FRONTIER COMMUNICATIONS CORPORATION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2008
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or
--
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to__________
Commission file number: 001-11001
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FRONTIER COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0619596
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 High Ridge Park
Stamford, Connecticut 06905
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(203) 614-5600
----------------------------------------------------
(Registrant's telephone number, including area code)
Citizens Communications Company
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "accelerated filer," "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
The number of shares outstanding of the registrant's Common Stock as of July 25,
2008 was 315,956,718.
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information (Unaudited)
Financial Statements
Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 2
Consolidated Statements of Operations for the three months ended June 30, 2008 and 2007 3
Consolidated Statements of Operations for the six months ended June 30, 2008 and 2007 4
Consolidated Statements of Shareholders' Equity for the year ended
December 31, 2007 and the six months ended June 30, 2008 5
Consolidated Statements of Comprehensive Income for the three
and six months ended June 30, 2008 and 2007 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Quantitative and Qualitative Disclosures about Market Risk 29
Controls and Procedures 30
Part II. Other Information
Legal Proceedings 31
Risk Factors 31
Unregistered Sales of Equity Securities and Use of Proceeds 31
Submission of Matters to a Vote of Security Holders 33
Other Information 34
Exhibits 34
Signature 35
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
June 30, 2008 December 31, 2007
------------------ -------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 178,874 $ 226,466
Accounts receivable, less allowances of $32,965 and $32,748, respectively 224,463 234,762
Other current assets 45,390 62,926
------------------ -------------------
Total current assets 448,727 524,154
Property, plant and equipment, net 3,265,260 3,335,244
Goodwill, net 2,633,310 2,634,559
Other intangibles, net 455,917 547,735
Investments 21,703 21,191
Other assets 188,312 193,186
------------------ -------------------
Total assets $ 7,013,229 $ 7,256,069
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Long-term debt due within one year $ 3,828 $ 2,448
Accounts payable and other current liabilities 368,704 443,443
------------------ -------------------
Total current liabilities 372,532 445,891
Deferred income taxes 712,597 711,645
Other liabilities 351,239 363,737
Long-term debt 4,746,612 4,736,897
Shareholders' equity:
Common stock, $0.25 par value (600,000,000 authorized shares; 318,421,000
and 327,749,000 outstanding, respectively, and 349,456,000
issued at June 30, 2008 and December 31, 2007) 87,364 87,364
Additional paid-in capital 1,188,509 1,280,508
Retained earnings 35,147 14,001
Accumulated other comprehensive loss, net of tax (77,161) (77,995)
Treasury stock (403,610) (305,979)
------------------ -------------------
Total shareholders' equity 830,249 997,899
------------------ -------------------
Total liabilities and shareholders' equity $ 7,013,229 $ 7,256,069
================== ===================
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
2
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
($ in thousands, except for per-share amounts)
(Unaudited)
2008 2007
--------------- --------------
Revenue $562,550 $578,826
Operating expenses:
Network access expenses 53,998 53,678
Other operating expenses 202,333 213,388
Depreciation and amortization 144,250 140,462
--------------- --------------
Total operating expenses 400,581 407,528
--------------- --------------
Operating income 161,969 171,298
Investment and other income (loss), net 6,393 (6,517)
Interest expense 90,710 98,649
--------------- --------------
Income before income taxes 77,652 66,132
Income tax expense 21,874 25,573
--------------- --------------
Net income available for common shareholders $ 55,778 $ 40,559
=============== ==============
Basic income per common share $ 0.17 $ 0.12
=============== ==============
Diluted income per common share $ 0.17 $ 0.12
=============== ==============
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
3
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
($ in thousands, except for per-share amounts)
(Unaudited)
2008 2007
--------------- --------------
Revenue $ 1,131,755 $ 1,134,973
Operating expenses:
Network access expenses 114,547 105,075
Other operating expenses 405,597 402,655
Depreciation and amortization 285,330 262,643
--------------- --------------
Total operating expenses 805,474 770,373
--------------- --------------
Operating income 326,281 364,600
Investment and other income (loss), net 5,158 3,500
Interest expense 181,570 192,613
--------------- --------------
Income before income taxes 149,869 175,487
Income tax expense 48,502 67,261
--------------- --------------
Net income available for common shareholders $ 101,367 $ 108,226
=============== ==============
Basic income per common share $ 0.31 $ 0.33
=============== ==============
Diluted income per common share $ 0.31 $ 0.32
=============== ==============
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
4
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2007 AND THE SIX MONTHS ENDED JUNE 30, 2008
($ and shares in thousands, except for per-share amounts)
(Unaudited)
Accumulated
Common Stock Additional Other Treasury Stock Total
------------------ Paid-In Retained Comprehensive -------------------- Shareholders'
Shares Amount Capital Earnings Loss Shares Amount Equity
-------- --------- ----------- ------------ ------------ -------- ----------- -----------
Balance January 1, 2007 343,956 $85,989 $1,207,399 $ 134,705 $ (81,899) (21,691) $ (288,162) $1,058,032
Stock plans - - (6,237) 667 - 1,824 25,399 19,829
Acquisition of Commonwealth 5,500 1,375 77,939 - - 12,640 168,121 247,435
Conversion of EPPICS - - (549) - - 291 3,888 3,339
Conversion of Commonwealth Notes - - 1,956 - - 2,508 34,775 36,731
Dividends on common stock of
$1.00 per share - - - (336,025) - - - (336,025)
Shares repurchased - - - - - (17,279) (250,000) (250,000)
Net income - - - 214,654 - - - 214,654
Other comprehensive income, net
of tax and reclassifications
adjustments - - - - 3,904 - - 3,904
-------- --------- ----------- ------------ ------------ -------- ----------- -----------
Balance December 31, 2007 349,456 87,364 1,280,508 14,001 (77,995) (21,707) (305,979) 997,899
Stock plans - - (9,883) - - 1,047 14,912 5,029
Conversion of EPPICS - - (13) - - 7 93 80
Acquisition of Commonwealth - - - - - 1 23 23
Dividends on common stock of
$0.50 per share - - (82,103) (80,221) - - - (162,324)
Shares repurchased - - - - - (10,383) (112,659) (112,659)
Net income - - - 101,367 - - - 101,367
Other comprehensive income, net
of tax and reclassifications
adjustments - - - - 834 - - 834
-------- --------- ----------- ------------ ------------ -------- ----------- -----------
Balance June 30, 2008 349,456 $87,364 $1,188,509 $ 35,147 $ (77,161) (31,035) $ (403,610) $ 830,249
======== ========= =========== ============ ============ ======== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
($ in thousands)
(Unaudited)
For the three months ended June 30, For the six months ended June 30,
--------------------------------------- ---------------------------------------
2008 2007 2008 2007
------------------ ------------------- ------------------ -------------------
Net income $ 55,778 $ 40,559 $ 101,367 $ 108,226
Other comprehensive income, net
of tax and reclassifications adjustments 417 3,164 834 3,144
------------------ ------------------- ------------------ -------------------
Total comprehensive income $ 56,195 $ 43,723 $ 102,201 $ 111,370
================== =================== ================== ===================
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
5
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
($ in thousands)
(Unaudited)
2008 2007
---------------- ----------------
Cash flows provided by (used in) operating activities:
Net income $ 101,367 $ 108,226
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation and amortization expense 285,330 262,643
Stock based compensation expense 6,164 5,445
Loss on extinguishment of debt 6,290 20,186
Other non-cash adjustments (7,303) 4,760
Deferred income taxes (including FIN 48) (8,996) 28,576
Change in accounts receivable 8,039 4,232
Change in accounts payable and other liabilities (58,597) (71,248)
Change in other current assets 6,561 6,736
---------------- ----------------
Net cash provided by operating activities 338,855 369,556
Cash flows provided from (used by) investing activities:
Capital expenditures (123,723) (111,769)
Cash paid for Commonwealth (net of cash acquired) - (657,610)
Other assets (purchased) distributions received, net (1,277) 3,851
---------------- ----------------
Net cash used by investing activities (125,000) (765,528)
Cash flows provided from (used by) financing activities:
Long-term debt borrowings 135,000 950,000
Long-term debt payments (130,281) (914,516)
Settlement of interest rate swaps 15,521 -
Financing costs paid (857) (15,753)
Premium paid to retire debt (6,290) (16,160)
Issuance of common stock 955 11,472
Common stock repurchased (112,659) (70,730)
Dividends paid (162,324) (170,841)
Repayment of customer advances for construction (512) (506)
---------------- ----------------
Net cash used by financing activities (261,447) (227,034)
Decrease in cash and cash equivalents (47,592) (623,006)
Cash and cash equivalents at January 1, 226,466 1,041,106
---------------- ----------------
Cash and cash equivalents at June 30, $ 178,874 $ 418,100
================ ================
Cash paid during the period for:
Interest $ 184,552 $ 176,558
Income taxes $ 49,585 $ 47,426
Non-cash investing and financing activities:
Change in fair value of interest rate swaps $ 7,909 $ (3,628)
Conversion of EPPICS $ 80 $ 3,279
Conversion of Commonwealth Notes $ - $ 36,732
Shares issued for Commonwealth acquisition $ 23 $ 247,315
Acquired debt $ - $ 244,553
Other acquired liabilities $ - $ 110,575
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
6
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
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(a) Basis of Presentation and Use of Estimates:
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Frontier Communications Corporation (formerly Citizens Communications
Company through July 30, 2008) and its subsidiaries are referred to as
"we," "us," "our," or the "Company" in this report. Our unaudited
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America (U.S. GAAP) and should be read in conjunction with the
consolidated financial statements and notes included in our Annual
Report on Form 10-K for the year ended December 31, 2007. Certain
reclassifications of balances previously reported have been made to
conform to the current presentation. All significant intercompany
balances and transactions have been eliminated in consolidation. These
unaudited consolidated financial statements include all adjustments
(consisting of normal recurring accruals) considered necessary to
present fairly the results for the interim periods shown.
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions which affect the
reported amounts of assets and liabilities at the date of the
financial statements, the disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses during
the reporting period. Actual results may differ from those estimates.
Estimates and judgments are used when accounting for allowance for
doubtful accounts, impairment of long-lived assets, intangible assets,
depreciation and amortization, income taxes, purchase price
allocations, contingencies, the long-term incentive program, and
pension and other postretirement benefits, among others. Certain
information and footnote disclosures have been excluded and/or
condensed pursuant to Securities and Exchange Commission rules and
regulations. The results of the interim periods are not necessarily
indicative of the results for the full year.
(b) Revenue Recognition:
--------------------
Revenue is recognized when services are provided or when products are
delivered to customers. Revenue that is billed in advance includes:
monthly recurring network access services, special access services and
monthly recurring local line charges. The unearned portion of this
revenue is initially deferred as a component of other liabilities on
our consolidated balance sheet and recognized in revenue over the
period that the services are provided. Revenue that is billed in
arrears includes: non-recurring network access services, switched
access services, non-recurring local services and long-distance
services. The earned but unbilled portion of this revenue is
recognized in revenue in our consolidated statements of operations and
accrued in accounts receivable in the period that the services are
provided. Excise taxes are recognized as a liability when billed.
Installation fees and their related direct and incremental costs are
initially deferred and recognized as revenue and expense over the
average term of a customer relationship. We recognize as current
period expense the portion of installation costs that exceeds
installation fee revenue.
The Company collects various taxes from its customers and subsequently
remits such funds to governmental authorities. Substantially all of
these taxes are recorded through the consolidated balance sheet and
presented on a net basis in our consolidated statements of operations.
We also collect Universal Service Fund (USF) surcharges from customers
(primarily federal USF) which have been recorded on a gross basis in
our consolidated statements of operations and have been included in
revenue and other operating expenses at $9.9 million and $9.9 million
for the three months ended June 30, 2008 and 2007, respectively, and
at $18.5 million and $17.2 million for the six months ended June 30,
2008 and 2007, respectively.
