cost, including a return
realized by Verizon Supply, or fair market value.
The Exchanges are billed for data processing services and equipment rentals, and
receive management, consulting, research and development and pension management
services from other affiliated companies. The Exchanges' special purpose
financial statements also include allocated expenses resulting from the sharing
of certain executive, administrative, financial, accounting, marketing,
personnel, engineering and other support services being performed at
consolidated work centers within Verizon. The amounts charged for these
affiliated transactions are based on proportional cost allocation methodologies.
GTE Funding Incorporated (an affiliate of the Company) provides short-term
financing and investment vehicles and cash management services. The Company is
contractually obligated to repay all amounts borrowed on its behalf by GTE
Funding Incorporated.
The Company has an agreement with Verizon Directories Corporation (Directories)
(100% owned by Verizon), whereby the Company provides its subscriber lists,
billing and collection and other services to Directories. In addition, when
Directories sells Yellow Page directory advertising to customers within the
Company's franchise area, the Company records a portion of the sale as revenue.
Also, the Company is billed for certain printing and other costs associated with
telephone directories, including the cost of customer contact information pages
which are included in the Company's White Pages directories.
8. Regulatory and Competitive Matters:
The Company's intrastate business is regulated by the state regulatory
commissions in Missouri. The Company is also subject to regulation by the
Federal Communications Commission (FCC) for its interstate business operations.
During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(the "Telecommunications Act"). Along with promoting competition in all segments
of the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.
In March 1998, the Missouri Public Service Commission (MPSC) initiated a generic
universal service fund (USF) proceeding to establish a USF mechanism and
rebalance rates. In December 1999, the MPSC issued an order requesting the
information on the size of the fund and the amount to be assessed under various
scenarios. The information was filed in February 2000. A June 2000 order
established a series of workshops to begin in the third quarter 2000 to decide
these issues.
The Company became subject to state price cap regulation in February 1999. The
first year of the plan allows for increases up to $1.50 per month to residential
and business one-party services with corresponding reductions in intrastate
access rates to a level not to exceed 150 percent of the Company's interstate
rates for similar services. In addition, a 10 percent reduction in intrastate
toll rates is required in the first year of the plan. The Company plans to file
the rebalancing plan with the MPSC in the third quarter of 2000. After January
2000, the Company is mandated to adjust local rates by the percent change in the
Consumer Price Index. This adjustment will be incorporated into the rebalancing
filing to minimize customer confusion.
Significant Customer
The largest volume of the Company's services are provided to AT&T Corp. ("AT&T")
and include amounts for access and billing and collection. The Company revenues
from services provided to AT&T were 14% of total revenues for 1999. This
concentration may or may not correspond with the concentrations of the
Exchanges.
9. Commitments and Contingencies:
The Exchanges have noncancelable operating leases covering certain buildings,
office space and equipment. The Exchanges' rental expense was $1.7 million in
1999. Minimum rental commitments under these noncancelable leases are
approximately $35,810, $10,595, $2,560, and $360 for the years 2000-2003,
respectively, and $2,190 in 2004 and thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions, and environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the results of operations or the financial position of the Company or
the Exchanges.
10. Segment Reporting:
The Exchanges do not have separate reportable segments of their own. The
Exchanges are part of GTE Midwest, which is part of the Domestic Wireline
segment of Verizon's National Operations. The Domestic Wireline segment provides
wireline communication services within franchised areas. These services include
local telephone service and toll calls, as well as access services that enable
long-distance carriers to complete calls to or from locations outside of the
Exchanges' operating areas. This segment also provides complex voice and data
services to businesses, billing and collection and operator assistance services
to other telecommunications companies and receives revenues in the form of a
publication right from an affiliate that publishes telephone directories in its
operating areas.
11. Bell Atlantic - GTE Merger:
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications.
Verizon Wisconsin I Operations
Special Purpose Financial Statements
As of June 30, 2000, and December 31, 1999
Together with Report of Independent Public Accountants
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Telephone USA of Wisconsin, LLC
And Verizon North Inc.:
We have audited the accompanying special purpose financial statements of
selected assets, liabilities and parent funding of Verizon Wisconsin I
Operations (the "Company") as of December 31, 1999, and the related statements
of income, parent funding and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the special purpose financial statements referred to above
present fairly, in all material respects, the selected assets, liabilities and
parent funding of the Company as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Dallas, Texas,
September 13, 2000
The accompanying notes are an integral part of these special purpose financial
statements.
Verizon Wisconsin I Operations
(As Described in Note 1)
Statements of Selected Assets, Liabilities and Parent Funding
As of June 30, 2000, and December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
SELECTED ASSETS
---------------
CURRENT ASSETS
Receivables, less allowances of $335
and $ 352 $ 5,007 $ 5,552
Inventories and supplies 54 65
Prepaid benefits and other 479 607
--------------------------------------------------------------------------------
Total current assets 5,540 6,224
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 63,909 63,130
EMPLOYEE BENEFIT PLANS 10,140 8,432
OTHER ASSETS 285 171
--------------------------------------------------------------------------------
Total assets $ 79,874 $ 77,957
================================================================================
SELECTED LIABILITIES AND PARENT FUNDING
---------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,046 $ 437
Advance billings and customer deposits 1,013 980
Accrued payroll costs 743 820
Other 754 515
--------------------------------------------------------------------------------
Total current liabilities 5,556 2,752
--------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS 2,379 2,350
OTHER LIABILITIES 181 34
--------------------------------------------------------------------------------
Total liabilities 8,116 5,136
--------------------------------------------------------------------------------
PARENT FUNDING 71,758 72,821
--------------------------------------------------------------------------------
Total liabilities and parent funding $ 79,874 $ 77,957
================================================================================
</TABLE>
Verizon Wisconsin I Operations
(As Described in Note 1)
Statements of Income
For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
REVENUES AND SALES:
Local services $ 8,801 $ 17,657
Network access services 6,608 14,874
Toll services 1,082 1,770
Other services and sales 2,177 4,906
--------------------------------------------------------------------------------
Total revenues and sales 18,668 39,207
--------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of services and sales 6,076 13,777
Selling, general and administrative 33 3,181
Depreciation and amortization 4,938 9,775
--------------------------------------------------------------------------------
Total operating costs and expenses 11,047 26,733
--------------------------------------------------------------------------------
OPERATING INCOME 7,621 12,474
INTEREST EXPENSE, net 1,124 2,622
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,497 9,852
INCOME TAXES 2,628 3,986
--------------------------------------------------------------------------------
NET INCOME $ 3,869 5,866
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
Verizon Wisconsin I Operations
(As Described in Note 1)
Statements of Cash Flows
For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,869 $ 5,866
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation 4,904 9,739
Employee pension plans (1,679) (2,373)
Provision for uncollectible accounts 133 402
Change in current assets and current
liabilities-
Receivables 413 236
Other current assets 140 (111)
Other current liabilities 2,803 177
Other, net 33 (264)
--------------------------------------------------------------------------------
Net cash provided by operating activities 10,616 13,672
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,684) (16,726)
--------------------------------------------------------------------------------
Net cash used in investing activities (5,684) (16,726)
--------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net transfers from (to) GTE Corporation (4,932) 3,054
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (4,932) 3,054
--------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS:
Beginning of year - -
--------------------------------------------------------------------------------
End of year $ - $ -
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
Verizon Wisconsin I Operations
(As Described in Note 1)
Statement of Parent Funding
For the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
<S> <C>
BALANCE, December 31, 1998 $ 63,901
Net income 5,866
Net transfers from GTE Corporation 3,054
--------------------------------------------------------------------------------
BALANCE, December 31, 1999 $ 72,821
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
Verizon Wisconsin I Operations
(As Described in Note 1)
Notes to Special Purpose Financial Statements
1. Description of Business:
The selected local telephone exchanges included in these special purpose
financial statements (the "Exchanges") serve approximately 61,500 switched
access lines in the state of Wisconsin. The Exchanges represent approximately 1%
of the assets of Verizon North Inc. ("Verizon North" or the "Company"), formerly
GTE North Incorporated. Verizon North is a wholly owned subsidiary of GTE
Corporation (GTE), which is a wholly owned subsidiary of Bell Atlantic
Corporation ("Bell Atlantic"), d/b/a Verizon Communications ("Verizon") (see
Note 11). Verizon provides a wide variety of communications services ranging
from local telephone service for the home and office to highly complex voice and
data services for various industries.
