<PAGE>
<PAGE>1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
Commission file number 1-4166
ROCHESTER TELEPHONE CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0613330
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
180 South Clinton Avenue, Rochester, NY 14646-0700
(Address of principal executive offices) (Zip Code)
(716) 777-1000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
$1.00 Par Value Common Stock 73,160,833 shares as of October 31, 1994
<PAGE>
<PAGE>2
ROCHESTER TELEPHONE CORPORATION
Part I - Financial Information
==============================
Item 1 - Financial Statements
Presented on the following pages are the consolidated
financial statements of Rochester Telephone Corporation. In
the opinion of management, the consolidated financial
information reflects all adjustments necessary for a fair
presentation of the financial statements for the interim
periods included herein. There have been no adjustments made
in the interim financial statements which are not of a normal
recurring nature.
<PAGE>
<PAGE>3
<TABLE>
ROCHESTER TELEPHONE CORPORATION
Consolidated Statement of Income
(Unaudited)
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
In thousands,
except per share data (1) 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues and Sales
Telephone Operations $150,149 $147,763 $456,053 $440,640
Telecommunication Services (2) 92,957 82,743 280,693 223,687
------- -------- -------- --------
Total Revenues and Sales 243,106 230,506 736,746 664,327
Costs and Expenses
Operating expenses 144,412 133,268 434,265 383,487
Cost of goods sold 3,956 4,362 15,870 15,279
Depreciation 28,474 28,944 88,077 85,755
Taxes other than income taxes 11,350 12,259 35,524 34,820
Software write-off - 3,300 - 3,300
------- -------- -------- --------
Total Costs and Expenses (2) 188,192 182,133 573,736 522,641
------- -------- -------- --------
Operating Income (2) 54,914 48,373 163,010 141,686
Interest expense 10,781 11,805 32,636 35,805
Other income and expense:
Allowance for funds used
during construction 275 290 831 962
Gain on sale of subsidiaries (3) - 954 12,933 954
Equity earnings (loss) from unconsolidated
wireless interests (2) 1,723 (156) 2,206 799
Other income (expense), net (4,047) (5,459) (15,153) (15,466)
------- ------- -------- --------
Income Before Taxes and Cumulative
Effect of Change in Accounting
Principle 42,084 32,197 131,191 93,130
Income taxes 15,884 12,960 47,693 36,045
------ ------- ------- ------
Income Before Cumulative Effect of
Change in Accounting Principle 26,200 19,237 83,498 57,085
Cumulative Effect of Change in
Accounting Principle - accounting
for postemployment benefits (4) - - (7,197) -
-------- -------- -------- --------
</TABLE>
<PAGE>
<PAGE>4
<TABLE>
Consolidated Statement of Income (cont'd)
(Unaudited)
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
In thousands, except per
except per share data (1) 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Consolidated Net Income 26,200 19,237 76,301 57,085
Dividends on preferred stock 297 297 890 890
-------- -------- -------- --------
Income Applicable to Common Stock $25,903 $18,940 $75,411 $56,195
======= ======= ======= =======
Dividends on common stock $14,818 $13,378 $44,448 $40,127
Average common shares outstanding 73,248 67,720 72,356 67,296
Earnings Per Common Share
Primary:
Income before cumulative effect of
change in accounting principle $.35 $.28 $ 1.14 $.84
Cumulative effect of change in
accounting principle - - (.10) -
-------- -------- -------- -------
Net Earnings Per Common Share $.35 $.28 $ 1.04 $.84
Fully Diluted:
Income before cumulative effect of
change in accounting principle $.35 $.28 $1.14 $.83
Cumulative effect of change in
accounting principle - - (.10) -
-------- -------- -------- -------
Net Earnings Per Common Share $.35 $.28 $1.04 $.83
======== ======== ======== =======
</TABLE>
<PAGE>
<PAGE>5
Consolidated Statement of Income (cont'd.)
(1) Share and per share data have been adjusted to reflect a 2-for-1
common stock split distributed in April 1994 in the form of a
100 percent stock dividend.
(2) In July 1994, Rochester Tel Mobile Communications (RTMC)
and NYNEX Mobile Communications combined cellular interests and
formed a 50/50 joint venture to operate a cellular network in
upstate New York. Financial results for the joint venture have
been reported on the equity method of accounting, reflecting
Rochester Tel's proportionate share of the joint venture's
earnings in the "Other income and expense" section. Previously,
RTMC's revenues and expenses had been consolidated. (See Supplemental
Wireless Operating Data schedule for additional information.)
(3) In May 1994, the Company sold its Minot Telephone
Company property in North Dakota which resulted in a pre-tax
gain of $12.9 million.
(4) On January 1, 1994, the Company adopted Financial
Accounting Standards Board Statement No. 112 (FAS 112),
"Employers' Accounting for Postemployment Benefits." The
Company recognized the obligation for postemployment
benefits through a cumulative effect charge to net income
of $7.2 million, net of taxes. The adoption of FAS 112
is not expected to significantly impact future operating
expense or the Company's cash flow.
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>6
<TABLE>
ROCHESTER TELEPHONE CORPORATION
Business Segment Information (Unaudited)
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
In thousands of dollars 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Telephone Operations (1)
Revenues
Local service $ 60,407 $ 60,962 $ 180,159 $ 173,405
Network access service 54,993 55,658 172,061 164,235
Long distance network service 6,193 4,866 18,679 18,390
Directory advertising, billing
services, and other 29,823 27,849 89,040 88,217
Less: Uncollectibles 1,267 1,572 3,886 3,607
--------- -------- -------- --------
Total Revenues $ 150,149 $ 147,763 $ 456,053 $ 440,640
========== =========== =========== ==========
Operating Income $ 45,688 $ 39,447 $ 134,959 $ 119,859
========== =========== =========== ==========
Depreciation $ 25,326 $ 24,976 76,237 $ 73,878
========== =========== =========== ==========
Construction Expenditures $ 15,749 $ 22,692 $ 41,746 $ 65,082
========== =========== =========== ==========
Identifiable Assets (2) $ 1,535,982 $ 1,394,788 $ 1,535,982 $1,394,788
========== =========== ========== =========
</TABLE>
<PAGE>
<PAGE>7
<TABLE>
ROCHESTER TELEPHONE CORPORATION
Business Segment Information (Unaudited)
(cont'd.)
Telecommunication Services
Sales
Network Systems and Services:
3 months Ended 9 Months Ended
September 30, September 30,
1994 1993 1994 1993
<CAPTION>
<S> <C> <C> <C> <C>
Non-Affiliate $ 90,195 $ 74,796 $257,620 $ 202,988
Affiliate 2,703 744 6,162 2,709
Wireless Communications (3) 1,791 7,920 22,686 20,333
Eliminations (1,732) (717) (5,775) (2,343)
---------- ---------- ---------- -----------
Total Sales $ 92,957 $82,743 $280,693 $ 223,687
=========== =========== =========== ===========
Operating Income
Network Systems and Services $ 9,611 $ 7,682 $ 26,639 $ 19,620
Wireless Communications (3) (404) 1,225 1,356 2,151
Eliminations 19 19 56 56
---------- ---------- ---------- -----------
Total Operating Income $ 9,226 $ 8,926 $ 28,051 $ 21,827
=========== =========== =========== ===========
Depreciation $ 3,148 $ 3,968 $ 11,840 $ 11,877
=========== =========== =========== ===========
Construction Expenditures $ 4,070 $ 3,426 $ 22,295 $ 7,747
=========== =========== =========== ===========
Identifiable Assets (2) $ 287,716 $ 265,089 $ 287,716 $ 265,089
=========== =========== =========== ===========
</TABLE>
(1) In May 1994, the Company sold its Minot Telephone Company
property in North Dakota.
(2) Includes assets eliminated in consolidation of $191,805,
in 1994 and $155,24 in 1993.
(3) In July 1994, Rochester Tel Mobile Communications (RTMC)
and NYNEX Mobile Communications combined cellular interests
and formed a 50/50 joint venture to operate a cellular network
in upstate New York. Financial results for the joint
venture have been reported on the equity method of accounting,
reflecting Rochester Tel's proportionate share of the joint
venture's earnings in the "Other income and expense" section.
Previously, RTMC's revenues and expenses had been consolidated.
(See Supplemental Wireless Operating Data schedule for
additional information.)
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>8
<TABLE>
ROCHESTER TELEPHONE CORPORATION
Consolidated Balance Sheet
<CAPTION>
September 30 December 31,
1994 1993
(Unaudited)
In thousands of dollars
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 196,963 $ 31,284
Short-term investments 9,057 349
Accounts receivable 171,386 157,320
Material and supplies 9,173 11,208
Prepayments and other 19,582 21,583
---------- ----------
Total Current Assets 406,161 221,744
---------- ----------
Property, Plant and Equipment
Telephone plant in service 1,540,975 1,561,032
Telephone plant under
constuction 33,242 33,048
---------- ----------
1,574,217 1,594,080
Less-Accumulated depreciation 681,713 652,578
---------- ----------
Net Telephone Plant 892,504 941,502
Telecommunication property 166,126 153,954
Less-Accumulated depreciation 73,305 68,265
---------- ----------
Net Telecommunication Property 92,821 85,689
---------- ----------
Goodwill 143,355 166,283
---------- ----------
Deferred and Other Assets 97,052 94,983
========== ==========
Total Assets $1,631,893 $1,510,201
</TABLE>
<PAGE>
<PAGE>9
Consolidated Balance Sheet (cont'd.)
