CITIZENS UTILITIES COMPANY
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For
the quarterly period ended June 30, 1999
-------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to__________
Commission file number 001-11001
---------
CITIZENS UTILITIES COMPANY
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 06-0619596
________________________________________ ___________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 High Ridge Park
P.O. Box 3801
Stamford, Connecticut 06905
________________________________________ ___________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 614-5600
------------------------------
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
--- ---
The number of shares outstanding of the registrant's class of common stock as of
July 31, 1999 was 260,553,664.
<PAGE>
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
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Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 2
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
June 30, 1999 and 1998 3
Consolidated Statements of Income and Comprehensive Income for the Six Months Ended
June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Quantitative and Qualitative Disclosures about Market Risk 23
Part II. Other Information
Legal Proceedings 24
Submission of Matters to a Vote of Security Holders 25
Other Information 25
Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1999 December 31, 1998
------------- -----------------
ASSETS
- ------
Current assets:
Cash $ 27,596 $ 31,922
Accounts receivable, net 294,038 318,378
Other 56,649 63,741
-------------- --------------
Total current assets 378,283 414,041
-------------- --------------
Property, plant and equipment 6,262,406 5,947,353
Less accumulated depreciation 2,044,416 1,898,730
-------------- --------------
Net property, plant and equipment 4,217,990 4,048,623
-------------- --------------
Investments 435,762 414,761
Regulatory assets 204,875 204,703
Deferred debits and other assets 233,579 210,804
-------------- --------------
Total assets $ 5,470,489 $ 5,292,932
============== ==============
LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
Long-term debt due within one year $ 23,878 $ 8,930
Short-term debt - 110,000
Accounts payable and current liabilities 430,604 388,801
-------------- --------------
Total current liabilities 454,482 507,731
Deferred income taxes 423,259 442,908
Customer advances for construction 201,305 211,941
Deferred credits and other liabilities 98,317 96,827
Regulatory liabilities 19,224 19,120
Long-term debt 2,106,514 1,900,246
-------------- --------------
Total liabilities 3,303,101 3,178,773
-------------- --------------
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities * 201,250 201,250
Contributions in aid of construction 95,713 90,353
Minority interest in subsidiary 19,658 29,785
Shareholders' equity:
Common stock issued, $.25 par value 65,075 64,787
Additional paid-in capital 1,563,929 1,554,188
Retained earnings 179,482 117,104
Accumulated other comprehensive income 42,281 56,692
-------------- --------------
Total shareholders' equity 1,850,767 1,792,771
-------------- --------------
Total liabilities and shareholders' equity $ 5,470,489 $ 5,292,932
============== ==============
* Represents securities of a subsidiary trust, the sole assets of which are
securities of a subsidiary partnership, substantially all the assets of which
are convertible debentures of the Company.
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------ ------------
Revenues $ 414,847 $ 366,347
------------ ------------
Operating expenses:
Cost of services 89,617 80,695
Depreciation 76,484 64,765
Other operating expenses 217,325 179,382
------------ ------------
Total operating expenses 383,426 324,842
------------ ------------
Income from operations 31,421 41,505
Other income, net 6,344 7,683
Minority interest 5,693 3,053
Interest expense 30,553 28,589
------------ ------------
Income before income taxes and dividend on convertible preferred securities 12,905 23,652
Income taxes 3,600 7,638
------------ ------------
Income before dividend on convertible preferred securities 9,305 16,014
Dividend on convertible preferred securities, net of income tax benefit 1,552 1,552
------------ ------------
Net income 7,753 14,462
Other comprehensive income (loss), net of tax and reclassification adjustment (293) 17,314
------------ ------------
Total comprehensive income $ 7,460 $ 31,776
============ ============
Net income per common share:
Basic $ .03 $ .06 *
Diluted $ .03 $ .06 *
Dividend rate declared on common stock - .75%
============ ============
*Adjusted for subsequent stock dividends.
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------ ------------
Revenues $ 852,361 $ 770,210
------------ ------------
Operating expenses:
Cost of services 197,299 188,727
Depreciation 152,125 128,362
Other operating expenses 435,193 355,338
------------ ------------
Total operating expenses 784,617 672,427
------------ ------------
Income from operations 67,744 97,783
Other income, net 81,536 18,321
Minority interest 11,686 5,136
Interest expense 60,366 55,395
------------ ------------
Income before income taxes, dividends on convertible preferred securities
and cumulative effect of change in accounting principle 100,600 65,845
Income taxes 35,118 19,166
------------ ------------
Income before dividends on convertible preferred securities and cumulative
effect of change in accounting principle 65,482 46,679
Dividends on convertible preferred securities, net of income tax benefit 3,104 3,104
------------ ------------
Income before cumulative effect of change in accounting principle 62,378 43,575
Cumulative effect of change in accounting principle, net of income tax benefit
and related minority interest - 2,334
------------ ------------
Net income 62,378 41,241
Other comprehensive income (loss), net of tax and reclassification adjustment (14,411) 23,284
------------ ------------
Total comprehensive income $ 47,967 $ 64,525
============ ============
Netincome per common share before cumulative effect of change in accounting
principle:
Basic $ .24 $ .17 *
Diluted $ .24 $ .17 *
Net income per common share:
Basic $ .24 $ .16 *
Diluted $ .24 $ .16 *
Compounded dividend rate declared on common stock - 1.51%
============ ============
*Adjusted for subsequent stock dividends.
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
4
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------- -------------
Net cash provided by operating activities $ 245,524 $ 156,382
------------- -------------
Cash flows from investing activities:
Construction expenditures (326,167) (221,399)
Securities purchased (629,546) (399,457)
Securities sold 653,035 386,194
Securities matured - 2,000
Other 223 6,565
------------- -------------
Net cash provided from investing activities (302,455) (226,097)
------------- -------------
Cash flows from financing activities:
Long-term debt borrowings 320,150 96,627
Long-term debt principal payments (157,915) (11,658)
Short-term debt repayments (110,000) -
Issuance of common stock 4,088 5,008
Common stock buybacks (3,718) -
------------- -------------
Net cash provided from financing activities 52,605 89,977
------------- -------------
Increase (decrease) in cash (4,326) 20,262
Cash at January 1, 31,922 35,163
------------- -------------
Cash at June 30, $ 27,596 $ 55,425
============= =============
The accompanying Notes are an integral part of these Financial Statements.
</TABLE>
5
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
------------------------------------------
(a) Basis of Presentation:
The unaudited consolidated financial statements include the accounts of
Citizens Utilities Company and its subsidiaries (the Company) and have
been prepared in conformity with generally accepted accounting
principles. These unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1998 Annual Report on Form
10-K. These unaudited consolidated financial statements include all
adjustments, which consist of normal recurring accruals necessary to
present fairly the results for the interim periods shown. Certain
information and footnote disclosures have been condensed pursuant to
Securities and Exchange Commission rules and regulations. The results
of the interim periods are not necessarily indicative of the results
for the full year. Certain reclassifications of balances previously
reported have been made to conform to current presentation.
(b) Regulatory Assets and Liabilities:
The Company's regulated operations are subject to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation." SFAS 71 requires
regulated entities to record regulatory assets and liabilities as a
result of actions of regulators.
(c) Net Income Per Common Share:
Basic net income per common share is computed using the weighted
average number of common shares outstanding during the period being
reported on. Diluted net income per common share reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock at the
beginning of the period being reported on. In 1998, both Basic and
Diluted net income per common share calculations are presented with
adjustments for subsequent stock dividends.
(d) Change in Accounting Principle:
In April 1998, the Accounting Standards Executive Committee of the
AICPA released Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires that the unamortized
portion of deferred start-up costs be written off and reported as a
change in accounting principle. Future costs of start-up activities
should then be expensed as incurred. Certain third party direct costs
incurred by Electric Lightwave, Inc. (ELI) in connection with
negotiating and securing initial rights-of-way and developing network
design for new market clusters or locations had been capitalized by ELI
in previous years and were being amortized over five years. The Company
adopted SOP 98-5 effective January 1, 1998. The net book value of these
deferred amounts was $3,394,000 which has been reported as a cumulative
effect of a change in accounting principle in the statements of income
and comprehensive income for the first quarter 1998, net of income tax
benefit of $577,000 and related minority interest of $483,000.
(2) Separation:
----------
On May 18, 1998, the Company announced its plans to separate its
communications businesses and public services businesses into two
stand-alone publicly traded companies. The Company had planned to transfer
to NewTelecom all of its telecommunications businesses, including its
approximate 82% ownership interest in ELI. This separation was subject to
federal and state regulatory approvals and was expected to be carried out
through a distribution of the stock of NewTelecom to the Company's
shareholders. The public services businesses were to continue to operate as
Citizens Utilities Company and provide natural gas transmission and
distribution, electric transmission and distribution, water distribution
and wastewater treatment services. This separation was being made in
recognition of the different investment features, performance criteria,
capital structures, dividend policies, customers' requirements and
regulatory designs of each business, and would have allowed each business
to pursue its own strategy and to compete more effectively in its
respective markets. Through May 1999, the Company had been pursuing its
separation plans, however, other opportunities have since become available
to acquire telecommunications properties which have resulted in the
Company's desire to no longer pursue separation plans.
On May 27, 1999 the Company announced that it has entered into definitive
agreements to purchase from GTE Corporation 187,000 telephone access lines
(as of year-end 1998) in Arizona, California and Minnesota for
approximately $664,000,000 in cash. The Company expects that the
acquisition, which is subject to various state and federal regulatory
approvals, is expected to be completed in 2000.
6
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 16, 1999 the Company announced that it has entered into a series of
definitive agreements to purchase from US West 530,000 telephone access
lines (as of year-end 1998) in Arizona, Colorado, Idaho, Iowa, Minnesota,
Montana, Nebraska, North Dakota and Wyoming for approximately
$1,650,000,000 in cash. The Company expects that the acquisition, which is
subject to various state and federal regulatory approvals, will occur on a
state-by-state basis, is expected to be completed in 2000.
The Company expects to temporarily fund the access line purchases with cash
and investment balances and bank credit facilities. The Company expects to
permanently fund the purchases with proceeds from the sale of the Company's
public services businesses and has appointed the investment banking firm
Morgan Stanley Dean Witter as financial advisor to develop the
divestiture plans.
(3) Net Income Per Common Share:
---------------------------
The reconciliation of the net income per common share calculation for
the three and six months ended June 30, 1999 and 1998, respectively, is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months ended June 30,
-----------------------------------------------------------------------------
1999 1998
--------------------------------- -------------------------------------
($ in thousands, except for per share amounts)
Per Per
Income Shares Share Income Shares Share
--------------------------------- -------------------------------------
Net income per common share:
Basic $ 7,753 260,143 $ .03 $ 14,462 259,619 $ .06
Effect of dilutive options - 1,412 - - 704 -
Diluted $ 7,753 261,555 $ .03 $ 14,462 260,323 $ .06
For the six months ended June 30,
-----------------------------------------------------------------------------
1999 1998
-------------------------------- ------------------------------------
($ in thousands, except for per share amounts)
Per Per
Income Shares Share Income Shares Share
-------------------------------- ------------------------------------
Net income per common share:
Basic $ 62,378 259,775 $ .24 $ 41,241 259,339 $ .16
Effect of dilutive options - 1,714 - - 669 -
Diluted $ 62,378 261,489 $ .24 $ 41,241 260,008 $ .16
</TABLE>
All share amounts represent weighted average shares outstanding for each
respective period. 1998 per share amounts have been adjusted for subsequent
stock dividends. The diluted net income per common share calculation
excludes the effect of potentially dilutive shares when their exercise
price exceeds the average market price over the period. The Company has
4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible
Preferred Securities which are convertible into common stock at a 3.76 to 1
ratio at an exercise price of $13.30 per share and 6,794,530 potentially
dilutive stock options at a range of $9.99 to $14.24 per share. These items
were adjusted for subsequent stock dividends and were not included in the
diluted net income per common share calculation for any of the above
periods as their effect was antidilutive.