On August 19, 1999, Verizon North entered into a purchase agreement with
Telephone USA of Wisconsin, LLC ("Telephone USA") to sell approximately 61,500
switched access lines in the state of Wisconsin to Telephone USA. The sale is
expected to close during 2000.
2. Basis of Presentation:
The accompanying special purpose financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
using exchange specific information where available (e.g., most revenue and
property, plant and equipment (PP&E) related accounts) and allocations where
data is not maintained on an exchange specific basis within the Company's books
and records (e.g., most operating expenses, assets other than PP&E, liabilities,
and capital accounts). Because of the significant amount of allocations and
estimates used to prepare these special purpose financial statements, they may
not reflect the financial position and results of operations of the Exchanges
after the acquisition by Telephone USA.
The accompanying special purpose financial statements include only those assets,
liabilities, and related operations of the Exchanges as historically incurred by
the Company and exclude all other assets, liabilities, and related operations of
Verizon and its subsidiaries, specifically cash, accrued interest, and
tax-related balance sheet accounts. The special purpose financial statements
also include expenses related to employees who support the Exchanges, some of
which are expected to remain employees of the Company.
Receivables related to end-user billings were identified by exchange using
billing system data. Customer Advances and Deposits were allocated to the
Exchanges based on total revenue. Receivables related to carrier and other
miscellaneous billings were allocated to the Exchanges in proportion to carrier
revenues.
Accounts payable were allocated based on operating expenses and capital
expenditures. Accrued payroll costs were allocated based on employee head count.
Other current liabilities and other liabilities were allocated based on line
count.
The Exchanges' operating expenses include both amounts incurred within its
operating territories that relate directly to its exchanges (the "Direct
Expenses") and amounts incurred in centralized Verizon service centers that
support multiple Verizon companies (the "Indirect Expenses"). The Direct
Expenses correspond roughly with locally performed functions which will transfer
to the buyer of the Exchanges. The Indirect Expenses correspond to substantial
back-office, support and overhead functions which will not transfer to the
buyer, but that the buyer will need to replace in some form in order to operate
the Exchanges. The Indirect Expenses have been allocated to Verizon North and
further to specific exchanges within Verizon North (including the Exchanges),
based on estimates of usage, or benefits received from such services. The level
of allocated Indirect Expenses may not be representative of the buyer's ongoing
expenses for these functions. Depreciation and amortization were calculated by
exchange using property, plant, and equipment data.
3. Summary of Significant Accounting Policies and Other Disclosures:
The notes which follow contain limited disclosure data where it can be
reasonably estimated for the Exchanges.
Revenue Recognition
Revenues are recognized when earned. This is generally based on usage of
local-exchange networks or facilities. For other products and services, revenues
are generally recognized when services are rendered or products are delivered to
customers.
Revenues arising from the provision of local exchange services billed to
end-users and revenues from the provision of access services billed to
interexchange carriers are specifically identifiable for the study areas that
encompass Verizon North and the Exchanges. Revenues arising from statewide
inter-carrier agreements and settlement processes, and from sales of
non-regulated products and services (collectively, the "Indirect Revenues") are
identifiable to a specific study area, but not to specific exchanges. The
Indirect Revenues have been allocated to the Exchanges based on a number of
ratios. Revenues from non-regulated products, including discounts and related
installation and maintenance agreements were allocated based on business lines.
The revenues from public telephones were allocated based on number of public
telephones. All other Indirect revenues were allocated based on the ratio
between Indirect Revenues and Direct Revenues for the Exchanges.
Depreciation and Amortization
Assets are depreciated using the remaining life methodology and straight-line
depreciation rates. This method depreciates the remaining net investment in
telephone plant, less anticipated net salvage value, over remaining economic
asset lives. This method requires the periodic review and revision of
depreciation rates.
The economic asset lives used are as follows:
Average lives (in years)
------------------------
Fiber-optic cable 20
Copper wire 15
Switching equipment 10
Circuit equipment 8
When depreciable telephone plant is retired in the normal course of business,
the amount of such plant is deducted from the respective plant and accumulated
depreciation accounts. Gains or losses on dispositions are amortized with the
remaining net investment in telephone plant.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses associated with employee separations are recognized when the pension
obligations are settled and the gain or loss is determinable.
Valuation of Assets
The impairment of tangible or intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
the Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination
of impairment, if any, is made based on estimated future cash flows, salvage
value, or expected net sales proceeds depending on the circumstances. Asset
impairment losses, and any subsequent adjustments to such losses as initially
recorded, as well as net gains or losses on sales of assets are recorded as a
component of operating income.
Income Taxes
The Company's results are included in Verizon's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with Verizon and
remits tax payments to Verizon based on its tax liability on a separate company
basis.
The Exchanges are not a taxable entity. The Exchanges' operating results are
included within the Company for income tax purposes. Although the Exchanges
contribute significant plant-related temporary differences (including investment
tax credits) to the Company's deferred tax balances, the Company does not
allocate income tax expense, income tax payables or deferred income taxes to the
Exchanges. As the buyer will most likely have a different tax scenario, no
deferred tax assets or liabilities are presented within these special purpose
financial statements. The provision for income taxes included in the
accompanying special purpose financial statements for 1999 was calculated based
on the income of the Exchanges and the Company's effective tax rate adjusted for
permanent differences not attributable to the Exchanges.
Inventories and Supplies
Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.
Software
Software costs are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which became effective in January 1999. The Company capitalizes
costs associated with externally acquired software (including right-to-use fees)
for internal use. Capitalized software is generally amortized on a straight-line
basis over its useful life, not to exceed five years for non-network software or
three years for network software.
Comprehensive Income
The Company had no comprehensive income components for the year ended December
31, 1999; therefore, comprehensive income is the same as net income for 1999.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS
No.133, as amended, which is effective January 1, 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides additional guidance on revenue recognition as
well as criteria for when revenue is generally realized and earned and also
requires the deferral of incremental direct selling costs. This bulletin
currently must be adopted by December 31, 2000, and will require the Company to
determine the effect of the accounting change as of January 1, 2000. The Company
is currently assessing the impact of SAB No. 101.