(c) Derivative Instruments and Hedging Activities:
----------------------------------------------
We account for derivative instruments and hedging activities in
accordance with Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended. SFAS No. 133, as amended, requires that all derivative
instruments, such as interest rate swaps, be recognized in the
financial statements and measured at fair value regardless of the
purpose or intent of holding them.
As of December 31, 2007, we had interest rate swap arrangements
related to a portion of our fixed rate debt. These arrangements were
all terminated on January 15, 2008. These hedge strategies satisfied
the fair value hedging requirements of SFAS No. 133, as amended. As a
result, the appreciation in value of the swaps through the time of
7
termination is included in the consolidated balance sheet and is
recognized as lower interest expense over the duration of the
remaining life of the underlying debt.
(d) Goodwill and Other Intangibles:
-------------------------------
Intangibles represent the excess of purchase price over the fair value
of identifiable tangible net assets acquired. We undertake studies to
determine the fair values of assets and liabilities acquired and
allocate purchase prices to assets and liabilities, including
property, plant and equipment, goodwill and other identifiable
intangibles. We annually (during the fourth quarter) examine the
carrying value of our goodwill and trade name to determine whether
there are any impairment losses. We test for impairment at the
"operating segment" level, as that term is defined in SFAS No. 142,
"Goodwill and Other Intangibles Assets." The Company currently has
four "operating segments" which are aggregated into one reportable
segment.
SFAS No. 142 requires that intangible assets with estimated useful
lives be amortized over those lives and be reviewed for impairment in
accordance with the SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" to determine whether any changes to
these lives are required. We periodically reassess the useful life of
our intangible assets to determine whether any changes to those lives
are required.
(2) Recent Accounting Literature and Changes in Accounting Principles:
------------------------------------------------------------------
Accounting for Endorsement Split-Dollar Life Insurance Arrangements
-------------------------------------------------------------------
In September 2006, the Financial Accounting Standards Board (FASB) reached
consensus on the guidance provided by Emerging Issues Task Force (EITF) No.
06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The
guidance is applicable to endorsement split-dollar life insurance
arrangements, whereby the employer owns and controls the insurance
policies, that are associated with a postretirement benefit. EITF No. 06-4
requires that for a split-dollar life insurance arrangement within the
scope of the issue, an employer should recognize a liability for future
benefits in accordance with SFAS No. 106 (if, in substance, a
postretirement benefit plan exists) or Accounting Principles Board Opinion
(APB) No. 12 (if the arrangement is, in substance, an individual deferred
compensation contract) based on the substantive agreement with the
employee. EITF No. 06-4 is effective for fiscal years beginning after
December 15, 2007. Our adoption of the accounting requirements of EITF No.
06-4 in the first quarter of 2008 had no impact on our financial position,
results of operations or cash flows.
Fair Value Measurements
-----------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. In February 2008,
the FASB amended SFAS No. 157 to defer the application of this standard to
nonfinancial assets and liabilities until 2009. The provisions of SFAS No.
157 related to financial assets and liabilities were effective as of the
beginning of our 2008 fiscal year. Our adoption of SFAS No. 157, as
amended, in the first quarter of 2008 had no impact on our financial
position, results of operations or cash flows. We are still in the process
of evaluating this standard with respect to its effect on nonfinancial
assets and liabilities and therefore have not yet determined the impact
that it will have on our financial statements upon full adoption in 2009.
Nonfinancial assets and liabilities for which we have not applied the
provisions of SFAS No. 157 include those measured at fair value in
impairment testing and those initially measured at fair value in a business
combination.
Fair Value Option for Financial Assets and Financial Liabilities
----------------------------------------------------------------
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -Including an Amendment of FASB
Statement No. 115," which permits entities to choose to measure many
financial instruments and certain other items at fair value. The provisions
of SFAS No. 159 are effective as of the beginning of our 2008 fiscal year.
Our adoption of SFAS No. 159 in the first quarter of 2008 had no impact
(not applicable) on our financial position, results of operations or cash
flows.
Accounting for Collateral Assignment Split-Dollar Life Insurance
----------------------------------------------------------------
Arrangements
------------
In March 2007, the FASB ratified the consensus reached by the EITF on Issue
No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements." EITF No. 06-10 provides guidance on an employers'
recognition of a liability and related compensation costs for collateral
8
assignment split-dollar life insurance arrangements that provide a benefit
to an employee that extends into postretirement periods, and the asset in
collateral assignment split-dollar life insurance arrangements. EITF No.
06-10 is effective for fiscal years beginning after December 15, 2007. Our
adoption of the accounting requirements of EITF No. 06-10 in the first
quarter of 2008 had no impact on our financial position, results of
operations or cash flows.
Accounting for the Income Tax Benefits of Dividends on Share-Based
------------------------------------------------------------------
Payment Awards
--------------
In June 2007, the FASB ratified EITF No. 06-11 "Accounting for the Income
Tax Benefits of Dividends on Share-Based Payment Awards." EITF No. 06-11
provides that tax benefits associated with dividends on share-based payment
awards be recorded as a component of additional paid-in capital. EITF No.
06-11 is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007. The implementation of this standard in the first
quarter of 2008 had no material impact on our financial position, results
of operations or cash flows.
Business Combinations
---------------------
In December 2007, the FASB revised SFAS No. 141, "Business Combinations."
The revised statement, SFAS No. 141R, requires an acquiring entity to
recognize all the assets acquired and liabilities assumed in a transaction
at the acquisition date at fair value, to remeasure liabilities related to
contingent consideration at fair value in each subsequent reporting period
and to expense all acquisition related costs. The effective date of SFAS
No. 141R is for business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. This standard does not impact our currently
reported results.
Noncontrolling Interests in Consolidated Financial Statements
-------------------------------------------------------------
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements." SFAS No. 160 establishes
requirements for ownership interest in subsidiaries held by parties other
than the Company (sometimes called "minority interest") be clearly
identified, presented and disclosed in the consolidated statement of
financial position within shareholder equity, but separate from the
parent's equity. All changes in the parent's ownership interest are
required to be accounted for consistently as equity transactions and any
noncontrolling equity investments in unconsolidated subsidiaries must be
measured initially at fair value. SFAS No. 160 is effective, on a
prospective basis, for fiscal years beginning after December 15, 2008.
However, presentation and disclosure requirements must be retrospectively
applied to comparative financial statements. The Company is currently
assessing the impact of SFAS No. 160 on its financial position, results of
operations and cash flows.
(3) Acquisition of Commonwealth Telephone and Global Valley Networks:
-----------------------------------------------------------------
On March 8, 2007, we acquired Commonwealth Telephone Enterprises, Inc.
(Commonwealth or CTE) in a cash-and-stock taxable transaction, for a total
consideration of approximately $1.1 billion. We paid $804.1 million in cash
($663.7 million net, after cash acquired) and issued common stock with a
value of $247.4 million.
On October 31, 2007, we acquired Global Valley Networks, Inc. (GVN) and GVN
Services (GVS) through the purchase from Country Road Communications, LLC
of 100% of the outstanding common stock of Evans Telephone Holdings, Inc.,
the parent Company of GVN and GVS. The purchase price of $62.0 million was
paid with cash on hand.
We have accounted for the acquisitions of Commonwealth and GVN as purchases
under U.S. GAAP. Under the purchase method of accounting, the assets and
liabilities of Commonwealth and GVN are recorded as of their respective
acquisition dates, at their respective fair values, and consolidated with
those of Frontier. The reported consolidated financial condition of
Frontier as of June 30, 2008 reflects the final allocation of these fair
values for Commonwealth and a preliminary allocation of these fair values
for GVN.
The following unaudited pro forma financial information presents the
combined results of operations of Frontier, Commonwealth and GVN as if the
acquisitions had occurred at the beginning of 2007. The historical results
of the Company include the results of Commonwealth from the date of its
acquisition on March 8, 2007, and GVN from the date of its acquisition on
October 31, 2007. The pro forma information is not necessarily indicative
of what the financial position or results of operations actually would have
been had the acquisitions been completed at the beginning of 2007. In
addition, the unaudited pro forma financial information does not purport to
project the future financial position or operating results of Frontier
after completion of the acquisitions.
9
For the three For the six
months ended months ended
June 30, 2007 June 30, 2007
------------------ -----------------
($ in thousands, except per share amounts)
-----------------------------------------
Revenue $ 582,556 $ 1,204,633
Operating income $ 171,555 $ 378,748
Net income available for common shareholders $ 38,479 $ 115,491
Basic and Diluted income per common share $ 0.11 $ 0.34
(4) Accounts Receivable:
--------------------
The components of accounts receivable, net at June 30, 2008 and December
31, 2007 are as follows:
($ in thousands) June 30, 2008 December 31, 2007
---------------- --------------------- --------------------
End user $ 240,577 $ 244,592
Other 16,851 22,918
Less: Allowance for doubtful accounts (32,965) (32,748)
--------------------- --------------------
Accounts receivable, net $ 224,463 $ 234,762
===================== ====================
The Company maintains an allowance for estimated bad debts based on its
estimate of collectibility of its accounts receivable. Bad debt expense,
which is recorded as a reduction of revenue, was $8.4 million and $6.7
million for the three months ended June 30, 2008 and 2007, respectively,
and $15.6 million and $11.6 million for the six months ended June 30, 2008
and 2007, respectively.
(5) Property, Plant and Equipment, Net:
-----------------------------------
Property, plant and equipment at June 30, 2008 and December 31, 2007 are as
follows:
($ in thousands) June 30, 2008 December 31, 2007
---------------- --------------------- ---------------------
Property, plant and equipment $ 7,482,934 $ 7,375,297
Less: Accumulated depreciation (4,217,674) (4,040,053)
--------------------- ---------------------
Property, plant and equipment, net $ 3,265,260 $ 3,335,244
===================== =====================
Depreciation expense is principally based on the composite group method.
Depreciation expense was $98.3 million and $93.3 million for the three
months ended June 30, 2008 and 2007, respectively, and $193.5 million and
$179.9 million for the six months ended June 30, 2008 and 2007,
respectively.
(6) Other Intangibles:
------------------
Other intangibles at June 30, 2008 and December 31, 2007 are as follows:
($ in thousands) June 30, 2008 December 31, 2007
---------------- ------------------------ ---------------------
Customer base $ 1,271,085 $ 1,271,085
Trade name 132,381 132,381
------------------------ ---------------------
Other intangibles 1,403,466 1,403,466
Less: Accumulated amortization (947,549) (855,731)
------------------------ ---------------------
Total other intangibles, net $ 455,917 $ 547,735
======================== =====================
Amortization expense was $45.9 million and $47.2 million for the three
months ended June 30, 2008 and 2007, respectively, and $91.8 million and
$82.7 million for the six months ended June 30, 2008 and 2007,
respectively. Amortization expense for the three and six months ended June
10
30, 2008 is comprised of $31.6 million and $63.2 million, respectively, for
amortization associated with our "legacy" properties and $14.3 million and
$28.6 million, respectively, for intangible assets (customer base and trade
name) that were acquired in the Commonwealth and GVN acquisitions.