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 131,770 $ 147,152
Notes payable 106 303
Advance billings 9,830 12,572
Dividends payable 14,866 14,058
Long-term debt due within one
year 3,498 3,962
Taxes accrued 10,289 14,729
Interest accrued 12,481 13,583
----------- -----------
Total Current Liabilities 182,840 206,359
----------- -----------
Long-Term Debt 490,023 492,555
----------- -----------
Deferred Income Taxes 116,175 116,967
----------- -----------
Deferred Benefits 32,885 16,121
----------- -----------
Minority Interests 104 3,100
----------- -----------
Shareowners Equity
Common stock 73,160 34,025
Capital in excess of par value 264,077 201,591
Retained earnings 449,852 418,889
----------- -----------
787,089 654,505
Less-Treasury stock, at cost - 2,191
----------- -----------
Common Shareowners Equity 787,089 652,314
Preferred stock 22,777 22,785
----------- -----------
Total Shareowners Equity 809,866 675,099
----------- -----------
Total Liabilities and $1,631,893 $1,510,201
Shareowners' Equity ========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>10
<TABLE>
ROCHESTER TELEPHONE CORORATION
Consolidated Statement of Cash Flows
(Unaudited)
<CAPTION>
9 Months Ended
September 30,
In thousands of dollars 1994 1993
<S> <C> <C>
Cash Flows from Operating Activities
Income before cumulative effect of change in
accounting principle $83,498 $ 57,085
Cumulative effect of change in accounting principle (7,197) -
---------- --------
Net Income 76,301 57,085
---------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 102,862 100,137
Gain on sale of assets (12,933) (4,108)
Equity earnings from unconsolidated cellular (2,206) (799)
interests
Cumulative effect of change in accounting 11,072 -
principle
Minority interests 365 155
Changes in operating assets and liabilities,
exclusive of impacts of purchase acquisitions:
(Increase) in accounts receivable (13,490) (13,390)
Decrease in material and supplies 1,336 1,908
Decrease in prepayments and other current assets 3,530 3,662
(Increase) in deferred and other assets (13,129) (1,547)
(Decrease) in accounts payable (11,155) (2,354)
(Decrease) in advance billings (2,735) (1,780)
(Decrease) in accrued interest and taxes (7,574) (1,053)
Increase in deferred benefits 5,526 10,885
Increase/(decrease) in deferred income taxes (3,124) 2,025
-------- -------
Total Adjustments 58,345 93,741
-------- -------
Net Cash Provided by Operating Activities 134,646 150,826
------- -------
</TABLE>
<PAGE>
<PAGE>11
<TABLE>
ROCHESTER TELEPHONE CORPORATION
Consolidated Statement of Cash Flows
(cont'd.) (Unaudited)
<CAPTION>
9 Months Ended
September 30,
1994 1993
<S> <C> <C>
Cash Flows from Investing Activities
Expenditures for property, plant and equipment, net (62,412) (68,386)
(Increase)/decrease in short-term investments (8,708) 229
Investment in cellular (438) (684)
Investment in nonaffiliated entities - (5,088)
Proceeds from asset sales - 2,751
Cash disposed of in sale of company - (321)
Proceeds from sale of company 55,689 -
Purchase of company (3,011) (7,377)
Cash acquired in purchase acquisitions - 264
Change in accounting method of wireless 744 -
--------- -------
Net Cash (Used in) Investing Activities (18,136) (78,612)
--------- --------
Cash Flows from Financing Activities
Increase/(decrease) in notes payable (197) 3,194
Proceeds from long-term debt 135 35,234
Repayments of long-term debt (12,244) (117,733)
Dividends paid (44,529) (40,803)
Issuance/(purchases) of treasury stock 2,302 (7,739)
Redemptions of preferred stock (8) (8)
Issuance of common stock 103,710 -
Net Cash Provided by (Used in) Financing Activities 49,169 (127,855)
--------- --------
Net Increase (Decrease) in Cash and Cash 165,679 (55,641)
Equivalents
Cash and Cash Equivalents at Beginning of Period 31,284 69,347
---------- --------
Cash and Cash Equivalents at End of Period $196,963 $ 13,706
========== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>12
ROCHESTER TELEPHONE CORPORATION
Supplemental Wireless Operating Data
(Unaudited)
In accordance with generally accepted accounting principles (GAAP),
revenues, expenses, and operating income in the Consolidated Statement of
Income and Business Segment Information reflect results of Wireless
Operations for only the affiliates in which the Company has an ownership
interest of greater than 50%. The formation of Upstate Cellular Network
(UCN), a 50/50 joint venture with NYNEX Corporation, in July 1994, caused
the Company to adopt the equity method of accounting for the financial
results of the UCN cellular interests, reflecting only its proportionate
share of earnings in the Other income and expense section on the
Consolidated Statement of Income. Consequently, the Consolidated
Statement of Income and Business Segment Information, beginning with third
quarter 1994 results, no longer reflect the revenues, expenses and
operating income of the Company's New York State wireless properties.
In order to provide more complete information about the Company's
involvement in Wireless Communications, the following tables set forth
unaudited, supplemental financial data for this business segment. These
tables reflect both a full 100% consolidation and a proportionate share
consolidation of entities in which the Company has a significant ownership
interest and acts as managing partner. This presentation differs from the
consolidation methodology used to prepare the Company's principal
financial statements in accordance with GAAP. The proportionate results
presented reflect the Company's ownership percentage of cellular interests
consolidated for financial reporting purposes and the Company's ownership
percentage of its significant unconsolidated cellular interests (which are
accounted for on the equity method for financial reporting purposes).
Total Properties Managed Rochester Tel
Assuming 100% Ownership Proportionate Share (1)
3 Months Ended 3 Months Ended
September 30, September 30,
Dollars in thousands 1994 1993 1994 1993
Net Revenues - Wireless $21,265 $9,820 $8,884 $7,240
------- -------- -------- --------
Operating Expenses 11,581 5,621 4,775 3,984
Cost of Goods Sold 2,664 1,216 1,193 961
Depreciation 2,367 966 939 570
Taxes Other Than Income Taxes 809 344 320 281
------- -------- -------- --------
Total Costs & Expenses 17,421 8,147 7,227 5,796
------- -------- -------- --------
Operating Income - Wireless $ 3,844 $1,673 $1,657 $1,444
======= ======= ====== =======
<PAGE>
<PAGE>13
Total Properties Managed Rochester Tel
Assuming 100% Ownership Proportionate Share (1)
9 Months Ended 9 Months Ended
September 30, September 30,
Dollars in thousands 1994 1993 1994 1993
Net Revenues - Wireless $44,526 $25,909 $26,390 $18,736
-------- --------- --------- --------
Operating Expenses 25,414 16,239 14,943 11,227
Cost of Goods Sold 6,360 3,471 4,164 2,717
Depreciation 4,561 2,768 2,377 1,592
Taxes Other Than Income Taxes 1,629 1,005 940 777
-------- --------- --------- --------
Total Costs & Expenses 37,964 23,483 22,424 16,313
-------- --------- --------- --------
Operating Income - Wireless $ 6,562 $ 2,426 $ 3,966 $ 2,423
======== ========= ========= ========
Number of Subscribers 129,149 53,260 53,546 40,838
Total Pops 4,198,000 2,042,400 1,710,625 1,302,165
========= ========== ========= =========
(1) At September 30, 1994, the Company's proportionate ownership
interests in the various partnerships it manages were: 50% of UCN (which
includes 100% of Buffalo, 100% of Utica-Rome, 85% of Rochester, 55% of
Syracuse, 40% of NY RSA #1, and 100% of Pageco), 70% of Alabama RSA #4
and #6, and 22.5% of NY RSA #3. At September 30, 1993, the Company's
proportionate ownership interests were: 85% of Rochester, 70% of Utica-
Rome, 100% of Pageco, 50% of Alabama RSA #4 and $6, and 22.5% of NY RSA
#3.
<PAGE>
<PAGE>14
ROCHESTER TELEPHONE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1: Consolidation
The consolidated financial information includes the
accounts of Rochester Telephone Corporation and its
affiliates (the "Company"). The Company reports its
operations in two segments: Telephone Operations and
Telecommunication Services. Telephone Operations is
comprised of 36 local telephone operating companies.
Telecommunication Services is segregated within the
Business Segment Information into two general lines of
business: 1) Network Systems and Services and 2)
Wireless Communications. Intercompany transactions
have been eliminated except for intercompany profit on
regulated company purchases (affiliate sales) from
Telecommunication Services. In the opinion of
management, prices charged by Telecommunication
Services are comparable to prices the regulated
companies would be required to pay other suppliers.
Note 2: Income Taxes
The Company files a consolidated federal income tax return.