4. Employee Benefit Plans:
Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," certain disclosures including components of pension
credits, postretirement benefit costs and the funded status of the plans,
including the actuarial present value of accumulated plan benefits, accumulated
or projected benefit obligation and the fair value of plan assets have not been
presented because the structure of the Verizon plans does not permit the plans'
data to be readily disaggregated.
Pension Plans
The Company participates in noncontributory defined benefit pension plans
sponsored by Verizon covering substantially all employees. The benefits to be
paid under these plans are generally based on years of credited service and
average final earnings. Verizon's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The assets of the
plans consist primarily of corporate equities, government securities and
corporate debt securities.
The significant weighted-average assumptions used by Verizon for the pension
measurements were as follows at December 31:
1999
------
Discount rate 8.00%
Rate of compensation increase 5.50%
Expected return on plan assets 9.00%
The Company's net periodic benefit credit was $280.6 million for 1999. The
Verizon plans are currently funded at levels significantly in excess of
projected benefit obligations. Included in the net periodic benefit credit for
1999 was a net pension gain of $131.7 million, comprised of one-time costs for
special termination benefits provided under voluntary and involuntary separation
programs, curtailment losses and settlement gains. These curtailment losses and
settlement gains are a result of the separation programs, as well as the
required settlement gain or loss recognition due to the fact that in 1999, the
Company's lump sum pension distributions surpassed the settlement threshold
equal to the sum of the service cost and interest cost components of net
periodic pension cost. Allocated on the basis of headcount, the Exchanges' net
periodic benefit credit, including non-recurring settlement gains, was
approximately $1.6 million for 1999 and $1.6 million (unaudited) for the six
months ended June 30, 2000.
Postretirement Benefits Other than Pensions
Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by Verizon. The
determination of benefit cost for postretirement health plans is generally based
on comprehensive hospital, medical and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.
The weighted-average assumptions used by Verizon in the actuarial computations
for postretirement benefits were as follows at December 31:
1999
------
Discount rate 8.00%
Expected return on plan assets 8.00%
The Company's postretirement benefit cost was $67.5 million for 1999. Allocated
on the basis of headcount, the Exchanges' postretirement cost was approximately
$.4 million for 1999.
Savings Plans
Verizon North sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in Verizon common
stock based on qualified employee contributions up to a certain predefined
limit. Matching contributions attributable to the Exchanges' employees were
included in these special purpose financial statements and may or may not
correspond to the matching benefits provided to the employees of the buyer.
5. Property, Plant and Equipment:
The Company maintains continuing property records which identify specific
property, plant and equipment (PP&E) balances, depreciation reserves and annual
capital expenditure amounts for the Exchanges. The balance in the accompanying
statements is based on these exchange specific amounts and does not include any
allocations of common assets utilized in providing the centralized services
described in Note 2.
PP&E is summarized as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Land $ 374
Buildings 7,452
Plant and equipment 162,007
Other 6,276
--------------------------------------------------------------------------------
Total 176,109
Less- Accumulated depreciation (112,979)
--------------------------------------------------------------------------------
Total property, plant, and equipment, net $ 63,130
================================================================================
</TABLE>
6. Parent Funding and Interest Expense:
For purposes of these statements, all funding requirements have been summarized
as "Parent Funding," without regard to whether the funding represents debt or
equity. No specific debt instruments can be directly associated with the
Exchanges, nor are separate equity accounts maintained. As such, interest
expense of the Company was allocated to the Exchanges based on the relative
percentage of the Exchanges gross PP&E balance to the gross PP&E balance for the
Company.
7. Transactions with Affiliates:
Historically, extensive transactions have occurred between the Exchanges and
affiliate entities. These transactions have included construction and
maintenance services, data processing and management services and financing and
directories agreements.
Verizon Supply (100% owned by Verizon) provides construction and maintenance
equipment, supplies and electronic repair services to the Exchanges. Such
purchases and services are recorded at the lower of cost, including a return
realized by Verizon Supply, or fair market value.
The Exchanges are billed for data processing services and equipment rentals, and
receive management, consulting, research and development and pension management
services from other affiliated companies. The Exchanges' special purpose
financial statements also include allocated expenses resulting from the sharing
of certain executive, administrative, financial, accounting, marketing,
personnel, engineering and other support services being performed at
consolidated work centers within Verizon. The amounts charged for these
affiliated transactions are based on proportional cost allocation methodologies.
GTE Funding Incorporated (an affiliate of the Company) provides short-term
financing and investment vehicles and cash management services. The Company is
contractually obligated to repay all amounts borrowed on its behalf by GTE
Funding Incorporated.
The Company has an agreement with Verizon Directories Corporation (Directories)
(100% owned by Verizon), whereby the Company provides its subscriber lists,
billing and collection and other services to Directories. In addition, when
Directories sells Yellow Page directory advertising to customers within the
Company's franchise area, the Company records a portion of the sale as revenue.
Also, the Company is billed for certain printing and other costs associated with
telephone directories, including the cost of customer contact information pages
which are included in the Company's White Pages directories.
8. Regulatory and Competitive Matters:
The Company's intrastate business is regulated by the state regulatory
commissions in Wisconsin. Interstate operations are subject to regulation by the
Federal Communications Commission.
During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(the "Telecommunications Act"). Along with promoting competition in all segments
of the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.
Significant Customer
The largest volume of the Company's services are provided to AT&T Corp. ("AT&T")
and include amounts for access and billing and collection. The Company revenues
from services provided to AT&T were 9% of total revenues for 1999. This
concentration may or may not correspond with the concentrations of the
Exchanges.
9. Commitments and Contingencies:
The Exchanges have noncancelable operating leases covering certain buildings,
office space and equipment. The Exchanges' rental expense was $95,270 in 1999.
Minimum rental commitments under these noncancelable leases are approximately
$21,311, $10,291, $8,631, and $3,366 for the years 2000-2003, respectively, and
$1,850 in 2004 and thereafter.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions, and environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the results of operations or the financial position of the Company or
the Exchanges.
10. Segment Reporting:
The Exchanges do not have separate reportable segments of their own. The
Exchanges are part of Verizon North, which is part of the Domestic Wireline
segment of Verizon's National Operations. The Domestic Wireline segment provides
wireline communication services within franchised areas. These services include
local telephone service and toll calls, as well as access services that enable
long-distance carriers to complete calls to or from locations outside of the
Exchanges' operating areas. This segment also provides complex voice and data
services to businesses, billing and collection and operator assistance services
to other telecommunications companies and receives revenues in the form of a
publication right from an affiliate that publishes telephone directories in its
operating areas.
11. Bell Atlantic - GTE Merger:
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications.
Verizon Wisconsin II Operations
Special Purpose Financial Statements
As of June 30, 2000, and December 31, 1999
Together with Report of Independent Public Accountants
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
CenturyTel Incorporated
And Verizon North Inc.:
We have audited the accompanying special purpose financial statements of
selected assets, liabilities and parent funding of Verizon Wisconsin II
Operations (the "Company") as of December 31, 1999, and the related statements
of income, parent funding and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the special purpose financial statements referred to above
present fairly, in all material respects, the selected assets, liabilities and
parent funding of the Company as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Dallas, Texas,
September 13, 2000
The accompanying notes are an integral part of these special purpose financial
statements.