(7) Long-Term Debt:
---------------
The activity in our long-term debt from December 31, 2007 to June 30, 2008
is as follows:
Six months ended June 30, 2008
-------------------------------------------------------------- Interest
Interest Rate* at
December 31, New Rate Conversion to June 30, June 30,
($ in thousands) 2007 Payments Borrowings Swap Common Stock 2008 2008
---------------- --------------- -------------- ------------- ------------ ----------------- -------------------------
Rural Utilities Service
Loan Contracts $ 17,555 $ (470) $ - $ - $ - $ 17,085 6.07%
Senior Unsecured Debt 4,715,013 (129,811) 135,000 (7,909) - 4,712,293 7.65%
EPPICS 14,521 - - - (80) 14,441 5.00%
Industrial Development
Revenue Bonds 13,550 - - - - 13,550 6.31%
--------------- -------------- ------------- ------------ ----------------- ---------------
TOTAL LONG-TERM DEBT $ 4,760,639 $ (130,281) $ 135,000 $ (7,909) $ (80) $ 4,757,369 7.63%
=============== ============== ============= ============ ================= ===============
Less: Debt Discount (21,294) (6,929)
Less: Current Portion (2,448) (3,828)
--------------- ---------------
$ 4,736,897 $ 4,746,612
=============== ===============
* Interest rate includes amortization of debt issuance costs, debt premiums
or discounts, and deferred gain on interest rate swap terminations. The
interest rates for Rural Utilities Service Loan Contracts, Senior Unsecured
Debt, and Industrial Development Revenue Bonds represent a weighted average
of multiple issuances.
During the first six months of 2008, we retired an aggregate principal
amount of $130.4 million of debt, including $128.7 million of 9.25% Senior
Notes due 2011, $1.6 million of other senior unsecured debt and rural
utilities service loan contracts, and $0.1 million of 5% Company Obligated
Mandatorily Redeemable Convertible Preferred Securities due 2036 (EPPICS).
On March 28, 2008, we borrowed $135.0 million under a senior unsecured term
loan facility that was established on March 10, 2008. The loan matures in
2013 and bears interest of 4.37% as of June 30, 2008 based on the prime
rate or LIBOR, at our election, plus a margin which varies depending on our
debt leverage ratio. We used the proceeds to repurchase, during the first
quarter of 2008, $128.7 million principal amount of our 9.25% Senior Notes
due 2011 and to pay for the $6.3 million of premium on early retirement of
these notes.
During the first quarter of 2007, we incurred and expensed approximately
$4.0 million of fees associated with the bridge loan facility established
to temporarily fund our acquisition of Commonwealth. On April 26, 2007, we
redeemed $495.2 million principal amount of our 7.625% Senior Notes due
2008 at a price of 103.041% plus accrued and unpaid interest. The debt
retirement generated a pre-tax loss on the early extinguishment of debt at
a premium of approximately $16.3 million in the second quarter of 2007 and
is included in investment and other income (loss), net. As a result of this
debt redemption, we also terminated three interest rate swap agreements
hedging an aggregate $150.0 million notional amount of indebtedness.
Payments on the swap terminations of approximately $1.0 million were made
in the second quarter of 2007.
As of June 30, 2008, EPPICS representing a total principal amount of $197.3
million have been converted into 15,925,159 shares of our common stock.
Approximately $3.9 million of EPPICS, which are convertible into 343,281
shares of our common stock, were outstanding at June 30, 2008. The above
table indicates $14.4 million of EPPICS outstanding at June 30, 2008, of
which $10.5 million is debt of related parties for which the Company has an
offsetting receivable.
As of June 30, 2008, we had an available line of credit with financial
institutions in the aggregate amount of $250.0 million and there were no
outstanding standby letters of credit issued under the facility. Associated
facility fees vary, depending on our debt leverage ratio, and were 0.225%
per annum as of June 30, 2008. The expiration date for this $250.0 million
five year revolving credit agreement is May 18, 2012. During the term of
11
the credit facility we may borrow, repay and reborrow funds. The credit
facility is available for general corporate purposes but may not be used to
fund dividend payments.
We are in compliance with all of our debt and credit facility covenants.
(8) Net Income Per Common Share:
----------------------------
The reconciliation of the net income per common share calculation for the
three and six months ended June 30, 2008 and 2007, respectively, is as
follows:
($ in thousands, except per share amounts) For the three months ended June 30, For the six months ended June 30,
------------------------------------------ ---------------------------------- ---------------------------------
2008 2007 2008 2007
---------------- ---------------- ---------------- ---------------
Net income used for basic and diluted earnings
----------------------------------------------
per common share:
-----------------
Total basic net income available for common
shareholders $ 55,778 $ 40,559 $ 101,367 $ 108,226
Effect of conversion of preferred securities -
EPPICS 31 32 62 89
---------------- ---------------- ---------------- ---------------
Total diluted net income available for common
shareholders $ 55,809 $ 40,591 $ 101,429 $ 108,315
================ ================ ================ ===============
Basic earnings per common share:
--------------------------------
Weighted average shares outstanding - basic 320,838 340,469 323,340 332,331
---------------- ---------------- ---------------- ---------------
Net income per share available for common
shareholders $ 0.17 $ 0.12 $ 0.31 $ 0.33
================ ================ ================ ===============
Diluted earnings per common share:
----------------------------------
Weighted average shares outstanding - basic 320,838 340,469 323,340 332,331
Effect of dilutive shares 122 760 286 953
Effect of conversion of preferred securities -
EPPICS 347 359 348 441
---------------- ---------------- ---------------- ---------------
Weighted average shares outstanding - diluted 321,307 341,588 323,974 333,725
================ ================ ================ ===============
Net income per share available for common
shareholders $ 0.17 $ 0.12 $ 0.31 $ 0.32
================ ================ ================ ===============
Stock Options
-------------
For the three and six months ended June 30, 2008, options to purchase
2,640,000 shares (at exercise prices ranging from $11.15 to $18.46)
issuable under employee compensation plans were excluded from the
computation of diluted earnings per share (EPS) for those periods because
the exercise prices were greater than the average market price of our
common stock and, therefore, the effect would be antidilutive. In
calculating diluted EPS we apply the treasury stock method and include
future unearned compensation as part of the assumed proceeds.
For the three and six months ended June 30, 2007, options to purchase
1,221,150 shares (at exercise prices ranging from $15.94 to $18.46)
issuable under employee compensation plans were excluded from the
computation of diluted EPS for those periods because the exercise prices
were greater than the average market price of common shares and, therefore,
the effect would be antidilutive.
In addition, for the three and six months ended June 30, 2008 and 2007,
restricted stock awards of 1,748,000 and 1,389,000 shares, respectively,
are excluded from our basic weighted average shares outstanding and
included in our dilutive shares until the shares are no longer subject to
restriction after the satisfaction of all specified conditions.
EPPICS
------
As a result of our July 2004 dividend announcement with respect to our
common stock, our EPPICS began to convert into shares of our common stock.
As of June 30, 2008, approximately 99% of the EPPICS outstanding, or about
$197.3 million aggregate principal amount of EPPICS, have converted into
15,925,159 shares of our common stock, including shares issued from
treasury.
12
We had 78,707 and 81,507 shares of potentially dilutive EPPICS at June 30,
2008 and 2007, respectively, which were convertible into our common stock
at a 4.3615 to 1 ratio at an exercise price of $11.46 per share. If all
remaining EPPICS had been converted, we would have issued approximately
343,281 and 355,493 shares of our common stock as of June 30, 2008 and
2007, respectively. These securities have been included in the diluted
income per common share calculation for the periods ended June 30, 2008 and
2007.
Stock Units
-----------
At June 30, 2008 and 2007, we had 279,645 and 191,450 stock units,
respectively, issued under our Non-Employee Directors' Deferred Fee Equity
Plan (Deferred Fee Plan) and our Non-Employee Directors' Equity Incentive
Plan (Directors' Equity Plan). These securities have not been included in
the diluted income per share of common stock calculation because their
inclusion would have had an antidilutive effect.
Share Repurchase Programs
-------------------------
In February 2008, our Board of Directors authorized us to repurchase up to
$200.0 million of our common stock in public or private transactions over
the following twelve-month period. This share repurchase program commenced
on March 4, 2008. As of June 30, 2008, we had repurchased approximately
10,383,000 shares of our common stock at an aggregate cost of approximately
$112.7 million.
(9) Stock Plans:
------------
At June 30, 2008, we had five stock-based compensation plans under which
grants have been made and awards remained outstanding. At June 30, 2008,
there were 16,058,182 shares authorized for grant under these plans and
4,246,415 shares available for grant. No further awards may be granted
under the Management Equity Incentive Plan (MEIP), the 1996 Equity
Incentive Plan (EIP) or the Deferred Fee Plan.
On March 17, 2008, the Company adopted the Long-Term Incentive Program
(LTIP). The LTIP will be offered under the Company's Amended and Restated
2000 Equity Incentive Plan and covers the named executive officers and
certain other officers. The LTIP is designed to incent and reward the
Company's senior executives in the form of common stock if they achieve
aggressive growth goals for revenue and free cash flow over a three-year
period (the Measurement Period). For purposes of the LTIP, revenue is
defined as the Company's total revenues less regulatory revenues, and free
cash flow is defined as the Company's publicly reported free cash flow,
adjusted to reflect the Company as a full cash taxpayer during the
Measurement Period. The growth in these numbers will be measured from a
2007 base, which in the case of free cash flow was also adjusted to reflect
the Company as a full cash taxpayer and for certain other items.
The following summary presents information regarding outstanding stock
options as of June 30, 2008 and changes during the six months then ended
with regard to options under the MEIP and the EIPs:
Weighted Weighted
Shares Average Average Aggregate
Subject to Option Price Remaining Intrinsic
Option Per Share Life in Years Value
------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2008 3,955,000 $ 13.13 3.4 $ 5,727,000
Options granted - $ -
Options exercised (131,000) $ 7.29 $ 507,000
Options canceled, forfeited or lapsed (53,000) $ 10.11
-------------------------------------------------------------------
Balance at June 30, 2008 3,771,000 $ 13.38 3.0 $ 2,586,000
===================================================================
Exercisable at June 30, 2008 3,756,000 $ 13.38 3.0 $ 2,586,000
===================================================================
There were no options granted during the first six months of 2008. Cash
received upon the exercise of options during the first six months of 2008
totaled $1.0 million.
The total intrinsic value of stock options exercised during the first six
months of 2007 was $4.9 million. The total intrinsic value of stock options
outstanding and exercisable at June 30, 2007 was $12.6 million. There were
no options granted during the first six months of 2007. Cash received upon
the exercise of options during the first six months of 2007 totaled $11.5
million.
13
The following summary presents information regarding unvested restricted
stock as of June 30, 2008 and changes during the six months then ended with
regard to restricted stock under the MEIP and the EIPs:
Weighted
Average
Number of Grant Date Aggregate
Shares Fair Value Fair Value
----------------------------------------------------------------------------------------------------
Balance at January 1, 2008 1,209,000 $ 14.06 $ 15,390,000
Restricted stock granted 883,000 $ 11.02 $ 10,007,000
Restricted stock vested (326,000) $ 13.96 $ 3,699,000
Restricted stock forfeited (18,000) $ 13.55 $ 200,000
--------------------------------------------------------------
Balance at June 30, 2008 1,748,000 $ 12.55 $ 19,818,000
==============================================================
For purposes of determining compensation expense, the fair value of each
restricted stock grant is estimated based on the average of the high and
low market price of a share of our common stock on the date of grant. Total
remaining unrecognized compensation cost associated with unvested
restricted stock awards at June 30, 2008 was $18.8 million and the weighted
average period over which this cost is expected to be recognized is
approximately three years.
The total fair value of shares granted and vested during the six months
ended June 30, 2007 was approximately $10.6 million and $7.2 million,
respectively. The total fair value of unvested restricted stock at June 30,
2007 was $21.2 million. The weighted average grant date fair value of
restricted shares granted during the six months ended June 30, 2007 was
$15.08. Shares granted during the first six months of 2007 totaled 696,000.
(10) Segment Information:
--------------------
We operate in one reportable segment, Frontier. Frontier provides both
regulated and unregulated voice, data and video services to residential,
business and wholesale customers and is typically the incumbent provider in
its service areas.
