8-K 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) September 29, 2000 CenturyTel, Inc. (Exact name of registrant as specified in its charter) Louisiana 1-7784 72-0651161 (State or other (Commission File (IRS Employer jurisdiction of Number) Identification No.) incorporation) 100 Century Park Drive, Monroe, Louisiana 71203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (318) 388-9000 ITEM 2. Acquisition or Disposition of Assets On September 29, 2000, CenturyTel, Inc. ("CenturyTel" or the "Company") consummated the final two of its four acquisitions of assets from affiliates of Verizon Communications, Inc. (successor to GTE Corporation). Collectively under these four acquisitions, the Company acquired over 490,000 access lines for approximately $1.5 billion in cash. The Company's Current Report on Form 8-K dated July 31, 2000 describes the first two Verizon acquisitions. Under the September 29, 2000 transactions: o The Company purchased approximately 70,500 telephone access lines and related local exchange assets comprising 42 exchanges throughout Wisconsin for approximately $194 million in cash. o Telephone USA of Wisconsin, LLC purchased approximately 62,900 telephone access lines and related local exchange assets comprising 35 exchanges throughout Wisconsin for approximately $170 million in cash. The Company owns 89% of Telephone USA, which was organized to acquire and own these Wisconsin properties. At closing, the Company made an equity investment in Telephone USA of approximately $37.8 million and financed substantially all of the remainder of the purchase price. To finance these September 29 acquisitions on a short-term basis, the Company borrowed $357 million on a floating-rate basis under its new $1.5 billion credit facility with Bank of America, N.A. and Citibank, N.A., as lenders, and Banc of America Securities LLC and Salomon Smith Barney Inc., as arrangers. The purchase price payable in connection with these acquisitions is subject to various post-closing adjustments to reflect, among other things, the actual amount of accounts receivable acquired by us. We do not expect the aggregate effect of these adjustments to be material. In addition to the continued provision of traditional local exchange telephone services, the Company intends to provide long distance, Internet access and other advanced technology services in certain of the acquired Wisconsin markets. The Company currently offers long distance and Internet access service in certain of the acquired Wisconsin markets, and plans to offer high-speed Digital Subscriber Line Internet access service in selected markets. For additional information regarding all four Verizon acquisitions, please see the historical financial statements, the pro forma financial information and the other materials filed herewith under Item 7 below. Item 5. Other Events. Third Quarter 2000 Operating Results On September 29, 2000, the Company announced that it expects third quarter 2000 earnings per share, excluding one-time items, to equal or exceed FirstCall consensus estimates of $0.42 per share and that revenues will likely range from $470 million to $480 million for the quarter. For additional information, please see Exhibit 99.1 filed herewith under Item 7 below. Debt Ratings On September 19, 2000, Moody's Investors Service lowered CenturyTel's long- term debt rating to Baa2 (with a stable outlook) from Baa1 and on September 20, 2000, Standard & Poor's affirmed its rating of CenturyTel's long-term debt of BBB+ (with a negative outlook). * * * * * * * * * * Item 7. Financial Statements and Exhibits (a) Financial statements of properties acquired 1. Report of Independent Public Accountants - GTE Arkansas Operations. 2. Statements of Selected Assets, Liabilities and Parent Funding as of June 30, 2000, and December 31, 1999 - GTE Arkansas Operations. 3. Statements of Income for the six months ended June 30, 2000, and for the year ended December 31, 1999 - GTE Arkansas Operations. 4. Statements of Cash Flows for the six months ended June 30, 2000, and for the year ended December 31, 1999 - GTE Arkansas Operations. 5. Statement of Parent Funding for the year ended December 31, 1999 - GTE Arkansas Operations. 6. Notes to Special Purpose Financial Statements - GTE Arkansas Operations. 7. Report of Independent Public Accountants - GTE Missouri Operations. 8. Statements of Selected Assets, Liabilities and Parent Funding as of June 30, 2000, and December 31, 1999 - GTE Missouri Operations. 9. Statements of Income for the six months ended June 30, 2000, and for the year ended December 31, 1999 - GTE Missouri Operations. 10. Statements of Cash Flows for the six months ended June 30, 2000, and for the year ended December 31, 1999 - GTE Missouri Operations. 11. Statement of Parent Funding for the year ended December 31, 1999 - GTE Missouri Operations. 12. Notes to Special Purpose Financial Statements - GTE Missouri Operations. 13. Report of Independent Public Accountants - Verizon Wisconsin I Operations. 14. Statements of Selected Assets, Liabilities and Parent Funding as of June 30, 2000, and December 31, 1999 - Verizon Wisconsin I Operations. 15. Statements of Income for the six months ended June 30, 2000, and for the year ended December 31, 1999 - Verizon Wisconsin I Operations. 16. Statements of Cash Flows for the six months ended June 30, 2000, and for the year ended December 31, 1999 - Verizon Wisconsin I Operations. 17. Statement of Parent Funding for the year ended December 31, 1999 - Verizon Wisconsin I Operations. 18. Notes to Special Purpose Financial Statements - Verizon Wisconsin I Operations. 19. Report of Independent Public Accountants - Verizon Wisconsin II Operations. 20. Statements of Selected Assets, Liabilities and Parent Funding as of June 30, 2000, and December 31, 1999 - Verizon Wisconsin II Operations. 21. Statements of Income for the six months ended June 30, 2000, and for the year ended December 31, 1999 - Verizon Wisconsin II Operations. 22. Statements of Cash Flows for the six months ended June 30, 2000, and for the year ended December 31, 1999 - Verizon Wisconsin II Operations. 23. Statement of Parent Funding for the year ended December 31, 1999 - Verizon Wisconsin II Operations. 24. Notes to Special Purpose Financial Statements - Verizon Wisconsin II Operations. (b) Unaudited Pro Forma Consolidated Condensed Financial Information 1. Introduction. 2. Pro Forma Consolidated Condensed Balance Sheet as of June 30, 2000. 3. Pro Forma Consolidated Condensed Statement of Income for the six months ended June 30, 2000. 4. Pro Forma Consolidated Condensed Statement of Income for the year ended December 31, 1999. 5. Notes to Unaudited Pro Forma Consolidated Condensed Financial Information. (c) Exhibits 2.1 Amended and Restated Asset Purchase Agreement by and among GTE Arkansas Incorporated, GTE Midwest Incorporated, GTE Southwest Incorporated and CenturyTel, Inc. dated as of June 29, 1999 (incorporated by reference to Exhibit 99 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 2.2 Asset Purchase Agreement by and between GTE Midwest Incorporated and Spectra Communications Group, LLC dated as of July 8, 1999 (incorporated by reference to Exhibit 2.2 of our Current Report on Form 8-K dated July 31, 2000). 2.3 Asset Purchase Agreement by and between GTE North Incorporated and Telephone USA of Wisconsin, LLC dated as of August 19, 1999. 2.4 Asset Purchase Agreement by and between GTE North Incorporated and CenturyTel, Inc. dated as of October 11, 1999. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Arthur Andersen LLP. 99.1 Press release announcing (i) certain third quarter 2000 results and (ii) closing of Verizon properties in Wisconsin. GTE Arkansas Operations Special Purpose Financial Statements As of June 30, 2000, and December 31, 1999 Together with Report of Independent Public Accountants Report of Independent Public Accountants To the Board of Directors and Shareholders of CenturyTel Incorporated, GTE Arkansas Incorporated, GTE Midwest Incorporated, and GTE Southwest Incorporated: We have audited the accompanying special purpose financial statements of selected assets, liabilities, and parent funding of GTE Arkansas Operations (the "Company") as of December 31, 1999, and the related statements of income, parent funding and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the special purpose financial statements referred to above present fairly, in all material respects, the selected assets, liabilities, and parent funding of the Company as of December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Dallas, Texas, September 13, 2000 The accompanying notes are an integral part of these special purpose financial statements. GTE Arkansas Operations (As Described in Note 1) Statements of Selected Assets, Liabilities, and Parent Funding As of June 30, 2000, and December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (unaudited) (audited) SELECTED ASSETS --------------- CURRENT ASSETS: Receivables, less allowance of $6,483 and $4,608 $ 23,762 $ 31,014 Inventories and supplies 583 592 Prepaid insurance and other 360 1,714 -------------------------------------------------------------------------------- Total current assets 24,705 33,320 -------------------------------------------------------------------------------- PROPERTY, PLANT, AND EQUIPMENT, net 195,531 202,862 EMPLOYEE BENEFIT PLANS 19,428 15,529 OTHER ASSETS 192 224 -------------------------------------------------------------------------------- Total assets $ 239,856 $ 251,935 ================================================================================ SELECTED LIABILITIES AND PARENT FUNDING --------------------------------------- CURRENT LIABILITIES: Accounts payable $ 7,364 $ 4,960 Advance billings and customer deposits 3,982 3,887 Accrued payroll costs 2,276 2,108 Other 1,172 557 -------------------------------------------------------------------------------- Total current liabilities 14,794 11,512 -------------------------------------------------------------------------------- EMPLOYEE BENEFIT PLANS 7,840 7,828 OTHER LIABILITIES 78 91 -------------------------------------------------------------------------------- Total liabilities 22,712 19,431 -------------------------------------------------------------------------------- PARENT FUNDING 217,144 232,504 -------------------------------------------------------------------------------- Total liabilities and parent funding $ 239,856 $ 251,935 ================================================================================
GTE Arkansas Operations (As Described in Note 1) Statements of Income For the Six Months Ended June 30, 2000, And for the Year Ended December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (unaudited) (audited) REVENUES AND SALES: Local services $ 28,878 $ 55,267 Network access services 35,446 73,249 Toll services 9,633 19,762 Other services and sales 9,063 20,541 -------------------------------------------------------------------------------- Total revenues and sales 83,020 168,819 -------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of services and sales 35,691 70,776 Selling, general, and administrative 9,737 24,819 Depreciation and amortization 19,642 38,078 -------------------------------------------------------------------------------- Total operating costs and expenses 65,070 133,673 -------------------------------------------------------------------------------- OPERATING INCOME 17,950 35,146 INTEREST EXPENSE, net 3,817 8,292 -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 14,133 26,854 INCOME TAXES 5,491 10,427 -------------------------------------------------------------------------------- NET INCOME $ 8,642 $ 16,427 ================================================================================
GTE Arkansas Operations (As Described in Note 1) Statements of Cash Flows For the Six Months Ended June 30, 2000, And for the Year Ended December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (unaudited) (audited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,642 $ 16,427 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 19,003 37,320 Employee pension plans (3,887) (5,599) Provision for uncollectible accounts 2,716 6,946 Change in current assets and current liabilities- Receivables 4,536 (7,164) Other current assets 1,363 1,536 Other current liabilities 3,282 (13,956) Other, net 18 (3,731) -------------------------------------------------------------------------------- Net cash provided by operating activities 35,673 31,779 -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (11,671) (24,541) -------------------------------------------------------------------------------- Net cash used in investing activities (11,671) (24,541) -------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Net transfers to GTE Corporation (24,002) (7,238) -------------------------------------------------------------------------------- Net cash used in financing activities (24,002) (7,238) -------------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS: Beginning of year - - -------------------------------------------------------------------------------- End of year $ - $ - ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. GTE Arkansas Operations (As Described in Note 1) Statement of Parent Funding For the Year Ended December 31, 1999 (Dollars in Thousands)
BALANCE, December 31, 1998 $ 223,315 Net income 16,427 Net transfers to GTE Corporation (7,238) -------------------------------------------------------------------------------- BALANCE, December 31, 1999 $ 232,504 ================================================================================
GTE Arkansas Operations (As Described in Note 1) Notes to Special Purpose Financial Statements 1. Description of Business: The selected local telephone exchanges included in these special purpose financial statements (the "Exchanges") serve approximately 231,000 switched access lines in the state of Arkansas. The Exchanges represent 100% of the assets of GTE Arkansas Incorporated ("GTE Arkansas") and a small percentage of the assets of GTE Midwest Incorporated ("GTE Midwest") and GTE Southwest Incorporated ("GTE Southwest"). GTE Arkansas, GTE Midwest, and GTE Southwest (collectively, the "Company") are wholly owned subsidiaries of GTE Corporation (GTE), which is a wholly owned subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), d/b/a Verizon Communications ("Verizon") (see Note 11). Verizon provides a wide variety of communications services ranging from local telephone service for the home and office to highly complex voice and data services for various industries. On June 29, 1999, the Company entered into a purchase agreement with CenturyTel Incorporated ("CenturyTel") to sell approximately 231,000 switched access lines in the state of Arkansas to CenturyTel. The sale was completed on July 31, 2000. 