Verizon Wisconsin II Operations
(As Described in Note 1)
Statements of Selected Assets, Liabilities and Parent Funding
As of June 30, 2000, and December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
SELECTED ASSETS
---------------
CURRENT ASSETS:
Receivables, less allowances of
$362 and $381 $ 5,154 $ 5,754
Inventories and supplies 8 8
Prepaid benefits and other 533 672
--------------------------------------------------------------------------------
Total current assets 5,695 6,434
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 58,149 57,556
EMPLOYEE BENEFIT PLANS 8,424 7,005
OTHER ASSETS 317 190
--------------------------------------------------------------------------------
Total assets $ 72,585 $ 71,185
================================================================================
SELECTED LIABILITIES AND PARENT FUNDING
---------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,192 $ 314
Advance billings and customer deposits 1,096 1,060
Accrued payroll costs 617 681
Other 839 574
--------------------------------------------------------------------------------
Total current liabilities 4,744 2,629
--------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS 1,977 1,952
OTHER LIABILITIES 202 38
--------------------------------------------------------------------------------
Total liabilities 6,923 4,619
--------------------------------------------------------------------------------
PARENT FUNDING 65,662 66,566
--------------------------------------------------------------------------------
Total liabilities and parent funding $ 72,585 $ 71,185
================================================================================
</TABLE>
The accompanying notes are an integral part of these special purpose financial
statements.
Verizon Wisconsin II Operations
(As Described in Note 1)
Statements of Income
For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
REVENUES AND SALES:
Local services $ 10,365 $ 20,265
Network access services 5,779 15,930
Toll services 1,015 1,638
Other services and sales 2,060 4,598
--------------------------------------------------------------------------------
Total revenues and sales 19,219 42,431
--------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of services and sales 6,785 15,350
Selling, general and administrative 13 3,523
Depreciation and amortization 4,546 8,976
--------------------------------------------------------------------------------
Total operating costs and expenses 11,344 27,849
--------------------------------------------------------------------------------
OPERATING INCOME 7,875 14,582
INTEREST EXPENSE, net 1,035 2,413
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,840 12,169
INCOME TAXES 2,767 4,922
--------------------------------------------------------------------------------
NET INCOME $ 4,073 $ 7,247
================================================================================
</TABLE>
The accompanying notes are an integral part of these special purpose financial
statements.
Verizon Wisconsin II Operations
(As Described in Note 1)
Statements of Cash Flows
For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,073 $ 7,247
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation 4,509 8,936
Employee pension plans (1,394) (1,936)
Provision for uncollectible accounts 144 435
Change in current assets and current
liabilities-
Receivables 456 141
Other current assets 140 (86)
Other current liabilities 2,115 130
Other, net 36 (286)
--------------------------------------------------------------------------------
Net cash provided by operating activities 10,079 14,581
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,102) (15,235)
--------------------------------------------------------------------------------
Net cash used in investing activities (5,102) (15,235)
--------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net transfers from (to) GTE Corporation (4,977) 654
--------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (4,977) 654
--------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS:
Beginning of year - -
--------------------------------------------------------------------------------
End of year $ - $ -
================================================================================
</TABLE>
The accompanying notes are an integral part of this special purpose financial
statement.
Verizon Wisconsin II Operations
(As Described in Note 1)
Statement of Parent Funding
For the Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
<S> <C>
BALANCE, December 31, 1998 $ 58,665
Net income 7,247
Net transfers from GTE Corporation 654
--------------------------------------------------------------------------------
BALANCE, December 31, 1999 $ 66,566
================================================================================
</TABLE>
The accompanying notes are an integral part of these special purpose financial
statements.
Notes to Special Purpose Financial Statements
Verizon Wisconsin II Operations
(As Described in Note 1)
Notes to Special Purpose Financial Statements
1. Description of Business:
The selected local telephone exchanges included in these special purpose
financial statements (the "Exchanges") serve approximately 68,500 switched
access lines in the state of Wisconsin. The Exchanges represent approximately 1%
of the assets of Verizon North Inc. ("Verizon North" or the "Company"), formerly
GTE North Incorporated. Verizon North is a wholly owned subsidiary of GTE
Corporation (GTE), which is a wholly owned subsidiary of Bell Atlantic
Corporation ("Bell Atlantic"), d/b/a Verizon Communications ("Verizon") (see
Note 11). Verizon provides a wide variety of communications services ranging
from local telephone service for the home and office to highly complex voice and
data services for various industries.
On October 11, 1999, Verizon North entered into a purchase agreement with
CenturyTel Incorporated ("CenturyTel") to sell approximately 68,500 switched
access lines in the state of Wisconsin to CenturyTel. The sale is expected to
close during 2000.
2. Basis of Presentation:
The accompanying special purpose financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
using exchange specific information where available (e.g., most revenue and
property, plant and equipment (PP&E) related accounts) and allocations where
data is not maintained on an exchange specific basis within the Company's books
and records (e.g., most operating expenses, assets other than PP&E, liabilities,
and capital accounts). Because of the significant amount of allocations and
estimates used to prepare these special purpose financial statements, they may
not reflect the financial position and results of operations of the Exchanges
after the acquisition by CenturyTel.
The accompanying special purpose financial statements include only those assets,
liabilities, and related operations of the Exchanges as historically incurred by
the Company and exclude all other assets, liabilities, and related operations of
Verizon and its subsidiaries, specifically cash, accrued interest, and
tax-related balance sheet accounts. The special purpose financial statements
also include expenses related to employees who support the Exchanges, some of
which are expected to remain employees of the Company.
Receivables related to end-user billings were identified by exchange using
billing system data. Customer Advances and Deposits were allocated to the
Exchanges based on total revenue. Receivables related to carrier and other
miscellaneous billings were allocated to the Exchanges in proportion to carrier
revenues.
Accounts payable were allocated based on operating expenses and capital
expenditures. Accrued payroll costs were allocated based on employee head count.
Other current liabilities and other liabilities were allocated based on line
count.
The Exchanges' operating expenses include both amounts incurred within its
operating territories that relate directly to its exchanges (the "Direct
Expenses") and amounts incurred in centralized Verizon service centers that
support multiple Verizon companies (the "Indirect Expenses"). The Direct
Expenses correspond roughly with locally performed functions which will transfer
to the buyer of the Exchanges. The Indirect Expenses correspond to substantial
back-office, support and overhead functions which will not transfer to the
buyer, but that the buyer will need to replace in some form in order to operate
the Exchanges. The Indirect Expenses have been allocated to Verizon North and
further to specific exchanges within Verizon North (including the Exchanges),
based on estimates of usage, or benefits received from such services. The level
of allocated Indirect Expenses may not be representative of the buyer's ongoing
expenses for these functions. Depreciation and amortization were calculated by
exchange using property, plant, and equipment data.
3. Summary of Significant Accounting Policies and Other Disclosures:
The notes which follow contain limited disclosure data where it can be
reasonably estimated for the Exchanges.