7
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Sale of Investments:
-------------------
In January 1999, Centennial Cellular Corp. (Centennial) was merged with CCW
Acquisition Corp., a company organized at the direction of Welsh, Carson,
Anderson & Stowe. The Company was a holder of 1,982,294 shares of
Centennial Class B Common Stock. In addition, as a holder of 102,187 shares
of Mandatorily Redeemable Convertible Preferred Stock of Centennial, the
Company was required to convert the preferred stock into approximately
2,972,000 shares of Class B Common Stock. The Company received
approximately $205,600,000 in cash for all of its Common Stock interests
and approximately $17,500,000 related to accrued dividends on the preferred
stock. The Company recorded a pre-tax gain of approximately $69,500,000 on
this transaction in January 1999 which is included in other income, net.
In March 1999, Adelphia Communication Corporation (Adelphia) and Century
Communications Corp. (Century) announced the signing of a definitive
agreement for the merger of Century with Adelphia. The Company currently
owns 1,807,095 shares of Century Class A Common Stock. Pursuant to the
merger agreement, each Century Class A Common Share will be exchanged for
cash of $9.16 and .6122 of a share of Adelphia Class A Common Stock (for a
total market value of $46.20 per Century Class A Common Share based on
Adelphia's July 29, 1999 closing price of $60.50.) This transaction is
expected to close during the fourth quarter of 1999.
A subsidiary of the Company, in a joint venture with a subsidiary of
Century, acquired and operates four cable television systems in southern
California serving over 90,000 basic subscribers. The Company accounts for
the joint venture following the equity method of accounting. The Company
has entered into an agreement to sell its interest in the joint venture to
Adelphia. Pursuant to this agreement, the Company will receive
approximately $27,700,000 in cash and 1,852,302 shares of Adelphia Class A
Common Stock (for a total market value of $139,764,000 based on Adelphia's
July 29, 1999 closing price of $60.50.) This transaction is expected to
close concurrent with the merger of Adelphia and Century.
(5) Segment Information:
-------------------
The Company is a diversified communications and public services company
which is segmented into communications, CLEC, gas, electric and water and
wastewater services. The communications sector provides both regulated and
competitive communications services to residential, business and wholesale
customers. The CLEC sector is a facilities based integrated communications
provider providing a broad range of communications services throughout the
United States through the Company's subsidiary, ELI. The gas sector
provides gas transmission and distribution services to primarily
residential customers. The electric sector provides electric transmission
and distribution services to primarily residential customers. The water and
wastewater sector provides water distribution, wholesale water
transmission, wastewater treatment and public works consulting services to
primarily residential customers and also provides marketing and billing
services to others.
Special items charged against operating income and sector EBITDA during
1999 and 1998 include Y2K and separation costs (see Note 2). Sector EBITDA
consists of sector operating income plus depreciation. EBITDA is a measure
commonly used to analyze companies on the basis of operating performance.
It is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as a measure of performance nor as an alternative to cash flow as a
measure of liquidity and may not be compared to similarly titled measures
of other companies.
8
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the three months For the six months
ended June 30, ended June 30,
------------------------------- ------------------------------
($ in thousands) ($ in thousands)
1999 1998 1999 1998
------------- ------------- ------------- -------------
Communications:
- --------------
Revenues $ 240,990 $ 211,431 $ 478,875 $ 424,592
Inter-sector revenues (12,369) (7,623) (23,022) (15,426)
Revenues as reported 228,621 203,808 455,853 409,166
Operating income excluding special items 46,674 39,856 87,752 78,178
Operating income as reported 40,085 39,582 77,393 77,630
Depreciation 51,613 46,120 106,504 91,275
EBITDA excluding special items 98,287 85,976 194,256 169,453
EBITDA 91,698 85,702 183,897 168,905
CLEC:
- ----
Revenues $ 46,095 $ 21,443 $ 84,311 $ 41,500
Inter-sector revenues (770) (740) (1,468) (1,615)
Revenues as reported 45,325 20,703 82,843 39,885
Operating loss excluding special items (24,178) (16,091) (53,723) (30,321)
Operating loss as reported (25,114) (16,091) (55,290) (30,321)
Depreciation 8,150 3,780 15,144 7,664
EBITDA excluding special items (16,028) (12,311) (38,579) (22,657)
EBITDA (16,964) (12,311) (40,146) (22,657)
Public Services:
- ---------------
Gas:
---
Revenues $ 68,955 $ 75,618 $ 172,911 $ 187,201
Operating income excluding special items 6,056 6,831 25,729 28,735
Operating income as reported 5,294 6,769 24,130 28,611
Depreciation 6,621 5,752 10,901 11,259
EBITDA excluding special items 12,677 12,583 36,630 39,994
EBITDA 11,915 12,521 35,031 39,870
Electric:
--------
Revenues $ 47,162 $ 43,799 $ 93,236 $ 91,073
Operating income excluding special items 6,301 4,983 12,558 11,562
Operating income as reported 5,922 4,956 12,176 11,509
Depreciation 6,061 5,880 12,042 11,747
EBITDA excluding special items 12,362 10,863 24,600 23,309
EBITDA 11,983 10,836 24,218 23,256
Water and Wastewater:
--------------------
Revenues $ 24,784 $ 22,419 $ 47,518 $ 42,885
Operating income excluding special items 6,794 6,326 12,073 10,429
Operating income as reported 5,234 6,289 9,335 10,354
Depreciation 4,039 3,233 7,534 6,417
EBITDA excluding special items 10,833 9,559 19,607 16,846
EBITDA 9,273 9,522 16,869 16,771
</TABLE>
9
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a reconciliation of certain sector items to the
total consolidated amount.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the six months
ended June 30, ended June 30,
------------------------------- -------------------------
($ in thousands) ($ in thousands)
1999 1998 1999 1998
-------------- -------------- ----------- ----------
Operating income
- ----------------
Total sector operating income excluding special items $ 41,647 $ 41,905 $ 84,389 $ 98,583
Y2K and separation costs (10,226) (400) (16,645) (800)
-------------- -------------- ------------- -------------
Consolidated reported operating income $ 31,421 $ 41,505 $ 67,744 $ 97,783
============== ============== ============== =============
EBITDA
- ------
Total sector EBITDA excluding special items $ 118,131 $ 106,670 $ 236,514 $ 226,945
Investment and other income 6,344 7,683 12,037 18,321
Gain on sale of Centennial - - 69,499 -
Minority interest 5,693 3,053 11,686 5,136
Y2K and separation costs (10,226) (400) (16,645) (800)
-------------- ------------- ------------- ------------
Consolidated EBITDA $ 119,942 $ 117,006 $ 313,091 $ 249,602
============== ============== ============= ============
</TABLE>
10
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
This quarterly report on Form 10-Q contains forward-looking statements that
are subject to risks and uncertainties which could cause actual results to
differ materially from those expressed or implied in the statements. All
forward-looking statements (including oral representations) are only
predictions or statements of current plans, which are constantly under
review by the Company. All forward-looking statements may differ from
actual future results due to, but not limited to, changes in the economy of
the Company's markets, the nature and pace of technological changes, the
number and effectiveness of competitors in the Company's markets, weather
conditions, changes in legal and regulatory policy, success in overall
strategy, the Company's ability to identify future markets and successfully
expand existing ones, the mix of products and services offered in the
Company's target markets, Y2K issues, the effects of separation and
acquisitions and/or dispositions. Readers should consider these important
factors in evaluating any statement in this Form 10-Q or otherwise made by
the Company or on its behalf. The following information is unaudited and
should be read in conjunction with the consolidated financial statements
and related notes to consolidated financial statements included in this
report and as presented in the Company's 1998 Annual Report on Form 10-K
previously filed. The Company has no obligation to update or revise these
forward-looking statements to reflect the occurrence of future events or
circumstances.
On May 18, 1998, the Company announced its plans to separate its
communications businesses and public services businesses into two
stand-alone publicly traded companies. The Company had planned to transfer
to NewTelecom all of its communications businesses, including its
approximate 82% ownership interest in ELI. This separation was subject to
federal and state regulatory approvals and was expected to be carried out
through a distribution of the stock of NewTelecom to the Company's
shareholders. The public services businesses were to continue to operate as
Citizens Utilities Company and provide natural gas transmission and
distribution, electric transmission and distribution, water distribution
and wastewater treatment services. This separation was being made in
recognition of the different investment features, performance criteria,
capital structures, dividend policies, customers' requirements and
regulatory designs of each business, and would have allowed each business
to pursue its own strategy and to compete more effectively in its
respective markets. Through May 1999, the Company had been pursuing its
separation plans, however, other opportunities have since become available
to acquire communications properties which fit within the Company's
acquisition criteria and have led the Company to discontinue its separation
plans.
On May 27, 1999 the Company announced that it has entered into definitive
agreements to purchase from GTE Corporation 187,000 telephone access lines
(as of year-end 1998) in Arizona, California and Minnesota for
approximately $664,000,000 in cash. The Company expects that the
acquisition, which is subject to various state and federal regulatory
approvals, and is expected to be completed in 2000, at which time the total
access lines should number approximately 200,000.
On June 16, 1999 the Company announced that it has entered into a series of
definitive agreements to purchase from US West 530,000 telephone access
lines (as of year-end 1998) in Arizona, Colorado, Idaho, Iowa, Minnesota,
Montana, Nebraska, North Dakota and Wyoming for approximately
$1,650,000,000 in cash. The Company expects that the acquisition, which is
subject to various state and federal regulatory approvals, will occur on a
state-by-state basis and is expected to be completed in 2000, at which time
the total access lines should number approximately 570,000.
The Company expects to temporarily fund the access line purchases with cash
and investment balances and bank credit facilities. The Company expects to
permanently fund the purchases with proceeds from the sale of the Company's
public services businesses and has appointed the investment banking firm
Morgan Stanley Dean Witter as financial advisor to develop the
divestiture plans.
11
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(a) Liquidity and Capital Resources
-------------------------------
The Company considers its operating cash flows and its ability to raise
debt and equity capital as the principal indicators of its liquidity. For
the six months ended June 30, 1999, the Company used cash flow from
operations and proceeds from net financings and parties desiring utility
services to fund capital expenditures. Funds requisitioned from the
Industrial Development Revenue Bond construction fund trust accounts were
used to partially fund the construction of utility plant.
The Company has committed revolving lines of credit with commercial banks
under which it may borrow up to $575,000,000. There were no amounts
outstanding under these lines at June 30, 1999. ELI has committed revolving
lines of credit with commercial banks under which it may borrow up to
$400,000,000. The Company has guaranteed all of ELI's obligations under
these revolving lines of credit. As of June 30, 1999, $130,000,000 was
outstanding under ELI's revolving lines of credit. In April 1999, ELI
completed an offering of $325 million of five-year senior unsecured notes.
The notes have an interest rate of 6.05% and mature on May 15, 2004. The
Company has guaranteed the payment of principal, any premium and interest
on the notes when due.
In January 1999, Centennial Cellular Corp. (Centennial) was merged with CCW
Acquisition Corp., a company organized at the direction of Welsh, Carson,
Anderson & Stowe. The Company was a holder of 1,982,294 shares of
Centennial Class B Common Stock. In addition, as a holder of 102,187 shares
of Mandatorily Redeemable Convertible Preferred Stock of Centennial, the
Company was required to convert the preferred stock into approximately
2,972,000 shares of Class B Common Stock. The Company received
approximately $205,600,000 in cash for all of its Common Stock interests
and approximately $17,500,000 related to accrued dividends on the preferred
stock. The Company recorded a pre-tax gain of approximately $69,500,000 on
this transaction in January 1999 which is included in other income, net.
In March 1999, Adelphia Communication Corporation (Adelphia) and Century
Communications Corp. (Century) announced the signing of a definitive
agreement for the merger of Century with Adelphia. The Company currently
owns 1,807,095 shares of Century Class A Common Stock. Pursuant to the
merger agreement, each Century Class A Common Share will be exchanged for
cash of $9.16 and .6122 of a share of Adelphia Class A Common Stock (for a
total market value of $46.20 per Century Class A Common Share based on
Adelphia's July 29, 1999 closing price of $60.50.) This transaction is
expected to close during the fourth quarter of 1999.