2. Basis of Presentation: The accompanying special purpose financial statements have been prepared in accordance with accounting principles generally accepted in the United States using exchange specific information where available (e.g., most revenue and property, plant, and equipment (PP&E) related accounts) and allocations where data is not maintained on an exchange specific basis within the company's books and records (e.g., most operating expenses, assets other than PP&E, liabilities, and capital accounts). Because of the significant amount of allocations and estimates used to prepare these special purpose financial statements, they may not reflect the financial position and results of operations of the Exchanges after the acquisition by CenturyTel. The accompanying special purpose financial statements include only those assets, liabilities, and related operations of the Exchanges as historically incurred by the Company and exclude all other assets, liabilities, and related operations of Verizon and its subsidiaries, specifically cash, accrued interest, and tax-related balance sheet accounts. These special purpose financial statements also include expenses related to employees who support the Exchanges, some of which are expected to remain employees of the Company. Receivables related to end-user billings were identified by exchange using billing system data. Customer Advances and Deposits were allocated to the Exchanges based on total revenue. Receivables related to carrier and other miscellaneous billings were allocated to the Exchanges in proportion to carrier revenues. Accounts payable were allocated based on operating expenses and capital expenditures. Accrued payroll costs were allocated based on employee head count. Other current liabilities and other liabilities were allocated based on line count. The Exchanges' operating expenses include both amounts incurred within its operating territories that relate directly to its exchanges (the "Direct Expenses") and amounts incurred in centralized Verizon service centers that support multiple Verizon companies (the "Indirect Expenses"). The Direct Expenses correspond roughly with locally performed functions which will transfer to a buyer of the Exchanges. The Indirect Expenses correspond to substantial back-office, support, and overhead functions which will not transfer to the buyer, but that the buyer will need to replace in some form in order to operate the Exchanges. The Indirect Expenses have been allocated to the Company, and further to specific exchanges within the Company (including the Exchanges), based on estimates of usage, or benefits received from such services. The level of allocated Indirect Expenses may not be representative of a buyer's ongoing expenses for these functions. Depreciation and amortization were calculated by exchange using property, plant, and equipment data. 3. Summary of Significant Accounting Policies and Other Disclosures: The notes which follow contain limited disclosure data where it can be reasonably estimated for the Exchanges. Revenue Recognition Revenues are recognized when earned. This is generally based on usage of local-exchange networks or facilities. For other products and services, revenues are generally recognized when services are rendered or products are delivered to customers. Verizon maintains its accounting records for revenues at the Federal Communications Commission (FCC) study area levels. The Exchanges being sold represent all operations in GTE's Arkansas study areas. Certain revenues that relate to intra-company activity or activity to be retained by Verizon are not included in the accompanying special purpose financial statements. Depreciation and Amortization Assets are depreciated using the remaining life methodology and straight-line depreciation rates. This method depreciates the remaining net investment in telephone plant, less anticipated net salvage value, over remaining economic asset lives. This method requires the periodic review and revision of depreciation rates. The economic asset lives used are as follows: Average lives (in years) ------------------------ Fiber-optic cable 20 Copper wire 15 Switching equipment 10 Circuit equipment 8 When depreciable telephone plant is retired in the normal course of business, the amount of such plant is deducted from the respective plant and accumulated depreciation accounts. Gains or losses on dispositions are amortized with the remaining net investment in telephone plant. Employee Benefit Plans Pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Curtailment gains and losses associated with employee separations are recognized when they occur. Settlement gains and losses associated with employee separations are recognized when the pension obligations are settled and the gain or loss is determinable. Valuation of Assets The impairment of tangible or intangible assets is assessed when changes in circumstances indicate that their carrying value may not be recoverable. Under the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is made based on estimated future cash flows, salvage value, or expected net sales proceeds depending on the circumstances. Asset impairment losses, and any subsequent adjustments to such losses as initially recorded, as well as net gains or losses on sales of assets are recorded as a component of operating income. Income Taxes The Company's results are included in Verizon's consolidated federal income tax return. The Company participates in a tax-sharing agreement with Verizon and remits tax payments to Verizon based on its tax liability on a separate company basis. The Exchanges are not a taxable entity. The Exchanges' operating results are included with the Company for income tax purposes. Although the Exchanges contribute significant plant-related temporary differences (including investment tax credits) to the Company's deferred tax balances, the Company does not allocate income tax expense, income tax payables, or deferred income taxes to the Exchanges. As the buyer will most likely have a different tax scenario, no deferred tax assets or liabilities are presented within these special purpose financial statements. The provision for income taxes included in the accompanying special purpose financial statements for 1999 was calculated based on the income of the Exchanges and the Company's effective tax rate adjusted for permanent differences not attributable to the Exchanges. Inventories and Supplies Inventories and supplies are stated at the lower of cost, determined principally by the average cost method, or net realizable value. Software Software costs are recognized in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which became effective in January 1999. The Company capitalizes costs associated with externally acquired software (including right-to-use fees) for internal use. Capitalized software is generally amortized on a straight-line basis over its useful life, not to exceed five years for non-network software or three years for network software. Comprehensive Income The Company had no comprehensive income components for the year ended December 31, 1999; therefore, comprehensive income is the same as net income for each of the periods. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires entities that use derivative instruments to measure these instruments at fair value and record them as assets or liabilities on the balance sheet. It also requires entities to reflect the gains or losses associated with changes in the fair value of these derivatives, either in earnings or as a separate component of comprehensive income, depending on the nature of the underlying contract or transaction. The Company is currently assessing the impact of adopting SFAS No. 133, as amended, which is effective January 1, 2001. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides additional guidance on revenue recognition as well as criteria for when revenue is generally realized and earned and also requires the deferral of incremental direct selling costs. This bulletin currently must be adopted by December 31, 2000, and will require the Company to determine the effect of the accounting change as of January 1, 2000. The Company is currently assessing the impact of SAB No. 101. 4. Employee Benefit Plans: Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," certain disclosures including components of pension credits, postretirement benefit costs and the funded status of the plans, including the actuarial present value of accumulated plan benefits, accumulated or projected benefit obligation and the fair value of plan assets have not been presented because the structure of the Verizon plans does not permit the plans' data to be readily disaggregated. Pension Plans The Company participates in noncontributory defined benefit pension plans sponsored by Verizon covering substantially all employees. The benefits to be paid under these plans are generally based on years of credited service and average final earnings. Verizon's funding policy, subject to the minimum funding requirements of employee benefit and tax laws, is to contribute such amounts as are determined on an actuarial basis to accumulate funds sufficient to meet the plans' benefit obligation to employees upon their retirement. The assets of the plans consist primarily of corporate equities, government securities, and corporate debt securities. The significant weighted-average assumptions used by Verizon for the pension measurements were as follows at December 31: 1999 ------ Discount rate 8.00% Rate of compensation increase 5.50% Expected return on plan assets 9.00% The Company's net periodic benefit credit was $106 million for 1999. The Verizon plans are currently funded at levels significantly in excess of projected benefit obligations. Included in the net periodic benefit credit for 1999 was a net pension gain of $58.8 million, comprised of one-time costs for special termination benefits provided under voluntary and involuntary separation programs, curtailment losses, and settlement gains. These curtailment losses and settlement gains are a result of the separation programs, as well as the required settlement gain or loss recognition due to the fact that in 1999, the Company's lump sum pension distributions surpassed the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost. Allocated on the basis of headcount, the Exchanges' net periodic benefit credit, including non-recurring settlement gains, was approximately $2.69 million for 1999 and $1.6 million (unaudited) for the six months ended June 30, 2000. Postretirement Benefits Other than Pensions Substantially all of the Company's employees are covered under postretirement healthcare and life insurance benefit plans sponsored by Verizon. The determination of benefit cost for postretirement health plans is generally based on comprehensive hospital, medical, and surgical benefit plan provisions. The Company intends to fund amounts for postretirement benefits as deemed appropriate. The weighted-average assumptions used by Verizon in the actuarial computations for postretirement benefits were as follows at December 31: 1999 ------ Discount rate 8.00% Expected return on plan assets 8.00% The Company's postretirement benefit cost was $44.3 million for 1999. Allocated on the basis of headcount, the Exchanges' postretirement cost was approximately $1.92 million for 1999. Savings Plans The Company sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all full-time employees. Under the plans, the Company provides matching contributions in Verizon common stock based on qualified employee contributions up to a certain predefined limit. Matching contributions attributable to the Exchanges' employees were included in these special purpose financial statements and may or may not correspond to the matching benefits provided to the employees of the buyer. 5. Property, Plant, and Equipment: The company maintains continuing property records which identify specific property, plant, and equipment (PP&E) balances, depreciation reserves, and annual capital expenditure amounts for the Exchanges. The balances in the accompanying statements are based on these exchange specific amounts, and do not include any allocations of common assets utilized in providing the centralized services described in Note 2. PP&E is summarized as follows at December 31 (dollars in thousands):
1999 ----------- Land $ 957 Buildings 23,317 Plant and equipment 549,147 Other 19,943 ----------- Total 593,364 Less- Accumulated depreciation (390,502) ----------- Total property, plant, and equipment, net $ 202,862 ===========
6. Parent Funding and Interest Expense: For purposes of these statements, all funding requirements have been summarized as "Parent Funding," without regard to whether the funding represents debt or equity. No specific debt instruments can be directly associated with the Exchanges, nor are separate equity accounts maintained. As such, interest expense of the Company was allocated to the Exchanges based on the relative percentage of the Exchanges gross property, plant, and equipment balance to the gross property, plant and equipment balance for the Company. 7. Transactions with Affiliates: Historically, extensive transactions have occurred between the Exchanges and affiliate entities. These transactions have included construction and maintenance services, data processing and management services, financing, and directories agreements. Verizon Supply (100% owned by Verizon) provides construction and maintenance equipment, supplies, and electronic repair services to the Exchanges. Such purchases and services are recorded at the lower of cost, including a return or fair market value. The Exchanges are billed for data processing services and equipment rentals, and receive management, consulting, research and development, and pension management services from other affiliated companies. The Exchanges' special purpose financial statements also include allocated expenses resulting from the sharing of certain executive, administrative, financial, accounting, marketing, personnel, engineering, and other support services being performed at consolidated work centers within Verizon. The amounts charged for these affiliated transactions are based on proportional cost allocation methodologies. GTE Funding Incorporated (an affiliate of the Company) provides short-term financing and investment vehicles and cash management services. GTE Midwest and GTE Southwest are contractually obligated to repay all amounts borrowed on its behalf by GTE Funding Incorporated. The Company has an agreement with Verizon Directories Corporation (Directories) (100% owned by Verizon), whereby the Company provides its subscriber lists, billing and collection, and other services to Directories. In addition, when Directories sells Yellow Page directory advertising to customers within the Company's franchise area, the Company records a portion of the sale as revenue. Also, the Company is billed for certain printing and other costs associated with telephone directories, including the cost of customer contact information pages which are included in the Company's White Pages directories. 8. Regulatory and Competitive Matters: The Company's intrastate business is regulated by the state regulatory commission in Arkansas. The Company is also subject to regulation by the FCC for its interstate business operations. During 1999, regulatory and legislative activity at both the state and federal levels continued to be a direct result of the Telecommunications Act of 1996 (the "Telecommunications Act"). Along with promoting competition in all segments of the telecommunications industry, the Telecommunications Act was intended to preserve and advance universal service. Significant Customer The largest volume of the Company's services are provided to AT&T Corp. ("AT&T") and include amounts for access, billing, and collection. The Company's revenues from services provided to AT&T were 10% of total revenues for 1999. These concentrations may or may not correspond with the concentrations of the Exchanges. 9. Commitments and Contingencies: The Exchanges have noncancelable operating leases covering certain buildings, office space, and equipment. The Exchanges' rental expense was $3.7 million in 1999. Minimum rental commitments under these noncancelable leases are approximately $62,512, $16,411, $3,450, and $2,550 for the years 2000-2003, respectively, and $10,300 in 2004 and thereafter. The Company is subject to a number of proceedings arising out of the conduct of its business, including those relating to regulatory actions, commercial transactions, and environmental, safety and health matters. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company. 10. Segment Reporting: The Exchanges do not have separate reportable segments of their own. The Exchanges are part of GTE Arkansas, GTE Midwest, and GTE Southwest. These entities are part of the Domestic Wireline segment of Verizon's National Operations. The Domestic Wireline segment provides wireline communication services within franchised areas. These services include local telephone service and toll calls, as well as access services that enable long-distance carriers to complete calls to or from locations outside of the Exchanges' operating areas. This segment also provides complex voice and data services to businesses, billing and collection, and operator assistance services to other telecommunications companies and receives revenues in the form of a publication right from an affiliate that publishes telephone directories in its operating areas. 