Frontier Communications 2007 Annual Report Download - page 78

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
subsidiary, Citizens Utilities Capital L.P. (the Partnership). The proceeds from the issuance of the Partnership
Convertible Preferred Securities and a Company capital contribution were used to purchase from us $211.8
million aggregate principal amount of 5% Convertible Subordinated Debentures due 2036. The sole assets of the
Trust are the Partnership Convertible Preferred Securities, and our Convertible Subordinated Debentures are
substantially all the assets of the Partnership. Our obligations under the agreements related to the issuances of
such securities, taken together, constitute a full and unconditional guarantee by us of the Trust’s obligations
relating to the Trust Convertible Preferred Securities and the Partnership’s obligations relating to the Partnership
Convertible Preferred Securities.
In accordance with the terms of the issuances, we paid the annual 5% interest in quarterly installments on
the Convertible Subordinated Debentures in 2007, 2006 and 2005. Cash was paid (net of investment returns) to
the Partnership in payment of the interest on the Convertible Subordinated Debentures. The cash was then
distributed by the Partnership to the Trust and then by the Trust to the holders of the EPPICS.
As of December 31, 2007, EPPICS representing a total principal amount of $197.3 million have been
converted into 15,918,182 shares of our common stock. A total of $4.0 million of EPPICS was outstanding as of
December 31, 2007, and if all outstanding EPPICS were converted, 350,259 shares of our common stock would
be issued upon such conversion. Our long-term debt footnote indicates $14.5 million of EPPICS outstanding at
December 31, 2007, of which $10.5 million is debt of related parties for which the Company has an offsetting
receivable.
We adopted the provisions of FIN No. 46R (revised December 2003) (FIN No. 46R), “Consolidation of
Variable Interest Entities,” effective January 1, 2004. Accordingly, the Trust holding the EPPICS and the related
Citizens Utilities Capital L.P. are deconsolidated.
(16) CAPITAL STOCK:
We are authorized to issue up to 600,000,000 shares of common stock. The amount and timing of dividends
payable on common stock are, subject to applicable law, within the sole discretion of our Board of Directors.
(17) STOCK PLANS:
At December 31, 2007, we had five stock-based compensation plans under which grants have been made
and awards remained outstanding. These plans, which are described below, are the Management Equity Incentive
Plan (MEIP), the 1996 Equity Incentive Plan (1996 EIP), the Amended and Restated 2000 Equity Incentive Plan
(2000 EIP), the Non-Employee Directors’ Deferred Fee Plan (Deferred Fee Plan) and the Non-Employee
Directors’ Equity Incentive Plan (Director’s Equity Plan, and together with the Deferred Fee Plan, the Director
Plans).
Prior to the adoption of SFAS No. 123R, we applied APB No. 25 and related interpretations to account for
our stock plans resulting in the use of the intrinsic value to value the stock and determine compensation expense.
Under APB No. 25, we were not required to recognize compensation expense for the cost of stock options. In
accordance with the adoption of SFAS No. 123R as of January 1, 2006, we recorded stock-based compensation
expense for the cost of our stock options. Compensation expense, recognized in other operating expenses, of $0.8
million and $2.2 million in 2007 and 2006, respectively, has been recorded for the cost of our stock options. Our
general policy is to issue shares upon the grant of restricted shares and exercise of options from treasury. At
December 31, 2007, there were 16,058,182 shares authorized for grant under these plans and 5,242,717 shares
available for grant. No further awards may be granted under the MEIP, the 1996 EIP and the Deferred Fee Plan.
In connection with the Director Plans, compensation costs associated with the issuance of stock units was
$1.6 million, $2.0 million and $1.1 million in 2007, 2006 and 2005, respectively. Cash compensation associated
with the Director Plans was $0.5 million, $0.5 million and $0.4 million in 2007, 2006 and 2005, respectively.
These costs are recognized in other operating expenses.
F-28