A subsidiary of the Company, in a joint venture with a subsidiary of
Century, acquired and operates four cable television systems in southern
California serving over 90,000 basic subscribers. The Company accounts for
the joint venture following the equity method of accounting. The Company
has entered into an agreement to sell its interest in the joint venture to
Adelphia. Pursuant to this agreement, the Company will receive
approximately $27,700,000 in cash and 1,852,302 shares of Adelphia Class A
Common Stock (for a total market value of $139,764,000 based on Adelphia's
July 29, 1999 closing price of $60.50.) This transaction is expected to
close concurrent with the merger of Adelphia and Century.
In May 1999, in connection with HTCC's debt restructuring, the Company
cancelled HTCC's $8,400,000 note obligation and the seven-year consulting
services agreement in exchange for the issuance by HTCC to the Company of
1,300,000 shares of HTCC common stock and 30,000 shares of HTCC's 5%
convertible preferred stock. Each share of HTCC convertible preferred stock
has a liquidation value of $70 and is convertible at the option of the
Company into 10 shares of HTCC common stock. To the extent the 1,300,000
HTCC common shares and the 300,000 HTCC common shares underlying the HTCC
convertible preferred stock do not achieve an average market closing price
of at least $7 per share during a certain period prior to March 31, 2000,
HTCC has agreed to issue additional HTCC convertible preferred shares with
a value equal to any such shortfall.
12
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Impact of the Year 2000
-----------------------
The Y2K issue results from computer programs using a two-digit format, as
opposed to four, to indicate the year. Such computer systems may be unable
to interpret dates beyond the year 1999, which could cause system failures
or other computer errors. In late 1997, the Company developed a four-phase
program to address the Y2K issue. The four-phase program was designed to
protect the safety and continuity of the Company's service delivery and
support capabilities, computer systems and other critical functions. The
Company's Y2K program seeks to address problems that could arise: (1) in
Information Technology (IT) areas including information systems and
technologies; (2) in non-IT areas such as communications networks and
switches, utility control and monitoring systems, premises, facilities and
general business equipment; and (3) due to suppliers of products and
services not being Y2K compliant. Phase I is inventory and identification
of those systems with which the Company has exposure to Y2K issues. Phase
II is the assessment and development of action plans. Phase III is the
implementation of the Y2K remediation plans. Phase IV, which in some
instances will run concurrent with Phase III, is the testing and validation
of each remedial action to ensure compliance. This phase includes, in some
cases, testing in an environment identical to, but separate from, the
production environment. Each of the Company's sectors has a program office
that manages the progress of the Y2K efforts. The Company has determined
priorities for taking corrective actions on mission critical systems or
products so as to ensure continued delivery of core business activities.
The Company is and will continue to use both internal and external
resources to reprogram, replace and test software and address remediation
of IT and non-IT operational assets for Y2K compliance. The Company has
contracted with consulting firms to provide direction, support,
methodologies, reporting standards and templates.
The following table includes information, by Phase, related to the Y2K
program for both the Company's sectors. The timing of expenses may vary and
is not necessarily indicative of readiness efforts or progress to date.
Funding of the Y2K costs is expected to occur from operating cash flows,
cash and investments and proceeds from the issuance of securities and/or
other borrowings.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Estimated Expenditures
---------------------------------------------------
Completion Dates Actual for Estimated for Total
for Mission six months six months Estimated for
Critical Systems ended ended the year ended
and Products % Completed 6/30/99 12/31/99 12/31/99
------------------- ----------- ------- -------- --------
Communications and
Corporate
IT $6,239,000 $ 10,953,000 $ 17,192,000
--
Inventory Completed 100%
Assessment Completed 100%
Remediation 9/30/99 98%
Testing 9/30/99 93%
Non-IT 173,000 1,611,000 1,784,000
------
Inventory Completed 100%
Assessment Completed 100%
Remediation 9/30/99 96%
Testing 9/30/99 67%
Public Services
IT 2,717,000 197,000 2,914,000
--
Inventory Completed 100%
Assessment Completed 100%
Remediation Completed 100%
Testing 8/31/99 97%
Non-IT 3,680,000 1,584,000 5,264,000
------
Inventory Completed 100%
Assessment Completed 100%
Remediation Completed 100%
Testing Completed 100%
--------------- ---------------- ----------------
Total $ 12,809,000 $ 14,345,000 $ 27,154,000
================ ================ ================
</TABLE>
13
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Certain public services state regulatory commissions, where the Company
operates, have issued orders allowing the deferral of Y2K costs for
consideration in future rate proceedings. In accordance with these orders
the Company deferred $2,388,000 in 1999.
The systems of vendors and suppliers play a major role in the conduct of
the business of the Company. As a result, as part of its Y2K program, the
Company has been contacting software suppliers to determine major areas of
exposure to Y2K issues. The Company has also been contacting its major
suppliers and service providers to ascertain their ability to comply. In
addition, the Company contracted with a consulting firm to review the Y2K
programs of selected third party vendors. Thus far, most of these parties
have stated that they intend to be Y2K compliant by the year 2000. However,
there can be no guarantee that the systems of suppliers or service
providers on which the Company's systems rely will be compliant, or that
failure to be compliant by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The Company's communications businesses rely, directly and/or indirectly,
on a large number of traffic carriers to carry communications traffic
through a series of interconnected chains of communications. Therefore,
despite its efforts, the Company cannot ensure that each entity involved in
the delivery of communications services will be Y2K compliant. In an effort
to address third party compliance issues, the Company's communications
sector has initiated testing activities with one of its major suppliers.
The electric power-supply systems of North America are connected into four
major interconnections called grids. Operational component failures of any
entity connected to any of the grids could cause failures in that grid. The
Company continues to assess these risks as the millennium approaches to
evaluate the likelihood of failures and develop approaches for mitigating
the risk of failures. In addition, the Company participates in trade
associations such as the Electric Power Research Institute (EPRI) and the
American Gas Association (AGA), which furthers the industry's efforts
toward Y2K readiness. The Company uses these organizations' Y2K programs'
vast resources to accelerate its Y2K program for embedded systems. They
also provide a forum for working within the industry peer group whereby
joint conclusions may be reached on other key aspects of Y2K readiness.
EPRI's Y2K program participants represent more than 70% of the electric
power generation capacity in the U.S. AGA represents 181 natural gas
utilities that deliver gas to homes and businesses in all fifty states.
The Company has completed approximately 90% of its Y2K remediation efforts
on mission critical systems and products so as to ensure continued delivery
of core business activities to our customers. Testing, remediation and
monitoring will continue through the remainder of 1999 to verify that there
are no outstanding problems that either were not captured during the
initial Y2K efforts or arose after June 30, 1999. Also, review,
modifications and testing of the contingency plans will take place
throughout the remainder of 1999 and into the year 2000.
The Contingency Plans for the Company was completed to meet the June 30,
1999 milestone. The plans are dedicated to ensuring that established and
expected levels of customer service are maintained without interruption,
while core business functionality is preserved during the millennium
transition. Additionally, the plans utilize existing operating policies and
procedures, disaster recovery plans, and enterprise prioritization of all
systems and applications by examining potential exposures while documenting
clear mitigation strategies. Contingency planning, risk mitigation, and
testing activities will continue through the year rollover by all Company
organizations.
The extent and magnitude of the Y2K problem is difficult to predict or
quantify. The above information is based on the Company's best estimates
which were made using numerous assumptions, including the availability and
future costs of certain technological and other resources, third party
modification actions and other factors. Given the complexity of the issue
and the possibility of unidentified risks, actual results may vary
materially from those discussed above. Specific factors that might cause
such differences include, among others, the availability and cost of the
personnel trained in this area, the ability to locate and correct all
affected computer codes, the timing and success of remedial efforts of
third party suppliers and similar uncertainties.
14
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
(b) Results of Operations
---------------------
REVENUES
--------
Total revenues for the three and six months ended June 30, 1999 increased
$48.5 million, or 13%, and $82.2 million, or 11%, respectively, as compared
with the prior year periods primarily due to increases in communications
and CLEC revenues.
Communications/CLEC Revenues
----------------------------
Communications and CLEC revenues for the three and six months ended June
30, 1999 increased $49.4 million, or 22%, and $89.6 million, or 20%,
respectively, as compared with the prior year periods primarily due to an
increase in communications network access services and CLECs local
telephone and long distance services.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Communications revenues 1999 1998 (Decrease) 1999 1998 (Decrease)
- ----------------------- ----------- ----------- ------------ ----------- ----------- ------------
Network access services $ 128,524 $ 104,121 23% $ 257,204 $ 208,007 24%
Local network services 72,079 64,896 11% 141,992 128,314 11%
Long distance services 19,832 21,409 (7%) 40,933 48,187 (15%)
Directory services 8,375 8,025 4% 16,772 15,808 6%
Other 12,180 12,980 (6%) 21,974 24,276 (9%)
Eliminations (12,369) (7,623) N/A (23,022) (15,426) N/A
----------- ----------- ----------- -----------
$ 228,621 $ 203,808 12% $ 455,853 $ 409,166 11%
=========== =========== =========== ===========
</TABLE>
Network access services revenues for the three months ended June 30, 1999
increased $24.4 million, or 23%, as compared with the prior year period
primarily due to increased minutes of use, an increase in special access
and universal service fund revenues and the acquisition of Rhinelander
Telecommunications, Inc. (RTI) in November 1998. Network access services
revenues for the six months ended June 30, 1999 increased $49.2 million, or
24%, as compared with the prior year period primarily due to an interstate
universal service fund settlement, increased minutes of use, an increase in
special access revenues and the acquisition of RTI in November 1998.
Local network services revenues for the three and six months ended June 30,
1999 increased $7.2 million, or 11%, and $13.7 million, or 11%,
respectively, as compared with the prior year periods primarily due to
access line growth, the acquisition of RTI and increased custom calling
features and private line sales.
Long distance services revenues for the three and six months ended June 30,
1999 decreased $1.6 million, or 7%, and $7.3 million, or 15%, respectively,
as compared with the prior year periods primarily due to the elimination of
long distance product offerings to out-of-territory customers.
Directory services revenues for the three and six months ended June 30,
1999 increased $.4 million, or 4%, and $1 million, or 6%, respectively, as
compared with the prior year periods primarily to the acquisition of RTI
and an increase in advertising revenue.
Other revenues for the three and six months ended June 30, 1999 decreased
$.8 million, or 6%, and $2.3 million, or 9%, respectively, as compared with
the prior year periods primarily due to the phasing out of certain
surcharges resulting from regulatory decisions in California and New York.
Eliminations represent network access revenues received by the Company's
local exchange operations from its long distance operations and CLEC
operations.
15
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
CLEC revenues 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------- ----------- ----------- ------------- ----------- ----------- -------------
Network services $ 12,983 $ 8,371 55% $ 23,407 $ 17,478 34%
Local telephone services 18,600 7,769 139% 32,908 13,793 139%
Long distance services 9,245 1,899 387% 17,775 3,721 378%
Data services 5,267 3,404 55% 10,221 6,508 57%
Eliminations (770) (740) N/A (1,468) (1,615) N/A
----------- ----------- ----------- ------------
$ 45,325 $ 20,703 119% $ 82,843 $ 39,885 108%
=========== =========== =========== ===========
Network services revenues for the three and six months ended June 30, 1999
increased $4.6 million, or 55%, and $5.9 million, or 34%, respectively, as
compared with the prior year periods primarily due to sales of additional
circuits to new and existing customers, partially offset by the expiration
of a short-term contract with a significant customer in the first quarter
of 1999.
Local telephone services revenues for the three and six months ended June
30, 1999 increased $10.8 million, or 139%, and $19.1 million, or 139%,
respectively, as compared with the prior year periods primarily due to an
increase in reciprocal compensation revenues that are earned under various
interconnection agreements. In addition, increased sales of the integrated
service digital network (ISDN) product to Internet Service Providers and an
increase in local dial tone services contributed to the increase.
Long distance services revenues for the three and six months ended June 30,
1999 increased $7.3 million, or 387%, and $14.1 million, or 378%,
respectively, as compared with the prior year periods primarily due to
increases in prepaid services resulting from new large volume customers.