11. Bell Atlantic - GTE Merger: On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE become a wholly owned subsidiary of Bell Atlantic. With the closing of the merger, the combined company began doing business as Verizon Communications. GTE Missouri Operations Special Purpose Financial Statements As of June 30, 2000, and December 31, 1999 Together with Report of Independent Public Accountants Report of Independent Public Accountants To the Board of Directors and Shareholders of Spectra Communications Group LLC And GTE Midwest Incorporated: We have audited the accompanying special purpose financial statements of selected assets, liabilities and parent funding of GTE Missouri Operations (the "Company") as of December 31, 1999, and the related statements of income, parent funding and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the special purpose financial statements referred to above present fairly, in all material respects, the selected assets, liabilities and parent funding of the Company as of December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Dallas, Texas, September 13, 2000 The accompanying notes are an integral part of these special purpose financial statements. GTE Missouri Operations (As Described in Note 1) Statements of Selected Assets, Liabilities and Parent Funding As of June 30, 2000, and December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) SELECTED ASSETS --------------- CURRENT ASSETS: Receivables, less allowances of $1,407 and $1,261 $ 12,167 $ 16,938 Inventories and supplies 65 59 Prepaid benefits and other 205 1,028 -------------------------------------------------------------------------------- Total current assets 12,437 18,025 -------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, net 129,325 135,532 EMPLOYEE BENEFIT PLANS 5,304 3,984 OTHER ASSETS 207 268 -------------------------------------------------------------------------------- Total assets $ 147,273 $ 157,809 ================================================================================ SELECTED LIABILITIES AND PARENT FUNDING --------------------------------------- CURRENT LIABILITIES: Accounts payable $ 2,424 $ 6,493 Advance billings and customer deposits 1,583 1,509 Accrued payroll costs 682 729 Other 1,840 692 -------------------------------------------------------------------------------- Total current liabilities 6,529 9,423 -------------------------------------------------------------------------------- EMPLOYEE BENEFIT PLANS 2,312 2,247 OTHER LIABILITIES 63 63 -------------------------------------------------------------------------------- Total liabilities 8,904 11,733 -------------------------------------------------------------------------------- PARENT FUNDING 138,369 146,076 -------------------------------------------------------------------------------- Total liabilities and parent funding $ 147,273 $ 157,809 ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. GTE Missouri Operations (As Described In Note 1) Statements of Income For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999 (Dollars In Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) REVENUES AND SALES: Local services $ 9,279 $ 17,987 Network access services 28,091 51,717 Toll services 6,137 11,828 Other services and sales 3,279 7,334 -------------------------------------------------------------------------------- Total revenues and sales 46,786 88,866 -------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of services and sales 13,296 27,742 Selling, general and administrative 5,007 14,436 Depreciation and amortization 11,109 20,505 -------------------------------------------------------------------------------- Total operating costs and expenses 29,412 62,683 -------------------------------------------------------------------------------- OPERATING INCOME 17,374 26,183 INTEREST EXPENSE, net 1,812 4,236 -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 15,562 21,947 INCOME TAXES 5,949 8,390 -------------------------------------------------------------------------------- NET INCOME $ 9,613 $ 13,557 ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. GTE Missouri Operations (As Described In Note 1) Statements of Cash Flows For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999 (Dollars In Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,613 $ 13,557 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 10,734 19,956 Employee pension plans (1,255) (1,908) Provision for uncollectible accounts 691 1,671 Change in current assets and current liabilities- Receivables 4,080 (9,223) Other current assets 817 68 Other current liabilities (2,894) 4,212 Other, net 61 1,524 -------------------------------------------------------------------------------- Net cash provided by operating activities 21,847 29,857 -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,527) (9,303) -------------------------------------------------------------------------------- Net cash used in investing activities 4,527) (9,303) -------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Net transfers to GTE Corporation (17,320) (20,554) -------------------------------------------------------------------------------- Net cash used in financing activities (17,320) (20,554) -------------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS: Beginning of year - - -------------------------------------------------------------------------------- End of year $ - $ - ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. GTE Missouri Operations (As Described In Note 1) Statement of Parent Funding (Dollars In Thousands)
BALANCE, December 31, 1998 $ 153,073 Net income 13,557 Net transfers to GTE Corporation (20,554) ------------ BALANCE, December 31, 1999 $ 146,076 ============
The accompanying notes are an integral part of this special purpose financial statement. GTE Missouri Operations (As Described In Note 1) Notes to Special Purpose Financial Statements 1. Description of Business: The selected local telephone exchanges included in these special purpose financial statements (the "Exchanges") serve approximately 127,000 switched access lines in the state of Missouri. The Exchanges represent approximately 15% of the assets of GTE Midwest Incorporated ("GTE Midwest" or the "Company"). GTE Midwest is a wholly owned subsidiary of GTE Corporation (GTE), which is a wholly owned subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), d/b/a Verizon Communications ("Verizon") (see Note 11). Verizon provides a wide variety of communications services ranging from local telephone service for the home and office to highly complex voice and data services for various industries. On July 8, 1999, GTE Midwest entered into a purchase agreement with Spectra Communications Group LLC ("Spectra") to sell approximately 127,000 switched access lines in the state of Missouri to Spectra. The sale was completed on July 31, 2000. 2. Basis of Presentation: The accompanying special purpose financial statements have been prepared in accordance with accounting principles generally accepted in the United States using exchange specific information where available (e.g., most revenue and property, plant and equipment (PP&E) related accounts) and allocations where data is not maintained on an exchange specific basis within the Company's books and records (e.g., most operating expenses, assets other than PP&E, liabilities, and capital accounts). Because of the significant amount of allocations and estimates used to prepare these special purpose financial statements, they may not reflect the financial position and results of operations of the Exchanges after the acquisition by Spectra. The accompanying special purpose financial statements include only those assets, liabilities, and related operations of the Exchanges as historically incurred by the Company and exclude all other assets, liabilities, and related operations of Verizon and its subsidiaries, specifically cash, accrued interest, and tax-related balance sheet accounts. These special purpose financial statements also include expenses related to employees who support the Exchanges, some of which are expected to remain employees of the Company. Receivables related to end-user billings were identified by exchange using billing system data. Customer Advances and Deposits were allocated to the Exchanges based on total revenue. Receivables related to carrier and other miscellaneous billings were allocated to the Exchanges in proportion to carrier revenues. Accounts payable were allocated based on operating expenses and capital expenditures. Accrued payroll costs were allocated based on employee head count. Other current liabilities and other liabilities were allocated based on line count. The Exchanges' operating expenses include both amounts incurred within its operating territories that relate directly to its exchanges (the "Direct Expenses") and amounts incurred in centralized Verizon service centers that support multiple Verizon companies (the "Indirect Expenses"). The Direct Expenses correspond roughly with locally performed functions which will transfer to the buyer of the Exchanges. The Indirect Expenses correspond to substantial back-office, support and overhead functions which will not transfer to the buyer, but that the buyer will need to replace in some form in order to operate the Exchanges. The Indirect Expenses have been allocated to GTE Midwest, and further to specific exchanges within GTE Midwest (including the Exchanges), based on estimates of usage, or benefits received from such services. The level of allocated Indirect Expenses may not be representative of the buyer's ongoing expenses for these functions. Depreciation and amortization were calculated by exchange using property, plant, and equipment data. 3. Summary of Significant Accounting Policies and Other Disclosures: The notes which follow contain limited disclosure data where it can be reasonably estimated for the Exchanges. Revenue Recognition Revenues are recognized when earned. This is generally based on usage of local-exchange networks or facilities. For other products and services, revenues are generally recognized when services are rendered or products are delivered to customers. Revenues arising from the provision of local exchange services billed to end-users and revenues from the provision of access services billed to interexchange carriers are specifically identifiable for the study areas that encompass GTE Midwest and the Exchanges. Revenues arising from statewide inter-carrier agreements and settlement processes, and from sales of non-regulated products and services (collectively, the "Indirect Revenues") are identifiable to a specific study area, but not to specific exchanges. The Indirect Revenues have been allocated to the Exchanges based on a number of ratios. Revenues from non-regulated products, including discounts and related installation and maintenance agreements were allocated based on business lines. The revenues from public telephones were allocated based on number of public telephones. All other Indirect revenues were allocated based on the ratio between Indirect Revenues and Direct Revenues for the Exchanges. Depreciation and Amortization Assets are depreciated using the remaining life methodology and straight-line depreciation rates. This method depreciates the remaining net investment in telephone plant, less anticipated net salvage value, over remaining economic asset lives. This method requires the periodic review and revision of depreciation rates. The economic asset lives used are as follows: Average lives (in years) ------------------------ Fiber-optic cable 20 Copper wire 15 Switching equipment 10 Circuit equipment 8 When depreciable telephone plant is retired in the normal course of business, the amount of such plant is deducted from the respective plant and accumulated depreciation accounts. Gains or losses on dispositions are amortized with the remaining net investment in telephone plant. Employee Benefit Plans Pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Curtailment gains and losses associated with employee separations are recognized when they occur. Settlement gains and losses associated with employee separations are recognized when the pension obligations are settled and the gain or loss is determinable. Valuation of Assets The impairment of tangible or intangible assets is assessed when changes in circumstances indicate that their carrying value may not be recoverable. Under the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is made based on estimated future cash flows, salvage value, or expected net sales proceeds depending on the circumstances. Asset impairment losses, and any subsequent adjustments to such losses as initially recorded, as well as net gains or losses on sales of assets are recorded as a component of operating income. Income Taxes The Company's results are included in Verizon's consolidated federal income tax return. The Company participates in a tax-sharing agreement with Verizon and remits tax payments to Verizon based on its tax liability on a separate company basis. The Exchanges are not a taxable entity. The Exchanges' operating results are included within the Company for income tax purposes. Although the Exchanges contribute significant plant-related temporary differences (including investment tax credits) to the Company's deferred tax balances, the Company does not allocate income tax expense, income tax payables or deferred income taxes to the Exchanges. As the buyer will most likely have a different tax scenario, no deferred tax assets or liabilities are presented within these special purpose financial statements. The provision for income taxes included in the accompanying special purpose financial statements for 1999 was calculated based on the income of the Exchanges and the Company's effective tax rate adjusted for permanent differences not attributable to the Exchanges. Inventories and Supplies Inventories and supplies are stated at the lower of cost, determined principally by the average cost method, or net realizable value. Software Software costs are recognized in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which became effective in January 1999. The Company capitalizes costs associated with externally acquired software (including right-to-use fees) for internal use. Capitalized software is generally amortized on a straight-line basis over its useful life, not to exceed five years for non-network software or three years for network software. Comprehensive Income The Company had no comprehensive income components for the year ended December 31, 1999; therefore, comprehensive income is the same as net income for 1999. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires entities that use derivative instruments to measure these instruments at fair value and record them as assets or liabilities on the balance sheet. It also requires entities to reflect the gains or losses associated with changes in the fair value of these derivatives, either in earnings or as a separate component of comprehensive income, depending on the nature of the underlying contract or transaction. The Company is currently assessing the impact of adopting SFAS No.133, as amended, which is effective January 1, 2001. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides additional guidance on revenue recognition as well as criteria for when revenue is generally realized and earned and also requires the deferral of incremental direct selling costs. This bulletin currently must be adopted by December 31, 2000, and will require the Company to determine the effect of the accounting change as of January 1, 2000. The Company is currently assessing the impact of SAB No. 101. 4. Employee Benefit Plans: Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," certain disclosures including components of pension credits, postretirement benefit costs and the funded status of the plans, including the actuarial present value of accumulated plan benefits, accumulated or projected benefit obligation and the fair value of plan assets have not been presented because the structure of the Verizon plans does not permit the plans' data to be readily disaggregated. Pension Plans The Company participates in noncontributory defined benefit pension plans sponsored by Verizon covering substantially all employees. The benefits to be paid under these plans are generally based on years of credited service and average final earnings. Verizon's funding policy, subject to the minimum funding requirements of employee benefit and tax laws, is to contribute such amounts as are determined on an actuarial basis to accumulate funds sufficient to meet the plans' benefit obligation to employees upon their retirement. The assets of the plans consist primarily of corporate equities, government securities and corporate debt securities. The significant weighted-average assumptions used by Verizon for the pension measurements were as follows at December 31: 1999 ------ Discount rate 8.00% Rate of compensation increase 5.50% Expected return on plan assets 9.00% The Company's net periodic benefit credit was $18.9 million for 1999. The Verizon plans are currently funded at levels significantly in excess of projected benefit obligations. Included in the net periodic benefit credit for 1999 was a net pension gain of $10.4 million, comprised of one-time costs for special termination benefits provided under voluntary and involuntary separation programs, curtailment losses and settlement gains. These curtailment losses and settlement gains are a result of the separation programs, as well as the required settlement gain or loss recognition due to the fact that in 1999, the Company's lump sum pension distributions surpassed the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost. Allocated on the basis of headcount, the Exchanges' net periodic benefit credit, including non-recurring settlement gains, was approximately $1.2 million for 1999 and $1.3 million (unaudited) for the six months ended June 30, 2000. Postretirement Benefits Other than Pensions Substantially all of the Company's employees are covered under postretirement healthcare and life insurance benefit plans sponsored by Verizon. The determination of benefit cost for postretirement health plans is generally based on comprehensive hospital, medical and surgical benefit plan provisions. The Company intends to fund amounts for postretirement benefits as deemed appropriate. The weighted-average assumptions used by Verizon in the actuarial computations for postretirement benefits were as follows at December 31: 1999 ------ Discount rate 8.00% Expected return on plan assets 8.00% The Company's postretirement benefit cost was $8.4 million for 1999. Allocated on the basis of headcount, the Exchanges' postretirement cost was approximately $.5 million for 1999. Savings Plans GTE Midwest sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all full-time employees. Under the plans, the Company provides matching contributions in Verizon common stock based on qualified employee contributions up to a certain predefined limit. Matching contributions attributable to the Exchanges' employees were included in these special purpose financial statements and may or may not correspond to the matching benefits provided to the employees of the buyer. 5. Property, Plant and Equipment: The Company maintains continuing property records which identify specific property, plant and equipment (PP&E) balances, depreciation reserves and annual capital expenditure amounts for the Exchanges. The balance in the accompanying statements is based on these exchange specific amounts and does not include any allocations of common assets utilized in providing the centralized services described in Note 2. PP&E is summarized as follows at December 31 (dollars in thousands):