The provision for income taxes consists of the
following (in thousands):
3 Months Ended 9 Months Ended
September 30, September 30,
1994 1993 1994 1993
Federal:
Current $14,972 $10,337 $45,390 $29,941
Deferred (667) 881 (2,730) 1,749
------- ------- -------- -------
14,305 11,218 42,660 31,690
State:
Current 1,670 1,732 5,427 4,079
Deferred (91) 10 (394) 276
------- ------- ------- -------
1,579 1,742 5,033 4,355
Total $15,884 $12,960 $47,693 $36,045
======= ======= ======= =======
Deferred income taxes have not been provided by
Telephone Operations for flow-through of temporary
differences where the regulatory agencies permit only
taxes actually paid to be recognized. At September 30,
1994, the cumulative balance of tax reductions not
previously offset by provisions for deferred federal
income taxes amounted to $43 million.
<PAGE>
<PAGE>15
ROCHESTER TELEPHONE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Similarly, the cumulative balances of tax reductions
not previously offset by provisions for deferred state
income taxes amounted to $20 million at September 30,
1994. Consistent with the provisions of Financial
Accounting Standards Board Statement No. 109 (FAS 109),
"Accounting for Income Taxes", a deferred tax liability
and a long-term deferred asset have been recorded to
reflect the impact applicable to these cumulative
reductions and the future revenue to be recovered when
these taxes become payable.
Note 3: Cash Flows
For purposes of the Statement of Cash Flows, the
Company considers all highly-liquid investments with a
maturity of three months or less when purchased to be
cash equivalents.
Actual interest paid was $33.7 million and $38.9
million for the nine month periods ended September 30,
1994, and September 30, 1993, respectively. In
addition, actual income taxes paid were $57.4 million
for the nine months ended September 30, 1994, and
$33.4 million for the nine months ended September 30,
1993.
Note 4: Stock Split
In November 1993, the Board of Directors approved
a 2-for-1 split of the Company's common stock effected
in the form of a 100 percent stock dividend with no
change in the $1.00 per share par value. The New York
State Public Service Commission (NYSPSC) approved the
split in March of 1994. The record date for the split
was April 15, 1994, and distribution of certificates
began on April 29, 1994. Historical share and per
share data have been retroactively adjusted to reflect
the split where appropriate.
Note 5: Stock Offering
In February of 1994, the Company sold 5.4 million
shares of its common stock at $42 per share in a public
offering. As part of the offering, 2,549,000 new
primary shares were issued and sold directly by the
Company and 2,885,000 shares were sold by C FON
Corporation, a wholly-owned subsidiary of Centel
Corporation, which is a wholly-owned subsidiary of
Sprint Corporation. All share and per share data
referred to in this Note are prior to the 2-for-1 stock
split in April of 1994.
<PAGE>
<PAGE>16
ROCHESTER TELEPHONE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
The net proceeds from the primary shares sold
during the offering, subject to approval by the NYSPSC,
may be used for general corporate purposes, including
expansion of the Company's lines of business.
Note 6: Earnings Per Share
Average common shares outstanding include amounts
for common stock equivalents resulting from stock
options outstanding at September 30, 1994 and September 30, 1993.
Primary earnings per common share amounts are
calculated by dividing Income Applicable to Common
Stock by the weighted average common shares and common
share equivalents outstanding, as applicable, during
each period. Earnings per share on a fully diluted
basis are computed as set forth in Exhibit 11.
Note 7: Stock Option Plans
In 1992 the Company implemented a Directors Stock
Option Plan and an Executive Stock Option Plan
("Plans"). Under the original Plans, which were
approved by shareowners in 1990, the Company was
authorized to issue a maximum of 400,000 shares of
common stock over a ten-year period.
At the April 1994 Annual Meeting, shareowners
approved amendments to the Plans which increased the
total number of option shares to 1,500,000. The
amendments also provided for an automatic adjustment in
the number of shares that may be issued as a result of
a stock split. Consequently, since the stock was split
(see Note 4) subsequent to the 1994 Annual Meeting,
there are currently 3,000,000 option shares available
for issuance.
Under both Plans, the exercise price is the fair
market value of the stock on the date of the grant of
the stock option. One third of the options become
exercisable on the first year anniversary of the grant
date. Another third become exercisable on the second
year anniversary and the final third become exercisable
on the third year anniversary of the grant date. The
options expire ten years after the date of grant.
<PAGE>
<PAGE>17
ROCHESTER TELEPHONE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Information with respect to options under the
above Plans follows:
Option Price
Shares Per Share Aggregate
------ ------------ ---------
Outstanding at
June 30, 1994 744,157 $14,939,126
Third Quarter Activity:
Granted - - -
Exercised (7,494) $15.750-$19.063 (137,011)
Cancelled (31,806) $15.750-$22.688 (632,256)
--------- ----------
Outstanding at
September 30, 1994 704,857 $14,169,859
========= ============
<PAGE>
<PAGE>18
ROCHESTER TELEPHONE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
At September 30, 1994, 84,949 shares were
exercisable and 2,280,468 shares were available for
future grant. Shares and option price per share were
adjusted for the 2-for-1 split in April, 1994.
Note 8: Postemployment Benefits
In 1992, the Financial Accounting Standards Board
released Statement No. 112, "Employers' Accounting for
Postemployment Benefits" (FAS 112) which was required
to be implemented by January 1, 1994. FAS 112
requires that projected future costs of providing
postemployment, pre-retirement benefits, such as
disability, pre-pension leave (salary continuation)
and severance pay, be recognized as an expense as
employees render service rather than when the benefits
are paid.
The Company adopted the provisions of FAS 112 effective
January 1, 1994. The Company recognized the obligation
for postemployment benefits through a cumulative effect
charge to net income of $7.2 million, net of taxes of
$3.9 million. The adoption of FAS 112 is not expected
to significantly impact future operating expense of the
Company's cash flow.
Note 9: Divestitures
On May 16, 1994, the Company completed the sale
of Minot Telephone Company in Minot, North Dakota to a
subsidiary of the Souris River Telecommunications
Cooperative. Minot Telephone was the Company's only
holding in North Dakota and the Company had reassessed
its prospects for expansion in North Dakota. The sale
of Minot Telephone Company resulted in a $9.5 million
after-tax gain, or $.13 per share.
Note 10: Commitments and Contingencies
It is anticipated that the Company will expend
approximately $86 million for additions to property,
plant, and equipment during 1994. In connection with
this capital program, the Company has made certain
commitments for the purchase of material and
equipment.
<PAGE>
<PAGE>19
ROCHESTER TELEPHONE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
The NYSPSC issued an Order on July 6, 1993 which
imposed a royalty on Rochester Tel in the amount of
two percent of the total capitalization of Rochester's
unregulated operations. Based upon an initial
interpretation of the Commission's Opinion and Order,
Rochester estimates that its effect is in the range of
$2.0 million per year. The Company vigorously
disagrees with the Commission's determination and has
sought judicial review of the Commission's Opinion and
Order. The Company's Open Market Plan, discussed in the
following two paragraphs, resolves the royalty issue
for the period of the Plan. See also Other Items in
Management's Discussion and Analysis of Financial
Condition and Results of Operations in Part I, Item 2
and Other Information - Legal Proceedings in Part II,
Item 1.
At its public meeting on October 13, 1994, the New
York State Public Service Commission unanimously
approved the Company's Open Market Plan and Corporate
Restructuring ("Plan"). The Commission's written Order
is expected in early November 1994. This landmark
decision will result in opening up the Rochester, New
York local exchange market to competition and
simultaneously allow Rochester Tel to form a holding
company. Pending approval of Rochester Tel's
shareowners scheduled in December 1994, this Plan will
become effective on January 1, 1995.
For the period of the Plan, the operating telephone
company in Rochester, New York will no longer be
regulated by the monopoly standard of rate-of-return
regulation, but instead by pure price cap regulation.
The local market for telephone service in Rochester
will be opened up to full competition. Over the
course of the next seven years, rate reductions of $21
million will be implemented for Rochester area
consumers. In addition, a total of $17 million will
be credited to the depreciation reserve. See also
Other Items in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Part
I, Item 2 and Other Information - Legal Proceedings in
Part II, Item 1.
<PAGE>
<PAGE>20
ROCHESTER TELEPHONE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
In July 1994, the Company definitively agreed to
purchase the Minnesota Cellular Telephone Company
("MSCTC") in a tax-deferred stock-for-stock
transaction. MSCTC is the non-wireline cellular
provider of service in Minnesota RSA #10 which is
south of Minneapolis. Regulatory approvals are
pending. The acquisition will be accounted for as a
pooling of interests and is expected to be completed
in the first quarter of 1995.
On October 9, 1994, the Company signed a Letter of
Intent to acquire WCT Communications, Inc., an
interexchange carrier based in Santa Barbara,
California that operates long distance and
telemanagement businesses in California and other
western states. WCT's interexchange operations, which
generated $103 million of revenues in its fiscal year
ended June 30, 1994, will be merged into Rochester
Tel's Long Distance operation, RCI Long Distance. The
October 9, 1994, Letter of Intent provided that the
Company would make a cash tender offer for all of the
stock of WCT for $7.32 in cash for each share of WCT,
of which approximately $.27 per share was to be placed
in escrow. On October 13, 1994, the parties agreed to
amend the Letter of Intent to eliminate the escrow,
and, as a result, adjusted the amount to be paid to
$7.10 per share. On November 8, 1994, the parties
reached a definitive agreement on the terms of the
Company's acquisition of WCT. Under the definitive
agreement, all shareowners will receive $6.50 per
share pursuant to a cash merger, with the exception of
Richard Frockt, WCT's chairman and 24 percent
shareholder, who has separately agreed to sell his
shares to Rochester Tel for $6.00 per share in cash
immediately prior to the merger. Mr. Frockt and
Christopher Edgecomb, WCT's Executive Vice President
and 7 percent shareholder, have agreed to vote their shares
in favor of the merger. The total cash consideration
to be paid by Rochester Tel for all the outstanding
shares of WCT will be approximately $96 million. The
transaction will be accounted for as a purchase
acquisition and is subject to necessary regulatory
approvals. The expected closing date for the
acquisition is in the first quarter of 1995.