As permitted by SFAS No. 131, we have utilized the aggregation criteria in
combining our operating segments because all of our Frontier properties
share similar economic characteristics, in that they provide the same
products and services to similar customers using comparable technologies in
all of the states in which we operate. The regulatory structure is
generally similar. Differences in the regulatory regime of a particular
state do not materially impact the economic characteristics or operating
results of a particular property.
(11) Derivative Instruments and Hedging Activities:
----------------------------------------------
On January 15, 2008, we terminated all of our interest rate swap agreements
representing $400.0 million notional amount of indebtedness associated with
our Senior Notes due in 2011 and 2013. Cash proceeds on the swap
terminations of approximately $15.5 million were received in January 2008.
The related gain has been deferred on the consolidated balance sheet and is
being amortized into interest expense over the term of the associated debt.
We recognized $3.4 million of deferred gain during the first six months of
2008 and anticipate recognizing $1.6 million during the second half of
2008.
As of January 16, 2008, we no longer have any derivative instruments. For
the six months ended June 30, 2007, the interest expense resulting from
these interest rate swaps totaled approximately $2.0 million.
14
(12) Investment and Other Income (Loss), Net:
----------------------------------------
The components of investment and other income (loss), net are as follows:
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ----------------------------------
($ in thousands) 2008 2007 2008 2007
---------------- --------------- ------------------ ---------------- ----------------
Interest and dividend income $ 1,424 $ 8,444 $ 6,528 $ 22,970
Bridge loan fee - - - (4,026)
Premium on debt repurchases - (17,092) (6,290) (18,217)
Gains on expiration/settlement of customer
advances, net 2,883 - 2,883 1,068
Equity earnings/minority interest in joint
ventures, net 2,405 1,575 2,108 578
Other, net (319) 556 (71) 1,127
--------------- ------------------ ---------------- ----------------
Total investment and other income
(loss), net $ 6,393 $ (6,517) $ 5,158 $ 3,500
=============== ================== ================ ================
(13) Retirement Plans:
-----------------
The following tables provide the components of net periodic benefit cost:
Pension Benefits
---------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------- ------------ ------------- ------------
($ in thousands)
----------------
Components of net periodic benefit cost
---------------------------------------
Service cost $ 1,619 $ 2,754 $ 3,238 $ 4,763
Interest cost on projected benefit obligation 12,875 13,115 25,750 25,045
Expected return on plan assets (16,354) (17,106) (32,708) (32,781)
Amortization of prior service cost and unrecognized
net obligation (64) 81 (128) 53
Amortization of unrecognized loss 1,272 2,906 2,544 5,806
------------- ------------ ------------- ------------
Net periodic benefit cost/(income) $ (652) $ 1,750 $ (1,304) $ 2,886
============= ============ ============= ============
Other Postretirement Benefits
---------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------- ------------ ------------- ------------
($ in thousands)
---------------
Components of net periodic benefit cost
---------------------------------------
Service cost $ 149 $ 175 $ 298 $ 350
Interest cost on projected benefit obligation 2,742 2,218 5,484 4,426
Expected return on plan assets (122) (254) (244) (508)
Amortization of prior service cost and transition
obligation (1,934) (1,447) (3,868) (2,894)
Amortization of unrecognized loss 1,404 1,171 2,808 2,361
------------- ------------ ------------- ------------
Net periodic benefit cost $ 2,239 $ 1,863 $ 4,478 $ 3,735
============= ============ ============= ============
We expect that our 2008 pension and other postretirement benefit expenses
will be between $5.0 million and $10.0 million, and that no contribution
will be required to be made by us to the pension plan in 2008.
15
(14) Commitments and Contingencies:
------------------------------
We anticipate capital expenditures of approximately $300.0 million - $310.0
million for 2008. Although we from time to time make short-term purchasing
commitments to vendors with respect to these expenditures, we generally do
not enter into firm, written contracts for such activities.
Ronald A. Katz Technology Licensing LP, filed suit against us for patent
infringement on June 8, 2007 in the U.S. District Court for the District of
Delaware. Katz Technology alleges that, by operating automated telephone
systems, including customer service systems, that allow our customers to
utilize telephone calling cards, order internet, DSL, and dial-up services,
and perform a variety of account related tasks such as billing and
payments, we have infringed thirteen of Katz Technology's patents and
continue to infringe three of Katz Technology's patents. Katz Technology
seeks unspecified damages resulting from our alleged infringement, as well
as a permanent injunction enjoining us from continuing the alleged
infringement. Katz Technology subsequently filed a tag-along notice with
the Judicial Panel on Multi-District Litigation, notifying them of this
action and its relatedness to In re Katz Interactive Dial Processing Patent
Litigation (MDL No. 1816), pending in the Central District of California
before Judge R. Gary Klausner. The Judicial Panel on Multi-District
Litigation has transferred the case to the Central District of California.
In January 2008, we received notice of the accused services and 40 asserted
claims from Katz Technology. The case is now in the discovery phase and
interrogatories have been served and answered. The parties have engaged in
settlement discussions but have not reached agreement. In the event that we
are not able to settle, we intend to vigorously defend against this
lawsuit.
We are party to various other legal proceedings arising in the normal
course of our business. The outcome of individual matters is not
predictable. However, we believe that the ultimate resolution of all such
matters, after considering insurance coverage, will not have a material
adverse effect on our financial position, results of operations, or our
cash flows.
We sold all of our utility businesses as of April 1, 2004. However, we have
retained a potential payment obligation associated with our previous
electric utility activities in the state of Vermont. The Vermont Joint
Owners (VJO), a consortium of 14 Vermont utilities, including us, entered
into a purchase power agreement with Hydro-Quebec in 1987. The agreement
contains "step-up" provisions that state that if any VJO member defaults on
its purchase obligation under the contract to purchase power from
Hydro-Quebec, then the other VJO participants will assume responsibility
for the defaulting party's share on a pro-rata basis. Our pro-rata share of
the purchase power obligation is 10%. If any member of the VJO defaults on
its obligations under the Hydro-Quebec agreement, then the remaining
members of the VJO, including us, may be required to pay for a
substantially larger share of the VJO's total power purchase obligation for
the remainder of the agreement (which runs through 2015). Paragraph 13 of
FIN No. 45 requires that we disclose "the maximum potential amount of
future payments (undiscounted) the guarantor could be required to make
under the guarantee." Paragraph 13 also states that we must make such
disclosure "... even if the likelihood of the guarantor's having to make
any payments under the guarantee is remote..." As noted above, our
obligation only arises as a result of default by another VJO member, such
as upon bankruptcy. Therefore, to satisfy the "maximum potential amount"
disclosure requirement we must assume that all members of the VJO
simultaneously default, a highly unlikely scenario given that the two
members of the VJO that have the largest potential payment obligations are
publicly traded with credit ratings equal to or superior to ours, and that
all VJO members are regulated utility providers with regulated cost
recovery. Despite the remote chance that such an event could occur, or that
the State of Vermont could or would allow such an event, assuming that all
the members of the VJO defaulted on January 1, 2008 and remained in default
for the duration of the contract (another 8 years), we estimate that our
undiscounted purchase obligation for 2008 through 2015 would be
approximately $1.1 billion. In such a scenario the Company would then own
the power and could seek to recover its costs. We would do this by seeking
to recover our costs from the defaulting members and/or reselling the power
to other utility providers or the northeast power grid. There is an active
market for the sale of power. We could potentially lose money if we were
unable to sell the power at cost. We caution that we cannot predict with
any degree of certainty any potential outcome.
(15) Subsequent Event:
-----------------
Effective July 31, 2008, Citizens Communications Company (CZN) changed its
name and stock symbol to Frontier Communications Corporation (FTR).
16
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Forward-Looking Statements
--------------------------
This quarterly report on Form 10-Q contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the statements. Statements that
are not historical facts are forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Words such as "believe," "anticipate," "expect" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
(including oral representations) are only predictions or statements of current
plans, which we review continuously. Forward-looking statements may differ from
actual future results due to, but not limited to, and our future results may be
materially affected by, any of the following possibilities:
* Reductions in the number of our access lines and high-speed internet
subscribers;
* The effects of competition from cable, wireless and other wireline
carriers (through voice over internet protocol (VOIP) or otherwise);
* The effects of greater than anticipated competition requiring new
pricing, marketing strategies or new product offerings and the risk
that we will not respond on a timely or profitable basis;
* The effects of general and local economic, business, industry and
employment conditions on our revenues;
* Our ability to effectively manage service quality;
* Our ability to successfully introduce new product offerings, including
our ability to offer bundled service packages on terms that are both
profitable to us and attractive to our customers;
* Our ability to sell enhanced and data services in order to offset
ongoing declines in revenue from local services, switched access
services and subsidies;
* Changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles or regulators;
* The effects of ongoing changes in the regulation of the communications
industry as a result of federal and state legislation and regulation,
including potential changes in state rate of return limitations on our
earnings, access charges and subsidy payments, and regulatory network
upgrade and reliability requirements;
* Our ability to effectively manage our operations, operating expenses
and capital expenditures, to pay dividends and to reduce or refinance
our debt;
* Adverse changes in the credit markets and/or in the ratings given to
our debt securities by nationally accredited ratings organizations,
which could limit or restrict the availability and/or increase the
cost of financing;
* The effects of bankruptcies in the telecommunications industry, which
could result in potential bad debts;
* The effects of technological changes and competition on our capital
expenditures and product and service offerings, including the lack of
assurance that our ongoing network improvements will be sufficient to
meet or exceed the capabilities and quality of competing networks;
* The effects of increased medical, retiree and pension expenses and
related funding requirements;
* Changes in income tax rates, tax laws, regulations or rulings, and/or
federal or state tax assessments;
17
* The effects of state regulatory cash management policies on our
ability to transfer cash among our subsidiaries and to the parent
company;
* Our ability to successfully renegotiate union contracts expiring in
2008 and thereafter;
* Our ability to pay a $1.00 per common share dividend annually, which
may be affected by our cash flow from operations, amount of capital
expenditures, debt service requirements, cash paid for income taxes
(which will increase in the future) and our liquidity;
* The effects of significantly increased cash taxes in 2008 and future
years; and
* The effects of any unfavorable outcome with respect to any of our
current or future legal, governmental or regulatory proceedings,
audits or disputes.
Any of the foregoing events, or other events, could cause financial information
to vary from management's forward-looking statements included in this report.
You should consider these important factors, as well as the risks set forth
under Item 1A. "Risk Factors," in our Annual Report on Form 10-K for the year
ended December 31, 2007, in evaluating any statement in this report on Form 10-Q
or otherwise made by us or on our behalf. The following information is unaudited
and should be read in conjunction with the consolidated financial statements and
related notes included in this report. We have no obligation to update or revise
these forward-looking statements.
Overview
--------
We are a full-service communications provider and one of the largest exchange
telephone carriers in the country. We offer our incumbent local exchange carrier
(ILEC) services under the "Frontier" name. On March 8, 2007, we completed the
acquisition of Commonwealth Telephone Enterprises, Inc., which includes a small
competitive local exchange carrier (CLEC) component. This acquisition expands
our presence in Pennsylvania and strengthens our position as a leading
full-service communications provider to rural markets. On October 31, 2007, we
completed the acquisition of Global Valley Networks, Inc. and GVN Services which
expands our presence in California and also strengthens our rural position. As
of June 30, 2008, we operated in 24 states with approximately 5,700 employees.
Competition in the telecommunications industry is intense and increasing. We
experience competition from many telecommunications service providers, including
cable operators, wireless carriers, voice over internet protocol (VOIP)
providers, long distance providers, competitive local exchange carriers,
internet providers and other wireline carriers. We believe that as of June 30,
2008, approximately 58% of the households in our territories are able to be
served VOIP service by cable operators. We also believe that competition will
continue to intensify in 2008 and 2009 and may result in reduced revenues in
those years. Our business experienced erosion in access lines and switched
access minutes in the first half of 2008 primarily as a result of competition.