1999 ---------- Plant and equipment $ 335,830 Buildings 13,848 Land 613 Other 699 -------------------------------------------------------------------------------- Total 350,990 Less - Accumulated depreciation (215,458) -------------------------------------------------------------------------------- Total property, plant and equipment, net $ 135,532 ================================================================================
6. Parent Funding and Interest Expense: For purposes of these statements, all funding requirements have been summarized as "Parent Funding," without regard to whether the funding represents debt or equity. No specific debt instruments can be directly associated with the Exchanges, nor are separate equity accounts maintained. As such, interest expense of the Company was allocated to the Exchanges based on the relative percentage of the Exchanges gross PP&E balance to the gross PP&E balance for the Company. 7. Transactions with Affiliates: Historically, extensive transactions have occurred between the Exchanges and affiliate entities. These transactions have included construction and maintenance services, data processing and management services and financing and directories agreements. Verizon Supply (100% owned by Verizon) provides construction and maintenance equipment, supplies and electronic repair services to the Exchanges. Such purchases and services are recorded at the lower of cost, including a return realized by Verizon Supply, or fair market value. The Exchanges are billed for data processing services and equipment rentals, and receive management, consulting, research and development and pension management services from other affiliated companies. The Exchanges' special purpose financial statements also include allocated expenses resulting from the sharing of certain executive, administrative, financial, accounting, marketing, personnel, engineering and other support services being performed at consolidated work centers within Verizon. The amounts charged for these affiliated transactions are based on proportional cost allocation methodologies. GTE Funding Incorporated (an affiliate of the Company) provides short-term financing and investment vehicles and cash management services. The Company is contractually obligated to repay all amounts borrowed on its behalf by GTE Funding Incorporated. The Company has an agreement with Verizon Directories Corporation (Directories) (100% owned by Verizon), whereby the Company provides its subscriber lists, billing and collection and other services to Directories. In addition, when Directories sells Yellow Page directory advertising to customers within the Company's franchise area, the Company records a portion of the sale as revenue. Also, the Company is billed for certain printing and other costs associated with telephone directories, including the cost of customer contact information pages which are included in the Company's White Pages directories. 8. Regulatory and Competitive Matters: The Company's intrastate business is regulated by the state regulatory commissions in Missouri. The Company is also subject to regulation by the Federal Communications Commission (FCC) for its interstate business operations. During 1999, regulatory and legislative activity at both the state and federal levels continued to be a direct result of the Telecommunications Act of 1996 (the "Telecommunications Act"). Along with promoting competition in all segments of the telecommunications industry, the Telecommunications Act was intended to preserve and advance universal service. In March 1998, the Missouri Public Service Commission (MPSC) initiated a generic universal service fund (USF) proceeding to establish a USF mechanism and rebalance rates. In December 1999, the MPSC issued an order requesting the information on the size of the fund and the amount to be assessed under various scenarios. The information was filed in February 2000. A June 2000 order established a series of workshops to begin in the third quarter 2000 to decide these issues. The Company became subject to state price cap regulation in February 1999. The first year of the plan allows for increases up to $1.50 per month to residential and business one-party services with corresponding reductions in intrastate access rates to a level not to exceed 150 percent of the Company's interstate rates for similar services. In addition, a 10 percent reduction in intrastate toll rates is required in the first year of the plan. The Company plans to file the rebalancing plan with the MPSC in the third quarter of 2000. After January 2000, the Company is mandated to adjust local rates by the percent change in the Consumer Price Index. This adjustment will be incorporated into the rebalancing filing to minimize customer confusion. Significant Customer The largest volume of the Company's services are provided to AT&T Corp. ("AT&T") and include amounts for access and billing and collection. The Company revenues from services provided to AT&T were 14% of total revenues for 1999. This concentration may or may not correspond with the concentrations of the Exchanges. 9. Commitments and Contingencies: The Exchanges have noncancelable operating leases covering certain buildings, office space and equipment. The Exchanges' rental expense was $1.7 million in 1999. Minimum rental commitments under these noncancelable leases are approximately $35,810, $10,595, $2,560, and $360 for the years 2000-2003, respectively, and $2,190 in 2004 and thereafter. The Company is subject to a number of proceedings arising out of the conduct of its business, including those relating to regulatory actions, commercial transactions, and environmental, safety and health matters. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company or the Exchanges. 10. Segment Reporting: The Exchanges do not have separate reportable segments of their own. The Exchanges are part of GTE Midwest, which is part of the Domestic Wireline segment of Verizon's National Operations. The Domestic Wireline segment provides wireline communication services within franchised areas. These services include local telephone service and toll calls, as well as access services that enable long-distance carriers to complete calls to or from locations outside of the Exchanges' operating areas. This segment also provides complex voice and data services to businesses, billing and collection and operator assistance services to other telecommunications companies and receives revenues in the form of a publication right from an affiliate that publishes telephone directories in its operating areas. 11. Bell Atlantic - GTE Merger: On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the closing of the merger, the combined company began doing business as Verizon Communications. Verizon Wisconsin I Operations Special Purpose Financial Statements As of June 30, 2000, and December 31, 1999 Together with Report of Independent Public Accountants Report of Independent Public Accountants To the Board of Directors and Shareholders of Telephone USA of Wisconsin, LLC And Verizon North Inc.: We have audited the accompanying special purpose financial statements of selected assets, liabilities and parent funding of Verizon Wisconsin I Operations (the "Company") as of December 31, 1999, and the related statements of income, parent funding and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the special purpose financial statements referred to above present fairly, in all material respects, the selected assets, liabilities and parent funding of the Company as of December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Dallas, Texas, September 13, 2000 The accompanying notes are an integral part of these special purpose financial statements. Verizon Wisconsin I Operations (As Described in Note 1) Statements of Selected Assets, Liabilities and Parent Funding As of June 30, 2000, and December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) SELECTED ASSETS --------------- CURRENT ASSETS Receivables, less allowances of $335 and $ 352 $ 5,007 $ 5,552 Inventories and supplies 54 65 Prepaid benefits and other 479 607 -------------------------------------------------------------------------------- Total current assets 5,540 6,224 -------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, net 63,909 63,130 EMPLOYEE BENEFIT PLANS 10,140 8,432 OTHER ASSETS 285 171 -------------------------------------------------------------------------------- Total assets $ 79,874 $ 77,957 ================================================================================ SELECTED LIABILITIES AND PARENT FUNDING --------------------------------------- CURRENT LIABILITIES: Accounts payable $ 3,046 $ 437 Advance billings and customer deposits 1,013 980 Accrued payroll costs 743 820 Other 754 515 -------------------------------------------------------------------------------- Total current liabilities 5,556 2,752 -------------------------------------------------------------------------------- EMPLOYEE BENEFIT PLANS 2,379 2,350 OTHER LIABILITIES 181 34 -------------------------------------------------------------------------------- Total liabilities 8,116 5,136 -------------------------------------------------------------------------------- PARENT FUNDING 71,758 72,821 -------------------------------------------------------------------------------- Total liabilities and parent funding $ 79,874 $ 77,957 ================================================================================
Verizon Wisconsin I Operations (As Described in Note 1) Statements of Income For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) REVENUES AND SALES: Local services $ 8,801 $ 17,657 Network access services 6,608 14,874 Toll services 1,082 1,770 Other services and sales 2,177 4,906 -------------------------------------------------------------------------------- Total revenues and sales 18,668 39,207 -------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of services and sales 6,076 13,777 Selling, general and administrative 33 3,181 Depreciation and amortization 4,938 9,775 -------------------------------------------------------------------------------- Total operating costs and expenses 11,047 26,733 -------------------------------------------------------------------------------- OPERATING INCOME 7,621 12,474 INTEREST EXPENSE, net 1,124 2,622 -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 6,497 9,852 INCOME TAXES 2,628 3,986 -------------------------------------------------------------------------------- NET INCOME $ 3,869 5,866 ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. Verizon Wisconsin I Operations (As Described in Note 1) Statements of Cash Flows For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,869 $ 5,866 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 4,904 9,739 Employee pension plans (1,679) (2,373) Provision for uncollectible accounts 133 402 Change in current assets and current liabilities- Receivables 413 236 Other current assets 140 (111) Other current liabilities 2,803 177 Other, net 33 (264) -------------------------------------------------------------------------------- Net cash provided by operating activities 10,616 13,672 -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,684) (16,726) -------------------------------------------------------------------------------- Net cash used in investing activities (5,684) (16,726) -------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Net transfers from (to) GTE Corporation (4,932) 3,054 -------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (4,932) 3,054 -------------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS: Beginning of year - - -------------------------------------------------------------------------------- End of year $ - $ - ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. Verizon Wisconsin I Operations (As Described in Note 1) Statement of Parent Funding For the Year Ended December 31, 1999 (Dollars in Thousands)
BALANCE, December 31, 1998 $ 63,901 Net income 5,866 Net transfers from GTE Corporation 3,054 -------------------------------------------------------------------------------- BALANCE, December 31, 1999 $ 72,821 ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. Verizon Wisconsin I Operations (As Described in Note 1) Notes to Special Purpose Financial Statements 1. Description of Business: The selected local telephone exchanges included in these special purpose financial statements (the "Exchanges") serve approximately 61,500 switched access lines in the state of Wisconsin. The Exchanges represent approximately 1% of the assets of Verizon North Inc. ("Verizon North" or the "Company"), formerly GTE North Incorporated. Verizon North is a wholly owned subsidiary of GTE Corporation (GTE), which is a wholly owned subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), d/b/a Verizon Communications ("Verizon") (see Note 11). Verizon provides a wide variety of communications services ranging from local telephone service for the home and office to highly complex voice and data services for various industries. On August 19, 1999, Verizon North entered into a purchase agreement with Telephone USA of Wisconsin, LLC ("Telephone USA") to sell approximately 61,500 switched access lines in the state of Wisconsin to Telephone USA. The sale is expected to close during 2000. 