Revenue Recognition
Revenues are recognized when earned. This is generally based on usage of
local-exchange networks or facilities. For other products and services, revenues
are generally recognized when services are rendered or products are delivered to
customers.
Revenues arising from the provision of local exchange services billed to
end-users and revenues from the provision of access services billed to
interexchange carriers are specifically identifiable for the study areas that
encompass Verizon North and the Exchanges. Revenues arising from statewide
inter-carrier agreements and settlement processes, and from sales of
non-regulated products and services (collectively, the "Indirect Revenues") are
identifiable to a specific study area, but not to specific exchanges. The
Indirect Revenues have been allocated to the Exchanges based on a number of
ratios. Revenues from non-regulated products, including discounts and related
installation and maintenance agreements were allocated based on business lines.
The revenues from public telephones were allocated based on number of public
telephones. All other Indirect revenues were allocated based on the ratio
between Indirect Revenues and Direct Revenues for the Exchanges.
Depreciation and Amortization
Assets are depreciated using the remaining life methodology and straight-line
depreciation rates. This method depreciates the remaining net investment in
telephone plant, less anticipated net salvage value, over remaining economic
asset lives. This method requires the periodic review and revision of
depreciation rates.
The economic asset lives used are as follows:
Average lives (in years)
------------------------
Fiber-optic cable 20
Copper wire 15
Switching equipment 10
Circuit equipment 8
When depreciable telephone plant is retired in the normal course of business,
the amount of such plant is deducted from the respective plant and accumulated
depreciation accounts. Gains or losses on dispositions are amortized with the
remaining net investment in telephone plant.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned during
the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits. Curtailment gains and losses associated
with employee separations are recognized when they occur. Settlement gains and
losses associated with employee separations are recognized when the pension
obligations are settled and the gain or loss is determinable.
Valuation of Assets
The impairment of tangible or intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
the Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination
of impairment, if any, is made based on estimated future cash flows, salvage
value, or expected net sales proceeds depending on the circumstances. Asset
impairment losses, and any subsequent adjustments to such losses as initially
recorded, as well as net gains or losses on sales of assets are recorded as a
component of operating income.
Income Taxes
The Company's results are included in Verizon's consolidated federal income tax
return. The Company participates in a tax-sharing agreement with Verizon and
remits tax payments to Verizon based on its tax liability on a separate company
basis.
The Exchanges are not a taxable entity. The Exchanges' operating results are
included within the Company for income tax purposes. Although the Exchanges
contribute significant plant-related temporary differences (including investment
tax credits) to the Company's deferred tax balances, the Company does not
allocate income tax expense, income tax payables or deferred income taxes to the
Exchanges. As the buyer will most likely have a different tax scenario, no
deferred tax assets or liabilities are presented within these special purpose
financial statements. The provision for income taxes included in the
accompanying special purpose financial statements for 1999 was calculated based
on the income of the Exchanges and the Company's effective tax rate adjusted for
permanent differences not attributable to the Exchanges.
Inventories and Supplies
Inventories and supplies are stated at the lower of cost, determined principally
by the average cost method, or net realizable value.
Software
Software costs are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which became effective in January 1999. The Company capitalizes
costs associated with externally acquired software (including right-to-use fees)
for internal use. Capitalized software is generally amortized on a straight-line
basis over its useful life, not to exceed five years for non-network software or
three years for network software.
Comprehensive Income
The Company had no comprehensive income components for the year ended December
31, 1999; therefore, comprehensive income is the same as net income for 1999.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS
No.133, as amended, which is effective January 1, 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides additional guidance on revenue recognition as
well as criteria for when revenue is generally realized and earned and also
requires the deferral of incremental direct selling costs. This bulletin
currently must be adopted by December 31, 2000, and will require the Company to
determine the effect of the accounting change as of January 1, 2000. The Company
is currently assessing the impact of SAB No. 101.
4. Employee Benefit Plans:
Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," certain disclosures including components of pension
credits, postretirement benefit costs and the funded status of the plans,
including the actuarial present value of accumulated plan benefits, accumulated
or projected benefit obligation and the fair value of plan assets have not been
presented because the structure of the Verizon plans does not permit the plans'
data to be readily disaggregated.
Pension Plans
The Company participates in noncontributory defined benefit pension plans
sponsored by Verizon covering substantially all employees. The benefits to be
paid under these plans are generally based on years of credited service and
average final earnings. Verizon's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The assets of the
plans consist primarily of corporate equities, government securities and
corporate debt securities.
The significant weighted-average assumptions used by Verizon for the pension
measurements were as follows at December 31:
1999
------
Discount rate 8.00%
Rate of compensation increase 5.50%
Expected return on plan assets 9.00%
The Company's net periodic benefit credit was $280.6 million for 1999. The
Verizon plans are currently funded at levels significantly in excess of
projected benefit obligations. Included in the net periodic benefit credit for
1999 was a net pension gain of $131.7 million, comprised of one-time costs for
special termination benefits provided under voluntary and involuntary separation
programs, curtailment losses and settlement gains. These curtailment losses and
settlement gains are a result of the separation programs, as well as the
required settlement gain or loss recognition due to the fact that in 1999, the
Company's lump sum pension distributions surpassed the settlement threshold
equal to the sum of the service cost and interest cost components of net
periodic pension cost. Allocated on the basis of headcount, the Exchanges' net
periodic benefit credit, including non-recurring settlement gains, was
approximately $1.3 million for 1999 and $1.3 million (unaudited) for the six
months ended June 30, 2000.
Postretirement Benefits Other than Pensions
Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by Verizon. The
determination of benefit cost for postretirement health plans is generally based
on comprehensive hospital, medical and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.
The weighted-average assumptions used by Verizon in the actuarial computations
for postretirement benefits were as follows at December 31:
1999
------
Discount rate 8.00%
Expected return on plan assets 8.00%
The Company's postretirement benefit cost was $67.5 million for 1999. Allocated
on the basis of headcount, the Exchanges' postretirement cost was approximately
$.3 million for 1999.
Savings Plans
Verizon North sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in Verizon common
stock based on qualified employee contributions up to a certain predefined
limit. Matching contributions attributable to the Exchanges' employees were
included in these special purpose financial statements and may or may not
correspond to the matching benefits provided to the employees of the buyer.
5. Property, Plant and Equipment:
The Company maintains continuing property records which identify specific
property, plant and equipment (PP&E) balances, depreciation reserves and annual
capital expenditure amounts for the Exchanges. The balance in the accompanying
statements is based on these exchange specific amounts and does not include any
allocations of common assets utilized in providing the centralized services
described in Note 2.
PP&E is summarized as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------------
<S> <C>
Land $ 191
Buildings 5,775
Plant and equipment 151,441
Other 4,690
--------------------------------------------------------------------------------
Total 162,097
Less- Accumulated depreciation (104,541)
--------------------------------------------------------------------------------
Total property, plant, and equipment, net $ 57,556
================================================================================
</TABLE>
6. Parent Funding and Interest Expense:
For purposes of these statements, all funding requirements have been summarized
as "Parent Funding," without regard to whether the funding represents debt or
equity. No specific debt instruments can be directly associated with the
Exchanges, nor are separate equity accounts maintained. As such, interest
expense of the Company was allocated to the Exchanges based on the relative
percentage of the Exchanges gross PP&E balance to the gross PP&E balance for the
Company.