<PAGE>
<PAGE>21
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
OVERVIEW
- --------
Consolidated net income for the three months ended
September 30, 1994 was $26.2 million, an increase of
$7.0 million, or 36.2 percent, over the comparable
period in 1993. Consolidated operating income for the
third quarter of 1994 rose 13.5 percent to $54.9
million when compared to the same period in 1993. The
increase in operating income was led by continuing
momentum in the Company's Long Distance operation and
strong results in telephone operations. With respect
to each of the Company's two primary business
segments, operating income from Telephone Operations
increased $6.2 million, or 15.8 percent, while
operating income from Telecommunication Services rose
$.3 million, or 3.4 percent. The operating results
for Telecommunication Services were negatively
impacted by a change in accounting for wireless
operations related to the formation of a 50/50 joint
venture for cellular operations in New York State.
Primary earnings per average common share were $.35
in the third quarter of 1994, a 25 percent increase
over the same period in 1993. Average common shares
outstanding rose 8.2 percent to 73.2 million shares
mainly due to additional shares issued in an equity
offering that was completed in February 1994 (see Note
5 in Notes to Consolidated Financial Statements set
forth in Part I, Item 1). All share and per share
data have been adjusted to reflect a 2-for-1 common
stock split effected in the form of a 100 percent
stock dividend in April 1994 (see Note 4 in Notes to
Consolidated Financial Statements set forth in Part I,
Item 1).
In the third quarter of 1993, certain one-time
events occurred which had a significant impact on the
comparability of the financial results. These events
were a $3.3 million software write-off, a $1.2 million
retroactive adjustment for the increase in the
statutory federal income tax rate, and a $1.0 million
after-tax gain on the sale of a telephone subsidiary
in Kansas. Adjusting for these items, earnings per
share increased from $.315 to $.35, or 11.1 percent in
the three months ended September 30, 1994 over the
same quarter in 1993.
<PAGE>
<PAGE>22
In July 1994, the Company and NYNEX Corporation
combined certain cellular interests and formed a 50/50
joint venture to operate a cellular network in upstate
New York. Financial results of the joint venture have
been reported by the Company on the equity method of
accounting, reflecting Rochester Tel's proportionate
share of the joint venture's earnings in the "Other
income and expense" section on the Consolidated
Statement of Income. Previously, the revenues and
expenses of the Company's wireless operations in New
York had been consolidated.
FINANCIAL REVIEW
Revenues and Sales
- ------------------
Total revenues and sales for the third quarter of
1994 were $243.1 million, an increase of $12.6
million, or 5.5 percent, over 1993. Sales from
Telecommunication Services for the three months in
1994 rose $10.2 million, or 12.3 percent, over the
comparable period in 1993. Strong growth in Long
Distance revenues resulted in an increase of $16.9
million, or 24.2 percent, for this business unit.
This increase is due to strong demand for consumer
services and the impact of the Mid Atlantic Telecom,
Inc. acquisition in September 1993. Wireless
Communications revenues decreased $6.1 million, or
77.4 percent, in the third quarter due to the change
in accounting for the 50/50 joint venture which was
formed in July 1994 with NYNEX Corporation. The
Company's proportionate share of wireless revenues,
however, increased $1.6 million, or 22.7 percent, in
the three months ended September 30, 1994. (See
Supplemental Wireless Operating Data schedule.)
Revenues from Telephone Operations for the three
months ended September 30, 1994 increased $2.4
million, or 1.6 percent, over 1993. The Rochester
operating company's revenues increased 3.8 percent in
the quarter due to higher switched access and feature
revenue, increased usage, and higher billing services
revenues. This increase was partially offset by
lower revenues at the Company's regional telephone
operations, which were affected by lost revenues
associated with the sale of its Minot Telephone
subsidiary in North Dakota in May 1994. Normalizing
for the sale of Minot, total Telephone Operations
revenues rose approximately $5.7 million, or 3.9
percent.
<PAGE>
<PAGE>23
Costs and Expenses
- ------------------
Total costs and expenses increased $6.1 million, or
3.3 percent in the three months ended September 30,
1994 when compared with the same period in 1993.
Operating expenses increased $11.1 million, or 8.4
percent, during the period primarily due to higher
access charges which have increased in line with
sales. This increase was offset in part by lower
expenses at the Rochester operating telephone company
related to workforce reduction programs initiated
early in 1994, the disposition of telephone
subsidiaries, and the change in accounting for
Wireless associated with the formation of the New York
State joint venture. The expenses in the third
quarter of 1993 included a one-time, $3.3 million
software write-off. Taxes other than income taxes
decreased $.9 million as a result of lower property
taxes and various operating tax refunds.
Operating Income
- ----------------
Operating income from Telephone Operations increased
$6.2 million, or 15.8 percent, in the third quarter of
1994 when compared to the corresponding quarter in
1993. At the Rochester operating company, operating
income rose 43.9 percent due to higher revenues and
lower expenses (which were favorably impacted by the
$3.3 million software write-off in 1993). Operating
income for the regional telephone companies was flat
in the third quarter of 1994 when compared to 1993 due
to the sale of Minot Telephone, which accounted for
$1.1 million in operating earnings in the third
quarter of 1993. Operating margins for the third
quarter of 1993 for the Rochester operating company
and the regional telephone companies were 27.7 percent
and 33.6 percent, respectively. In the third quarter
of 1993, the Rochester operating company margin was
24.4 percent (excluding the one-time software
write-off) and the margin for the regional telephone
companies was 33.3 percent.
Operating income from Telecommunication Services
increased $.3 million, or 3.4 percent in the third
quarter of 1994 over 1993. A 20.3 percent increase in
operating income for Long Distance was offset by a
decrease in operating income for Wireless
Communications due to the change in accounting for the
New York State joint venture. The operating margins
for Long Distance in the three month periods ended
September 30, 1994 and 1993 were 10.0 percent and 10.3
percent, respectively.
<PAGE>
<PAGE>24
Interest Expense
- ----------------
Interest expense decreased $1.0 million, or 8.7
percent, in the three month period ended September 30,
1994 when compared with the same period in 1993. This
decrease is the result of less long-term debt
outstanding related to the recall of debt in 1993 and
early 1994.
Gain on Sale of Assets
- ----------------------
In September 1993, the Company sold its S&A
Telephone subsidiary in Kansas, resulting in a pre-tax
gain of $1.0 million.
Equity Earnings (Loss) From Unconsolidated Wireless Interests
- -------------------------------------------------------------
The Company's proportionate share of earnings from
its wireless partnerships in which it has a 50 percent
or less ownership interest increased $1.9 million in
the third quarter of 1994 over 1993. This increase is
a result of a change in accounting related to the
formation of a 50/50 joint venture in July 1994
between Rochester Tel and NYNEX Corporation which
combined certain of the companies' interests in order
to operate a cellular network in upstate New York.
Beginning in the third quarter of 1994, financial
results for the joint venture have been reported on
the equity method of accounting, reflecting Rochester
Tel's proportionate share of the joint venture's
earnings. Previously, Rochester Tel's revenues and
expenses associated with its Rochester and Utica-Rome
cellular partnerships in New York had been
consolidated.
Other Income (Expense), Net
- ---------------------------
Other income (expense), net improved $1.4 million in
the three month period ended September 30, 1994 due to
increased interest income resulting from more cash
available to invest and higher interest rates. The
increase in cash available was due, in part, to the
equity offering and the sale of Minot Telephone.
<PAGE>
<PAGE>25
Income Taxes
- ------------
Consolidated income taxes increased $2.9 million, or
22.6 percent, in the third quarter of 1994 over the
same period in 1993. This increase is primarily due
to higher income, partially offset by a $1.2 million
retroactive federal income tax increase recorded in
the third quarter of 1993. The effective income tax
rate was 37.7 percent for the three months ended
September 30, 1994, as compared with 40.3 percent for
the comparable three months in 1993.
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
OVERVIEW
- --------
Consolidated net income for the nine months ended
September 30, 1994 was $76.3 million, an increase of
$19.2 million, or 33.7 percent, over the comparable
period in 1993. Results for 1994 include a $7.2
million cumulative effect charge related to a change
in accounting principle and a $9.5 million after-tax
gain from the sale of a telephone subsidiary in North
Dakota. Consolidated operating income rose $21.3
million, or 15.1 percent, during the same nine month
period. The growth in operating income is largely due
to favorable results in the Company's core telephone
operations business and rapid growth in the Long
Distance operation. Operating income from Telephone
Operations amounted to $135.0 million for the nine
month period in 1994, an increase of $15.1 million, or
12.6 percent, over 1993. Telecommunication Services
operating income rose $6.2 million to $28.1 million,
an increase of 28.5 percent.