Competition in our markets may result in reduced revenues in 2008 and 2009.
The communications industry is undergoing significant changes. The market is
extremely competitive, resulting in lower prices. In addition, the slowing
economic environment in 2008 may be impacting consumer behavior to reduce
household expenditures by disconnecting wireline services. These trends are
likely to continue and result in a challenging revenue environment. These
factors could also result in more bankruptcies and, therefore, affect our
ability to collect money owed to us by customers.
We employ a number of strategies to combat the competitive pressures noted
above. Our strategies are focused in three areas: customer retention, upgrading
and up-selling services to our existing customer base, and new product
deployment.
18
We hope to achieve our customer retention goals by bundling services around the
local access line and providing exemplary customer service. Bundled services
include high-speed internet, unlimited long distance calling, enhanced telephone
features and video offerings. We tailor these services to the needs of our
residential and business customers in the markets we serve and continually
evaluate the introduction of new and complementary products and services, which
can also be purchased separately. Customer retention is also enhanced by
offering 1, 2 and 3 year price protection plans where customers commit to a term
in exchange for predictable pricing and/or promotional offers. Additionally, we
are focused on enhancing the customer experience as we believe exceptional
customer service will differentiate us from our competition. Our commitment to
providing exemplary customer service is demonstrated by the expansion of our
customer services hours, shorter scheduling windows for in-home appointments and
the implementation of call reminders and follow-up calls for service
appointments. In addition, due to a recent realignment and restructuring of
approximately 70 local area markets, those markets are now operated by local
managers with responsibility for the customer experience in those markets as
well as the financial results.
We utilize targeted and innovative promotions to upgrade and up-sell a variety
of service offerings including high-speed internet, video, and enhanced long
distance and feature packages in order to maximize the average revenue per
access line (wallet share) paid to Frontier. We intend to continue to evaluate
the need and effectiveness of offering such promotions to drive sales and may
offer additional promotions during 2008.
Lastly, we are focused on introducing a number of new products that our
customers desire including wireless data, internet portal advertising and the
"Frontier Peace of Mind" product suite. This last category is a suite of
products aimed at managing our customers' computer environment and protecting
residential and business customers against loss of data as a result of computer
failure. It includes one or a combination of hard drive back-up, access to an
enhanced level of help desk support and inside wire maintenance. We offer our
Peace of Mind services both to our customers and to other users inside and
outside of our service territories. Although we are optimistic about the
opportunities provided by each of these initiatives, we can provide no assurance
about their long term profitability or impact on revenue.
We believe that the combination of offering multiple products and services to
our customers pursuant to price protection programs, billing them on a single
bill and providing superior customer service will make our customers more loyal
to us, and will help us generate new, and retain existing, customer revenue.
Revenues from data and internet services such as high-speed internet continue to
increase as a percentage of our total revenues and revenues from services such
as local line and access charges (including federal and state subsidies) are
decreasing as a percentage of our total revenues. The decreasing revenue from
historical sources, along with the potential for increasing operating costs,
could cause our profitability and our cash generated by operations to decrease.
19
a) Liquidity and Capital Resources
-------------------------------
As of June 30, 2008, we had cash and cash equivalents aggregating $178.9
million. Our primary source of funds continued to be cash generated from
operations. For the six months ended June 30, 2008, we used cash flow from
operations, incremental borrowing and cash and cash equivalents to fund capital
expenditures, dividends, interest payments, debt repayments and stock
repurchases.
Cash Flow from Operating Activities
-----------------------------------
We believe our operating cash flows, existing cash balances, and credit facility
will be adequate to finance our working capital requirements, fund capital
expenditures, make required debt payments through 2009, pay taxes, pay dividends
to our stockholders in accordance with our dividend policy and support our
short-term and long-term operating strategies. However, a number of factors,
including but not limited to, increased cash taxes, losses of access lines,
increases in competition and lower subsidy and access revenues are expected to
reduce our cash generated by operations. Our below-investment grade credit
ratings may make it more difficult and expensive to refinance our maturing debt,
although we do not have any significant maturities until 2011. We have
approximately $1.9 million of debt maturing during the last six months of 2008
and approximately $3.9 million and $7.2 million of debt maturing in 2009 and
2010, respectively.
We paid $49.6 million in cash taxes during the first six months of 2008 and
expect to pay approximately $100 million to $110 million for the full year of
2008. Our cash tax estimate reflects the currently estimated impact of the
"Economic Stimulus Act of 2008." We expect that our cash taxes will increase
further in 2009.
Cash Flow used by Investing Activities
--------------------------------------
Acquisitions
------------
On March 8, 2007, we acquired Commonwealth in a cash-and-stock taxable
transaction, for a total consideration of approximately $1.1 billion. We paid
$804.1 million in cash ($663.7 million net, after cash acquired) and issued
common stock with a value of $247.4 million.
On October 31, 2007, we completed the acquisition of Global Valley Networks,
Inc. and GVN Services for a total cash consideration of $62.0 million.
Capital Expenditures
--------------------
For the six months ended June 30, 2008, our capital expenditures were $123.7
million. We continue to closely scrutinize all of our capital projects,
emphasize return on investment and focus our capital expenditures on areas and
services that have the greatest opportunities with respect to revenue growth and
cost reduction. We anticipate capital expenditures of approximately $300.0
million to $310.0 million for 2008.
Cash Flow used by Financing Activities
--------------------------------------
Debt Reduction and Debt Exchanges
---------------------------------
For the six months ended June 30, 2008, we retired an aggregate principal amount
of $130.4 million of debt, including $128.7 million principal amount of our
9.25% Senior Notes due 2011, $1.6 million of other senior unsecured debt and
rural utilities service loan contracts, and $0.1 million of 5% Company Obligated
Mandatorily Redeemable Convertible Preferred Securities (EPPICS) that were
converted into our common stock.
For the six months ended June 30, 2007, we retired an aggregate principal amount
of $935.6 million of debt, including $3.3 million of EPPICS and $17.8 million of
3.25% Commonwealth convertible notes that were converted into our common stock.
On April 26, 2007, we redeemed $495.2 million principal amount of our 7.625%
Senior Notes due 2008 at a price of 103.041% plus accrued and unpaid interest.
During the first quarter of 2007, we temporarily borrowed and repaid $200.0
million utilized to temporarily fund the acquisition of Commonwealth, and we
paid down the $35.0 million Commonwealth credit facility. Through June 30, 2007
we retired $183.3 million face amount of Commonwealth convertible notes for
which we paid $165.4 million in cash and $36.7 million in common stock. We also
paid down $14.2 million of industrial development revenue bonds and $3.9 million
of rural utilities service loan contracts.
20
We may from time to time repurchase our debt in the open market, through tender
offers, exchanges of debt securities, by exercising rights to call or in
privately negotiated transactions. We may also exchange existing debt for newly
issued debt obligations.
Issuance of Debt Securities
---------------------------
On March 28, 2008, we borrowed $135.0 million under a senior unsecured term loan
facility that was established on March 10, 2008. The loan matures in 2013 and
bears interest of 4.37% as of June 30, 2008 based on the prime rate or LIBOR, at
our election, plus a margin which varies depending on our debt leverage ratio.
We used the proceeds to repurchase, during the first quarter of 2008, $128.7
million principal amount of our 9.25% Senior Notes due 2011 and to pay for the
$6.3 million of premium on early retirement of these notes.
On March 23, 2007, we issued in a private placement an aggregate $300.0 million
principal amount of 6.625% Senior Notes due 2015 and $450.0 million principal
amount of 7.125% Senior Notes due 2019. Proceeds from the sale were used to pay
down $200.0 million principal amount of indebtedness incurred on March 8, 2007
under a bridge loan facility in connection with the acquisition of Commonwealth
and redeem, on April 26, 2007, $495.2 million principal amount of our 7.625%
Senior Notes due 2008 at a price of 103.041% plus accrued and unpaid interest.
In the second quarter of 2007, we completed an exchange offer (to publicly
register the debt) for the $750.0 million in total of private placement notes
described above, in addition to the $400.0 million principal amount of 7.875%
Senior Notes due 2027 issued in a private placement on December 22, 2006, for
registered notes.
EPPICS
------
As of June 30, 2008, EPPICS representing a total principal amount of $197.3
million have been converted into 15,925,159 shares of our common stock, and a
total of $3.9 million remains outstanding to third parties. Our long-term debt
footnote indicates $14.4 million of EPPICS outstanding at June 30, 2008, of
which $10.5 million is debt of related parties for which we have an offsetting
receivable.
Interest Rate Management
------------------------
In order to manage our interest expense, we had entered into interest rate swap
agreements. Under the terms of these agreements, we made semi-annual, floating
rate interest payments based on six month LIBOR and received a fixed rate on the
notional amount. The underlying variable rate on these swaps was set either in
advance or in arrears.
The notional amounts of fixed-rate indebtedness hedged as of December 31, 2007
were $400.0 million. Such contracts required us to pay variable rates of
interest (estimated average pay rates of approximately 8.54% as of December 31,
2007) and receive fixed rates of interest (average receive rate of 8.50% as of
December 31, 2007). All swaps were accounted for under SFAS No. 133 (as amended)
as fair value hedges. For the six months ended June 30, 2007, the interest
expense resulting from these interest rate swaps totaled approximately $2.0
million.
On January 15, 2008, we terminated all of our interest rate swap agreements
representing $400.0 million notional amount of indebtedness associated with our
Senior Notes due in 2011 and 2013. Cash proceeds on the swap terminations of
approximately $15.5 million were received in January 2008. The related gain has
been deferred on the consolidated balance sheet and is being amortized into
interest expense over the term of the associated debt.
Credit Facilities
-----------------
As of June 30, 2008, we had available lines of credit with financial
institutions in the aggregate amount of $250.0 million and there were no
outstanding standby letters of credit issued under the facility. Associated
facility fees vary, depending on our debt leverage ratio, and were 0.225% per
annum as of June 30, 2008. The expiration date for this $250.0 million five year
revolving credit agreement is May 18, 2012. During the term of the credit
facility we may borrow, repay and reborrow funds. The credit facility is
available for general corporate purposes but may not be used to fund dividend
payments.
Covenants
---------
The terms and conditions contained in our indentures and credit facility
agreements include the timely payment of principal and interest when due, the
maintenance of our corporate existence, keeping proper books and records in
accordance with U.S. GAAP, restrictions on the allowance of liens on our assets,
and restrictions on asset sales and transfers, mergers and other changes in
corporate control. We currently have no restrictions on the payment of dividends
either by contract, rule or regulation, other than those imposed by the Delaware
General Corporate Law. However, we would be restricted under our credit
facilities from declaring dividends if an event of default has occurred and is
continuing at the time or will result from the dividend declaration.
21
Our $200.0 million term loan facility with the Rural Telephone Finance
Cooperative (RTFC), that matures in 2011, contains a maximum leverage ratio
covenant. Under the leverage ratio covenant, we are required to maintain a ratio
of (i) total indebtedness minus cash and cash equivalents in excess of $50.0
million to (ii) consolidated adjusted EBITDA (as defined in the agreement) over
the last four quarters no greater than 4.00 to 1.
Our $250.0 million credit facility, and our $150.0 million and $135.0 million
senior unsecured term loans, each contain a maximum leverage ratio covenant.
Under the leverage ratio covenant, we are required to maintain a ratio of (i)
total indebtedness minus cash and cash equivalents in excess of $50.0 million to
(ii) consolidated adjusted EBITDA (as defined in the agreements) over the last
four quarters no greater than 4.50 to 1. Although all of these facilities are
unsecured, they will be equally and ratably secured by certain liens and equally
and ratably guaranteed by certain of our subsidiaries if we issue debt that is
secured or guaranteed.