7. Transactions with Affiliates:
Historically, extensive transactions have occurred between the Exchanges and
affiliate entities. These transactions have included construction and
maintenance services, data processing and management services and financing and
directories agreements.
Verizon Supply (100% owned by Verizon) provides construction and maintenance
equipment, supplies and electronic repair services to the Exchanges. Such
purchases and services are recorded at the lower of cost, including a return
realized by Verizon Supply, or fair market value.
The Exchanges are billed for data processing services and equipment rentals, and
receive management, consulting, research and development and pension management
services from other affiliated companies. The Exchanges' special purpose
financial statements also include allocated expenses resulting from the sharing
of certain executive, administrative, financial, accounting, marketing,
personnel, engineering and other support services being performed at
consolidated work centers within Verizon. The amounts charged for these
affiliated transactions are based on proportional cost allocation methodologies.
GTE Funding Incorporated (an affiliate of the Company) provides short-term
financing and investment vehicles and cash management services. The Company is
contractually obligated to repay all amounts borrowed on its behalf by GTE
Funding Incorporated.
The Company has an agreement with Verizon Directories Corporation (Directories)
(100% owned by Verizon), whereby the Company provides its subscriber lists,
billing and collection and other services to Directories. In addition, when
Directories sells Yellow Page directory advertising to customers within the
Company's franchise area, the Company records a portion of the sale as revenue.
Also, the Company is billed for certain printing and other costs associated with
telephone directories, including the cost of customer contact information pages
which are included in the Company's White Pages directories.
8. Regulatory and Competitive Matters:
The Company's intrastate business is regulated by the state regulatory
commissions in Wisconsin. Interstate operations are subject to regulation by the
Federal Communications Commission.
During 1999, regulatory and legislative activity at both the state and federal
levels continued to be a direct result of the Telecommunications Act of 1996
(the "Telecommunications Act"). Along with promoting competition in all segments
of the telecommunications industry, the Telecommunications Act was intended to
preserve and advance universal service.
Significant Customer
The largest volume of the Company's services are provided to AT&T Corp. ("AT&T")
and include amounts for access and billing and collection. The Company revenues
from services provided to AT&T were 9% of total revenues for 1999. This
concentration may or may not correspond with concentrations of the Exchanges.
9. Commitments and Contingencies:
The Exchanges have noncancelable operating leases covering certain buildings,
office space and equipment. The Exchanges' rental expense was $68,460 in 1999.
Minimum rental commitments under these noncancelable leases are approximately
$11,969 $4,141, $1,405, and $200 for the years 2000-2003, respectively.
The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions, and environmental, safety and health matters. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the results of operations or the financial position of the Company or
the Exchanges.
10. Segment Reporting:
The Exchanges do not have separate reportable segments of their own. The
Exchanges are part of Verizon North, which is part of the Domestic Wireline
segment of Verizon's National Operations. The Domestic Wireline segment provides
wireline communication services within franchised areas. These services include
local telephone service and toll calls, as well as access services that enable
long-distance carriers to complete calls to or from locations outside of the
Exchanges' operating areas. This segment also provides complex voice and data
services to businesses, billing and collection and operator assistance services
to other telecommunications companies and receives revenues in the form of a
publication right from an affiliate that publishes telephone directories in its
operating areas.
11. Bell Atlantic - GTE Merger:
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications.
* * * * * * * * * *
CenturyTel, Inc.
Unaudited Pro Forma Consolidated Condensed Financial Information
Introduction
Background. On July 31, 2000 and September 29, 2000, affiliates of CenturyTel,
Inc. (the "Company") acquired over 490,000 telephone access lines and related
assets from Verizon Communications, Inc. (successor to GTE Corporation)
("Verizon") in four separate transactions for approximately $1.5 billion in
cash.
Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000
telephone access lines and related local exchange assets comprising
106 exchanges throughout Arkansas for approximately $843 million in
cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related
local exchange assets comprising 107 exchanges throughout Missouri for
approximately $297 million cash. The Company owns 57.1% of Spectra,
which was organized to acquire and operate these Missouri
properties. At closing, the Company made a preferred equity investment
in Spectra of approximately $55 million and financed substantially all
of the remainder of the purchase price.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $194 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related
local exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $170 million in cash. The Company owns 89% of
Telephone USA, which was organized to acquire and own these
Wisconsin properties. At closing, the Company made an equity
investment in Telephone USA of approximately $37.8 million and
financed substantially all of the remainder of the purchase price.
To finance these acquisitions on a short-term basis, the Company borrowed
$1.157 billion on a floating-rate basis under its new $1.5 billion credit
facility with Bank of America, N.A. and Citibank, N.A., as lenders, and Banc
of America Securities LLC and Salomon Smith Barney Inc., as arrangers, and
borrowed $300 million on a floating-rate basis under its existing credit
facility with Bank of America, N.A.
The orders of the Arkansas and Wisconsin public service commissions approving
the purchases of the Arkansas and Wisconsin assets remain subject to appeal, but
those orders (and each other regulatory order necessary to authorize the Verizon
acquisitions) are in full force and effect. The Company expects that the order
of the Wisconsin Public Service Commission, when issued in writing, will contain
several requirements relating to rates, service standards and other matters.
In connection with authorizing the Wisconsin acquisitions, the Wisconsin Public
Service Commission indicated its intent to review the possibility of regulating
all of the Company's Wisconsin local exchange carriers on an unitary basis,
which would reduce the Company's revenues in Wisconsin (unless and to the extent
these reductions could be mitigated through rate adjustments or other revenue
enhancements approved by the Wisconsin Public Service Commission).
In addition to the continued provision of traditional local exchange telephone
services, the Company intends to provide long distance, Internet access
(including high-speed Digital Subscriber Line Internet access service) and other
advanced technology services in certain of the acquired service areas. The
Company currently offers long distance and Internet access service in certain
Arkansas and Wisconsin communities adjacent to the acquired service areas.
Pro forma information. The following unaudited pro forma consolidated condensed
balance sheet as of June 30, 2000 and the unaudited pro forma consolidated
condensed statements of income for the year ended December 31, 1999 and the six
months ended June 30, 2000 are based on the historical results of operations and
financial condition of CenturyTel, Inc., and its subsidiaries (the "Company")
and the Verizon properties acquired and reflects the effects of the
transactions described above. Pro forma adjustments, and the assumptions
on which they are based, are described in the accompanying notes to the
unaudited pro forma consolidated condensed financial information.
The pro forma financial information has been prepared assuming that the
aggregate purchase price of $1.504 billion will be financed with $1.0 billion of
proceeds from the issuance of senior long-term debt securities, $300 million of
bank indebtedness due in 2002, $157 million of proceeds from a commercial
paper issuance and $47 million of available cash.
The pro forma financial information related to the Verizon acquisitions has been
prepared using the purchase method of accounting and is based on the assumptions
that the purchase of all of the Verizon properties took place as of June 30,
2000 for purposes of the pro forma balance sheet and as of January 1, 1999 for
purposes of the pro forma statements of income. In accordance with the purchase
method of accounting, the actual consolidated financial statements of the
Company will reflect the Verizon acquisitions only from and after their
respective dates of acquisition.