Data services revenues for the three and six months ended June 30, 1999
increased $1.9 million, or 55%, and $3.7 million, or 57%, respectively, as
compared with the prior year periods primarily due to increased sales from
Internet and frame relay services.
Eliminations reflect intercompany activity between the Company's CLEC and
communications sectors.
16
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Public Services Revenues
------------------------
Public services revenues for the three and six months ended June 30, 1999
decreased $.9 million, or 1%, and $7.5 million, or 2%, respectively, as
compared with the prior year periods primarily due to decreased gas
revenues, offset by increased electric and water and wastewater revenues.
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Gas revenues 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------ ----------- ----------- ------------ ----------- ----------- -------------
Residential $ 29,164 $ 33,297 (12%) $ 81,138 $ 95,400 (15%)
Commercial 21,550 25,970 (17%) 53,236 61,748 (14%)
Industrial 8,652 12,138 (29%) 23,691 19,570 21%
Municipal 656 827 (21%) 1,922 2,672 (28%)
----------- ----------- ----------- -----------
Total Distribution 60,022 72,232 (17%) 159,987 179,390 (11%)
Transportation 4,023 440 814% 5,050 1,392 263%
Other 4,910 2,946 67% 7,874 6,419 23%
----------- ----------- ----------- -----------
$ 68,955 $ 75,618 (9%) $ 172,911 $ 187,201 (8%)
=========== =========== =========== ===========
Residential, commercial and municipal revenues for the three and six months
ended June 30, 1999 decreased $8.7 million, or 15%, and $23.5 million, or
15%, respectively, as compared with the prior year periods primarily due to
lower purchased gas costs passed on to customers and decreased consumption
due to warmer weather conditions in certain of the Company's service
territories.
Industrial revenues for the three months ended June 30, 1999 decreased $3.5
million, or 29%, as compared with the prior year period primarily due to
decreased consumption by a significant customer. Industrial revenues for
the six months ended June 30, 1999 increased $4.1 million, or 21%, as
compared with the prior year period primarily due to increased consumption
and an increase in customers.
Transportation and other revenues for the three and six months ended June
30, 1999 increased $5.5 million, or 164%, and $5.1 million, or 65%,
respectively, primarily due to increased consumption by industrial
customers, partially offset by decreased consumption by residential and
commercial customers.
17
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Electric revenues 1999 1998 (Decrease) 1999 1998 (Decrease)
- ----------------- ----------- ----------- ------------ ----------- ----------- -------------
Residential $ 18,359 $ 17,732 4% $ 38,685 $ 38,511 0%
Commercial 14,405 13,269 9% 27,998 26,433 6%
Industrial 10,794 9,633 12% 20,053 19,710 2%
Municipal 1,966 2,036 (3%) 3,944 3,931 0%
----------- ----------- ----------- -----------
Total Distribution 45,524 42,670 7% 90,680 88,585 2%
Transportation 48 917 (95%) 953 1,488 (36%)
Other 1,590 212 650% 1,603 1,000 60%
----------- ----------- ----------- -----------
$ 47,162 $ 43,799 8% $ 93,236 $ 91,073 2%
=========== =========== =========== ===========
Electric revenues for the three and six months ended June 30, 1999
increased $3.4 million, or 8%, and $2.2 million, or 2%, respectively, as
compared with the prior year periods primarily due to higher purchased
electric energy and fuel oil costs passed on to customers and increased
consumption.
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Water and Wastewater revenues 1999 1998 (Decrease) 1999 1998 (Decrease)
- ----------------------------- ----------- ----------- ------------ ----------- ----------- -------------
Residential distribution $ 18,226 $ 17,784 2% $ 35,820 $ 34,197 5%
Commercial distribution 4,657 3,347 39% 7,799 6,255 25%
Industrial distribution 291 237 23% 523 447 17%
Other 1,610 1,051 53% 3,376 1,986 70%
----------- ----------- ----------- -----------
$ 24,784 $ 22,419 11% $ 47,518 $ 42,885 11%
=========== =========== =========== ===========
Water and wastewater revenues for the three and six months ended June 30,
1999 increased $2.4 million, or 11%, and $4.6 million, or 11%,
respectively, as compared with the prior year periods primarily due to
customer growth, increased consumption and rate increases in Ohio in
January 1999 and California in November 1998.
18
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
OPERATING EXPENSES
------------------
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Cost of Services 1999 1998 (Decrease) 1999 1998 (Decrease)
- ---------------- ----------- ----------- ------------ ----------- ----------- -------------
Gas purchased $ 32,850 $ 38,973 (16%) $ 85,554 $ 98,167 (13%)
Network expenses 47,033 29,991 57% 92,779 65,763 41%
Electric energy and fuel oil
purchased 22,873 20,094 14% 43,456 41,838 4%
Eliminations (13,139) (8,363) N/A (24,490) (17,041) N/A
----------- ----------- ----------- -----------
$ 89,617 $ 80,695 11% $ 197,299 $ 188,727 5%
=========== =========== =========== ===========
Gas purchased expenses for the three and six months ended June 30, 1999
decreased $6.1 million, or 16%, and $12.6 million, or 13%, respectively, as
compared with the prior year periods primarily due to a decrease in the
cost of gas and lower consumption as a result of warmer weather conditions
in the Company's service territories.
Network expenses for the three and six months ended June 30, 1999 increased
$17 million, or 57%, and $27 million, or 41%, respectively, as compared
with the prior year periods primarily due to increases in long distance
costs related to the Company's CLEC subsidiary's prepaid services programs
and expenses related to the CLEC national data expansion. The increase in
CLEC's network expenses was partially offset by decreased communications
network expenses primarily due to decreased long distance minutes of use.
Electric energy and fuel oil purchased expenses for the three and six
months ended June 30, 1999 increased $2.8 million, or 14%, and $1.6
million, or 4%, respectively, as compared with the prior year periods
primarily due to higher supplier prices and increased consumption.
Eliminations represent network expenses incurred by the Company's long
distance operation for services provided by its local exchange operations
and intercompany activity between the Company's CLEC and communications
sectors.
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- -------------
Depreciation expense $ 76,484 $ 64,765 18% $ 152,125 $ 128,362 19%
Depreciation expense for the three and six months ended June 30, 1999
increased $11.7 million, or 18% and $23.8 million, or 19%, respectively, as
compared with the prior year periods primarily due to increased property,
plant and equipment.
19
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Other Operating Expenses 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------------------ ----------- ----------- ------------ ----------- ----------- -------------
Operating and maintenance $ 172,456 $ 146,930 17% $ 345,065 $ 286,863 20%
Taxes other than income 27,239 21,899 24% 55,935 48,873 14%
Sales and marketing 17,630 10,553 67% 34,193 19,602 74%
----------- ----------- ----------- -----------
$ 217,325 $ 179,382 21% $ 435,193 $ 355,338 22%
=========== =========== =========== ===========
Operating and maintenance expenses for the three and six months ended June
30, 1999 increased $25.5 million, or 17%, and $58.2 million, or 20%,
respectively, as compared with the prior year periods primarily due to
increased CLEC operating expenses as a result of the CLEC national data
expansion, increased Y2K and separation expenses and the acquisition of
RTI.
Taxes other than income for the three and six months ended June 30, 1999
increased $5.3 million, or 24%, and $7.1 million or 14%, respectively, as
compared with the prior year periods primarily due to an increase in
payroll and property taxes.
Sales and marketing expenses for the three and six months ended June 30,
1999 increased $7.1 million, or 67%, and $14.6 million, or 74%,
respectively, as compared with the prior year periods primarily due to
increased personnel and product advertising to support the delivery of
services in existing and new markets including the CLEC national data
expansion.
OTHER INCOME, NET /MINORITY INTEREST /INTEREST EXPENSE /INCOME TAXES
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
Other Income, Net 1999 1998 (Decrease) 1999 1998 (Decrease)
- ----------------- ----------- ----------- ------------ ----------- ----------- -------------
Investment income $ 6,191 $ 7,851 (21%) $ 80,802 $ 16,622 386%
Other 153 (168) 191% 734 1,699 (57%)
----------- ----------- ----------- -----------
$ 6,344 $ 7,683 (17%) $ 81,536 $ 18,321 345%
=========== =========== =========== ===========
Investment income for the three months ended June 30, 1999 decreased $1.7
million or 21% as compared with the prior year period primarily due to
lower average investment balances. Investment income for the six months
ended June 30, 1999 increased $64.2 million, or 386%, as compared with the
prior year period primarily due to the $69.5 million gain on the sale of
the Company's investment in Centennial in January 1999 partially offset by
lower investment income earned due to lower average investment balances.
Other income for the three months ended June 30, 1999 increased $.3
million, or 191%, as compared with the prior year period primarily due to a
supplemental sales program for the supply of natural gas, offset by a
decrease in the equity component of Allowance for Funds Used during
Construction. Other income for the six months ended June 30, 1999 decreased
$1 million or 57% as compared with the prior year period primarily due to a
decrease in the equity component of Allowance for Funds Used during
Construction.
20
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- ------------
Minority interest $ 5,693 $ 3,053 86% $ 11,686 $ 5,136 128%
Minority interest is a result of ELI's initial public offering in November
1997 and it represents 17.51% (the minority's share) of ELI's loss before
the income tax benefit and the cumulative effect of change in accounting
principle in 1998. Minority interest for the three and six months ended
June 30, 1999 increased $2.6 million, or 86%, and $6.6 million, or 128%,
respectively, as compared with the prior year periods primarily due to
increased losses recorded by ELI.
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- -------------
Interest expense $ 30,553 $ 28,589 7% $ 60,366 $ 55,395 9%
Interest expense for the three and six months ended June 30, 1999 increased
$2 million, or 7% and $5 million, or 9%, respectively, as compared with the
prior year periods primarily due to an increase in the usage of ELI's
outstanding line of credit and the issuance of $325 million of five-year
unsecured notes in April 1999 by ELI.
For the three months For the six months
ended June 30, ended June 30,
--------------------------------------------- -------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ------------ ----------- ----------- -------------
Income taxes $ 3,600 $ 7,638 (53%) $ 35,118 $ 19,166 83%
Income taxes for the three and six months ended June 30, 1999 decreased $4 million, or 53% and increased $16 million, or 83%,
as compared with the prior year periods primarily due to changes in taxable income.
21
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
NET INCOME AND NET INCOME PER COMMON SHARE
-------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
------------------------------------------ -----------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
------------ ------------ -------------- ------------ ------------- --------------
Net income $ 7,753 $ 14,462 (46%) $ 62,378 $ 41,241 51%
Net income per common share:
Basic $ .03 $ .06 (50%) $ .24 $ .16 50%
Diluted $ .03 $ .06 (50%) $ .24 $ .16 50%
</TABLE>
Net income and net income per share for the three months ended June 30,
1999 decreased $6.7 million, or 46%, and .03(cent), or 50%, respectively,
as compared with the prior year period primarily due to increased losses
from the Company's CLEC subsidiary and Y2K and separation costs. Net income
and net income per share for the six months ended June 30, 1999 increased
$21.1 million, or 51%, and .08(cent), or 50%, respectively, as compared
with the prior year period primarily due to the first quarter $69.5 million
gain on the sale of the Company's investment in Centennial.
22
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company is exposed to the impact of interest rate and market risks. In the
normal course of business, the Company employs established policies, procedures
and internal processes to manage its exposure to interest rate and market risks.
The Company's objective in managing its interest rate risk is to limit the
impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve these objectives, the Company refinances
debt when advantageous and maintains fixed rate debt on a majority of its
borrowings. In an effort to reduce interest rate risk the Company's CLEC
subsidiary issued $325 million, five-year senior unsecured notes in April 1999
that are guaranteed by the Company. The notes have a fixed interest rate. The
net proceeds from the issuance were used to repay outstanding borrowings under
the Company's floating rate bank credit facility. The Company maintains a
portfolio of investments consisting of both equity and debt financial
instruments. The Company's equity portfolio is comprised of primarily
investments in communications companies. The Company's bond portfolio consists
of government, corporate and municipal fixed-income securities. The Company does
not hold or issue derivative or other financial instruments for trading
purposes. The Company purchases monthly gas futures contracts to manage
well-defined commodity price fluctuations, caused by weather and other
unpredictable factors, associated with the Company's commitments to deliver
natural gas to certain industrial customers at fixed prices. This derivative
financial instrument activity is not material to the Company's consolidated
financial position, results of operations or cash flows.