In January 1994, the Company adopted Financial
Accounting Standards Board Statement No. 112 (FAS
112), "Employers' Accounting for Postemployment
Benefits." The Company recognized the obligation for
postemployment benefits through a cumulative effect
charge to net income of $7.2 million, net of taxes of
$3.9 million. The adoption of FAS 112 is not expected
to significantly impact future operating expense or
the Company's cash flow.
<PAGE>
<PAGE>26
Primary earnings per average common share, before
the cumulative effect of a change in accounting
principle, were $1.14 for the first nine months of
1994. This represents an increase of $.30 per share,
or 35.7 percent, over the comparable period in 1993.
The adoption of FAS 112 negatively impacted primary
earnings by $.10 per share in 1994. After the impact
of the change in accounting principle, primary
earnings per average common share were $1.04 for the
nine month period ended September 30, 1994,
representing an increase of 23.8 percent over 1993.
Average common shares outstanding for the nine months
in 1994 were 72.4 million, an increase of 5.1 million
over 1993. The increase in average common shares is
the result of the Company's equity offering that was
completed in February of 1994 (see Note 5 in Notes to
Consolidated Financial Statements set forth in Part I,
Item 1). All share and per share data have been
adjusted to reflect a 2-for-1 common stock split
effected in the form of a 100 percent stock dividend
in April 1994 (see Note 4 in Notes to Consolidated
Financial Statements set forth in Part I, Item 1).
FINANCIAL REVIEW
- ----------------
Revenues and Sales
- ------------------
Total revenues and sales for the nine months ended
September 30, 1994 were $736.7 million, an increase of
$72.4 million, or 10.9 percent, over the corresponding
period in 1993. Telecommunication Services sales rose
$57.0 million, or 25.5 percent, totaling $280.7
million for the first nine months in 1994. The growth
in Telecommunication Services was due to increasing
sales in Long Distance operations. The success in
Long Distance is the result of sales of services to
additional customers, greater usage, growth in
consumer services, price increases and the impact of
the acquisitions of Budget Call Long Distance, Inc. in
June 1993 and Mid Atlantic Telecom, Inc. in September
1993.
Revenues from Telephone Operations were $456.1
million in the first nine months of 1994, an increase
of $15.4 million, or 3.5 percent, over 1993.
Increases in local service revenues and network access
services were the primary factors for this growth.
Network access revenues rose $7.8 million, or
<PAGE>
<PAGE>27
4.8 percent during the first nine months in 1994 as a result
of higher usage and increased toll service rates. Local
service revenues increased $6.8 million, or 3.9
percent, over 1993 due to rate increases in Minnesota
and Iowa, access line growth and higher feature
revenue. Telephone Operations revenues were reduced by
$4.5 million in 1994 over 1993 as a result of the sale
of Minot Telephone in May of 1994 and S&A Telephone in
September of 1993.
Costs and Expenses
- ------------------
Total consolidated costs and expenses increased
$51.1 million, or 9.8 percent, during the first nine
months of 1994 when compared to the same period in
1993. This increase was primarily due to higher
operating expenses in the Company's Long Distance
operations, resulting from higher access charges which
have increased in line with sales, and from increased
marketing and selling expenses. Costs and expenses for
Telephone Operations remained virtually flat in 1994
over 1993 due to cost savings from work force
reductions realized in 1994 and a $3.3 million
software write-off taken in 1993. Operating expenses
at the Rochester operating company decreased 1.9
percent excluding the software write-off taken in
1993. Total costs and expenses were reduced by $3.4
million in 1994 over 1993 from the sale of the Minot
Telephone and S&A Telephone subsidiaries.
Operating Income
- ----------------
Operating income from Telephone Operations was
$135.0 million for the nine month period ended
September 30, 1994, an increase of $15.1 million, or
12.6 percent, over 1993. This increase was
attributable to positive results at both the Rochester
operating company and the regional telephone
operations. Operating margins for the first nine
months in 1994 for the Rochester operating company and
regional telephone operations were 25.2 percent and
34.2 percent, respectively. In comparison, the
Rochester operating company's margin in 1993 was 23.6
percent (excluding the one-time software write-off)
and the regional telephone's margin was 32.4 percent.
<PAGE>
<PAGE>28
Operating income from Telecommunication Services for
the first nine months of 1994 was $28.1 million, an
increase of $6.2 million, or 28.5 percent, over 1993.
The Company's Long Distance operations drove this
positive change, accounting for $5.0 million of the
increase. The operating margin for Long Distance was
9.9 percent for 1994, compared with 10.3 percent in
1993. In addition, the Company's business systems
operation, Rotelcom, improved its operating results in
1994 over 1993. The change in accounting for the
upstate New York cellular joint venture with NYNEX
resulted in a $.8 million decrease in operating income
for Wireless Communications in 1994 versus 1993.
Interest Expense
- ----------------
Interest expense for the nine month period ended
September 30, 1994 decreased $3.2 million, or 8.9
percent, over 1993. This decrease is attributable to
a lower amount of long-term debt outstanding related
to the recall of certain issues of debt during 1993
and 1994.
Gain on Sale of Subsidiaries
- ----------------------------
In May 1994, the Company sold its Minot Telephone
property in North Dakota, resulting in a pre-tax gain
of $12.9 million. In September 1993, the Company sold
its S&A Telephone subsidiary in Kansas for a pre-tax
gain of $1.0 million.
Equity Earnings (Loss) From Unconsolidated Wireless Interests
- -------------------------------------------------------------
Equity earnings from the Company's interests in
Wireless partnerships for the first nine months of
1994 were $2.2 million, an increase of $1.4 million
from the prior year. This increase was the result of
a change in accounting related to the formation of a
50/50 joint venture in July 1994 between Rochester Tel
and NYNEX Corporation which combined certain of the
companies' interests in order to operate a cellular
network in upstate New York. Financial results for
the joint venture have been reported on the equity
method of accounting, reflecting Rochester Tel's
proportionate share of the joint venture's earnings.
Previously, Rochester Tel's revenues and expenses
associated with its Rochester and Utica-Rome cellular
partnerships in New York had been consolidated.
<PAGE>
<PAGE>29
Income Taxes
- ------------
Consolidated income taxes increased $11.6 million,
or 32.3 percent, in the nine month period ended
September 30, 1994. Taxes associated with the sale of
Minot Telephone in May 1994 accounted for $3.4 million
of the increase. The remainder of the increase was
due to higher income. The effective income tax rates
for the first nine months of 1994 and 1993 were 36.4
percent and 38.7 percent, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
- -------------------------
At September 30, 1994, the Company had $197.0
million in cash and cash equivalents compared to $31.3
million at December 31, 1993, an increase of $165.7
million. This increase is primarily due to the
Company's equity offering in February 1994 (see Note 5
in Notes to Consolidated Financial Statements set
forth in Part I, Item 1) and the proceeds from the
sale of the Minot Telephone property in May 1994 (see
Note 9 in Notes to Consolidated Financial Statements
set forth in Part I, Item 1). See Consolidated Cash
Statement of Cash Flows for additional information.
Debt
- ----
At September 30, 1994, the Company's total debt,
including notes payable, amounted to $493.6 million, a
decrease of $3.2 million from December 31, 1993. This
decrease is the result of the early retirement of debt
in the first quarter of 1994 and the normal paydown of
debt during the year, offset in part by debt at the
Company's wireless subsidiary in Alabama.
Debt Ratio and Interest Coverage
- --------------------------------
The Company's debt ratio (total debt as a percent of
total capitalization) was 37.9 percent at September
30, 1994 as compared to 42.4 percent at December 31,
1993. This change is primarily due to the common
stock issuance in February 1994. Pre-tax interest
coverage before the cumulative effect of a change in
accounting principle was 5.0 times for the first nine
months of 1994, as compared with 3.6 times for the
first nine months of 1993.
<PAGE>
<PAGE>30
Capital Spending
- ----------------
The Company plans to spend a total of approximately
$86 million on capital expenditures in 1994. Of this
total, approximately $60 million will be used for
Telephone Operations and approximately $26 million
will be spent on Telecommunication Services. The
Company has a number of financing options available to
fund its capital spending program, including the use
of internally generated funds and the issuance of
additional debt or equity.
Dividends
- ---------
On September 19, 1994, the Board of Directors
declared the third quarter 1994 regular dividend of
20.25 cents per share on the Company's common stock,
payable November 1, 1994, to shareowners of record on
October 14, 1994.
OTHER ITEMS
Acquisitions / Dispositions
- ---------------------------
In July 1994, the Company definitively agreed to
purchase the Minnesota Cellular Telephone Company
("MSCTC") in a tax-deferred stock-for-stock
transaction. MSCTC is the non-wireline cellular
provider of service in Minnesota RSA #10 which is
south of Minneapolis. Regulatory approvals are
pending. The acquisition will be accounted for as a
pooling of interests and is expected to be completed
in the first quarter of 1995.
In September 1994, the Company announced its intent
to sell Ontonagan County Telephone Company and its
subsidiary, Midway Telephone, both located in
Michigan's Upper Peninsula, to Mid-South
Telecommunications, headquartered in Houston, Texas.
The pending sale is the result of the Company's plans
to expand in areas other than Michigan's Upper
Peninsula. The sale is expected to be completed in
the first half of 1995, pending regulatory approvals.