2. Basis of Presentation: The accompanying special purpose financial statements have been prepared in accordance with accounting principles generally accepted in the United States using exchange specific information where available (e.g., most revenue and property, plant and equipment (PP&E) related accounts) and allocations where data is not maintained on an exchange specific basis within the Company's books and records (e.g., most operating expenses, assets other than PP&E, liabilities, and capital accounts). Because of the significant amount of allocations and estimates used to prepare these special purpose financial statements, they may not reflect the financial position and results of operations of the Exchanges after the acquisition by Telephone USA. The accompanying special purpose financial statements include only those assets, liabilities, and related operations of the Exchanges as historically incurred by the Company and exclude all other assets, liabilities, and related operations of Verizon and its subsidiaries, specifically cash, accrued interest, and tax-related balance sheet accounts. The special purpose financial statements also include expenses related to employees who support the Exchanges, some of which are expected to remain employees of the Company. Receivables related to end-user billings were identified by exchange using billing system data. Customer Advances and Deposits were allocated to the Exchanges based on total revenue. Receivables related to carrier and other miscellaneous billings were allocated to the Exchanges in proportion to carrier revenues. Accounts payable were allocated based on operating expenses and capital expenditures. Accrued payroll costs were allocated based on employee head count. Other current liabilities and other liabilities were allocated based on line count. The Exchanges' operating expenses include both amounts incurred within its operating territories that relate directly to its exchanges (the "Direct Expenses") and amounts incurred in centralized Verizon service centers that support multiple Verizon companies (the "Indirect Expenses"). The Direct Expenses correspond roughly with locally performed functions which will transfer to the buyer of the Exchanges. The Indirect Expenses correspond to substantial back-office, support and overhead functions which will not transfer to the buyer, but that the buyer will need to replace in some form in order to operate the Exchanges. The Indirect Expenses have been allocated to Verizon North and further to specific exchanges within Verizon North (including the Exchanges), based on estimates of usage, or benefits received from such services. The level of allocated Indirect Expenses may not be representative of the buyer's ongoing expenses for these functions. Depreciation and amortization were calculated by exchange using property, plant, and equipment data. 3. Summary of Significant Accounting Policies and Other Disclosures: The notes which follow contain limited disclosure data where it can be reasonably estimated for the Exchanges. Revenue Recognition Revenues are recognized when earned. This is generally based on usage of local-exchange networks or facilities. For other products and services, revenues are generally recognized when services are rendered or products are delivered to customers. Revenues arising from the provision of local exchange services billed to end-users and revenues from the provision of access services billed to interexchange carriers are specifically identifiable for the study areas that encompass Verizon North and the Exchanges. Revenues arising from statewide inter-carrier agreements and settlement processes, and from sales of non-regulated products and services (collectively, the "Indirect Revenues") are identifiable to a specific study area, but not to specific exchanges. The Indirect Revenues have been allocated to the Exchanges based on a number of ratios. Revenues from non-regulated products, including discounts and related installation and maintenance agreements were allocated based on business lines. The revenues from public telephones were allocated based on number of public telephones. All other Indirect revenues were allocated based on the ratio between Indirect Revenues and Direct Revenues for the Exchanges. Depreciation and Amortization Assets are depreciated using the remaining life methodology and straight-line depreciation rates. This method depreciates the remaining net investment in telephone plant, less anticipated net salvage value, over remaining economic asset lives. This method requires the periodic review and revision of depreciation rates. The economic asset lives used are as follows: Average lives (in years) ------------------------ Fiber-optic cable 20 Copper wire 15 Switching equipment 10 Circuit equipment 8 When depreciable telephone plant is retired in the normal course of business, the amount of such plant is deducted from the respective plant and accumulated depreciation accounts. Gains or losses on dispositions are amortized with the remaining net investment in telephone plant. Employee Benefit Plans Pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Curtailment gains and losses associated with employee separations are recognized when they occur. Settlement gains and losses associated with employee separations are recognized when the pension obligations are settled and the gain or loss is determinable. Valuation of Assets The impairment of tangible or intangible assets is assessed when changes in circumstances indicate that their carrying value may not be recoverable. Under the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is made based on estimated future cash flows, salvage value, or expected net sales proceeds depending on the circumstances. Asset impairment losses, and any subsequent adjustments to such losses as initially recorded, as well as net gains or losses on sales of assets are recorded as a component of operating income. Income Taxes The Company's results are included in Verizon's consolidated federal income tax return. The Company participates in a tax-sharing agreement with Verizon and remits tax payments to Verizon based on its tax liability on a separate company basis. The Exchanges are not a taxable entity. The Exchanges' operating results are included within the Company for income tax purposes. Although the Exchanges contribute significant plant-related temporary differences (including investment tax credits) to the Company's deferred tax balances, the Company does not allocate income tax expense, income tax payables or deferred income taxes to the Exchanges. As the buyer will most likely have a different tax scenario, no deferred tax assets or liabilities are presented within these special purpose financial statements. The provision for income taxes included in the accompanying special purpose financial statements for 1999 was calculated based on the income of the Exchanges and the Company's effective tax rate adjusted for permanent differences not attributable to the Exchanges. Inventories and Supplies Inventories and supplies are stated at the lower of cost, determined principally by the average cost method, or net realizable value. Software Software costs are recognized in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which became effective in January 1999. The Company capitalizes costs associated with externally acquired software (including right-to-use fees) for internal use. Capitalized software is generally amortized on a straight-line basis over its useful life, not to exceed five years for non-network software or three years for network software. Comprehensive Income The Company had no comprehensive income components for the year ended December 31, 1999; therefore, comprehensive income is the same as net income for 1999. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires entities that use derivative instruments to measure these instruments at fair value and record them as assets or liabilities on the balance sheet. It also requires entities to reflect the gains or losses associated with changes in the fair value of these derivatives, either in earnings or as a separate component of comprehensive income, depending on the nature of the underlying contract or transaction. The Company is currently assessing the impact of adopting SFAS No.133, as amended, which is effective January 1, 2001. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides additional guidance on revenue recognition as well as criteria for when revenue is generally realized and earned and also requires the deferral of incremental direct selling costs. This bulletin currently must be adopted by December 31, 2000, and will require the Company to determine the effect of the accounting change as of January 1, 2000. The Company is currently assessing the impact of SAB No. 101. 4. Employee Benefit Plans: Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," certain disclosures including components of pension credits, postretirement benefit costs and the funded status of the plans, including the actuarial present value of accumulated plan benefits, accumulated or projected benefit obligation and the fair value of plan assets have not been presented because the structure of the Verizon plans does not permit the plans' data to be readily disaggregated. Pension Plans The Company participates in noncontributory defined benefit pension plans sponsored by Verizon covering substantially all employees. The benefits to be paid under these plans are generally based on years of credited service and average final earnings. Verizon's funding policy, subject to the minimum funding requirements of employee benefit and tax laws, is to contribute such amounts as are determined on an actuarial basis to accumulate funds sufficient to meet the plans' benefit obligation to employees upon their retirement. The assets of the plans consist primarily of corporate equities, government securities and corporate debt securities. The significant weighted-average assumptions used by Verizon for the pension measurements were as follows at December 31: 1999 ------ Discount rate 8.00% Rate of compensation increase 5.50% Expected return on plan assets 9.00% The Company's net periodic benefit credit was $280.6 million for 1999. The Verizon plans are currently funded at levels significantly in excess of projected benefit obligations. Included in the net periodic benefit credit for 1999 was a net pension gain of $131.7 million, comprised of one-time costs for special termination benefits provided under voluntary and involuntary separation programs, curtailment losses and settlement gains. These curtailment losses and settlement gains are a result of the separation programs, as well as the required settlement gain or loss recognition due to the fact that in 1999, the Company's lump sum pension distributions surpassed the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost. Allocated on the basis of headcount, the Exchanges' net periodic benefit credit, including non-recurring settlement gains, was approximately $1.6 million for 1999 and $1.6 million (unaudited) for the six months ended June 30, 2000. Postretirement Benefits Other than Pensions Substantially all of the Company's employees are covered under postretirement healthcare and life insurance benefit plans sponsored by Verizon. The determination of benefit cost for postretirement health plans is generally based on comprehensive hospital, medical and surgical benefit plan provisions. The Company intends to fund amounts for postretirement benefits as deemed appropriate. The weighted-average assumptions used by Verizon in the actuarial computations for postretirement benefits were as follows at December 31: 1999 ------ Discount rate 8.00% Expected return on plan assets 8.00% The Company's postretirement benefit cost was $67.5 million for 1999. Allocated on the basis of headcount, the Exchanges' postretirement cost was approximately $.4 million for 1999. Savings Plans Verizon North sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all full-time employees. Under the plans, the Company provides matching contributions in Verizon common stock based on qualified employee contributions up to a certain predefined limit. Matching contributions attributable to the Exchanges' employees were included in these special purpose financial statements and may or may not correspond to the matching benefits provided to the employees of the buyer. 5. Property, Plant and Equipment: The Company maintains continuing property records which identify specific property, plant and equipment (PP&E) balances, depreciation reserves and annual capital expenditure amounts for the Exchanges. The balance in the accompanying statements is based on these exchange specific amounts and does not include any allocations of common assets utilized in providing the centralized services described in Note 2. PP&E is summarized as follows at December 31 (dollars in thousands):
1999 -------- Land $ 374 Buildings 7,452 Plant and equipment 162,007 Other 6,276 -------------------------------------------------------------------------------- Total 176,109 Less- Accumulated depreciation (112,979) -------------------------------------------------------------------------------- Total property, plant, and equipment, net $ 63,130 ================================================================================
6. Parent Funding and Interest Expense: For purposes of these statements, all funding requirements have been summarized as "Parent Funding," without regard to whether the funding represents debt or equity. No specific debt instruments can be directly associated with the Exchanges, nor are separate equity accounts maintained. As such, interest expense of the Company was allocated to the Exchanges based on the relative percentage of the Exchanges gross PP&E balance to the gross PP&E balance for the Company. 7. Transactions with Affiliates: Historically, extensive transactions have occurred between the Exchanges and affiliate entities. These transactions have included construction and maintenance services, data processing and management services and financing and directories agreements. Verizon Supply (100% owned by Verizon) provides construction and maintenance equipment, supplies and electronic repair services to the Exchanges. Such purchases and services are recorded at the lower of cost, including a return realized by Verizon Supply, or fair market value. The Exchanges are billed for data processing services and equipment rentals, and receive management, consulting, research and development and pension management services from other affiliated companies. The Exchanges' special purpose financial statements also include allocated expenses resulting from the sharing of certain executive, administrative, financial, accounting, marketing, personnel, engineering and other support services being performed at consolidated work centers within Verizon. The amounts charged for these affiliated transactions are based on proportional cost allocation methodologies. GTE Funding Incorporated (an affiliate of the Company) provides short-term financing and investment vehicles and cash management services. The Company is contractually obligated to repay all amounts borrowed on its behalf by GTE Funding Incorporated. The Company has an agreement with Verizon Directories Corporation (Directories) (100% owned by Verizon), whereby the Company provides its subscriber lists, billing and collection and other services to Directories. In addition, when Directories sells Yellow Page directory advertising to customers within the Company's franchise area, the Company records a portion of the sale as revenue. Also, the Company is billed for certain printing and other costs associated with telephone directories, including the cost of customer contact information pages which are included in the Company's White Pages directories. 8. Regulatory and Competitive Matters: The Company's intrastate business is regulated by the state regulatory commissions in Wisconsin. Interstate operations are subject to regulation by the Federal Communications Commission. During 1999, regulatory and legislative activity at both the state and federal levels continued to be a direct result of the Telecommunications Act of 1996 (the "Telecommunications Act"). Along with promoting competition in all segments of the telecommunications industry, the Telecommunications Act was intended to preserve and advance universal service. Significant Customer The largest volume of the Company's services are provided to AT&T Corp. ("AT&T") and include amounts for access and billing and collection. The Company revenues from services provided to AT&T were 9% of total revenues for 1999. This concentration may or may not correspond with the concentrations of the Exchanges. 9. Commitments and Contingencies: The Exchanges have noncancelable operating leases covering certain buildings, office space and equipment. The Exchanges' rental expense was $95,270 in 1999. Minimum rental commitments under these noncancelable leases are approximately $21,311, $10,291, $8,631, and $3,366 for the years 2000-2003, respectively, and $1,850 in 2004 and thereafter. The Company is subject to a number of proceedings arising out of the conduct of its business, including those relating to regulatory actions, commercial transactions, and environmental, safety and health matters. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company or the Exchanges. 10. Segment Reporting: The Exchanges do not have separate reportable segments of their own. The Exchanges are part of Verizon North, which is part of the Domestic Wireline segment of Verizon's National Operations. The Domestic Wireline segment provides wireline communication services within franchised areas. These services include local telephone service and toll calls, as well as access services that enable long-distance carriers to complete calls to or from locations outside of the Exchanges' operating areas. This segment also provides complex voice and data services to businesses, billing and collection and operator assistance services to other telecommunications companies and receives revenues in the form of a publication right from an affiliate that publishes telephone directories in its operating areas. 