23
<PAGE>
PART II. OTHER INFORMATION
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
In November 1995, the Company's Vermont electric division was permitted an 8.5%
rate increase. Subsequently, the Vermont Public Service Board (VPSB) called into
question the level of rates awarded the Company in connection with its formal
review of allegations made by the Department of Public Service (the DPS), the
consumer advocate in Vermont and a former Citizens employee. The major issues in
this proceeding involved classification of certain costs to property, plant and
equipment accounts and the Company's Demand Side Management program. In
addition, the DPS believed that the Company should have sought and received
regulatory approvals prior to construction of certain facilities in prior years.
On June 16, 1997, the VPSB ordered the Company to reduce its rates for Vermont
electric service by 14.65% retroactive to November 1, 1995 and to refund to
customers, with interest, all amounts collected since that time in excess of the
rates authorized by the VPSB. In addition, the VPSB assessed statutory penalties
totaling $60,000 and placed the Company on regulatory probation for a period of
at least five years. During this probationary period, the Company could lose its
franchise to operate in Vermont if it violates the terms of probation prescribed
by the VPSB. The VPSB prescribed final terms of probation in its final order
issued September 15, 1998. In October 1998, the Company filed an appeal in the
Vermont Supreme Court challenging certain of the penalties imposed by the VPSB.
In August 1997, a lawsuit was filed in the United States District Court for the
District of Connecticut (Leventhal vs. Tow, et al.) against the Company and five
of its officers, one of whom is also a director, on behalf of all persons who
purchased or otherwise acquired Series A and Series B shares of Common Stock of
the Company between September 5, 1996 and July 11, 1997, inclusive. On February
9, 1998, the plaintiffs filed an amended complaint. The complaint alleged that
Citizens and the individual defendants, during such period, violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 based upon certain public
statements made by the Company, which are alleged to be materially false or
misleading, or are alleged to have failed to disclose information necessary to
make the statements made not false or misleading. The plaintiffs sought to
recover unspecified compensatory damages. The Company and the individual
defendants believed the allegations are unfounded and filed a motion to dismiss
on March 27, 1998. On March 30, 1999 the Court dismissed the action. On April
29, 1999 the plaintiffs filed a notice of appeal with the Court of Appeals for
the Second Circuit.
In March 1998, a lawsuit was filed in the United States District Court for the
District of Connecticut (Ganino vs. Citizens Utilities Company, et al.), against
the Company and three of its officers, one of whom is also a director, on behalf
of all purchasers of the Company's Common Stock between May 6, 1996 and August
7, 1997, inclusive. The complaint alleges that the Company and the individual
defendants, during such period, violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by making materially false and misleading public
statements concerning the Company's relationship with a purported affiliate,
Hungarian Telephone and Cable Corp. (HTCC), and by failing to disclose material
information necessary to render prior statements not misleading. The plaintiff
seeks to recover unspecified compensatory damages. The Company and the
individual defendants believe that the allegations are unfounded and filed a
motion to dismiss. The plaintiff requested leave to file an amended complaint
and an amended complaint was served on the Company on July 24, 1998. The
Company's motion to dismiss the amended complaint was filed on October 13, 1998.
The Court dismissed the action with prejudice on June 28, 1999.
In November 1998, a class action lawsuit was filed in state District Court for
Jefferson Parish, Louisiana, against the Company and three of its subsidiaries:
LGS Natural Gas Company, LGS Intrastate, Inc. and Louisiana General Service
Company. The lawsuit alleges that the Company and the other named defendants
passed through in rates charged to Louisiana customers certain costs that
plaintiffs contend were unlawful. The lawsuit seeks compensatory damages in the
amount of the alleged overcharges and punitive damages equal to three times the
amount of any compensatory damages, as allowed under Louisiana law. In addition,
the Louisiana Public Service Commission has opened an investigation into the
allegations raised in the lawsuit. The Company and its subsidiaries believe that
the allegations made in the lawsuit are unfounded and the Company will
vigorously defend its interests in both the lawsuit and the related Commission
investigation.
In addition, the Company is party to various other legal proceedings arising in
the normal course of business. The outcome of individual matters is not
predictable. However, management believes that the ultimate resolution of all
such matters, including those discussed above, after considering insurance
coverages, will not have a material adverse effect on the Company's financial
position, results of operations, or its cash flows.
24
<PAGE>
PART II. OTHER INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Registrant held its 1999 Annual Meeting of the Stockholders on May 20,
1999.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14;
there was no solicitation in opposition to management's nominees for
directors as listed in the Proxy Statement. All such nominees were elected.
J. C. Goodale did not stand for re-election.
The stockholders voted to elect all nominees as directors. Directors
elected along with their respective percentage of total outstanding
shares voted in the affirmative were: N.I.Botwinik (77.0%), A.I. Fleischman
(77.3%), S. Harfenist (77.3%), A.N. Heine (77.2%), J.L.Schroeder (77.3%),
R.D.Siff (77.2%), R.A. Stanger (77.3%), C.H. Symington, Jr. (77.3%),
E. Tornberg (77.3%), C. Tow (75.1%) and L. Tow (75.4%). Directors elected
along with their respective percentage of total outstanding shares voted in
abstention were: N.I. Botwinik (5.9%), A.I. Fleischman (5.5%), S.
Harfenist (5.6%), A.N. Heine (5.7%), J.L. Schroeder (5.5%), R.D. Siff
(5.7%), R.A. Stanger (5.5%), C.H. Symington, Jr.(5.5%), E. Tornberg (5.6%),
C. Tow (7.8%) and L. Tow (7.4%).
Item 5. Other Information
-----------------
As disclosed in the Company's proxy statement for the 1999 annual meeting, under
the Company's bylaws, if any stockholder intends to propose any matter at the
2000 annual meeting, the proponent must give written notice to the Company not
earlier than January 1, 1999 nor later than February 15, 2000. Proposals notice
after February 15, 2000 will not be entertained at the meeting. Furthermore, in
accordance with a recent amendment to the proxy rules and regulations of the
Securities and Exchange Commission, if a stockholder does not notify the Company
by February 14, 2000 of a proposal, then the Company's proxies would be able to
use their discretionary voting authority when the stockholder's proposal is
raised at the meeting.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
3(ii) By-laws amended May 20, 1999 changing the number of Board
Members from twelve to eleven.
27 Financial data schedule for the periods ended June 30, 1999
and June 30, 1998.
b) Reports on Form 8-K:
The Company filed on Form 8-K dated May 13, 1999 under Item 7 "Exhibits,"
a press release announcing financial results for the quarter ended
March 31, 1999 and certain operating data.
The Company filed on Form 8-K dated May 28, 1999 under Item 5 "Other
Events" and Item 7 "Exhibits," a press release announcing definitive
agreements to purchase 187,000 telephone access lines from GTE Corporation.
The Company filed on Form 8-K dated June 17, 1999 under Item 5
"Other Events" and Item 7 "Exhibits," a press release announcing a
series of definitive agreements to purchase 530,000 telephone access
lines from US West.
25
<PAGE>
PART II. OTHER INFORMATION (Continued)
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS UTILITIES COMPANY
--------------------------
(Registrant)
By: /s/ Robert J. DeSantis
----------------------------
Chief Financial Officer,
Vice President and Treasurer
By: /s/ Livingston E. Ross
-----------------------------
Livingston E. Ross
Vice President and Controller
Date: August 5, 1999
BYLAWS*
OF
CITIZENS UTILITIES COMPANY
As amended March 9, 1937; May 12, 1942; June 15, 1946; October 1, 1946; May 23,
1947; January 7, 1948, April 1, 1948; March 31, 1949; January 26, 1951; April
11, 1952; July 28, 1954; February 24, 1960; November 18, 1963; May 10, 1966;
February 3, 1967; April 10, 1968; April 17, 1970; June 11, 1970; June 7, 1974;
August 8, 1975; November 7, 1980; January 16, 1981; March 3, 1981;February 20,
1986; June 5, 1987; August 8, 1988; May 5, 1989; May 31, 1989; June 23, 1989;
September 11, 1989 (clerical correction); May 1, 1990; April 14, 1992; and
February 17, 1993, February 8, 1994 (clerical correction); October 24, 1995,
August 8, 1996 (clerical correction), December 17,1996; January 20, 1998; May
20, 1999
<PAGE>
BYLAWS
OF
CITIZENS UTILITIES COMPANY
TITLE
1. The title of this corporation is CITIZENS UTILITIES COMPANY.
LOCATION OF OFFICES
2. The principal office of the corporation in Delaware shall
be in Wilmington and the resident agent in charge thereof shall be PRENTICE
HALL CORPORATION SYSTEM, INC., 1013 Centre Road.
The corporation may also have an office or offices at such other
places within or without the State of Delaware as the Board of
Directors may from time to time designate.
CORPORATE SEAL
3. The corporate seal shall be circular in form and have
inscribed thereon the name of the corporation, the year of its incorporation
(1935) and the words "Incorporated Delaware".
MEETINGS OF STOCKHOLDERS
4. All meetings of stockholders shall be held at the offices of the
corporation or such other place as shall be designated by the Board of
Directors of the corporation.
Annual Meetings of stockholders shall be held on a date and at a time
designated by the Board of Directors of the corporation. At each annual meeting
the stockkholders shall elect a Board of Directors, such election to be by
majority of the stock present or represented by proxy, and entitled to vote at
the meeting.
Each stockholder shall, at every meeting of the stockholders, be
entitled to one vote in person or by written proxy signed by him, for each share
of stock held by him, but no proxy shall be voted on after one year from its
date. Such right to vote shall be subject to the right of the Board of Directors
to close the transfer books or to fix a record date for voting stockholders as
hereinafter provided.
<PAGE>
27
- -
Special meetings of the stockholders may be called by the Chief
Executive Officer and shall be called on the request in writing or by vote of a
majority of the Board of Directors or on demand in writing of stockholders of
record owning thirty-three percent (33%) in amount of the capital stock
outstanding and entitled to vote.
Notice of each meeting of stockholders, whether annual or special, shall
be mailed by the secretary to each stockholder of record, at his or her post
office address as shown by the stock books of the Company, at least ten days and
not more than sixty days prior to the date of the meeting. If the transfer books
are closed or a record date is fixed in connection with an annual meeting, as
permitted by By-Law 17, the notice of the meeting shall be given to the
stockholders of record as of the time said books are closed or record date is
fixed, but if the transfer books are not closed or a record date is not fixed,
said notice shall be given to the stockholders of record at the time the notice
is mailed.
The holders of a majority of the stock outstanding and entitled to vote
shall constitute a quorum, but the holders of a smaller amount may adjourn any
meeting from time to time without further notice until a quorum is secured.
At the annual meeting of stockholders, only such business shall be
conducted as shall have been brought before the meeting (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for below, who shall be
entitled to vote at such meeting and who complies with the procedures set forth
below; provided that any such business proposed by a stockholder is otherwise
proper for consideration under applicable law, the corporation's certificate of
incorporation and these Bylaws.
For business to be brought before an annual meeting by a stockholder,
the stockholder must have given notice thereof in writing to the Secretary of
the corporation, delivered to or mailed and received at the principal office of
the corporation no [earlier than the January 1 and no] later than the February
15 preceding the annual meeting. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the meeting
(a) a brief description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the corporation's books, of the stockholder proposing
such business, and the name and address of the beneficial owner, if any, on
whose behalf the proposal is made, (c) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder of
record and by the beneficial owner, if any, on whose behalf the proposal is
made, together with documentary support for any claim of beneficial ownership,
(d) any material interest of such stockholder of record and the beneficial
owner, if any, on whose behalf the proposal is made in such business and (e) any
information, in addition to that required above, which may be required from time
to time by Regulation 14A of the Securities Exchange Act of 1934 with respect to
security holder proposals.