<PAGE>
<PAGE>31
On October 9, 1994, the Company signed a Letter of
Intent to acquire WCT Communications, Inc., an
interexchange carrier based in Santa Barbara,
California that operates long distance and
telemanagement businesses in California and other
western states. WCT's interexchange operations, which
generated $102 million of revenues in its fiscal year
ended June 30, 1994, will be merged into Rochester
Tel's Long Distance operation, RCI Long Distance. The
October 9, 1994, Letter of Intent provided that the
Company would make a cash tender offer for all of the
stock of WCT for $7.32 in cash for each share of WCT,
of which approximately $.27 per share was to be placed
in escrow. On October 13, 1994, the parties agreed to
amend the Letter of Intent to eliminate the escrow,
and, as a result, adjusted the amount to be paid to
$7.10 per share. On November 8, 1994, the parties
reached a definitive agreement on the terms of the
Company's acquisition of WCT. Under the definitive
agreement, all shareowners will receive $6.50 per
share pursuant to a cash merger, with the exception of
Richard Frockt, WCT's chairman and 24 percent
shareholder, who has separately agreed to sell his
shares to Rochester Tel for $6.00 per share in cash
immediately prior to the merger. Mr. Frockt and
Christopher Edgecomb, WCT's Executive Vice President
and 7 percent shareholder, have agreed to vote their shares
in favor of the merger. The total cash consideration to
be paid by Rochester Tel for all the outstanding
shares of WCT will be approximately $96 million. The
transaction will be accounted for as a purchase
acquisition and is subject to necessary regulatory
approvals. The expected closing date for the
acquisition is in the first quarter of 1995.
Open Market Plan
- ----------------
A. Background and Overview
-----------------------
At its public meeting on October 13, 1994, the New
York State Public Service Commission ("PSC")
unanimously approved the Company's Open Market Plan
and Corporate Restructuring ("Open Market Plan"), with
a number of clarifications to be discussed in its
written Order expected in early November 1994. This
landmark decision will result in opening up the
Rochester, New York local exchange market ("Rochester
Market") to competition and simultaneously allow
Rochester Tel to form a holding company. Pending
approval by Rochester Tel's shareowners scheduled for
December 1994, this Open Market Plan will become
effective on January 1, 1995 ("Effective Date").
<PAGE>
<PAGE>32
Rochester Tel initiated the Open Market Plan in a
February 1993 petition ("Petition"). After a year and
a half of negotiations and regulatory process, a joint
stipulation agreement was signed by the Company and
the PSC Staff in May 1994 ("Open Market Plan
Agreement"). Public hearings were held in Rochester
in mid-August and on September 22, 1994, the
Administrative Law Judge issued a report recommending
that the PSC approve the Open Market Plan without
change. The Open Market Plan was also endorsed by the
New York State Department of Economic Development, the
Communications Workers of America, Time Warner, the
New York State Telephone Association, and the Public
Utility Law Project.
For the period of the Open Market Plan, the
operating telephone company in Rochester, New York
will no longer be regulated by the monopoly standard
of rate-of-return regulation, but instead by pure
price cap regulation. The local market for telephone
service in Rochester will be opened up to full
competition. Over the course of the next seven years,
rate reductions of $21 million will be implemented for
Rochester area consumers. In addition, a total of $17
million will be credited to the depreciation reserve.
In addition, two new companies will be formed from
the operating assets of the existing Rochester
operating telephone company. One company ("R-Com")
will be a competitive telecommunications company which
will provide an array of services on a retail basis in
the Rochester marketplace. This company will have the
flexibility to price and introduce services as
necessary to compete. The second company ("R-Net")
will be a network company which will be regulated and
will provide services to the new competitive
subsidiary company and all other telecommunications
providers on an equal basis. The network company will
also continue to provide services to individual retail
customers. This configuration has been established to
better meet the current and emerging competition in
the marketplace.
The Company will also reorganize into a holding
company structure. Under this approach, the Company
will become a new unregulated holding company for the
consolidated organization. This structure will
provide financing flexibility to continue acquisition
and diversification efforts necessary for the
long-term growth of the business.
<PAGE>
<PAGE>33
B. The Open Market Plan Agreement
------------------------------
Restructuring of the Company
----------------------------
The Open Market Plan Agreement provides that the Company
will be reorganized into an unregulated parent holding company,
which will directly or indirectly own all of the stock of:
1. R-Net, a regulated telephone and network transport corporation
to be formed immediately prior to the Effective Date, which will
offer retail services to existing customers as well as sell and
market wholesale network services and other services to retailers
of telecommunication services in the Rochester Market;
2. R-Com, a corporation to be formed immediately prior to the
Effective Date, which will be a lightly regulated retail provider
of telecommunication services to residential and business customers
located, initially, in the Rochester Market;
3. Distributed Solutions, Inc., an existing unregulated
subsidiary of the Company, which will provide computer, billing
and other information processing services to the Company's
affiliates and to third parties ("DSI"); and
4. the Company's other existing subsidiaries, including those
that provide local exchange services outside the Rochester
Market as well as telecommunication equipment and services in the
Rochester Market and other markets.
The resulting holding company will be organized as a New York
business corporation whose businesses outside of New York State
will not be subject to PSC regulation. The holding company will
be entitled, among other actions, to issue securities and effect
acquisitions or enter new lines of business without obtaining the
approval of the PSC, subject to certain exceptions. As a result,
the Company should be able to respond more quickly to customer
needs and new opportunities. As a provider of local exchange
services in the Rochester Market, R-Net will be subject to
regulation by the PSC. As described below, the Open Market Plan
Agreement provides the basis for PSC regulation of R-Net's
service offerings, R-Net's rates, transactions between R-Net
and its affiliates and R-Net's relationship with other carriers.
Similarly, AuSable Valley Telephone Company, Inc., Highland
Telephone Company, Seneca-Gorham Telephone Corporation and
Sylvan Lake Telephone Company, Inc., the Company's other
subsidiaries which currently provide local exchange services
in New York State (the"Other NY Telcos"), are also subject
to PSC regulation. Unlike R-Net and the Other NY Telcos,
however, R-Com will be lightly regulated as a local
service resale operator in the same manner as similarly
situated providers. Neither the rates charged by R-Com
<PAGE>
<PAGE>34
nor its rate of return will be regulated, although R-Com
will be required to file tariffs containing its rates with
the PSC. In addition, local service resale operators are
subject to certain PSC billing and collection rules,
although to a lesser extent than facilities-based providers
of local exchange services.
The Company expects that the businesses to be
transferred by it pursuant to the Open Market Plan to
R-Net and R-Com, its wholly-owned subsidiaries, will
represent approximately 28% and 4%, respectively, of
the Company's consolidated revenues as of the
Effective Date, and 37% and less than 1%,
respectively, of the Company's consolidated operating
assets as of such date. DSI's revenues and operating
assets represent less than 1% of the Company's
consolidated revenues and consolidated operating
assets.
Service Offerings by R-Net
--------------------------
R-Net will use the "Rochester Telephone" name and,
subject to the ongoing authority of the PSC, provide
the retail service offerings in the Rochester Market
currently provided by the Company with the exception
of the services that are now considered to be
competitive by the PSC. These competitive services,
consisting principally of Centrex, private line
service and voice mail, will be provided by R-Com. In
addition, to the extent reasonable and upon request,
R-Net will unbundle and offer the services or network
elements available from its network facilities, on a
tariff basis, for wholesale purchase by R-Com, by
other carriers certified by the PSC to offer telephone
service or by other bona fide service providers. R-Net
will continue (1) to provide retail services until
such services are considered competitive by the PSC,
at which time they may be transferred to R-Com, and
(2) to offer White and Yellow pages directories for
the Rochester Market.
Service Offerings by R-Com
--------------------------
R-Com will provide integrated communications
services by means of buying network access from R-Net
or other carriers and packaging these services with R-Com's
own and others' product lines such as voice
mail, data services, long distance and wireless.
Initially, however, R-Com's customer base will be only
those customers for the retail services transferred to
R-Com on the Effective Date, consisting principally of
Centrex, private line services and voice mail.
Customers purchasing any services other than those
transferred to R-Com initially will be served by R-Net.
<PAGE>
<PAGE>35
Thereafter, R-Com and the other providers may
compete for customers from R-Net's customer base
through direct marketing efforts. R-Com may compete
for new customers or for R-Net's customers by
reselling services purchased from R-Net or from
another vendor or by selling services provided through
R-Com's own facilities. In the future, R-Com will
receive R-Net's customer base with respect to other
services that are deemed to be competitive by the PSC
and are transferred to R-Com, or are developed by
R-Com. While R-Com's services will initially be
limited to customers in the Rochester Market, the
Company anticipates that R-Com may eventually offer
its services outside the Rochester Market.
Rate Stabilization Plan
-----------------------
The Open Market Plan Agreement provides for a total
of $21 million in rate reductions for R-Net (the "Rate
Stabilization Plan") over a seven year period
beginning January 1, 1995, subject to termination by
either the Company or the PSC after five years (the
"Rate Period"). The Rate Stabilization Plan also
precludes R-Net from increasing basic residential and
business telephone service rates during the Rate
Period. In consideration of the rate reductions, the
Rate Stabilization Plan subjects R-Net's local
exchange services to price-cap regulation rather than
incentive earnings regulation to which the Company's
local exchange services in the Rochester Market are
currently subject. While the Rate Stabilization Plan
requires R-Net to reduce its rates during the Rate
Period, the Company cannot predict the effect of the
Rate Stabilization Plan on the Company's results of
operations because such effect is also dependent on
the extent of usage of R-Net's network and on R-Net's
costs. The rates provided in the Rate Stabilization
Plan were designed to permit R-Net to recover its
costs and to earn a reasonable rate of return,
calculated using the methodology utilized by the PSC
to set the rate of return earned by providers of local
exchange services in New York State. There is no
assurance, however, that R-Net will recover its costs
or earn a reasonable rate of return.