Our credit facilities and certain indentures for our senior unsecured debt
obligations limit our ability to create liens or merge or consolidate with other
companies and our subsidiaries' ability to borrow funds, subject to important
exceptions and qualifications.
We are in compliance with all of our debt and credit facility covenants.
Proceeds from the Sale of Equity Securities
-------------------------------------------
We receive proceeds from the issuance of our common stock upon the exercise of
options pursuant to our stock-based compensation plans. For the six months ended
June 30, 2008 and 2007, we received approximately $1.0 million and $11.5
million, respectively, upon the exercise of outstanding stock options.
Share Repurchase Programs
-------------------------
In February 2008, our Board of Directors authorized us to repurchase up to
$200.0 million of our common stock in public or private transactions over the
following twelve month period. This share repurchase program commenced on March
4, 2008. As of June 30, 2008, we had repurchased approximately 10,383,000 shares
of our common stock at an aggregate cost of approximately $112.7 million.
In February 2007, our Board of Directors authorized us to repurchase up to
$250.0 million of our common stock in public or private transactions over the
following twelve month period. This share repurchase program commenced on March
19, 2007 and was completed on October 15, 2007. During 2007, we repurchased
17,279,600 shares of our common stock at an aggregate cost of $250.0 million.
Dividends
---------
We expect to pay regular quarterly dividends. Our ability to fund a regular
quarterly dividend will be impacted by our ability to generate cash from
operations. The declarations and payment of future dividends will be at the
discretion of our Board of Directors, and will depend upon many factors,
including our financial condition, results of operations, growth prospects,
funding requirements, applicable law, restrictions in our credit facilities and
other factors our Board of Directors deems relevant.
Off-Balance Sheet Arrangements
------------------------------
We do not maintain any off-balance sheet arrangements, transactions, obligations
or other relationships with unconsolidated entities that would be expected to
have a material current or future effect upon our financial statements.
Critical Accounting Policies and Estimates
------------------------------------------
We review all significant estimates affecting our consolidated financial
statements on a recurring basis and record the effect of any necessary
adjustment prior to their publication. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial
statements; accordingly, it is possible that actual results could differ from
those estimates and changes to estimates could occur in the near term. The
preparation of our financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, the disclosure of the contingent assets
and liabilities, and the reported amounts of revenue and expenses during the
reporting period. Estimates and judgments are used when accounting for allowance
for doubtful accounts, impairment of long-lived assets, intangible assets,
depreciation and amortization, pension and other postretirement benefits, the
long-term incentive program, income taxes, contingencies and purchase price
allocations, among others.
22
Management has discussed the development and selection of these critical
accounting estimates with the Audit Committee of our Board of Directors and our
Audit Committee has reviewed our disclosures relating to such estimates.
There have been no material changes to our critical accounting policies and
estimates from the information provided in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the year ended December 31, 2007.
New Accounting Pronouncements
-----------------------------
The following new accounting standards were adopted by the Company in the first
quarter of 2008 without any material financial statement impact. All of these
standards are more fully described in Note 2 to the consolidated financial
statements.
* Accounting for Endorsement Split-Dollar Life Insurance Arrangements
----------------------------------------------------------------------
(EITF No. 06-4)
---------------
* Fair Value Measurements (SFAS No. 157), as amended
--------------------------------------------------
* The Fair Value Option for Financial Assets and Financial Liabilities -
----------------------------------------------------------------------
Including an Amendment of FASB Statement No. 115 (SFAS No. 159)
---------------------------------------------------------------
* Accounting for Collateral Assignment Split-Dollar Life Insurance
----------------------------------------------------------------------
Arrangements (EITF No. 06-10)
-----------------------------
* Accounting for the Income Tax Benefits of Dividends on Share-Based
----------------------------------------------------------------------
Payment Awards (EITF No. 06-11)
-------------------------------
The following new accounting standards that will be adopted by the Company in
2008 and 2009 are currently being evaluated by the Company.
* Business Combinations (SFAS No. 141R)
-------------------------------------
* Noncontrolling Interests in Consolidated Financial Statements (SFAS
----------------------------------------------------------------------
No. 160)
--------
23
(b) Results of Operations
---------------------
REVENUE
Revenue is generated primarily through the provision of local, network access,
long distance, and data and internet services. Such services are provided
through either a monthly recurring fee or a fee based on usage at a tariffed
rate and revenue recognition is not dependent upon significant judgments by
management, with the exception of a determination of a provision for
uncollectible amounts.
Consolidated revenue for the three months ended June 30, 2008 decreased $16.3
million, or 3%, as compared with the prior year period. Consolidated revenue for
the six months ended June 30, 2008 decreased $3.2 million as compared with the
prior year period. Excluding the additional revenue due to the CTE and GVN
acquisitions, revenue decreased $63.7 million during the first half of 2008, or
6%, as compared with the prior period. During the first quarter of 2007, we had
a significant favorable settlement of a carrier dispute that resulted in a
favorable one-time impact to our revenue of $38.7 million. Excluding the
additional revenue due to the one-time favorable settlement in the first quarter
of 2007 and the additional revenue due to the CTE and GVN acquisitions, our
revenue for the six months ended June 30, 2008 would have declined $25.0
million, or 3%, as compared to the first six months of 2007. This decline is a
result of lower local services revenue, subsidy revenue and switched access
revenue, partially offset by a $22.6 million increase in data and internet
services revenue.
Change in the number of our access lines is one factor that is important to our
revenue and profitability. We have lost access lines primarily because of
competition, changing consumer behavior, economic conditions, changing
technology and by some customers disconnecting second lines when they add
high-speed internet or cable modem service. We lost approximately 88,400 access
lines during the six months ended June 30, 2008, but added approximately 36,500
high-speed internet subscribers during this same period. The loss of lines
during the first six months of 2008 was primarily among residential customers
throughout our markets. The non-residential line losses were principally in our
eastern and central regions and Rochester, New York.
While access lines is an important metric to gauge some revenue trends, it is
not necessarily the best or only measure to evaluate the business. Management
believes that understanding the different components of revenue is most
important. For this reason, presented on page 26 is a revenue breakdown that
categorizes revenue into customer revenue and regulatory revenue (switched and
subsidy revenue). Despite the decline in access lines, our customer revenue,
which is all revenue except switched access and subsidy, has remained relatively
flat overall. The average monthly customer revenue per access line has improved
and resulted in an increased wallet share, primarily from residential customers.
We expect to continue to lose access lines but to increase high-speed internet
subscribers during the remainder of 2008. A continued loss of access lines,
combined with increased competition and the other factors discussed herein may
cause our revenues, profitability and cash flows to decrease in the second half
of 2008.
Our historical results include the results of operations of Commonwealth from
the date of its acquisition on March 8, 2007 and of GVN from the date of its
acquisition on October 31, 2007. The financial tables below include a
comparative analysis of our results of operations on a historical basis for the
three and six months ended June 30, 2008 and 2007, including the results of our
acquisitions.
REVENUE
For the three months ended June 30, For the six months ended June 30,
------------------------------------------ -------------------------------------------------
($ in thousands)
---------------- 2008 2007 $ Change % Change 2008 2007 $ Change % Change
---------- --------- ----------- --------- ------------- ----------- --------- ----------
Local services $ 214,703 $226,363 $ (11,660) -5% $ 431,861 $ 430,807 $ 1,054 0%
Data and internet
services 151,655 138,243 13,412 10% 297,637 256,267 41,370 16%
Access services 101,003 113,429 (12,426) -11% 208,821 252,453 (43,632) -17%
Long distance services 46,912 47,053 (141) 0% 93,365 87,481 5,884 7%
Directory services 29,070 28,664 406 1% 57,698 57,334 364 1%
Other 19,207 25,074 (5,867) -23% 42,373 50,631 (8,258) -16%
---------- --------- ----------- ------------- ----------- ---------
$ 562,550 $578,826 $ (16,276) -3% $ 1,131,755 $1,134,973 $ (3,218) 0%
========== ========= =========== ============= =========== =========
24
Local Services
Local services revenue for the three months ended June 30, 2008 decreased $11.7
million, or 5%, as compared with the prior year period. The loss of access lines
accounted for $8.7 million of the decline in local services revenue.
Local services revenue for the six months ended June 30, 2008 increased $1.1
million, as compared with the prior year period. Local services revenue
increased $21.7 million as a result of the CTE and GVN acquisitions and
decreased $18.4 million for our legacy Frontier operations, primarily due to the
continued loss of access lines. Enhanced services revenue decreased $2.2
million, as compared with the prior year period, primarily due to a decline in
access lines and a shift in customers purchasing our unlimited voice
communications packages.
Economic conditions and/or increasing competition could make it more difficult
to sell our packages and bundles and cause us to increase our promotions and/or
lower our prices for those products and services, which would adversely affect
our revenues, profitability and cash flow.
Data and Internet Services
Data and internet services revenue for the three months ended June 30, 2008
increased $13.4 million, or 10%, as compared with the prior year period,
primarily due to growth in data and high-speed internet services.
Data and internet services revenue for the six months ended June 30, 2008
increased $41.4 million, or 16%, as compared with the prior year period. Data
and internet services revenue increased $18.8 million as a result of the CTE and
GVN acquisitions and another $15.6 million due to the overall growth in data and
high-speed internet customers. The number of the Company's high-speed internet
subscribers has increased by more than 80,000, or 17%, since June 30, 2007. Data
and internet services also includes revenue from data transmission services to
other carriers and high-volume commercial customers with dedicated high-capacity
circuits like DS-1's and DS-3's. Revenue from these dedicated high-capacity
circuits increased $8.5 million, as compared with the prior year period,
primarily due to growth in the number of those circuits.
Access Services
Access services revenue for the three months ended June 30, 2008 decreased $12.4
million, or 11%, as compared with the prior year period. Switched access revenue
of $72.7 million decreased $10.1 million, as compared with the prior year
period, primarily due to the impact of a decline in minutes of use related to
access line losses. Access services revenue includes subsidy payments we receive
from federal and state agencies. Subsidy revenue of $28.3 million decreased $2.3
million, primarily due to lower receipts under the Federal High Cost Fund
program resulting from our reduced cost structure and an increase in the
program's National Average Cost per Local Loop (NACPL).
Access services revenue for the six months ended June 30, 2008 decreased $43.6
million, or 17%, as compared with the prior year period. Access services revenue
increased $11.3 million as a result of the CTE and GVN acquisitions. Switched
access revenue, excluding the impact of the CTE and GVN acquisitions, of $116.7
million decreased $45.6 million, primarily due to the first quarter 2007
settlement of a carrier dispute resulting in a favorable impact on our revenue
of $38.7 million (a one-time event) and the impact of a decline in minutes of
use related to access line losses. Excluding the impact of that one-time
favorable settlement in the first six months of 2007, our switched access
revenue for the first half of 2008 would have declined by $6.9 million, or 6%,
from the comparable period in 2007. Subsidy revenue, excluding the impact of the
CTE and GVN acquisitions, of $52.5 million decreased $9.3 million, primarily due
to lower receipts under the Federal High Cost Fund program resulting from our
reduced cost structure and an increase in the program's NACPL.
Many factors may lead to further increases in the NACPL, thereby resulting in
decreases in our federal subsidy revenue in the future. The Federal
Communications Commission (FCC) and state regulators are currently considering a
number of proposals for changing the manner in which eligibility for federal
subsidies is determined as well as the amounts of such subsidies. On May 1, 2008
the FCC issued an order to cap Competitive Eligible Telecommunications Companies
(CETC) receipts from the high cost Federal Universal Service Fund. While this
order will have no impact on our current receipt levels, we believe this is a
positive first step to limit the rapid growth of the fund. The CETC cap will
remain in place until the FCC takes additional steps towards needed reform. The
FCC is also reviewing the mechanism by which subsidies are funded. Additionally,
the FCC and certain states have open proceedings to address reform to access
charges and other intercarrier compensation. We cannot predict when or how these
matters will be decided nor the effect on our subsidy or access revenues. In
addition, we have been approached by, and/or are involved in formal state
proceedings with, various carriers seeking reductions in intrastate access rates
in certain states. Future reductions in our subsidy and access revenues will
directly affect our profitability and cash flows as those regulatory revenues do
not have associated variable expenses.