The Chairman of the meeting, in addition to making any other
determinations that may be appropriate to the conduct of the meeting, shall
determine whether such notice has been duly given and whether such business is
otherwise proper for consideration (using as a non-exclusive guideline the
provisions of Rule 14a-8(c) under the Securities Exchange Act of 1934), and
shall direct that any business not properly brought before the meeting shall not
be transacted.
DIRECTORS
5. The property and business of the corporation shall be managed and controlled
by its Board of Directors, which shall consist of not less than seven nor more
than thirteen members. The number of Directors shall be fixed from time to time,
within the limits prescribed, by resolution of the Board of Directors. As of May
20, 1999, the Board of Directors shall consist of eleven members, unless a
different number shall thereafter be fixed by resolution of the Board of
Directors. Vacancies in the Board of Directors (except vacancies resulting from
the removal of directors by stockholders), including vacancies in the Board of
Directors resulting from any increase in the number of Directors, may be filled
by a majority of the Directors then in office, though less than a quorum.
Directors shall otherwise be elected by the stockholders at the annual
meeting and shall hold office until the next annual election and until their
successors are elected and qualified. At all elections of Directors of this
corporation each stockholder shall be entitled to one vote in person or by
written proxy signed by him, for each share of stock owned by him, and election
shall be by majority vote of the stock present or represented by proxy and
entitled to vote at the meeting. The stockholders of this corporation shall have
no preemptive right to subscribe to any issue of shares of stock of this
corporation now or hereafter made.
A Director may be designated a "Director Emeritus" of the Company by the
vote of the Board of Directors. A Director Emeritus shall be invited to attend
all meetings of the Board of Directors but shall not have the right to vote. A
Director Emeritus shall receive such compensation as the Board shall determine.
A Director Emeritus shall be designated by the Board of Directors for a
one-year term (and may be reappointed) at the Annual Meeting of the Board of
Directors following the Company's Annual Meeting of Shareholders. The Board of
Directors shall have an Executive Committee. The Executive Committee of the
Board shall consist of four (4) members, to be appointed by and to serve at the
pleasure of the Board. The Chairman of the Board shall be the Chairman of the
Executive Committee. During intervals between meetings of the Board, the
Committee shall have the power and authority of the Board of Directors of the
management of the business affairs and property of the Company.
A majority of the Directors in office shall be independent directors as
hereinafter defined. At the time that the nominees for the Board of Directors
are selected for proposal for election at the Annual Meeting of Shareholders,
the Board of Directors will review the circumstances of each nominee and
determine whether he or she is an independent director. If it should be
determined that a majority of the nominees are not independent directors, the
Nominating Committee shall take steps to select and recommend the nomination of
a sufficient number of individuals who are independent directors so that a
majority of members of the Board of Directors shall be independent directors.
The Board of Directors shall have a Nominating Committee. The Nominating
Committee shall consist of not less than two directors and not more than four
directors, to be appointed by and to serve at the pleasure of the Board. Each
member of the Nominating Committee shall be an independent director as
hereinafter defined. The Nominating Committee shall consider recommendations of
individuals who may be expected to make contributions to the Company or members
of the Board of Directors. The Nominating Committee shall establish procedures
for the nominating process and make recommendations to the Board of Directors
annually for the slate of nominees for the Board of Directors to be proposed at
the Annual Meeting of Shareholders.
The Board of Directors shall have a Compensation Committee. The
Compensation Committee shall consist of not less than two directors and not
more than five directors, to be appointed by and to serve at the pleasure of
the Board. Each member of the Compensation Committee shall be an independent
director as hereafter defined. The Compensation Committee shall consider
matters related to compensation of officers, directors and employees of the
Company and to make recommendations with respect thereto to the Board of
Directors. The Compensation Committee shall have the authority to retain
independent legal counsel and compensation advisors.
For purposes of this Article 5 of the Bylaws, "independent director"
shall mean a director who is:
(a) an individual who is not and has not been employed as an
executive officer by the Company (or any corporation, the majority of
the voting stock of which is owned, directly or indirectly through one
or more other subsidiaries, by the Company) within three (3) fiscal
years immediately prior to his or her most recent election or
appointment as a member of the Board of Directors; or
(b) an individual who is not a regular paid advisor or
consultant to the Company and who is not an affiliate (within the
meaning of Exchange Act Rule 12b-2 of the Securities and Exchange
Commission) of any entity that is a regular paid advisor or consultant
to the Company; or
(c) an individual who is not an employee or owner of five
percent (5%) or more of the voting stock of any business or
professional entity that has made, during the Company's last full
fiscal year, payments to the Company or its subsidiaries for property,
goods or services in excess of five percent (5%) of the lesser of (i)
the Company's consolidated gross revenues for its last full fiscal
year, or (ii) such other entity's consolidated gross revenues for its
last full fiscal year; or
(d) an individual who is not an employee or owner of five
percent (5%) or more of the voting stock of any business or
professional entity to which the Company or its subsidiaries have made,
during the Company's last full fiscal year, payments for property,
goods or services in excess of five percent (5%) of the lesser of (i)
the Company's consolidated gross revenues for its last full fiscal
year, or (ii) such other entity's consolidated gross revenues for its
last full fiscal year; or
(e) an individual who is not a party to a personal service
contract with the Company pursuant to which fees or other compensation
received by the individual from the Company during his or her last full
fiscal year (other than fees received as a member of the Company's
Board of Directors or a committee thereof so as to require description
of such contract under Item 404(a) of Regulation S-K promulgated by the
Securities and Exchange Commission, as in effect on January 1, 1994; or
(f) an individual who is not employed by a tax-exempt
organization that received, during its last full fiscal year,
contributions from the Company in excess of five percent (5%) of the
lesser of (i) the consolidated gross revenues of the Company during its
last full fiscal year, or (ii) the contributions received by the
tax-exempt organization during its last full fiscal year; or
(g) an individual who has not carried out a transaction or did
not have a relationship, during the Company's last full fiscal year,
such that the specifics of a transaction would be required to be
described under Item 404 of Regulation S-K promulgated by the
Securities and Exchange Commission, as in effect on January 1, 1994; or
(h) an individual who is not employed by a public company at
which an executive officer of the Company serves as a member of the
board of directors;
or
(i) an individual who has not had any relationship described
in paragraphs (a) - (h) with any corporation, the majority of the
voting stock of which is owned directly or indirectly, through one or
more subsidiaries, by the Company; or
(j) an individual who is not a member of the immediate family
of any person described in paragraphs (a) - (i). For these purposes, an
individual's immediate family shall include such individual's spouse,
parents, children, siblings, mothers- and fathers-in-law, sons- and
daughters-in-laws, and brothers and sisters-in-law.
The term "independent director" shall have no legal significance
under applicable corporate or securities law or in any respect other than for
the purposes of this Bylaw. No inference shall be drawn that a director is
"not independent," "interested," or "a party to a contract or transaction" or
has a "financial interest" in any contract or transaction within the meaning of
any applicable corporate or securities law, and no director shall be
disqualified from taking action or refraining from acting on any matter
coming before the Board of Directors by reason of his or her status as an
independent director under this Bylaw.
Nominations of persons for election to the Board of Directors of the
corporation may be made by any stockholder of the corporation who is a
stockholder of record at the time of giving of the notice provided for below,
who shall be entitled to vote for the election of Directors at the meeting and
who complies with the notice procedures set forth below. Nominations by
stockholders shall be made pursuant to notice in writing to the Nominating
Committee of the corporation, delivered to or mailed and received at the
principal office of the corporation no [earlier than the January 1 and no] later
than the February 15 preceding the annual meeting. Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election as a Director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a Director if
elected); (b) as to,the stockholder giving the notice (i) the name and address,
as they appear on the corporation's books, of such stockholder and (ii) the
class and number of shares of the corporation which are beneficially owned by
such stockholder and also which are owned of record by such stockholder and
(iii) documentary support for such claim of beneficial ownership; (c) as to the
beneficial owner, if any, on whose behalf the nomination is made, (i) the name
and address of such person, (ii) the class and number of shares of the
corporation which are beneficially owned by such person and (iii) documentary
support for such claim of beneficial ownership and (d) a description of all
arrangements or understandings between the stockholder giving notice, the
beneficial owner and each nominee and any other person or persons (naming such
person or persons) relating to the nomination to be made or resulting
directorship.
The Nominating Committee shall determine whether a stockholder
nomination was made in accordance with the procedures prescribed herein and
whether the stockholder's nominee should be recommended as a member of the slate
of nominees to be proposed at the annual meeting, and the Nominating Committee
may disregard any nomination not made in accordance with these Bylaws. The
Chairman of the meeting shall not nominate for election to the Board of
Directors any stockholder nominee who has been disregarded by the Nominating
Committee.
POWERS OF DIRECTORS
6. The Board of Directors shall have all such powers as may be
exercised by the Corporation, subject to the provisions of the statutes, the
Certificate of Incorporation, and the Bylaws.
MEETINGS OF DIRECTORS
7. Meetings of the Board of Directors shall be held at such place within or
without the State of Delaware as may from time to time be fixed by resolution of
the Board of Directors, or as may be specified by the Chief Executive Officer in
the call of any meeting. Regular meetings of the Board of Directors shall be
held at such times as may from time to time be fixed by resolution of the Board
of Directors and special meetings may be held at any time upon the call of two
(2) Directors or of the Chief Executive Officer, by oral, telegraphic or written
notice duly served or sent or mailed to each Director not less than five (5)
days before such meeting. A meeting of the Board may be held without notice
immediately after the annual meeting of stockholders at the same place at which
such meeting is held. Notice need not be given of regular meetings of the Board
held at times fixed by resolution of the Board. Meetings may be held at any time
without notice if all the Directors are present or if those not present waive
notice of the meeting in writing.
(Telephone Participation in Meetings)
Members of the Board of Directors (or any committees thereof) may
participate in a meeting of the Board of Directors (or of such committees) by
means of conference telephone or other communications equipment via which all
persons participating can hear each other. Such participation in the substantive
discussion and determinations of a meeting shall constitute presence in person
at such meeting.
A majority of the Directors shall constitute a quorum, but a smaller
number may adjourn any meeting from time to time without further notice until a
quorum is secured.
OFFICERS OF THE COMPANY
8. The officers of the Company shall be a Chairman of the Board of
Directors, a President, one or more vice presidents (with such duties and titles
as may be assigned to them), a secretary, a treasurer, one or more assistant
vice presidents (with such duties and titles as may be assigned to them), and
such other officers as may from time to time be chosen by the Board of
Directors.
The officers of the Company shall hold office until their successors are
elected and qualified. If the office of any officer or officers becomes vacant
for any reason, the vacancy shall be filled by the affirmative vote of a
majority of the whole Board of Directors.
DUTIES OF THE CHAIRMAN
9. The Chairman presides at all meetings of the Board of Directors and at all
meetings of the shareholders. It shall be his prerogative to see that all
orders, resolutions, and policy determinations of the Board of Directors are
carried into effect. He acts in a general oversight and advisory capacity with
respect to the affairs of the Company. He provides leadership to the Board in
reviewing and deciding upon matters which constitute major policies of the
Company, what the Company does and the manner in which the Company business is
conducted.
DUTIES OF THE CHIEF EXECUTIVE OFFICER
9A. It shall be the duty of the Chief Executive Officer to carry into
effect all orders, resolutions, and policy determinations of the Board of
Directors; to execute all contracts and agreements; to keep the seal of the
Company; and to sign and to affix the seal of the Company to any instrument
requiring the same, which seal shall be aftested by the signature of the
Secretary or Treasurer or Assistant Secretary or Assistant Treasurer. He shall
have the general supervision and direction of the other officers of the Company.
He shall submit a report of the operations of the Company for the year
to the Directors at their meeting next preceding the annual meeting of the
stockholders and to the stockholders at their annual meeting.
He shall have the general duties and powers of supervision and
management usually vested in the chief executive officer of a corporation.
The Chief Executive may also hold another office with the Company.