11. Bell Atlantic - GTE Merger: On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the closing of the merger, the combined company began doing business as Verizon Communications. Verizon Wisconsin II Operations Special Purpose Financial Statements As of June 30, 2000, and December 31, 1999 Together with Report of Independent Public Accountants Report of Independent Public Accountants To the Board of Directors and Shareholders of CenturyTel Incorporated And Verizon North Inc.: We have audited the accompanying special purpose financial statements of selected assets, liabilities and parent funding of Verizon Wisconsin II Operations (the "Company") as of December 31, 1999, and the related statements of income, parent funding and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the special purpose financial statements referred to above present fairly, in all material respects, the selected assets, liabilities and parent funding of the Company as of December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Dallas, Texas, September 13, 2000 The accompanying notes are an integral part of these special purpose financial statements. Verizon Wisconsin II Operations (As Described in Note 1) Statements of Selected Assets, Liabilities and Parent Funding As of June 30, 2000, and December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) SELECTED ASSETS --------------- CURRENT ASSETS: Receivables, less allowances of $362 and $381 $ 5,154 $ 5,754 Inventories and supplies 8 8 Prepaid benefits and other 533 672 -------------------------------------------------------------------------------- Total current assets 5,695 6,434 -------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, net 58,149 57,556 EMPLOYEE BENEFIT PLANS 8,424 7,005 OTHER ASSETS 317 190 -------------------------------------------------------------------------------- Total assets $ 72,585 $ 71,185 ================================================================================ SELECTED LIABILITIES AND PARENT FUNDING --------------------------------------- CURRENT LIABILITIES: Accounts payable $ 2,192 $ 314 Advance billings and customer deposits 1,096 1,060 Accrued payroll costs 617 681 Other 839 574 -------------------------------------------------------------------------------- Total current liabilities 4,744 2,629 -------------------------------------------------------------------------------- EMPLOYEE BENEFIT PLANS 1,977 1,952 OTHER LIABILITIES 202 38 -------------------------------------------------------------------------------- Total liabilities 6,923 4,619 -------------------------------------------------------------------------------- PARENT FUNDING 65,662 66,566 -------------------------------------------------------------------------------- Total liabilities and parent funding $ 72,585 $ 71,185 ================================================================================
The accompanying notes are an integral part of these special purpose financial statements. Verizon Wisconsin II Operations (As Described in Note 1) Statements of Income For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) REVENUES AND SALES: Local services $ 10,365 $ 20,265 Network access services 5,779 15,930 Toll services 1,015 1,638 Other services and sales 2,060 4,598 -------------------------------------------------------------------------------- Total revenues and sales 19,219 42,431 -------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of services and sales 6,785 15,350 Selling, general and administrative 13 3,523 Depreciation and amortization 4,546 8,976 -------------------------------------------------------------------------------- Total operating costs and expenses 11,344 27,849 -------------------------------------------------------------------------------- OPERATING INCOME 7,875 14,582 INTEREST EXPENSE, net 1,035 2,413 -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 6,840 12,169 INCOME TAXES 2,767 4,922 -------------------------------------------------------------------------------- NET INCOME $ 4,073 $ 7,247 ================================================================================
The accompanying notes are an integral part of these special purpose financial statements. Verizon Wisconsin II Operations (As Described in Note 1) Statements of Cash Flows For the Six Months Ended June 30, 2000, and for the Year Ended December 31, 1999 (Dollars in Thousands)
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Audited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,073 $ 7,247 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 4,509 8,936 Employee pension plans (1,394) (1,936) Provision for uncollectible accounts 144 435 Change in current assets and current liabilities- Receivables 456 141 Other current assets 140 (86) Other current liabilities 2,115 130 Other, net 36 (286) -------------------------------------------------------------------------------- Net cash provided by operating activities 10,079 14,581 -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,102) (15,235) -------------------------------------------------------------------------------- Net cash used in investing activities (5,102) (15,235) -------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Net transfers from (to) GTE Corporation (4,977) 654 -------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (4,977) 654 -------------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS: Beginning of year - - -------------------------------------------------------------------------------- End of year $ - $ - ================================================================================
The accompanying notes are an integral part of this special purpose financial statement. Verizon Wisconsin II Operations (As Described in Note 1) Statement of Parent Funding For the Year Ended December 31, 1999 (Dollars in Thousands)
BALANCE, December 31, 1998 $ 58,665 Net income 7,247 Net transfers from GTE Corporation 654 -------------------------------------------------------------------------------- BALANCE, December 31, 1999 $ 66,566 ================================================================================
The accompanying notes are an integral part of these special purpose financial statements. Notes to Special Purpose Financial Statements Verizon Wisconsin II Operations (As Described in Note 1) Notes to Special Purpose Financial Statements 1. Description of Business: The selected local telephone exchanges included in these special purpose financial statements (the "Exchanges") serve approximately 68,500 switched access lines in the state of Wisconsin. The Exchanges represent approximately 1% of the assets of Verizon North Inc. ("Verizon North" or the "Company"), formerly GTE North Incorporated. Verizon North is a wholly owned subsidiary of GTE Corporation (GTE), which is a wholly owned subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), d/b/a Verizon Communications ("Verizon") (see Note 11). Verizon provides a wide variety of communications services ranging from local telephone service for the home and office to highly complex voice and data services for various industries. On October 11, 1999, Verizon North entered into a purchase agreement with CenturyTel Incorporated ("CenturyTel") to sell approximately 68,500 switched access lines in the state of Wisconsin to CenturyTel. The sale is expected to close during 2000. 2. Basis of Presentation: The accompanying special purpose financial statements have been prepared in accordance with accounting principles generally accepted in the United States using exchange specific information where available (e.g., most revenue and property, plant and equipment (PP&E) related accounts) and allocations where data is not maintained on an exchange specific basis within the Company's books and records (e.g., most operating expenses, assets other than PP&E, liabilities, and capital accounts). Because of the significant amount of allocations and estimates used to prepare these special purpose financial statements, they may not reflect the financial position and results of operations of the Exchanges after the acquisition by CenturyTel. The accompanying special purpose financial statements include only those assets, liabilities, and related operations of the Exchanges as historically incurred by the Company and exclude all other assets, liabilities, and related operations of Verizon and its subsidiaries, specifically cash, accrued interest, and tax-related balance sheet accounts. The special purpose financial statements also include expenses related to employees who support the Exchanges, some of which are expected to remain employees of the Company. Receivables related to end-user billings were identified by exchange using billing system data. Customer Advances and Deposits were allocated to the Exchanges based on total revenue. Receivables related to carrier and other miscellaneous billings were allocated to the Exchanges in proportion to carrier revenues. Accounts payable were allocated based on operating expenses and capital expenditures. Accrued payroll costs were allocated based on employee head count. Other current liabilities and other liabilities were allocated based on line count. The Exchanges' operating expenses include both amounts incurred within its operating territories that relate directly to its exchanges (the "Direct Expenses") and amounts incurred in centralized Verizon service centers that support multiple Verizon companies (the "Indirect Expenses"). The Direct Expenses correspond roughly with locally performed functions which will transfer to the buyer of the Exchanges. The Indirect Expenses correspond to substantial back-office, support and overhead functions which will not transfer to the buyer, but that the buyer will need to replace in some form in order to operate the Exchanges. The Indirect Expenses have been allocated to Verizon North and further to specific exchanges within Verizon North (including the Exchanges), based on estimates of usage, or benefits received from such services. The level of allocated Indirect Expenses may not be representative of the buyer's ongoing expenses for these functions. Depreciation and amortization were calculated by exchange using property, plant, and equipment data. 3. Summary of Significant Accounting Policies and Other Disclosures: The notes which follow contain limited disclosure data where it can be reasonably estimated for the Exchanges. Revenue Recognition Revenues are recognized when earned. This is generally based on usage of local-exchange networks or facilities. For other products and services, revenues are generally recognized when services are rendered or products are delivered to customers. Revenues arising from the provision of local exchange services billed to end-users and revenues from the provision of access services billed to interexchange carriers are specifically identifiable for the study areas that encompass Verizon North and the Exchanges. Revenues arising from statewide inter-carrier agreements and settlement processes, and from sales of non-regulated products and services (collectively, the "Indirect Revenues") are identifiable to a specific study area, but not to specific exchanges. The Indirect Revenues have been allocated to the Exchanges based on a number of ratios. Revenues from non-regulated products, including discounts and related installation and maintenance agreements were allocated based on business lines. The revenues from public telephones were allocated based on number of public telephones. All other Indirect revenues were allocated based on the ratio between Indirect Revenues and Direct Revenues for the Exchanges. Depreciation and Amortization Assets are depreciated using the remaining life methodology and straight-line depreciation rates. This method depreciates the remaining net investment in telephone plant, less anticipated net salvage value, over remaining economic asset lives. This method requires the periodic review and revision of depreciation rates. The economic asset lives used are as follows: Average lives (in years) ------------------------ Fiber-optic cable 20 Copper wire 15 Switching equipment 10 Circuit equipment 8 When depreciable telephone plant is retired in the normal course of business, the amount of such plant is deducted from the respective plant and accumulated depreciation accounts. Gains or losses on dispositions are amortized with the remaining net investment in telephone plant. Employee Benefit Plans Pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Curtailment gains and losses associated with employee separations are recognized when they occur. Settlement gains and losses associated with employee separations are recognized when the pension obligations are settled and the gain or loss is determinable. Valuation of Assets The impairment of tangible or intangible assets is assessed when changes in circumstances indicate that their carrying value may not be recoverable. Under the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," a determination of impairment, if any, is made based on estimated future cash flows, salvage value, or expected net sales proceeds depending on the circumstances. Asset impairment losses, and any subsequent adjustments to such losses as initially recorded, as well as net gains or losses on sales of assets are recorded as a component of operating income. Income Taxes The Company's results are included in Verizon's consolidated federal income tax return. The Company participates in a tax-sharing agreement with Verizon and remits tax payments to Verizon based on its tax liability on a separate company basis. The Exchanges are not a taxable entity. The Exchanges' operating results are included within the Company for income tax purposes. Although the Exchanges contribute significant plant-related temporary differences (including investment tax credits) to the Company's deferred tax balances, the Company does not allocate income tax expense, income tax payables or deferred income taxes to the Exchanges. As the buyer will most likely have a different tax scenario, no deferred tax assets or liabilities are presented within these special purpose financial statements. The provision for income taxes included in the accompanying special purpose financial statements for 1999 was calculated based on the income of the Exchanges and the Company's effective tax rate adjusted for permanent differences not attributable to the Exchanges. Inventories and Supplies Inventories and supplies are stated at the lower of cost, determined principally by the average cost method, or net realizable value. Software Software costs are recognized in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which became effective in January 1999. The Company capitalizes costs associated with externally acquired software (including right-to-use fees) for internal use. Capitalized software is generally amortized on a straight-line basis over its useful life, not to exceed five years for non-network software or three years for network software. Comprehensive Income The Company had no comprehensive income components for the year ended December 31, 1999; therefore, comprehensive income is the same as net income for 1999. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires entities that use derivative instruments to measure these instruments at fair value and record them as assets or liabilities on the balance sheet. It also requires entities to reflect the gains or losses associated with changes in the fair value of these derivatives, either in earnings or as a separate component of comprehensive income, depending on the nature of the underlying contract or transaction. The Company is currently assessing the impact of adopting SFAS No.133, as amended, which is effective January 1, 2001. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides additional guidance on revenue recognition as well as criteria for when revenue is generally realized and earned and also requires the deferral of incremental direct selling costs. This bulletin currently must be adopted by December 31, 2000, and will require the Company to determine the effect of the accounting change as of January 1, 2000. The Company is currently assessing the impact of SAB No. 101. 