25
Long Distance Services
Long distance services revenue for the three months ended June 30, 2008 was
relatively unchanged as compared with the prior year period.
Long distance services revenue for the six months ended June 30, 2008 increased
$5.9 million, or 7%, as compared with the prior year period, as a result of $6.9
million in additional long distance services revenue from the CTE and GVN
acquisitions. We have actively marketed a package of unlimited long distance
minutes with our digital phone and state unlimited bundled service offerings.
The sale of our digital phone and state unlimited products, and its associated
unlimited minutes, has resulted in an increase in long distance customers, and
the minutes used by these customers. This has lowered our overall average rate
per minute billed.
Our long distance minutes of use increased by 23% during the six months ended
June 30, 2008 compared to the six months of 2007. Our long distance services
revenues have remained relatively unchanged, but may decrease in the future due
to lower rates and/or minutes of use. Competing services such as wireless, VOIP,
and cable telephony are resulting in a loss of customers, minutes of use and
further declines in the rates we charge our customers. We expect these factors
will continue to adversely affect our long distance revenues during the
remainder of 2008.
Directory Services
Directory services revenue for the three and six months ended June 30, 2008 was
relatively unchanged as compared with the prior year periods.
Other
Other revenue for the three and six months ended June 30, 2008 decreased $5.9
million, or 23%, and $8.3 million, or 16%, as compared with the prior year
periods, primarily due to higher bad debt expenses, fewer equipment sales and
decreased "bill and collect" fee revenue.
OTHER FINANCIAL AND OPERATING DATA
As of As of %
June 30, 2008 June 30, 2007 Change
----------------- ------------------ -----------
Access lines:
Residential 1,516,402 1,654,854 -8%
Business 825,345 848,864 -3%
----------------- ------------------
Total access lines 2,341,747 2,503,718 -6%
----------------- ------------------
High-speed internet (HSI)
subscribers 559,345 479,317 17%
Video subscribers 107,596 81,092 33%
For the three months ended June 30, For the six months ended June 30,
-------------------------------------------------- -----------------------------------------------------
2008 2007 $ Change % Change 2008 2007 $ Change % Change
-------------------------------------------------- -----------------------------------------------------
Revenue:
Residential $ 239,633 $ 248,550 $ (8,917) -4% $ 480,995 $ 470,328 $ 10,667 2%
Business 221,914 216,847 5,067 2% 441,939 412,192 29,747 7%
------------- ----------- ----------- ------------- ------------- ------------
Total customer revenue 461,547 465,397 (3,850) -1% 922,934 882,520 40,414 5%
------------- ----------- ----------- ------------- ------------- ------------
Regulatory (Access
Services) 101,003 113,429 (12,426) -11% 208,821 252,453 (43,632) -17%
------------- ----------- ----------- ------------- ------------- ------------
Total revenue $ 562,550 $ 578,826 $ (16,276) -3% $1,131,755 $1,134,973 $ (3,218) 0%
------------- ----------- ----------- ------------- ------------- ------------
Switched access minutes
of use (in millions) 2,538 2,748 -8% 5,141 5,276 -3%
Average monthly total
revenue per access line $ 79.31 $ 76.53 4% $ 79.04 $ 78.75 (1) 0%
Average monthly customer
revenue per access line $ 65.07 $ 61.53 6% $ 64.46 $ 64.04 (2) 1%
(1) For the six months ended June 30, 2007, the calculation excludes CTE and
GVN data and excludes the $38.7 million favorable one-time impact from the
first quarter 2007 settlement of a switched access dispute. The amount is
$81.82 with the $38.7 million favorable one-time impact from the
settlement.
(2) For the six months ended June 30, 2007, the calculation excludes CTE and
GVN data.
26
NETWORK ACCESS EXPENSES
For the three months ended June 30, For the six months ended June 30,
------------------------------------------- ---------------------------------------------------
($ in thousands)
---------------- 2008 2007 $ Change % Change 2008 2007 $ Change % Change
---------- --------- ----------- ---------- ------------ ------------ ---------- ------------
Network access $ 53,998 $ 53,678 $ 320 1% $ 114,547 $ 105,075 $ 9,472 9%
Network access expenses for the three months ended June 30, 2008 increased $0.3
million, or 1%, as compared with the prior year period.
Network access expenses for the six months ended June 30, 2008 increased $9.5
million, or 9%, as compared with the prior year period, as a result of $9.8
million in additional network access expenses due to the CTE and GVN
acquisitions.
OTHER OPERATING EXPENSES
For the three months ended June 30, For the six months ended June 30,
----------------------------------------------------- --------------------------------------------------
($ in thousands)
---------------- 2008 2007 $ Change % Change 2008 2007 $ Change % Change
------------ ------------ ------------- ---------- ------------ ----------- ----------- -----------
Wage and benefit expenses $ 95,317 $100,500 $ (5,183) -5% $195,463 $200,328 $ (4,865) -2%
Severance and early
retirement costs 480 1,594 (1,114) -70% 3,371 1,776 1,595 90%
Stock based compensation 3,145 2,038 1,107 54% 6,164 5,445 719 13%
All other operating
expenses 103,391 109,256 (5,865) -5% 200,599 195,106 5,493 3%
------------ ------------ ------------- ------------ ----------- -----------
$202,333 $213,388 $ (11,055) -5% $405,597 $402,655 $ 2,942 1%
============ ============ ============= ============ =========== ===========
Wage and benefit expenses
Wage and benefit expenses for the three months ended June 30, 2008 decreased
$5.2 million, or 5%, as compared to the prior year period, primarily due to
headcount reductions and associated decreases in compensation and benefit
expenses attributable to the integration of the back office, customer service
and administrative support functions of the CTE and GVN operations acquired in
2007.
Wage and benefit expenses for the six months ended June 30, 2008 decreased $4.9
million, or 2%, as compared with the prior year period. Wage and benefit
expenses increased $1.9 million as a result of the CTE and GVN acquisitions. All
other wage and benefit expenses decreased $6.8 million for the six months ended
June 30, 2008, as compared with the prior year period, primarily due to
headcount reductions and associated decreases in compensation and benefit
expenses from the integration of functions, as described above.
Included in wage and benefit expenses is pension and other postretirement
benefit expenses. These costs for the six months ended June 30, 2008 and 2007
were approximately $3.2 million and $6.6 million, respectively. Based on current
assumptions and plan asset values, we estimate that our 2008 pension and other
postretirement benefit expenses will be approximately $5.0 million to $10.0
million and that no contribution will be made by us to our pension plan in 2008.
In future periods, if the value of our pension plan assets decline and/or
projected pension and/or postretirement benefit costs increase, we may have
increased pension and/or other postretirement benefit expenses.
Severance and early retirement costs
Severance and early retirement costs for the three months ended June 30, 2008
decreased $1.1 million as compared with the prior year period, primarily due to
CTE related charges recorded in the second quarter of 2007.
Severance and early retirement costs for the six months ended June 30, 2008
increased $1.6 million as compared with the prior year period, primarily due to
charges recorded in the first half of 2008 related to employee early retirements
and terminations for 42 Rochester, New York employees.
27
Stock based compensation
Stock based compensation for the three months ended June 30, 2008 increased $1.1
million, or 54%, as compared with the prior year period, due to costs associated
with the recently adopted long-term incentive program.
Stock based compensation for the six months ended June 30, 2008 increased $0.7
million, or 13%, as compared with the prior year period, due to costs associated
with the recently adopted long-term incentive program, partially offset by
reduced costs associated with stock units and stock options, since we have fewer
stock option grants that remain unvested compared to the prior year period.
All other operating expenses
All other operating expenses for the three months ended June 30, 2008 decreased
$5.9 million, or 5%, as compared with the prior year period, primarily due to
the expense savings realized by our acquisitions of Commonwealth and Global
Valley. All other operating expenses for the six months ended June 30, 2008
increased $5.5 million, or 3%, as compared with the prior year period, primarily
due to the additional expenses of $10.5 million resulting from the CTE and GVN
acquisitions, as 2008 includes six months of expenses for CTE and GVN while 2007
includes approximately four months for CTE and no costs for GVN.
DEPRECIATION AND AMORTIZATION EXPENSE
For the three months ended June 30, For the six months ended June 30,
------------------------------------------ -------------------------------------------------
($ in thousands)
---------------- 2008 2007 $ Change % Change 2008 2007 $ Change % Change
---------- --------- ----------- --------- ------------- ----------- --------- ----------
Depreciation expense $ 98,367 $ 93,286 $ 5,081 5% $ 193,512 $ 179,933 $ 13,579 8%
Amortization expense 45,883 47,176 (1,293) -3% 91,818 82,710 9,108 11%
---------- --------- ----------- ------------- ----------- ---------
$144,250 $140,462 $ 3,788 3% $ 285,330 $ 262,643 $ 22,687 9%
========== ========= =========== ============= =========== =========
Depreciation and amortization expense for the three months ended June 30, 2008
increased $3.8 million, or 3%, as compared to the prior year period.
Depreciation and amortization expense for the six months ended June 30, 2008
increased $22.7 million, or 9%, as compared with the prior year period.
Depreciation and amortization expense for the six months ended June 30, 2008
increased $25.3 million as a result of our 2007 acquisitions of CTE and GVN and
includes amortization expense related to the customer base acquired in the CTE
and GVN acquisitions and the Commonwealth trade name. Depreciation and
amortization expense for the six months ended June 30, 2008 decreased $2.6
million, as compared with the prior year period, primarily due to a declining
net asset base for our legacy Frontier properties, partially offset by changes
in the remaining useful lives of certain assets. An independent study updating
the estimated remaining useful lives of our plant assets is performed annually.
We adopted the lives proposed in the study effective October 1, 2007. Our
"composite depreciation rate" increased from 5.25% to 5.45% as a result of the
study. We anticipate depreciation expense of approximately $375.0 million to
$385.0 million and amortization expense of $180.0 million to $185.0 million for
2008.
INVESTMENT AND OTHER INCOME (LOSS), NET/INTEREST EXPENSE/INCOME TAX EXPENSE
For the three months ended June 30, For the six months ended June 30,
------------------------------------------ -------------------------------------------------
($ in thousands)
---------------- 2008 2007 $ Change % Change 2008 2007 $ Change % Change
--------- ---------- ----------- --------- ------------- ---------- --------- ----------
Investment and
other income (loss), net $ 6,393 $ (6,517) $ 12,910 198% $ 5,158 $ 3,500 $ 1,658 47%
Interest expense $ 90,710 $ 98,649 $ (7,939) -8% $ 181,570 $ 192,613 $ (11,043) -6%
Income tax expense $ 21,874 $ 25,573 $ (3,699) -14% $ 48,502 $ 67,261 $ (18,759) -28%
Investment and other income (loss), net
Investment and other income (loss), net for the three months ended June 30, 2008
increased $12.9 million, or 198%, as compared with the prior year period,
primarily due to the loss on retirement of debt of $17.1 million during the
second quarter of 2007, partially offset by a decrease of $7.0 million in income
from short-term investments of cash.
28
Investment and other income (loss), net for the six months ended June 30, 2008
increased $1.7 million, or 47%, as compared with the prior year period,
primarily due to a reduction in the loss on retirement of debt of $11.9 million
and the $4.0 million expense of a bridge loan fee recorded during the first
quarter of 2007, partially offset by a decrease of $16.4 million in income from
short-term investments of cash.
Our average cash balance was $211.0 million and $832.3 million for the six
months ended June 30, 2008 and 2007, respectively.