Accordingly, the duties and responsibilities of the position may be assigned by
the Board of Directors to any Company officer.
DUTIES OF THE PRESIDENT
9B. Unless otherwise decided by the Board of Directors, the President shall be
the chief executive and administrative officer of the Company. It shall be his
duty to see that all orders and policy determination conveyed by the Chairman
are carried into effect. He shall have the general supervision and direction of
the operations and administration of the affairs of the Company and general
supervision and direction of the other officers and employees of the Company and
shall see that their duties are properly performed.
VICE PRESIDENT
10. The vice president or vice presidents, in the order of their
seniority, shall be vested with all the powers and required to perform all the
duties of the President in his absence or disability and shall perform such
other duties as may be prescribed by the Board of Directors.
CHIEF EXECUTIVE PRO TEM
11. In the absence or disability of both the Chairman and President,
the Board may appoint a chief executive pro tem.
SECRETARY
12. The secretary shall attend all meetings of the corporation and the
Board of Directors. He shall act as clerk thereof and shall record all of the
proceedings of such meetings in a book kept for that purpose. He shall give
proper notice of meetings of stockholders and Directors and shall perform such
other duties as shall be assigned to him by the Chairman, President or the Board
of Directors.
TREASURER
13. The treasurer shall have custody of the funds and securities of the
corporation and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. He shall
disburse the funds of the corporation as may be ordered by the Board, or
Chairman or President, taking proper vouchers for such disbursements and shall
render to the Chairman, President and Directors, whenever they may require it,
an account of all his transactions as treasurer and of the financial condition
of the corporation.
He shall keep an account of stock and income notes registered and
transferred in such manner and subject to such regulations as the Board of
Directors may prescribe.
He shall give the corporation a bond, if required by the Board of
Directors, in such sum and in form and with security satisfactory to the Board
of Directors for the faithful performance of the duties of his office and the
restoration to the corporation, in case of his death, resignation, or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession, belonging to the corporation. He shall perform
such other duties as the Board of Directors may from time to time prescribe or
require.
DUTIES OF OFFICERS MAY BE DELEGATED
14. In case of the absence or disability of any officer of the
corporation or for any other reason deemed sufficient by a majority of the
Board, the Board of Directors may delegate his powers or duties to any other
officer or to any Director for the time being. The duties relating to the
execution of contracts and agreements and the signing of instruments and
affixing the seal of the Company and other matters may be delegated to any
officer, from time to time, as the Board shall see fit.
CERTIFICATES OF STOCK
15. Certificates of stock shall be signed by the Chairman, President or
a vice president and either the treasurer, assistant treasurer, secretary or
assistant secretary. If a certificate of stock be lost or destroyed, another may
be issued in its stead upon proof of such loss or destruction and the giving of
a satisfactory bond of indemnity, in an amount sufficient to indemnify the
corporation against any claim.
TRANSFER OF STOCK
16. All transfer of stock of the corporation shall be made upon its
books upon presentation of the certificate or certificates therefor, properly
endorsed by the holder of the shares in person or by his lawfully constituted
representative, and upon surrender of such certificate or certificates of stock
for cancellation.
CLOSING OF TRANSFER BOOKS
17. The Board of Directors shall have the power to close the stock
transfer books of the corporation for a period not exceeding sixty days
preceding the date for any meeting of stockholders or for payment of any
dividend or for the allotment of rights or when any change or conversion or
exchange of capital stock shall go into effect, or for a period of not exceeding
sixty days in connection with obtaining the consent of stockholders for any
purpose. In lieu of so closing the books, the Board of Directors may fix in
advance a date, not exceeding sixty days preceding the said above mentioned
dates, as a record date for the determination of the stockholders entitled to
notice of or to vote at any such meeting, and any adjournment thereof, or
entitled to dividends or other rights hereinbefore mentioned, or to give such
consent.
STOCKHOLDERS OF RECORD
18. The corporation shall be entitled to treat the holder of record of
any share or shares of stock as the holder in fact thereof and accordingly shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person whether or not it shall have express or
other notice thereof, save as expressly provided by the laws of Delaware.
FISCAL YEAR
19. The fiscal year of the corporation shall begin on the first day in
January in each year.
DIVIDENDS
20. Dividends, to the extent not restricted by provisions of the
corporation's Certificate of Incorporation or by subsisting agreements of the
corporation, may be declared by the Board of Directors and paid in cash, in
property, or in shares of the capital stock of the corporation to the extent
permitted by law, out of net assets in excess of its capital or out of its net
profits, provided there shall be no impairment of the capital of the corporation
represented by its issued and outstanding stock of all classes having a
preference upon the distribution of assets.
BOOKS AND RECORDS
21. The books, accounts, and records of the corporation may be kept
within or without the State of Delaware, at such place or places as may from
time to time be designated by the Bylaws or by resolution of the Directors.
NOTICES
22. Notice required to be given under the provisions of these Bylaws to
any Director, officer or stockholder shall not be construed to mean personal
notice, but may be given in writing by depositing the same in a post office or
letter box, in a postpaid sealed or unsealed wrapper, addressed to such
stockholder, officer or Director at such address as appears on the books of the
corporation, and such notice shall be deemed to be given at the time when the
same shall be thus mailed. In computing the number of days notice required for
any meeting, the day on which the notice shall be deposited in the mail or sent
by telegraph shall be excluded.
WAIVER OF NOTICE
23. Any stockholder, officer, or Director may waive in writing, or by
telegraph, any notice required to be given under these Bylaws, whether before or
after the time stated therein.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
24. Paragraph (a). Right of Indemnification. The Corporation shall, to the
fullest extent permitted by applicable law as then in effect, indemnify any
person (the "indemnitee") who was or is involved in any manner (including,
without limitation, as a party or a witness) or was or is threatened to be made
so involved in any threatened, pending or completed investigation, claim,
action, suit or proceeding, whether civil, criminal administrative or
investigative (including, without limitation, any action or proceeding by or in
the right of the Corporation to procure a judgement in its favor) (a
"Proceeding") by reason of the fact that he is or was a director or officer of
the Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, or of a partnership, joint venture,
trust or other enterprise (including, without limitation, service with respect
to any employee benefit plan), whether the basis of any such Proceeding is
alleged action in an official capacity as director or officer or in any other
capacity while serving as a director or officer, against all expenses, liability
and loss (including, without limitation, attorneys' fees, judgments, fines,
ERISA excise taxes or penalties, and amounts paid or to be paid in settlement)
actually and reasonably incurred by him in connection with such Proceeding. Such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his heirs, executors, administrators
and legal representatives. The right to indemnification conferred in this By-law
shall include the right to receive payment of any expenses incurred by the
indemnitee in connection with such Proceeding in advance of the final
disposition of the Proceeding, consistent with applicable law as then in effect.
All rights to indemnification conferred in this By-law, including rights to the
advancement of expenses and the evidentiary, procedural and other provisions of
this By-law, shall be contract rights. The Corporation may, by action of its
Board of Directors, provide indemnification for employees, agents, attorneys and
representatives of the Corporation with the same, or with more or less, scope
and extent as herein provided for officers and directors. No amendment to the
Restated Certificate of Incorporation or amendment or repeal of the By-laws
purporting to have the effect of modifying or repealing any of the provisions of
this By-law in a manner adverse to the indemnitee shall abridge or adversely
affect any right to indemnification or other similar rights and benefits with
respect to any acts or omissions occurring prior to such amendment or repeal.
This By-law shall be applicable to all Proceedings, whether arising from acts or
omissions occurring before or after the adoption of this Bylaw. The phrases
"this By-law" and "By-law" shall refer to "By-laws 24 and 24A," and for all
purposes, except the corporate procedure required for amendment of the By-law,
this By-law shall be considered as one By-law.
Paragraph (b). By-Law Not Exclusive. The right of indemnification,
including the right to receive payment in advance of expenses, conferred in this
By-law shall not be exclusive of any other rights to which any person seeking
indemnification may otherwise be entitled under any provision of the Restated
Certificate of Incorporation, By-law, agreement, applicable corporate law and
statute, vote of disinterested directors or stockholders or otherwise. The
indemnitee is free to proceed under any of the rights or procedures available to
him.
Paragraph (c). Burden of Proof. In any determination, review of a
determination, action, arbitration, or other proceeding relating to the right to
indemnification conferred in this By-law, the Corporation shall have the burden
of proof that the indemnitee has not met any standard of conduct or belief which
may be required by applicable law to be applied in connection with a
determination that the indemnitee is not entitled to indemnity and also the
burden of proof on any of the issues which may be material to a determination
that the indemnitee is not entitled to indemnification. Neither a failure to
make such a determination of entitlement nor an adverse determination of
entitlement to indemnity shall be a defense of the Corporation in an action or
proceeding brought by the indemnitee or by or on behalf of the Corporation
relating to indemnification or create any presumption that the indemnitee has
not met any such standard of conduct or belief or is otherwise not entitled to
indemnity. If successful in whole or in part in such an action or proceeding,
the indemnitee shall be entitled to be further indemnified by the Corporation
for the expenses actually and reasonably incurred by him in connection with such
action or proceeding.
Paragraph (d). Advancement of Expenses. All reasonable expenses
incurred by or on behalf of indemnitee in connection with any Proceeding shall
be advanced from time to time to the indemnitee by the Corporation promptly
after the receipt by the Corporation of a statement from the indemnitee
requesting such advance, whether prior to or after final disposition of such
Proceeding.
Paragraph (e). Insurance, Contracts and Funding. The Corporation may
purchase and maintain insurance to protect itself and any person who is, or may
become an officer, director, employee, agent, attorney, trustee or
representative (any of the foregoing being herein referred to as a
"Representative") of the Corporation or, at the request of the Corporation, a
Representative of another corporation or entity, against any expenses, liability
or loss asserted against him or incurred by him in connection with any
Proceeding in any such capacity, or arising out of his status as such, whether
or not the Corporation would have the power to indemnify him against such
expense, liability or loss under the provisions of this By-law or otherwise. The
Corporation may enter into contracts with any Representative of the Corporation,
or any person serving as such at the request of the Corporation for another
corporation or entity, in furtherance of the provisions of this By-law. Such
contracts shall be deemed specifically approved and authorized by the
stockholders of the Corporation and not subject to invalidity by reason of any
interested directors. The Corporation may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification of any person entitled thereto.
Paragraph (f) Severability; Statutory Alternative. If any provision or
provisions of this By-law shall be held to be invalid, illegal or unenforceable
for any reason whatsoever (i) the validity, legality and enforceability of all
of the remaining provisions of this By-law shall not in any way be affected or
impaired thereby; and (ii) to the fullest extent possible, the remaining
provisions of this By-law shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable. In the event
that the indemnitee elects, as an alternative to the procedures specified in
this By-law, to follow one of the procedures authorized by applicable corporate
law or statute to enforce his right to indemnification and notifies the
Corporation of his election, the Corporation agrees to follow the procedure so
elected by the indemnitee. If in accordance with the preceding sentence, the
procedure therefor contemplated herein or the procedure elected by the
indemnitee in any specific circumstances (or such election by the indemnitee)
shall be invalid or ineffective in bringing about a valid and binding
determination of the entitlement of the indemnitee to indemnification, the most
nearly comparable procedure authorized by applicable corporate law or statute
shall be followed by the Corporation and the indemnitee.
24A. Procedures; Presumptions and Effect of Certain Proceedings;
Remedies. In furtherance, but not in limitation, of the foregoing provisions of
this By-law, the following procedures, presumptions and remedies shall apply
with respect to advancement of expenses and the right to indemnification under
this By-law:
Section 1. Advancement of Expenses. The advancement or
reimbursement of expenses to an indemnitee shall be made within 20 days after
the receipt by the Corporation of a request therefor from the indemnitee. Such
request shall reasonably evidence the expenses incurred or about to be incurred
by the indemnitee and, if required by law at the time of such advance, shall
include or be accompanied by an undertaking by or on behalf of the indemnitee to
repay the amounts advanced if it should ultimately be determined that the
indemnitee is not entitled to be indemnified against such expenses.
Section 2. Procedure for Determination of Entitlement to Indemnification.