<PAGE>
<PAGE>36
During the Rate Period, depreciation of R-Net's
assets will be increased by an aggregate of $17
million. R-Net can decide when to increase the
depreciation provided that, by the end of the first
year, the amount shall be at least $5 million and, by
the end of the fifth year, the cumulative amount shall
be at least $15 million.
Termination of the Rate Stabilization Plan
------------------------------------------
Although the Rate Stabilization Plan is scheduled to
expire on December 31, 2001, it may be terminated by
either R-Net or the PSC upon the filing of a rate
proceeding seeking permanent or temporary rates to be
effective on January 1, 2000. Even if the Rate
Stabilization Plan is terminated, however, the other
terms of the Open Market Plan Agreement will remain in
effect unless specifically modified by the PSC, except
that the PSC may not modify any of the provisions
relating to the restructuring of the Company into an
unregulated holding company.
Royalty Dispute
---------------
The Open Market Plan Agreement addresses issues
arising out of the PSC order issued on July 6, 1993
(the "Royalty Order") imposing an annual royalty on
the Company in the amount of 2% of the total
capitalization of the Company's unregulated
operations. The PSC justified its decision in the
Royalty Order on, among other reasons, the benefit to
the Company's unregulated operations from their use of
the Rochester Telephone name and reputation. Under the
Open Market Plan Agreement, the PSC will not impute a
royalty on either the Company or R-Net during the Rate
Period or for any prior period, subject to limited
exceptions. Upon the termination of the Rate Period,
however, the PSC may impute a royalty for the period
beginning on the termination date, subject to the
outcome of any litigation regarding the royalty. The
Company can continue to pursue the litigation it
instituted to challenge the Royalty Order. The Company
has filed a motion with the New York State Court of
Appeals seeking leave to appeal a decision of the
Appellate Division of the New York State Supreme Court
which ruled that the Royalty Order was valid.
Restrictions on Affiliate Transactions
--------------------------------------
The Open Market Plan Agreement provides that any
transaction between R-Net and the Company, or between
R-Net and any of its affiliates, will be conducted at
arm's length. Transactions between R-Net and its
affiliates are generally limited to tariffed purchases
and sales subject to certain exceptions.
<PAGE>
<PAGE>37
R-Net's Relationship with Other Carriers
----------------------------------------
The Open Market Plan Agreement contains certain
provisions to ensure that similarly situated third
party carriers can use R-Net's network on a
nondiscriminatory basis. All competing providers of
local exchange services will have the same access to
R-Net's network functionalities, services and data
bases, upon the same terms and conditions as R-Net
provides such functionalities and data bases to any
affiliate or other entity. Moreover, R-Net is
precluded from providing a competitive information
advantage to any affiliate, including R-Com.
Upon implementation of the Open Market Plan,
customers' current telephone numbers will remain the
same, no matter which telephone reseller is chosen. If
a customer changes network carriers, however, the
customer's telephone number will be retained only at
the election of the competing carrier.
C. Uncertainties Under the Open Market Plan
----------------------------------------
There is no assurance that the Open Market Plan will
be advantageous to shareowners. In forming its belief
that, overall, the Open Market Plan is in the best
interests of the Company and its shareowners, the
Board of Directors considered the possible effects of
the Open Market Plan described below.
1. Increased Competition in Rochester Market. The
Open Market Plan is designed to remove barriers to and
may hasten local telephone competition in the
Rochester Market because the terms of the Open Market
Plan Agreement provide for (a) the full
interconnection of competing local networks, including
reciprocal compensation for terminating traffic, (b)
equal access to network databases, (c) access to local
telephone numbers and (d) telephone number
portability. Indeed, Time Warner Communications and
other potential competitors of the Company have
already announced an intention to provide basic local
exchange services in the Rochester Market. The
inherent risk associated with opening the Rochester
Market to competition is that some customers will
purchase services from competitors, which would reduce
the number of customers of the Company and potentially
cause a decrease in the Company's revenues and
profitability. The Company believes, however, that
usage of its network following implementation of the
Open Market Plan will increase, thereby offsetting, to
some extent, the loss of revenues from end-user
customers. Increased competition may also result in
<PAGE>
<PAGE>38
price decreases which are not offset by cost
reductions. The Company believes, however, that R-Net
and R-Com will be able to compete profitably in the
Rochester Market following implementation of the Open
Market Plan, especially because (1) the Open Market
Plan will enable the Company to broaden the scope and
quality of its competitive offerings and (2) price-cap
regulation will not require R-Net to rebate earnings
achieved through operating efficiencies that
previously would have been shared with customers.
Moreover, the Company believes that local exchange
services in the Rochester Market are already subject
to competition from alternative transmission media
which provide access services to long distance
companies. The Company believes that this trend will
continue whether or not the Open Market Plan is
implemented. Accordingly, the Company believes that
the Open Market Plan allows it to anticipate the
inevitable erosion of its market share in local
exchange services on terms that the Company believes
will be in the best interests of its customers,
employees and shareowners.
2. Risks of Rate Stabilization Plan. While the price-
cap regulation incorporated in the Open Market Plan
Agreement will provide certain benefits to the
Company, the terms of the Open Market Plan Agreement
will pose certain economic risks to the Company. The
Rate Stabilization Plan incorporated in the Open
Market Plan Agreement provides for a total of $21
million in rate reductions for R-Net over the Rate
Period. During the Rate Period, the rates charged by R-Net
for basic residential and business telephone
service may not be increased for any reason.
Accordingly, R-Net's rate of return may be less than
the return permitted in current rate proceedings by
the PSC to other providers of local exchange services
in New York State. While the Rate Stabilization Plan
requires R-Net to reduce its rates during the Rate
Period, the Company cannot predict the effect of the
Rate Stabilization Plan on the Company's results of
operations because such effect is also dependent on
the extent of usage of R-Net's network and on R-Net's
costs. The rates provided in the Rate Stabilization
Plan were designed to permit R-Net to recover its
costs and to earn a reasonable rate of return,
calculated using the methodology utilized by the PSC
to set the rate of return earned by providers of local
exchange services in New York State. There is no
assurance, however, that R-Net will recover its costs
or earn a reasonable rate of return.
<PAGE>
<PAGE>39
3. Restraints on the Company's Control of R-Net,
Including Dividend Restrictions. Although R-Net will
be a wholly-owned subsidiary of the Company, the
Company's ability to control the management and
operations of R-Net will be restricted by various
provisions of the Open Market Plan Agreement,
including requirements that:
(a) the members of the board of directors of R-Net
will consist of a majority of persons who are
neither officers or employees of R-Net nor directors,
officers or employees of the Company or any of its
affiliates ("Outside Directors"), whose nomination,
following the initial selection of directors by the
Company, will be the responsibility of a committee of
Outside Directors;
(b) only one of R-Net's directors may
simultaneously serve as a director, officer or
employee of the Company or any of its affiliates other
than R-Net;
(c) the members of the audit committee of the
board of directors of R-Net will all be Outside
Directors;
(d) the annual compensation (including cash,
bonuses and options to purchase the Company's stock)
of officers and employees of R-Net will be based solely
on the service quality and profitability of R-Net;
(e) the officers and senior management employees
of R-Net, together with certain of their family
members, may not own in the aggregate in excess of 10%
of the outstanding shares of the Company's stock,
including ownership through stock options and R-Net's
savings plan;
(f) the person holding the position of legal
counsel to R-Net will be responsible for the provision
of legal services to R-Net only; and
(g) transactions between R-Net and its
affiliates will be subject to pricing and other
restrictions under the Open Market Plan Agreement.