Interest expense
Interest expense for the three months ended June 30, 2008 decreased $7.9
million, or 8%, as compared with the prior year period, primarily due to the
amortization of the deferred gain associated with the termination of our
interest rate swap agreements and lower average debt levels. Our average debt
outstanding was $4,757.9 million and $5,064.5 million for the three months ended
June 30, 2008 and 2007, respectively.
Interest expense for the six months ended June 30, 2008 decreased $11.0 million,
or 6%, as compared with the prior year period, primarily due to the amortization
of the deferred gain associated with the termination of our interest rate swap
agreements and retirement of related debt during the first quarter of 2008,
along with slightly lower average debt levels. Our average debt outstanding was
$4,758.8 million and $4,887.3 million for the six months ended June 30, 2008 and
2007, respectively. Our composite average borrowing rate as of June 30, 2008 as
compared with the prior year was 31 basis points lower, decreasing from 7.94% to
7.63%.
Income tax expense
Income tax expense for the three and six months ended June 30, 2008 decreased
$3.7 million, or 14%, and $18.8 million, or 28%, respectively, as compared with
the prior year periods, primarily due to changes in taxable income and the
reduction in income tax expense of $7.5 million recorded in the second quarter
of 2008 that resulted from the expiration of certain statute of limitations on
April 15, 2008. The effective tax rate for the first six months of 2008 was
32.4% as compared with 38.3% for the first six months of 2007. Our cash taxes
paid for the six months ended June 30, 2008 were $49.6 million, an increase of
$2.2 million from the first six months of 2007. We expect to pay approximately
$100 million to $110 million for the full year of 2008. Our 2008 cash tax
estimate reflects the currently estimated impact of the "Economic Stimulus Act
of 2008."
As a result of the expiration of certain statute of limitations on April 15,
2008, the liabilities on our books as of December 31, 2007 related to uncertain
tax positions recorded under FASB Interpretation No. (FIN) 48 were reduced by
$16.2 million in the second quarter of 2008. This reduction lowered income tax
expense by $7.5 million, goodwill by $3.0 million and deferred income tax assets
by $5.7 million during the second quarter of 2008.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Disclosure of primary market risks and how they are managed
We are exposed to market risk in the normal course of our business operations
due to ongoing investing and funding activities, including those associated with
our pension assets. Market risk refers to the potential change in fair value of
a financial instrument as a result of fluctuations in interest rates and equity
prices. We do not hold or issue derivative instruments, derivative commodity
instruments or other financial instruments for trading purposes. As a result, we
do not undertake any specific actions to cover our exposure to market risks, and
we are not party to any market risk management agreements other than in the
normal course of business. Our primary market risk exposures are interest rate
risk and equity price risk as follows:
Interest Rate Exposure
Our exposure to market risk for changes in interest rates relates primarily to
the interest-bearing portion of our investment portfolio. Our long-term debt as
of June 30, 2008 was approximately 94% fixed rate debt with minimal exposure to
interest rate changes after the termination of our remaining interest rate swap
agreements on January 15, 2008.
Our objectives in managing our interest rate risk are to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve these objectives, all but $282.4 million of our
borrowings at June 30, 2008 have fixed interest rates. Consequently, we have
limited material future earnings or cash flow exposures from changes in interest
rates on our long-term debt. An adverse change in interest rates would increase
the amount that we pay on our variable obligations and could result in
fluctuations in the fair value of our fixed rate obligations. Based upon our
overall interest rate exposure at June 30, 2008, a near-term change in interest
rates would not materially affect our consolidated financial position, results
of operations or cash flows.
29
On January 15, 2008, we terminated all of our interest rate swap agreements
representing $400.0 million notional amount of indebtedness associated with our
Senior Notes due in 2011 and 2013. Cash proceeds on the swap terminations of
approximately $15.5 million were received in January 2008. The related gain has
been deferred on the consolidated balance sheet, and is being amortized into
interest expense over the term of the associated debt.
Sensitivity analysis of interest rate exposure
At June 30, 2008, the fair value of our long-term debt was estimated to be
approximately $4.4 billion, based on our overall weighted average borrowing rate
of 7.63% and our overall weighted average maturity of approximately 13 years.
There has been no material change in the weighted average maturity applicable to
our obligations since December 31, 2007.
Equity Price Exposure
Our exposure to market risks for changes in security prices as of June 30, 2008
is limited to our pension assets. We have no other security investments of any
material amount.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures
We carried out an evaluation, under the supervision and with the participation
of our management, including our principal executive officer and principal
financial officer, regarding the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon this evaluation, our
principal executive officer and principal financial officer concluded, as of the
end of the period covered by this report, June 30, 2008, that our disclosure
controls and procedures are effective.
(b) Changes in internal control over financial reporting
We reviewed our internal control over financial reporting at June 30, 2008.
There has been no change in our internal control over financial reporting
identified in an evaluation thereof that occurred during the second fiscal
quarter of 2008 that materially affected or is reasonably likely to materially
affect our internal control over financial reporting.
30
PART II. OTHER INFORMATION
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Legal Proceedings
-----------------
There have been no material changes to our legal proceedings from the
information provided in Item 3. Legal Proceedings included in our Annual Report
on Form 10-K for the year ended December 31, 2007, except as set forth below:
Ronald A. Katz Technology Licensing LP, filed suit against us for patent
infringement on June 8, 2007 in the U.S. District Court for the District of
Delaware. Katz Technology alleges that, by operating automated telephone
systems, including customer service systems, that allow our customers to utilize
telephone calling cards, order internet, DSL, and dial-up services, and perform
a variety of account related tasks such as billing and payments, we have
infringed thirteen of Katz Technology's patents and continue to infringe three
of Katz Technology's patents. Katz Technology seeks unspecified damages
resulting from our alleged infringement, as well as a permanent injunction
enjoining us from continuing the alleged infringement. Katz Technology
subsequently filed a tag-along notice with the Judicial Panel on Multi-District
Litigation, notifying them of this action and its relatedness to In re Katz
Interactive Dial Processing Patent Litigation (MDL No. 1816), pending in the
Central District of California before Judge R. Gary Klausner. The Judicial Panel
on Multi-District Litigation has transferred the case to the Central District of
California. In January 2008, we received notice of the accused services and 40
asserted claims from Katz Technology. The case is now in the discovery phase and
interrogatories have been served and answered. The parties have engaged in
settlement discussions but have not reached agreement. In the event that we are
not able to settle, we intend to vigorously defend against this lawsuit.
Item 1A. Risk Factors
------------
There have been no material changes to our risk factors from the information
provided in Item 1A. "Risk Factors" included in our Annual Report on Form 10-K
for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
There were no unregistered sales of equity securities during the quarter ended
June 30, 2008.
31
ISSUER PURCHASES OF EQUITY SECURITIES
---------------------------------------------------------------------------------------------------------
(d) Maximum
Approximate
Dollar Value of
(c) Total Number of Shares that May
(a) Total Shares Purchased as Yet Be Purchased
Number of (b) Average Part of Publicly Under the Plans
Shares Price Paid Announced Plans or or Programs (in
Period Purchased per Share Programs millions)
---------------------------------------------------------------------------------------------------------
April 1, 2008 to April 30, 2008
Share Repurchase Program (1) 2,410,812 $ 10.51 4,727,580 $ 149.9
Employee Transactions (2) 247 $ 10.81 N/A N/A
May 1, 2008 to May 31, 2008
Share Repurchase Program (1) 2,582,411 $ 10.84 7,309,991 $ 121.9
Employee Transactions (2) - - N/A N/A
June 1, 2008 to June 30, 2008
Share Repurchase Program (1) 3,073,533 $ 11.24 10,383,524 $ 87.4
Employee Transactions (2) 143 $ 9.26 N/A N/A
Totals April 1, 2008 to June 30, 2008
Share Repurchase Program (1) 8,066,756 $ 10.89 10,383,524 $ 87.4
Employee Transactions (2) 390 $ 10.24 N/A N/A
(1) In February 2008, our Board of Directors authorized us to repurchase up to
$200.0 million of our common stock in public or private transactions over
the following twelve-month period. This share repurchase program commenced
on March 4, 2008.
(2) Includes restricted shares withheld (under the terms of grants under
employee stock compensation plans) to offset minimum tax withholding
obligations that occur upon the vesting of restricted shares. The Company's
stock compensation plans provide that the value of shares withheld shall be
the average of the high and low price of the Company's common stock on the
date the relevant transaction occurs.
32
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The registrant held its 2008 Annual Meeting of the Stockholders on May
15, 2008 (the "Meeting").
(b) Election of directors. At the Meeting, all nominees were elected
pursuant to the following votes:
Number of Votes
-----------------
DIRECTOR FOR WITHHELD
-------- --- --------
Kathleen Q. Abernathy 277,530,899 8,356,519
Leroy T. Barnes, Jr. 277,521,933 8,365,485
Peter C.B. Bynoe 277,598,311 8,289,107
Michael T. Dugan 277,636,905 8,250,513
Jeri B. Finard 277,574,695 8,312,723
Lawton W. Fitt 276,868,610 9,018,808
William M. Kraus 277,130,395 8,757,023
Howard L. Schrott 277,692,849 8,194,569
Larraine D. Segil 277,640,379 8,247,039
David H. Ward 277,383,897 8,503,521
Myron A. Wick III 277,129,109 8,758,309
Mary Agnes Wilderotter 274,948,439 10,938,979
(c) Other matters submitted to stockholders at the Meeting:
(1) Adoption of an amendment to the Company's Restated Certificate of
Incorporation to change the Company's name from Citizens
Communications Company to Frontier Communications Corporation. The
matter passed with the following vote:
Number of votes FOR 274,962,708
Number of votes AGAINST 6,180,244
Number of votes ABSTAINING 4,744,466
(2) Adoption of an amendment to the Company's Restated Certificate of
Incorporation to replace the enumerated purposes clause with a general
purposes clause. The matter passed with the following vote:
Number of votes FOR 274,765,633
Number of votes AGAINST 5,198,721
Number of votes ABSTAINING 5,923,064
(3) Stockholder proposal related to executive compensation. The matter
did not pass with the following vote:
Number of votes FOR 89,901,631
Number of votes AGAINST 103,441,872
Number of votes ABSTAINING 8,801,979
Number of BROKER NON-VOTES 83,741,936
(4) Ratification of appointment of KPMG LLP as the Company's
independent registered public accounting firm for 2008. The matter
passed with the following vote:
Number of votes FOR 276,369,552
Number of votes AGAINST 5,825,909
Number of votes ABSTAINING 3,691,957
33
Item 5. Other Information
-----------------
As disclosed in our Proxy Statement for the 2008 Annual Meeting, proposals that
stockholders wish to include in our Proxy Statement and form of proxy for our
2009 annual Stockholders meeting must be received by the Secretary of the
Company no later than December 10, 2008. For a stockholder proposal that is not
intended to be included in our Proxy Statement for our 2009 Annual Meeting, the
proposal must be received by the Secretary of the Company not earlier than
January 15, 2009 nor later than February 14, 2009 in order to be properly
presented at the 2009 Annual Meeting. Furthermore, in accordance with the proxy
rules and regulations of the Securities and Exchange Commission, if a
stockholder does not notify us of a proposal by February 14, 2009, then our
proxies would be able to use their discretionary voting authority if a
stockholder's proposal is raised at the meeting.
Item 6. Exhibits
--------
a) Exhibits:
3.1 Certificate of Amendment of Restated Certificate of Incorporation
effective July 31, 2008.
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
34
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER COMMUNICATIONS CORPORATION
-----------------------------------
(Registrant)
By: /s/ Robert J. Larson
-----------------------------
Robert J. Larson
Senior Vice President and
Chief Accounting Officer
Date: August 5, 2008
35