4. Employee Benefit Plans: Pursuant to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," certain disclosures including components of pension credits, postretirement benefit costs and the funded status of the plans, including the actuarial present value of accumulated plan benefits, accumulated or projected benefit obligation and the fair value of plan assets have not been presented because the structure of the Verizon plans does not permit the plans' data to be readily disaggregated. Pension Plans The Company participates in noncontributory defined benefit pension plans sponsored by Verizon covering substantially all employees. The benefits to be paid under these plans are generally based on years of credited service and average final earnings. Verizon's funding policy, subject to the minimum funding requirements of employee benefit and tax laws, is to contribute such amounts as are determined on an actuarial basis to accumulate funds sufficient to meet the plans' benefit obligation to employees upon their retirement. The assets of the plans consist primarily of corporate equities, government securities and corporate debt securities. The significant weighted-average assumptions used by Verizon for the pension measurements were as follows at December 31: 1999 ------ Discount rate 8.00% Rate of compensation increase 5.50% Expected return on plan assets 9.00% The Company's net periodic benefit credit was $280.6 million for 1999. The Verizon plans are currently funded at levels significantly in excess of projected benefit obligations. Included in the net periodic benefit credit for 1999 was a net pension gain of $131.7 million, comprised of one-time costs for special termination benefits provided under voluntary and involuntary separation programs, curtailment losses and settlement gains. These curtailment losses and settlement gains are a result of the separation programs, as well as the required settlement gain or loss recognition due to the fact that in 1999, the Company's lump sum pension distributions surpassed the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost. Allocated on the basis of headcount, the Exchanges' net periodic benefit credit, including non-recurring settlement gains, was approximately $1.3 million for 1999 and $1.3 million (unaudited) for the six months ended June 30, 2000. Postretirement Benefits Other than Pensions Substantially all of the Company's employees are covered under postretirement healthcare and life insurance benefit plans sponsored by Verizon. The determination of benefit cost for postretirement health plans is generally based on comprehensive hospital, medical and surgical benefit plan provisions. The Company intends to fund amounts for postretirement benefits as deemed appropriate. The weighted-average assumptions used by Verizon in the actuarial computations for postretirement benefits were as follows at December 31: 1999 ------ Discount rate 8.00% Expected return on plan assets 8.00% The Company's postretirement benefit cost was $67.5 million for 1999. Allocated on the basis of headcount, the Exchanges' postretirement cost was approximately $.3 million for 1999. Savings Plans Verizon North sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all full-time employees. Under the plans, the Company provides matching contributions in Verizon common stock based on qualified employee contributions up to a certain predefined limit. Matching contributions attributable to the Exchanges' employees were included in these special purpose financial statements and may or may not correspond to the matching benefits provided to the employees of the buyer. 5. Property, Plant and Equipment: The Company maintains continuing property records which identify specific property, plant and equipment (PP&E) balances, depreciation reserves and annual capital expenditure amounts for the Exchanges. The balance in the accompanying statements is based on these exchange specific amounts and does not include any allocations of common assets utilized in providing the centralized services described in Note 2. PP&E is summarized as follows at December 31 (dollars in thousands):
1999 -------------------------------------------------------------------------------- Land $ 191 Buildings 5,775 Plant and equipment 151,441 Other 4,690 -------------------------------------------------------------------------------- Total 162,097 Less- Accumulated depreciation (104,541) -------------------------------------------------------------------------------- Total property, plant, and equipment, net $ 57,556 ================================================================================
6. Parent Funding and Interest Expense: For purposes of these statements, all funding requirements have been summarized as "Parent Funding," without regard to whether the funding represents debt or equity. No specific debt instruments can be directly associated with the Exchanges, nor are separate equity accounts maintained. As such, interest expense of the Company was allocated to the Exchanges based on the relative percentage of the Exchanges gross PP&E balance to the gross PP&E balance for the Company. 7. Transactions with Affiliates: Historically, extensive transactions have occurred between the Exchanges and affiliate entities. These transactions have included construction and maintenance services, data processing and management services and financing and directories agreements. Verizon Supply (100% owned by Verizon) provides construction and maintenance equipment, supplies and electronic repair services to the Exchanges. Such purchases and services are recorded at the lower of cost, including a return realized by Verizon Supply, or fair market value. The Exchanges are billed for data processing services and equipment rentals, and receive management, consulting, research and development and pension management services from other affiliated companies. The Exchanges' special purpose financial statements also include allocated expenses resulting from the sharing of certain executive, administrative, financial, accounting, marketing, personnel, engineering and other support services being performed at consolidated work centers within Verizon. The amounts charged for these affiliated transactions are based on proportional cost allocation methodologies. GTE Funding Incorporated (an affiliate of the Company) provides short-term financing and investment vehicles and cash management services. The Company is contractually obligated to repay all amounts borrowed on its behalf by GTE Funding Incorporated. The Company has an agreement with Verizon Directories Corporation (Directories) (100% owned by Verizon), whereby the Company provides its subscriber lists, billing and collection and other services to Directories. In addition, when Directories sells Yellow Page directory advertising to customers within the Company's franchise area, the Company records a portion of the sale as revenue. Also, the Company is billed for certain printing and other costs associated with telephone directories, including the cost of customer contact information pages which are included in the Company's White Pages directories. 8. Regulatory and Competitive Matters: The Company's intrastate business is regulated by the state regulatory commissions in Wisconsin. Interstate operations are subject to regulation by the Federal Communications Commission. During 1999, regulatory and legislative activity at both the state and federal levels continued to be a direct result of the Telecommunications Act of 1996 (the "Telecommunications Act"). Along with promoting competition in all segments of the telecommunications industry, the Telecommunications Act was intended to preserve and advance universal service. Significant Customer The largest volume of the Company's services are provided to AT&T Corp. ("AT&T") and include amounts for access and billing and collection. The Company revenues from services provided to AT&T were 9% of total revenues for 1999. This concentration may or may not correspond with concentrations of the Exchanges. 9. Commitments and Contingencies: The Exchanges have noncancelable operating leases covering certain buildings, office space and equipment. The Exchanges' rental expense was $68,460 in 1999. Minimum rental commitments under these noncancelable leases are approximately $11,969 $4,141, $1,405, and $200 for the years 2000-2003, respectively. The Company is subject to a number of proceedings arising out of the conduct of its business, including those relating to regulatory actions, commercial transactions, and environmental, safety and health matters. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company or the Exchanges. 10. Segment Reporting: The Exchanges do not have separate reportable segments of their own. The Exchanges are part of Verizon North, which is part of the Domestic Wireline segment of Verizon's National Operations. The Domestic Wireline segment provides wireline communication services within franchised areas. These services include local telephone service and toll calls, as well as access services that enable long-distance carriers to complete calls to or from locations outside of the Exchanges' operating areas. This segment also provides complex voice and data services to businesses, billing and collection and operator assistance services to other telecommunications companies and receives revenues in the form of a publication right from an affiliate that publishes telephone directories in its operating areas. 11. Bell Atlantic - GTE Merger: On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under a definitive merger agreement dated as of July 27, 1998. Under the terms of the agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the closing of the merger, the combined company began doing business as Verizon Communications. * * * * * * * * * * CenturyTel, Inc. Unaudited Pro Forma Consolidated Condensed Financial Information Introduction Background. On July 31, 2000 and September 29, 2000, affiliates of CenturyTel, Inc. (the "Company") acquired over 490,000 telephone access lines and related assets from Verizon Communications, Inc. (successor to GTE Corporation) ("Verizon") in four separate transactions for approximately $1.5 billion in cash. Under these transactions: o On July 31, 2000, the Company purchased approximately 231,000 telephone access lines and related local exchange assets comprising 106 exchanges throughout Arkansas for approximately $843 million in cash. o On July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased approximately 127,000 telephone access lines and related local exchange assets comprising 107 exchanges throughout Missouri for approximately $297 million cash. The Company owns 57.1% of Spectra, which was organized to acquire and operate these Missouri properties. At closing, the Company made a preferred equity investment in Spectra of approximately $55 million and financed substantially all of the remainder of the purchase price. o On September 29, 2000, the Company purchased approximately 70,500 telephone access lines and related local exchange assets comprising 42 exchanges throughout Wisconsin for approximately $194 million in cash. o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA") purchased approximately 62,900 telephone access lines and related local exchange assets comprising 35 exchanges throughout Wisconsin for approximately $170 million in cash. The Company owns 89% of Telephone USA, which was organized to acquire and own these Wisconsin properties. At closing, the Company made an equity investment in Telephone USA of approximately $37.8 million and financed substantially all of the remainder of the purchase price. To finance these acquisitions on a short-term basis, the Company borrowed $1.157 billion on a floating-rate basis under its new $1.5 billion credit facility with Bank of America, N.A. and Citibank, N.A., as lenders, and Banc of America Securities LLC and Salomon Smith Barney Inc., as arrangers, and borrowed $300 million on a floating-rate basis under its existing credit facility with Bank of America, N.A. The orders of the Arkansas and Wisconsin public service commissions approving the purchases of the Arkansas and Wisconsin assets remain subject to appeal, but those orders (and each other regulatory order necessary to authorize the Verizon acquisitions) are in full force and effect. The Company expects that the order of the Wisconsin Public Service Commission, when issued in writing, will contain several requirements relating to rates, service standards and other matters. In connection with authorizing the Wisconsin acquisitions, the Wisconsin Public Service Commission indicated its intent to review the possibility of regulating all of the Company's Wisconsin local exchange carriers on an unitary basis, which would reduce the Company's revenues in Wisconsin (unless and to the extent these reductions could be mitigated through rate adjustments or other revenue enhancements approved by the Wisconsin Public Service Commission). In addition to the continued provision of traditional local exchange telephone services, the Company intends to provide long distance, Internet access (including high-speed Digital Subscriber Line Internet access service) and other advanced technology services in certain of the acquired service areas. The Company currently offers long distance and Internet access service in certain Arkansas and Wisconsin communities adjacent to the acquired service areas. Pro forma information. The following unaudited pro forma consolidated condensed balance sheet as of June 30, 2000 and the unaudited pro forma consolidated condensed statements of income for the year ended December 31, 1999 and the six months ended June 30, 2000 are based on the historical results of operations and financial condition of CenturyTel, Inc., and its subsidiaries (the "Company") and the Verizon properties acquired and reflects the effects of the transactions described above. Pro forma adjustments, and the assumptions on which they are based, are described in the accompanying notes to the unaudited pro forma consolidated condensed financial information. The pro forma financial information has been prepared assuming that the aggregate purchase price of $1.504 billion will be financed with $1.0 billion of proceeds from the issuance of senior long-term debt securities, $300 million of bank indebtedness due in 2002, $157 million of proceeds from a commercial paper issuance and $47 million of available cash. The pro forma financial information related to the Verizon acquisitions has been prepared using the purchase method of accounting and is based on the assumptions that the purchase of all of the Verizon properties took place as of June 30, 2000 for purposes of the pro forma balance sheet and as of January 1, 1999 for purposes of the pro forma statements of income. In accordance with the purchase method of accounting, the actual consolidated financial statements of the Company will reflect the Verizon acquisitions only from and after their respective dates of acquisition. This unaudited pro forma consolidated condensed financial data does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the asset acquisitions including, but not limited to (i) charging higher access rates than those authorized for Verizon with respect to the acquired Arkansas properties, (ii) offering long distance, Internet access and other advanced technology services to an increased number of customers in the acquired markets and (iii) cost savings associated with operating and administering the acquired properties with the Company's existing personnel and operating assets. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if such transactions had been consummated on the dates and in accordance with the assumptions described above, nor is it necessarily indicative of future operating results or financial position. The historical Verizon financial information reflects the operating and management structure of Verizon and is not necessarily indicative of the results of operations that may be obtained with respect to the acquired properties under the Company's operating and management structure. You are urged to read the financial information below along with (i) the Company's publicly available historical consolidated financial statements and accompanying notes and (ii) the special purpose financial statements of the Verizon acquired operations, which are included elsewhere in this Current Report on Form 8-K. CENTURYTEL, INC. Pro Forma Consolidated Condensed Balance Sheet June 30, 2000 (Unaudited)