Section 2.l. To obtain indemnification (except with respect to the
advancement of expenses), an indemnitee shall submit to the Chief Executive
Officer or Secretary of the Corporation a written request, including such
documentation and information as is reasonably available to the indemnitee and
reasonably necessary to determine whether and to what extent the indemnitee is
entitled to indemnification (the "Supporting Documentation"). The Secretary of
the Corporation shall promptly advise the Board of Directors in writing that the
indemnitee has requested indemnification. The determination of the indemnitee's
entitlement to indemnification shall be made not later than 60 days after
receipt by the Corporation of the written request and Supporting Documentation.
Section 2.2. The indemnitee's entitlement to indemnification shall be
determined in one of the following ways: (a) by a majority vote of the
Disinterested Directors (as hereinafter defined) (which term shall mean the
Disinterested Director, if there is only one); (b) by a written opinion of the
Independent Counsel (as hereinafter defined) if (i) a majority of the
Disinterested Directors so directs; (ii) there is no Disinterested Director, or
(iii) a Change of Control (as hereinafter defined) shall have occurred and the
indemnitee so requests in which case the Disinterested Directors shall be deemed
to have so directed; (c) by the stockholders of the Corporation (but only if a
majority of the Disinterested Directors determines that the issue of entitlement
to indemnification should be submitted to the stockholders for their
determination); or (d) as provided in Section 3 of this By-law.
Section 2.3. In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 2.2
of this By-law, a majority of the Disinterested Directors shall select the
Independent Counsel, but only an Independent Counsel to which the
indemnitee does not reasonably object; provided, however, that if a Change
of Control shall have occurred, the indemnitee shall select such Independent
Counsel, but only an Independent Counsel to which the Board of Directors does
not reasonably object.
Section 3. Presumptions and Effect of Certain Proceedings. Except as otherwise
expressly provided in this By-law, the indemnitee shall be presumed to be
entitled to indemnification upon submission of a request for indemnification
together with the Supporting Documentation, and thereafter in any determination
or review of any determination, and in any arbitration, proceeding or
adjudication the Corporation shall have the burden of proof to overcome that
presumption in reaching a contrary determination. In any event, if the person
or persons empowered under Section 2.2 of this By-law to determine entitlement
to indemnification shall not have been appointed or shall not have made a
determination within 60 days after receipt by the Corporation of the request
therefor together with the Supporting Documentation, the indemnitee shall be
deemed to be entitled to indemnification. In either case, the indemnitee shall
be entitled to such indemnification, unless (a) the indemnitee misrepresented or
failed to disclose a material fact in making the request for indemnification or
in the Supporting Documentation or (b) such indemnification is prohibited by
law, in either case as finally determined by adjudication or, at the
indemnitee's sole option, arbitration (as provided in Section 4 of this By-law).
The termination of any Proceeding, or of any claim, issue or matter therein, by
judgment, order, settlement or conviction, or upon a plea of nolo contenders or
its equivalent, shall not, of itself, adversely affect the right of the
indemnitee to indemnification or create any presumption with respect to any
standard of conduct or belief or any other matter which might form a basis for a
determination that the indemnitee is not entitled to indemnification. With
regard to the right to indemnification for expenses, (a) if and to the extent
that the indemnitee has been successful on the merits or otherwise in any
Proceeding, or (b) if a Proceeding was terminated without a determination of
liability on the part of the indemnitee with respect to any claim, issue or
matter therein or without any payments in settlement or compromise being made by
the indemnitee with respect to a claim, issue or matter therein, or (c) if and
to the extent that the indemnitee was not a party to the Proceeding, the
indemnitee shall be deemed to be entitled to indemnification, which entitlement
shall not be defeated or diminished by any determination which may be made
pursuant to clauses (a), (b) or (c) of Section 2.2. The indemnitee shall be
presumptively entitled to indemnification in all respects for any act, omission
or conduct taken or occurring which (whether by condition or otherwise) is
required, authorized or approved by any order issued or other action by any
commission or governmental body pursuant to any federal statute or state statute
regulating the Corporation or any of its subsidiaries by reason of its status as
a public utility or public utility holding company or by reason of its
activities as such. To the extent permitted by law, the presumption shall be
conclusive on all parties with respect to acts, omissions or conduct of the
indemnitee if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation or its subsidiary.
No presumption adverse to an indemnitee shall be drawn with respect to any act,
omission or conduct of the indemnitee if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation or its subsidiary taken or occurring in the absence of, or
inconsistent with, any order issued or action by any commission or governmental
body.
Section 4. Remedies of Indemnitee.
Section 4.1. In the event that a determination is made pursuant to Section 2 of
this By-law that the indemnitee is not entitled to indemnification under this
By-law, (a) the indemnitee shall be entitled to seek an adjudication of his
entitlement to such indemnification either, at the indemnitee's sole option, in
(i) an appropriate court of the State of Delaware or any other court of
competent jurisdiction or (ii) to the extent consistent with law, arbitration to
be conducted by three arbitrators (or, if the dispute involves less than
$100,000, by a single arbitrator) pursuant to the rules of the American
Arbitration Association; (b) any such judicial Proceeding or arbitration shall
be de novo and the indemnitee shall not be prejudiced by reason of such adverse
determination; and (c) in any such judicial Proceeding or arbitration the
Corporation shall have the burden of proof that the indemnitee is not entitled
to indemnification under this By-law.
Section 4.2. If a determination shall have been made or deemed to have been
made, pursuant to Sections 2 or 3 of this By-law, that the indemnitee is
entitled to indemnification, the Corporation shall be obligated to pay the
amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination, unless (a) the indemnitee
misrepresented or failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (b) such indemnification
is prohibited by law, in either case as finally determined by adjudication or,
at the indemnitee's sole option, arbitration (as provided in Section 4.1 of this
By-law). In the event that (i) advancement of expenses is not timely made by the
Corporation pursuant to this By-law or (ii) payment of indemnification is not
made within five days after a determination of entitlement to indemnification
has been made or deemed to have been made pursuant to Section 2 or 3 of this
By-law, the indemnitee shall be entitled to seek judicial enforcement of the
Corporation's obligations to pay to the indemnitee such advancement of expense
of indemnification. Notwithstanding the foregoing, the Corporation may bring an
action, in an appropriate court in the State of Delaware or any other court of
competent jurisdiction, contesting the right of the indemnitee to receive
indemnification hereunder due to the occurrence of a circumstance described in
subclause (a) of this Section 4.2 or a prohibition of law (both of which are
herein referred to as a "Disqualifying Circumstance"). In either instance, if
the indemnitee shall elect, at his sole option, that such dispute shall be
determined by arbitration (as provided in Section 4.1 of this By-law), the
indemnitee and the Corporation shall submit the controversy to arbitration. In
any such enforcement action or other proceeding whether brought by the
indemnitee or the Corporation, indemnitee shall be entitled to indemnification
unless the Corporation can satisfy the burden of proof that indemnification is
prohibited by reason of a Disqualifying Circumstance.
Section 4.3. The Corporation shall be precluded from asserting in any
judicial Proceeding or arbitration commenced pursuant to this Section 4 that the
procedures and presumptions of this By-law are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
or arbitrators that the Corporation is bound by all the provisions of this
By-law.
Section 4.4. In the event that the indemnitee, pursuant to this By-law,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover damages for breach of, this By-law, or is otherwise
involved in any adjudication or arbitration with respect to his right to
indemnification, the indemnitee shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any expenses
actually and reasonably incurred by him if the indemnitee prevails in such
judicial adjudication or arbitration. If it shall be determined in such judicial
adjudication or arbitration that the indemnitee is entitled to receive part but
not all of the indemnification or advancement of expenses sought, the expenses
incurred by the indemnitee in connection with such judicial adjudication or
arbitration shall be prorated accordingly.
Section 5. Definitions. For purposes of indemnification under this By-law or
otherwise.
Section 5.1. "Change in Control" means a change in control of the
Corporation of a nature that would be required to be reported in response to
Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934 (the "Act"), whether or not the Corporation is then subject to
such reporting requirement; provided that, without limitation, such a change in
control shall be deemed to have occurred if (a) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of
securities of the Corporation representing 20 percent or more of the combined
voting power of the Corporation's then outstanding securities without the prior
approval of at least two-thirds of the members of the Board of Directors in
office immediately prior to such acquisition; (b) the Corporation is a party to
a merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which, members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a majority
of the Board of Directors thereafter; or (c) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (including for this purpose any new Director whose
election or nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds of the Directors then still in office
who were Directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board of Directors.
Section 5.2. "Disinterested Director" means a Director of the
Corporation who is not or was not a material party to the Proceeding in respect
of which indemnification is sought by the indemnitee.
Section 5.3. "Independent Counsel" means a law firm or a member of a law
firm that neither presently is, nor in the past five years has been, retained
to represent (a) the Corporation or the indemnitee in any manner or (b) any
other party to the Proceeding giving rise to a claim for indemnification under
this By-law. Notwithstanding the foregoing, the term "Independent Counsel"
shall not include any person who, under the applicable standards of professional
conduct then prevailing under the law of the State of Delaware, would have a
conflict of interest in representing either the Corporation or the indemnitee
in an action to determine the indemnitee's rights under this By-law.
Section 6. Acts of Disinterested Directors. Disinterested Directors
considering or acting on any indemnification matter under this By-law or under
governing corporate law or otherwise may consider or take action as the Board of
Directors or may consider or take action as a committee or individually or
otherwise. In the event that Disinterested Directors consider or take action as
the Board of Directors, one-third of the total number of Directors in office
shall constitute a quorum.
AMENDMENTS OF BYLAWS
25. These By-laws may be amended or altered by the vote of a majority
of the whole Board of Directors at any meeting provided that notice of such
proposed amendment shall have been given in the notice given to the Directors of
such meeting. Such authority in the Board of Directors is subject to the power
of the stockholders to change or repeal any By-laws by a majority vote of the
stockholders present and represented at any annual meeting or at any special
meeting called for such purpose, and the Board of Directors shall not repeal or
alter any By-laws, other than By-law 24A, adopted by the stockholders.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000020520
<NAME> CITIZENS UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,217,990
<OTHER-PROPERTY-AND-INVEST> 435,762<F1>
<TOTAL-CURRENT-ASSETS> 378,283
<TOTAL-DEFERRED-CHARGES> 204,875<F2>
<OTHER-ASSETS> 233,579<F3>
<TOTAL-ASSETS> 5,470,489
<COMMON> 65,075
<CAPITAL-SURPLUS-PAID-IN> 1,563,929
<RETAINED-EARNINGS> 179,482
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,850,767
201,250<F4>
0
<LONG-TERM-DEBT-NET> 2,106,514
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 23,878
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,489,330
<TOT-CAPITALIZATION-AND-LIAB> 5,470,489
<GROSS-OPERATING-REVENUE> 852,361
<INCOME-TAX-EXPENSE> 35,118
<OTHER-OPERATING-EXPENSES> 129,010<F5>
<TOTAL-OPERATING-EXPENSES> 784,617
<OPERATING-INCOME-LOSS> 67,744
<OTHER-INCOME-NET> 81,536
<INCOME-BEFORE-INTEREST-EXPEN> 160,966
<TOTAL-INTEREST-EXPENSE> 60,366
<NET-INCOME> 62,378
3,104<F4>
<EARNINGS-AVAILABLE-FOR-COMM> 62,378
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 245,524
<EPS-BASIC> .24
<EPS-DILUTED> .24
<FN>
<F1>REPRESENTS INVESTMENT FUNDS.
<F2>REPRESENTS REGULATORY ASSETS.
<F3>DEFERRED DEBITS AND OTHER ASSETS.
<F4>COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF A SUBSIDIARY TRUST, THE SOLE ASSETS OF WHICH ARE SECURITIES OF A
SUBSIDIARY PARTNERSHIP, SUBSTANTIALLY ALL THE ASSETS OF WHICH ARE
CONVERTIBLE DEBENTURES OF THE COMPANY.
<F5>REPRESENTS COMMODITIES PURCHASED.
</FN>
</TABLE>