This unaudited pro forma consolidated condensed financial data does not give
effect to any potential revenue enhancements or cost synergies or other
operating efficiencies that could result from the asset acquisitions including,
but not limited to (i) charging higher access rates than those authorized for
Verizon with respect to the acquired Arkansas properties, (ii) offering long
distance, Internet access and other advanced technology services to an increased
number of customers in the acquired markets and (iii) cost savings associated
with operating and administering the acquired properties with the Company's
existing personnel and operating assets.
The pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if such transactions had been consummated on the dates and in
accordance with the assumptions described above, nor is it necessarily
indicative of future operating results or financial position. The historical
Verizon financial information reflects the operating and management structure
of Verizon and is not necessarily indicative of the results of operations that
may be obtained with respect to the acquired properties under the Company's
operating and management structure.
You are urged to read the financial information below along with (i) the
Company's publicly available historical consolidated financial statements and
accompanying notes and (ii) the special purpose financial statements of the
Verizon acquired operations, which are included elsewhere in this Current Report
on Form 8-K.
CENTURYTEL, INC.
Pro Forma Consolidated Condensed Balance Sheet
June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
As reported
---------------------------------------------------------------- Pro forma Pro forma
CenturyTel Verizon adjustments consolidated
------------------------------------------------------------------------------------------
(Dollars in thousands)
(See Notes A and B)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 49,685 (27,000) 22,685
Accounts receivable 207,733 46,090 253,823
Materials and supplies,
at average cost 24,699 710 25,409
Other 10,484 1,577 12,061
-----------------------------------------------------------------------------------------
Total current assets 292,601 48,377 (27,000) 313,978
-----------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,235,891 446,914 162,773 2,845,578
-----------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired 1,621,491 886,250 2,507,741
Other 571,884 44,297 (43,296) 572,885
-----------------------------------------------------------------------------------------
Total investments and other assets 2,193,375 44,297 842,954 3,080,626
-----------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,721,867 539,588 978,727 6,240,182
=========================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term debt and current
maturities of long-term debt $ 75,022 157,000 232,022
Accounts payable 110,186 15,026 (15,026) 110,186
Accrued expenses and other liabilities 117,269 8,923 (8,923) 117,269
Advance billing and customer deposits 34,235 7,674 41,909
-----------------------------------------------------------------------------------------
Total current liabilities 336,712 31,623 133,051 501,386
-----------------------------------------------------------------------------------------
LONG-TERM DEBT 1,953,844 1,300,000 3,253,844
-----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 483,760 15,032 38,609 537,401
-----------------------------------------------------------------------------------------
PARENT FUNDING 492,933 (492,933)
-----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 140,540 140,540
Paid in capital 502,971 502,971
Unrealized holding gain on investments,
net of taxes 59,359 59,359
Retained earnings 1,240,706 1,240,706
Unearned ESOP shares (4,000) (4,000)
Preferred stock - non-redeemable 7,975 7,975
-----------------------------------------------------------------------------------------
Total stockholders' equity 1,947,551 1,947,551
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 4,721,867 539,588 978,727 6,240,182
=========================================================================================
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
CenturyTel, Inc.
Pro Forma Consolidated Condensed Statement of Income
For the Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
As reported
---------------------------------------------------------------- Pro forma Pro forma
CenturyTel Verizon adjustments consolidated
------------------------------------------------------------------------------------------
(Dollars in thousands)
(See Notes A and C)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $ 553,014 167,693 720,707
Wireless 211,546 211,546
Other 71,552 71,552
-----------------------------------------------------------------------------------------
Total operating revenues 836,112 167,693 1,003,805
-----------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 429,218 76,638 505,856
Depreciation and amortization 170,580 40,235 19,848 230,663
-----------------------------------------------------------------------------------------
Total operating expenses 599,798 116,873 19,848 736,519
-----------------------------------------------------------------------------------------
OPERATING INCOME 236,314 50,820 (19,848) 267,286
-----------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE
Interest expense (71,309) (7,788) (52,313) (131,410)
Income from unconsolidated cellular
entities 8,016 8,016
Minority interest (5,163) 637 (4,526)
Gain on sale of assets 9,910 9,910
Other income and expense 6,613 6,613
-----------------------------------------------------------------------------------------
Total other income (expense) (51,933) (7,788) (51,676) (111,397)
-----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 184,381 43,032 (71,524) 155,889
Income tax expense 77,252 16,835 (28,610) 65,477
-----------------------------------------------------------------------------------------
NET INCOME $ 107,129 26,197 (42,914) 90,412
=========================================================================================
BASIC EARNINGS PER SHARE $ 0.76 0.64
=========================================================================================
DILUTED EARNINGS PER SHARE $ 0.76 0.64
=========================================================================================
AVERAGE BASIC SHARES OUTSTANDING 139,874 139,874
=========================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 141,729 141,729
=========================================================================================
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed
financial information.
CENTURYTEL, INC.
Pro Forma Consolidated Condensed Statement of Income
For the year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
As reported
---------------------------------------------------------------- Pro forma Pro forma
CenturyTel Verizon adjustments consolidated
------------------------------------------------------------------------------------------
(Dollars in thousands)
(See Notes A and D)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $ 1,126,112 339,323 1,465,435
Wireless 422,269 422,269
Other 128,288 128,288
-----------------------------------------------------------------------------------------
Total operating revenues 1,676,669 339,323 2,015,992
-----------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 819,784 173,604 993,388
Depreciation and amortization 348,816 77,334 42,558 468,708
-----------------------------------------------------------------------------------------
Total operating expenses 1,168,600 250,938 42,558 1,462,096
-----------------------------------------------------------------------------------------
OPERATING INCOME 508,069 88,385 (42,558) 553,896
-----------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE
Interest expense (150,557) (17,563) (102,640) (270,760)
Income from unconsolidated
cellular entities 27,675 27,675
Minority interest (27,913) 4,853 (23,060)
Gain on sale of assets 62,808 62,808
Other income and expense 9,190 9,190
-----------------------------------------------------------------------------------------
Total other income (expense) (78,797) (17,563) (97,787) (194,147)
-----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 429,272 70,822 (140,345) 359,749
Income tax expense 189,503 27,725 (56,138) 161,090
-----------------------------------------------------------------------------------------
NET INCOME $ 239,769 43,097 (84,207) 198,659
=========================================================================================
BASIC EARNINGS PER SHARE $ 1.72 1.43
=========================================================================================
DILUTED EARNINGS PER SHARE $ 1.70 1.41
=========================================================================================
AVERAGE BASIC SHARES OUTSTANDING 138,848 138,848
=========================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 141,432 141,432
=========================================================================================
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
Notes to Unaudited Pro Forma Consolidated Condensed Financial Information
(A) Purchase of Verizon assets.
Costs of acquisition. The total cash purchase price of the Verizon
assets has been assumed to be approximately $1.504 billion.
Operations. As explained further above, the pro forma adjustments do
not consider the effect of possible revenue enhancements or cost synergies that
may occur in connection with combining the operations of the acquired
properties with the Company's operations.