As reported ---------------------------------------------------------------- Pro forma Pro forma CenturyTel Verizon adjustments consolidated ------------------------------------------------------------------------------------------ (Dollars in thousands) (See Notes A and B) ASSETS CURRENT ASSETS Cash and cash equivalents $ 49,685 (27,000) 22,685 Accounts receivable 207,733 46,090 253,823 Materials and supplies, at average cost 24,699 710 25,409 Other 10,484 1,577 12,061 ----------------------------------------------------------------------------------------- Total current assets 292,601 48,377 (27,000) 313,978 ----------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,235,891 446,914 162,773 2,845,578 ----------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired 1,621,491 886,250 2,507,741 Other 571,884 44,297 (43,296) 572,885 ----------------------------------------------------------------------------------------- Total investments and other assets 2,193,375 44,297 842,954 3,080,626 ----------------------------------------------------------------------------------------- TOTAL ASSETS $ 4,721,867 539,588 978,727 6,240,182 ========================================================================================= LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term debt and current maturities of long-term debt $ 75,022 157,000 232,022 Accounts payable 110,186 15,026 (15,026) 110,186 Accrued expenses and other liabilities 117,269 8,923 (8,923) 117,269 Advance billing and customer deposits 34,235 7,674 41,909 ----------------------------------------------------------------------------------------- Total current liabilities 336,712 31,623 133,051 501,386 ----------------------------------------------------------------------------------------- LONG-TERM DEBT 1,953,844 1,300,000 3,253,844 ----------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 483,760 15,032 38,609 537,401 ----------------------------------------------------------------------------------------- PARENT FUNDING 492,933 (492,933) ----------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock 140,540 140,540 Paid in capital 502,971 502,971 Unrealized holding gain on investments, net of taxes 59,359 59,359 Retained earnings 1,240,706 1,240,706 Unearned ESOP shares (4,000) (4,000) Preferred stock - non-redeemable 7,975 7,975 ----------------------------------------------------------------------------------------- Total stockholders' equity 1,947,551 1,947,551 ----------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 4,721,867 539,588 978,727 6,240,182 =========================================================================================
See accompanying notes to unaudited pro forma consolidated condensed financial information. CenturyTel, Inc. Pro Forma Consolidated Condensed Statement of Income For the Six Months Ended June 30, 2000 (Unaudited)
As reported ---------------------------------------------------------------- Pro forma Pro forma CenturyTel Verizon adjustments consolidated ------------------------------------------------------------------------------------------ (Dollars in thousands) (See Notes A and C) OPERATING REVENUES Telephone $ 553,014 167,693 720,707 Wireless 211,546 211,546 Other 71,552 71,552 ----------------------------------------------------------------------------------------- Total operating revenues 836,112 167,693 1,003,805 ----------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 429,218 76,638 505,856 Depreciation and amortization 170,580 40,235 19,848 230,663 ----------------------------------------------------------------------------------------- Total operating expenses 599,798 116,873 19,848 736,519 ----------------------------------------------------------------------------------------- OPERATING INCOME 236,314 50,820 (19,848) 267,286 ----------------------------------------------------------------------------------------- OTHER INCOME AND EXPENSE Interest expense (71,309) (7,788) (52,313) (131,410) Income from unconsolidated cellular entities 8,016 8,016 Minority interest (5,163) 637 (4,526) Gain on sale of assets 9,910 9,910 Other income and expense 6,613 6,613 ----------------------------------------------------------------------------------------- Total other income (expense) (51,933) (7,788) (51,676) (111,397) ----------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE 184,381 43,032 (71,524) 155,889 Income tax expense 77,252 16,835 (28,610) 65,477 ----------------------------------------------------------------------------------------- NET INCOME $ 107,129 26,197 (42,914) 90,412 ========================================================================================= BASIC EARNINGS PER SHARE $ 0.76 0.64 ========================================================================================= DILUTED EARNINGS PER SHARE $ 0.76 0.64 ========================================================================================= AVERAGE BASIC SHARES OUTSTANDING 139,874 139,874 ========================================================================================= AVERAGE DILUTED SHARES OUTSTANDING 141,729 141,729 =========================================================================================
See accompanying notes to unaudited pro forma consolidated condensed financial information. CENTURYTEL, INC. Pro Forma Consolidated Condensed Statement of Income For the year ended December 31, 1999 (Unaudited)
As reported ---------------------------------------------------------------- Pro forma Pro forma CenturyTel Verizon adjustments consolidated ------------------------------------------------------------------------------------------ (Dollars in thousands) (See Notes A and D) OPERATING REVENUES Telephone $ 1,126,112 339,323 1,465,435 Wireless 422,269 422,269 Other 128,288 128,288 ----------------------------------------------------------------------------------------- Total operating revenues 1,676,669 339,323 2,015,992 ----------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 819,784 173,604 993,388 Depreciation and amortization 348,816 77,334 42,558 468,708 ----------------------------------------------------------------------------------------- Total operating expenses 1,168,600 250,938 42,558 1,462,096 ----------------------------------------------------------------------------------------- OPERATING INCOME 508,069 88,385 (42,558) 553,896 ----------------------------------------------------------------------------------------- OTHER INCOME AND EXPENSE Interest expense (150,557) (17,563) (102,640) (270,760) Income from unconsolidated cellular entities 27,675 27,675 Minority interest (27,913) 4,853 (23,060) Gain on sale of assets 62,808 62,808 Other income and expense 9,190 9,190 ----------------------------------------------------------------------------------------- Total other income (expense) (78,797) (17,563) (97,787) (194,147) ----------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE 429,272 70,822 (140,345) 359,749 Income tax expense 189,503 27,725 (56,138) 161,090 ----------------------------------------------------------------------------------------- NET INCOME $ 239,769 43,097 (84,207) 198,659 ========================================================================================= BASIC EARNINGS PER SHARE $ 1.72 1.43 ========================================================================================= DILUTED EARNINGS PER SHARE $ 1.70 1.41 ========================================================================================= AVERAGE BASIC SHARES OUTSTANDING 138,848 138,848 ========================================================================================= AVERAGE DILUTED SHARES OUTSTANDING 141,432 141,432 =========================================================================================
See accompanying notes to unaudited pro forma consolidated condensed financial information. Notes to Unaudited Pro Forma Consolidated Condensed Financial Information (A) Purchase of Verizon assets. Costs of acquisition. The total cash purchase price of the Verizon assets has been assumed to be approximately $1.504 billion. Operations. As explained further above, the pro forma adjustments do not consider the effect of possible revenue enhancements or cost synergies that may occur in connection with combining the operations of the acquired properties with the Company's operations. Other transactions. The pro forma adjustments do not reflect the effects of the Company's acquisitions and dispositions of certain other properties during 1999 and 2000, the aggregate effect of which is not material for pro forma purposes. (B) June 30, 2000 Balance Sheet Pro Forma Adjustments. The pro forma adjustments applicable to the acquisition of the Verizon properties with respect to the unaudited pro forma consolidated condensed balance sheet as of June 30, 2000, as set forth below, reflect preliminary allocations of the aggregate purchase price to the acquired properties. (These adjustments are in addition to those summarized below to reflect the effect of FAS 71, which is defined below). The preliminary estimates of the fair value of the noncurrent assets and liablities are subject to change upon completion of our valuation analysis, which could result in some of Verizon's intangible assets being amortized over a shorter life than the 40-year goodwill amortization period assumed hereunder. The pro forma financial information has been prepared assuming that the aggregate purchase price of $1.504 billion will be financed with $1.0 billion of proceeds from the issuance of senior long-term debt securities, $300 million of bank indebtedness due in 2002, $157 million of proceeds from a commercial paper issuance and $47 million of available cash. For pro forma purposes, the weighted average interest rate of the Company's financings is assumed to be 8.25%.
Short-term debt and Net Excess current Accrued Deferred property, cost of Investments maturities expenses and Long- credits plant and net assets and other of long- Accounts other term and other Parent Adjustment Cash equipment acquired assets term debt payable liabilities debt liabilities funding ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) (1) (a) $ 1,457,000 157,000 1,300,000 (b) (1,504,000) 1,504,000 (2) (492,933) (492,933) (3) 43,296 (43,296) (4) 162,773 (162,773) (5) (23,949) (15,026) (8,923) (6) 20,000 18,609 38,609 ------------------------------------------------------------------------------------------------------------------------------------ $ (27,000) 162,773 886,250 (43,296) 157,000 (15,026) (8,923) 1,300,000 38,609 (492,933) ====================================================================================================================================
Adjustment: (1) Reflects (a) borrowing $1.457 billion and (b) delivery of $1.504 billion to purchase assets of Verizon. (2) Reflects the elimination of Verizon's parent debt and equity funding and excess cost of net assets acquired. (3) Reflects the elimination of excess pension assets, as such amounts are retained by Verizon. The Company has not reflected in the Pro Forma Consolidated Condensed Statements of Income any adjustments reflecting any income generated by these excess pension assets. (4) Reflects the increase in net property, plant and equipment and the related decrease in excess cost of net assets acquired resulting from conforming the net book value of the acquired assets to the amounts that would be required to be recorded if such assets had been accounted for under Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("FAS 71"). (5) Reflects the elimination of Verizon's accounts payable and accrued expenses and other liabilities, as such liabilities are retained by Verizon. (6) Reflects the receipt of $20 million from minority investors and the establishment of minority interest liability to reflect the share of equity of Spectra (42.9%) and TelUSA (11%) attributable to the minority investors. (C) June 30, 2000 Income Statement Pro Forma Adjustments. Set forth below are the pro forma adjustments applicable to the acquisition of the Verizon assets with respect to the unaudited pro forma consolidated condensed statement of income for the six-month period ended June 30, 2000:
Depreciation and Interest Minority Income Adjustment amortization expense interest tax expense -------------------------------------------------------------------------------------------------- (Dollars in thousands) Amortization of excess cost of net assets acquired (assuming a 40-year amortization period) $ 10,329 Adjust depreciation expense to reflect the application of FAS 71 9,519 Interest on borrowings of $1.457 billion at an assumed rate of 8.25% (1) 60,101 Eliminate Verizon interest expense on parent funding (7,788) Record minority interest to reflect the share of the pro forma losses of Spectra (42.9%) and TelUSA (11%) attributable to the minority investors (637) Tax benefit relating to pro forma adjustments (assuming a 40% tax rate) (28,610) -------------------------------------------------------------------------------------------------- $ 19,848 52,313 (637) (28,610) ==================================================================================================
(1) Use of an assumed rate .125% higher or lower than 8.25% would have changed net income by approximately $546,000. (D) December 31, 1999 Income Statement Pro Forma Adjustments. Set forth below are the pro forma adjustments applicable to the acquisition of the Verizon assets with respect to the unaudited pro forma consolidated condensed statement of income for the year ended December 31, 1999:
Depreciation and Interest Minority Income Adjustment amortization expense interest tax expense -------------------------------------------------------------------------------------------------- (Dollars in thousands) Amortization of excess cost of net assets acquired (assuming a 40-year amortization period) $ 20,659 Adjust depreciation expense to reflect the application of FAS 71 21,899 Interest on borrowings of $1.457 billion at an assumed rate of 8.25% (1) 120,203 Eliminate Verizon interest expense on parent funding (17,563) Record minority interest to reflect the share of the pro forma losses of Spectra (42.9%) and TelUSA (11%) attributable to the minority investors (4,853) Tax benefit relating to pro forma adjustments (assuming a 40% tax rate) (56,138) -------------------------------------------------------------------------------------------------- $ 42,558 102,640 (4,853) (56,138) ==================================================================================================
(1) Use of an assumed rate .125% higher or lower than 8.25% would have changed net income by approximately $1.1 million. (E) Reclassifications. Certain reclassifications have been made to the historical financial information to conform to the presentation of the condensed pro forma information. (F) Verizon Historical Results. All amounts reflected above under the headings "As Reported - Verizon" are based on special purpose financial statements of the Verizon acquired operations. In connection with the preparation of these special purpose financial statements, Verizon made numerous assumptions and allocations where specific data was not available pertaining to the acquired assets. Because of the significant amount of allocations and estimates used to prepare these special purpose financial statements, they may not reflect the financial position and results of operations of the acquired properties after such properties are acquired by the Company. For additional information, see the special purpose financial statements, and the notes thereto, filed in connection with this Current Report on Form 8-K. FORWARD-LOOKING STATEMENTS In addition to historical information, this Current Report on Form 8-K includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such forward-looking statements are subject to uncertainties that could cause the Company's actual results to differ materially from such statements. Such uncertainties include, but are not limited to: the Company's ability to effectively manage its growth, including obtaining adequate financing on attractive terms, integrating newly acquired properties into its operations, hiring adequate numbers of qualified staff and successfully upgrading our billing and other information systems; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry; the effects of greater than anticipated competition in our markets; possible changes in the demand for, and pricing of, our products and services; the Company's ability to successfully introduce new product or service offerings on a timely and cost-effective basis; and the effects of more general factors such as changes in general market conditions or in legislation, regulation or public policy. These and other uncertanties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any of its forward- looking statements for any reason. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CenturyTel, Inc. By: /s/ Neil A. Sweasy ------------------------- Neil A. Sweasy Vice President and Controller