Other transactions. The pro forma adjustments do not reflect the effects of
the Company's acquisitions and dispositions of certain other properties during
1999 and 2000, the aggregate effect of which is not material for pro forma
purposes.
(B) June 30, 2000 Balance Sheet Pro Forma Adjustments.
The pro forma adjustments applicable to the acquisition of the Verizon
properties with respect to the unaudited pro forma consolidated condensed
balance sheet as of June 30, 2000, as set forth below, reflect preliminary
allocations of the aggregate purchase price to the acquired properties. (These
adjustments are in addition to those summarized below to reflect the effect of
FAS 71, which is defined below). The preliminary estimates of the fair value of
the noncurrent assets and liablities are subject to change upon completion of
our valuation analysis, which could result in some of Verizon's intangible
assets being amortized over a shorter life than the 40-year goodwill
amortization period assumed hereunder. The pro forma financial information has
been prepared assuming that the aggregate purchase price of $1.504 billion will
be financed with $1.0 billion of proceeds from the issuance of senior long-term
debt securities, $300 million of bank indebtedness due in 2002, $157 million
of proceeds from a commercial paper issuance and $47 million of available cash.
For pro forma purposes, the weighted average interest rate of the Company's
financings is assumed to be 8.25%.
<TABLE>
<CAPTION>
Short-term
debt and
Net Excess current Accrued Deferred
property, cost of Investments maturities expenses and Long- credits
plant and net assets and other of long- Accounts other term and other Parent
Adjustment Cash equipment acquired assets term debt payable liabilities debt liabilities funding
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (a) $ 1,457,000 157,000 1,300,000
(b) (1,504,000) 1,504,000
(2) (492,933) (492,933)
(3) 43,296 (43,296)
(4) 162,773 (162,773)
(5) (23,949) (15,026) (8,923)
(6) 20,000 18,609 38,609
------------------------------------------------------------------------------------------------------------------------------------
$ (27,000) 162,773 886,250 (43,296) 157,000 (15,026) (8,923) 1,300,000 38,609 (492,933)
====================================================================================================================================
</TABLE>
Adjustment:
(1) Reflects (a) borrowing $1.457 billion and (b) delivery of $1.504 billion to
purchase assets of Verizon.
(2) Reflects the elimination of Verizon's parent debt and equity funding and
excess cost of net assets acquired.
(3) Reflects the elimination of excess pension assets, as such amounts are
retained by Verizon. The Company has not reflected in the Pro Forma
Consolidated Condensed Statements of Income any adjustments reflecting any
income generated by these excess pension assets.
(4) Reflects the increase in net property, plant and equipment and the related
decrease in excess cost of net assets acquired resulting from conforming
the net book value of the acquired assets to the amounts that would be
required to be recorded if such assets had been accounted for under
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" ("FAS 71").
(5) Reflects the elimination of Verizon's accounts payable and accrued expenses
and other liabilities, as such liabilities are retained by Verizon.
(6) Reflects the receipt of $20 million from minority investors and the
establishment of minority interest liability to reflect the share of
equity of Spectra (42.9%) and TelUSA (11%) attributable to the minority
investors.
(C) June 30, 2000 Income Statement Pro Forma Adjustments.
Set forth below are the pro forma adjustments applicable to the acquisition of
the Verizon assets with respect to the unaudited pro forma consolidated
condensed statement of income for the six-month period ended June 30, 2000:
<TABLE>
<CAPTION>
Depreciation
and Interest Minority Income
Adjustment amortization expense interest tax expense
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amortization of excess cost of net
assets acquired (assuming a 40-year
amortization period) $ 10,329
Adjust depreciation expense to reflect
the application of FAS 71 9,519
Interest on borrowings of $1.457 billion at
an assumed rate of 8.25% (1) 60,101
Eliminate Verizon interest expense
on parent funding (7,788)
Record minority interest to reflect the
share of the pro forma losses of Spectra (42.9%)
and TelUSA (11%) attributable to the
minority investors (637)
Tax benefit relating to pro forma
adjustments (assuming a 40% tax rate) (28,610)
--------------------------------------------------------------------------------------------------
$ 19,848 52,313 (637) (28,610)
==================================================================================================
</TABLE>
(1) Use of an assumed rate .125% higher or lower than 8.25% would have changed
net income by approximately $546,000.
(D) December 31, 1999 Income Statement Pro Forma Adjustments.
Set forth below are the pro forma adjustments applicable to the acquisition of
the Verizon assets with respect to the unaudited pro forma consolidated
condensed statement of income for the year ended December 31, 1999:
<TABLE>
<CAPTION>
Depreciation
and Interest Minority Income
Adjustment amortization expense interest tax expense
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amortization of excess cost of net
assets acquired (assuming a 40-year
amortization period) $ 20,659
Adjust depreciation expense to reflect the
application of FAS 71 21,899
Interest on borrowings of $1.457 billion at
an assumed rate of 8.25% (1) 120,203
Eliminate Verizon interest expense
on parent funding (17,563)
Record minority interest to reflect the
share of the pro forma losses of Spectra (42.9%)
and TelUSA (11%) attributable to the
minority investors (4,853)
Tax benefit relating to pro forma
adjustments (assuming a 40% tax rate) (56,138)
--------------------------------------------------------------------------------------------------
$ 42,558 102,640 (4,853) (56,138)
==================================================================================================
</TABLE>
(1) Use of an assumed rate .125% higher or lower than 8.25% would have changed
net income by approximately $1.1 million.
(E) Reclassifications.
Certain reclassifications have been made to the historical financial information
to conform to the presentation of the condensed pro forma information.
(F) Verizon Historical Results.
All amounts reflected above under the headings "As Reported - Verizon"
are based on special purpose financial statements of the Verizon acquired
operations. In connection with the preparation of these special purpose
financial statements, Verizon made numerous assumptions and allocations where
specific data was not available pertaining to the acquired assets. Because
of the significant amount of allocations and estimates used to prepare these
special purpose financial statements, they may not reflect the financial
position and results of operations of the acquired properties after such
properties are acquired by the Company. For additional information, see the
special purpose financial statements, and the notes thereto, filed in connection
with this Current Report on Form 8-K.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Current Report on Form 8-K includes
certain forward-looking statements regarding events and financial trends that
may affect the Company's future operating results and financial position. Such
forward-looking statements are subject to uncertainties that could cause the
Company's actual results to differ materially from such statements. Such
uncertainties include, but are not limited to: the Company's ability to
effectively manage its growth, including obtaining adequate financing on
attractive terms, integrating newly acquired properties into its operations,
hiring adequate numbers of qualified staff and successfully upgrading our
billing and other information systems; the risks inherent in rapid technological
change; the effects of ongoing changes in the regulation of the communications
industry; the effects of greater than anticipated competition in our markets;
possible changes in the demand for, and pricing of, our products and services;
the Company's ability to successfully introduce new product or service offerings
on a timely and cost-effective basis; and the effects of more general factors
such as changes in general market conditions or in legislation, regulation
or public policy. These and other uncertanties related to the business are
described in greater detail in Item 1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update any of its forward-
looking statements for any reason.
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.
CenturyTel, Inc.
By: /s/ Neil A. Sweasy
-------------------------
Neil A. Sweasy
Vice President and Controller