In addition, the Open Market Plan Agreement also
contains the following financial covenants which are
intended to ensure that R-Net will not lack the
financial strength to provide quality service:
<PAGE>
<PAGE>40
(a) dividends will not be paid by R-Net to the
Company if (i) R-Net's senior debt has been downgraded
to "BBB" by Standard & Poor's ("S&P") or the
equivalent rating by other rating agencies or is
placed on credit watch for such a downgrade or (ii) a
service quality penalty is imposed under the Open
Market Plan Agreement;
(b) dividends also will not be paid unless R-
Net's directors certify that such dividends will
neither impair R-Net's service quality nor its ability
to finance its short and long term capital needs on
reasonable terms while maintaining an S&P debt rating
target of "A";
(c) the assets of R-Net may only be pledged for
the debt obligations of R-Net;
(d) R-Net will initially have at least $40
million of public long-term debt, which, at the
election of the Company and subject to PSC approval,
will either be (i) issued by R-Net within 90 days of
the Effective Date, provided that the effective cost
of such debt to customers shall not exceed 8% or (ii)
issued by the Company prior to the Effective Date and
assigned to R-Net as soon as practicable thereafter,
provided, that, in either case, such debt will be
rated at least "A" by S&P and at least "A2" by Moody's
Investor Services;
(e) any initial intercompany debt owed by R-Net
to the Company must consist of components such that,
in the aggregate, the interest rate and maturity shall
match the terms of the public debt issued by the
Company prior to the Effective Date for the rendition
of public service in the Company's pre-restructuring
service territory;
(f) the ratio of R-Net's long-term debt to total
capital may not exceed 40.37% on the Effective Date;
and
<PAGE>
<PAGE>41
(g) R-Net will endeavor to maintain sufficient
public debt to support continuation of separate debt
ratings from three major rating agencies. While a
majority of the members of the Board of Directors of R-Net
will be Outside Directors, the approval of the Company,
as the sole shareowner of R-Net, will be required under
New York law in order for R-Net to make certain
extraordinary transactions, amendments of the R-Net
Certificate of Incorporation and certain amendments of
the R-Net By-Laws. In addition, under the R-Net Certificate
of Incorporation, approval of the Company, as the sole
shareowner of R-Net, will also be required for (1) the
adoption of any operating or capital budgets or financing
plans or, to the extent not provided for in a budget or
plan approved by the shareowners, the making or incurrence
of any investments, capital expenditures, indebtedness
or off-balance sheet liabilities, in each case in excess
of $10 million in the aggregate in any fiscal year of R-Net,
(2) the execution of material contracts or (3) the appointment
of R-Net officers.
4. Holding Company Structure. Upon reorganization of the
Company to an unregulated parent holding company, the
Company will not directly own any material assets other
than its interest in the capital stock of its subsidiaries,
including R-Net and R-Com. In addition, as described above,
dividends from R-Net to the Company are subject to
restrictions under the Open Market Plan Agreement.
5. Potential Diversification Risk. On the Effective Date,
the PSC will cease to regulate the Company's ability to
finance or expand its businesses outside of New York State.
The Company will therefore be able to make acquisitions
and investments, enter into new lines of business and
geographic areas, issue equity securities and incur
long-term indebtedness without PSC approval, subject to
certain exceptions. As a result, the Company will have
greater flexibility to finance and expand its existing
businesses. Thus, upon implementation of the Open
Market Plan, the Company may be able to pursue
opportunities with both greater potential profits and
greater business risk than it could currently pursue
as a telephone company subject to the authority of the
PSC. While the pursuit of such opportunities may
conceivably result in increased volatility of the
Company's securities, it may also result in potentially
greater returns to the Company and its shareowners,
although there is no assurance of greater returns.
There can be no assurance that any expansion of the
Company's business will be successful or, if unsuccessful,
that it will not have a direct or indirect adverse
effect on the Company as a whole. It is the current
intention of the Company to engage only in telecommunication
related businesses.
<PAGE>
<PAGE>42
6. Royalty Dispute. While the PSC has agreed that no
royalty will be imposed by the PSC against the Company
or R-Net during the Rate Period or for any prior
period, subject to limited exceptions, the PSC will
not be precluded from seeking any royalties pursuant
to the Royalty Order, as it may be modified as a
result of judicial appeal, subsequent to the
expiration of the Rate Period. The Company estimated
the effect of the Royalty Order, if imposed in 1994,
to be in the range of $2.0 million per year. Under the
Open Market Plan Agreement, however, the Company is
permitted to continue its litigation challenging the
Royalty Order. The Company has filed a motion with the
New York State Court of Appeals seeking leave to
appeal a decision of the Appellate Division of the New
York State Supreme Court which held that the Royalty
Order was valid.
7. Overlap of Retail Services. The Open Market Plan
ultimately agreed to by the Staff, in contrast to the
proposal initially filed by the Company in the
Petition, will not completely divide the Company's
telephone operations in the Rochester Market between a
wholesale provider of local network services and a
retail provider of diversified telecommunication
services. Rather, upon implementation of the Open
Market Plan, R-Com will have the Company's existing
customer base for only a limited number of competitive
retail services consisting of Centrex and high
capacity private lines and certain currently
nonregulated services (e.g., customer premises
equipment). R-Net, while offering wholesale services
to R-Com and other telecommunication companies, will
be required to provide on a retail basis those
telecommunication services which the PSC does not yet
deem competitive. To the extent R-Net provides certain
services to the same retail customers who may be
served by R-Com for other services, the Company will,
in the aggregate, incur certain sales and service
related expenses that are duplicated by both R-Net and
R-Com. The Company expects, however, that as more
services presently offered by R-Net become
competitive, the PSC will approve the termination of
the provision of those services by R-Net in favor of
service by R-Com, which will result in a reduction in
R-Net's retail related expenses. In addition, R-Com
can compete for R-Net customers to the same extent as
any other competitor.
<PAGE>
<PAGE>43
8. Compliance Costs. Under the Open Market Plan Agreement,
R-Net and its affiliates will be obligated to furnish
various periodic reports to the Staff and the PSC to
demonstrate compliance with the terms of the Open Market
Plan Agreement, including terms designed to ensure the
fairness of transactions between R-Net and its affiliates
and the absence of discrimination of R-Net against
non-affiliates. Although the Company is currently
subject to PSC reporting requirements, the obligations
under the Open Market Plan Agreement will represent an
incremental cost to the Company, but the Company does not
believe such costs will be material to the Company as a whole.
These additional ongoing costs will, however, be offset to
the extent the Company is no longer required to seek PSC
approval for unregulated operations upon reorganization to
a holding company structure.
9. FCC Waivers/Transfers. Although approval by the Federal
Communications Commission (the "FCC") is not required to
effect the Open Market Plan, the Company has sought waivers
from certain of the FCC's rules to permit greater flexibility
with respect to R-Net's tariff and billing procedures. In
addition, the Company intends to apply to the FCC for approval
of the transfer of certain common carrier radio licenses from
one of its subsidiaries to R-Net in connection with the
Company's restructuring. Although the FCC may not act on
these waivers and license transfers prior to the Effective
Date, the failure to obtain these waivers and license
transfers will not have a material adverse effect on R-Net
nor the Company. The Company believes that the FCC will
grant the requested waivers and approve the transfer of the
radio licenses to R-Net.
Corporate Name Change
- ---------------------
On October 18, 1994, the Company announced that it
is changing its name to Frontier Corporation effective
January 1, 1995, pending shareowner approval scheduled
for December 1994. The name change is intended to
portray a more consistent image for the nationwide
scope of the Company's vision of being the premier
provider of integrated communications services.
Under the Company's new identity system, the Company
will be renamed Frontier Corporation (see previous
section on Open Market Plan). The competitive company
to be formed in the Rochester, New York market will be
named Frontier Communications of Rochester, Inc. The
network company in Rochester will retain the Rochester
Telephone name. Virtually all of the Company's other
telephone and telecommunications properties will be
changing their names to a Frontier branding system.
Organizationally, all of the companies will report
into Frontier Corporation.
<PAGE>
<PAGE>44
Regulatory Proceedings
- ----------------------
In 1986, the Company and the NYSPSC entered into
an agreement which allowed the Company to pursue
certain acquisitions and investments without further
Commission approval. This agreement was amended in
1987, 1989 and 1991. The 1991 amendment preceded the
acquisition of the Vista Telephone properties in
Minnesota and Iowa from Centel Corporation. Certain
portions of the amendment expired in June 1993, and at
the request of the Company, the Commission extended
the amendment to December 1993. The Company's Open
Market Plan and Corporate Restructuring ("Plan")
approved by the Commission on October 13, 1994, will
eliminate the necessity of this agreement. Until the holding
company reorganization becomes effective, on January 1,
1995 after shareowner approval, it must continue to petition
the Commission for approval of future acquisitions.
In 1984, the NYSPSC initiated a proceeding to
investigate whether or not the Company's unregulated
subsidiaries should pay a royalty to the Rochester,
New York operating company for alleged intangible
benefits received from the use of the Rochester
Telephone name and reputation. The proceeding was
reopened in 1990. In its Opinion and Order in Case
87-C-8959, issued July 6, 1993, the Commission, by a
three-to-two vote, imposed a royalty in the amount of
two percent of the total capitalization of Rochester
Tel's unregulated operations. Based upon an initial
interpretation of the Order, Rochester Tel estimates
that the effect of the Order is in the range of $2
million per year. The Company vigorously disagrees
with the Commission's determination and has sought
judicial review of the Commission's Opinion and Order.
See Part II, Item 1, Legal Proceedings, for more
information. The Open Market Plan discussed in Part I
above, approved by the NYSPSC on October 13, 1994,
resolves the royalty issue for the period of the Plan.
Incentive Regulation
- --------------------
In February 1994, the Commission approved an
incentive regulation agreement which reduced the
Rochester, New York operating company's revenue
requirement by $5 million in 1993 and $9.5 million in
1994, plus interest. In 1994, 50 percent of the
Rochester, New York operating company's earnings above
the authorized return on equity are subject to sharing
with ratepayers. However, under the Open Market Plan,
the 1994 amounts will be credited to the Company's
depreciation reserve. The authorized return is
currently 10.9 percent. Also, if the Rochester, New
York operating company's service levels in 1994 drop
below 1992 levels, the Company will be subject to a
penalty of one-half of one percent of its local
service and intraLATA toll revenues.
<PAGE>
<PAGE>45
Part II - Other Information
- ---------------------------
Item 1 - Legal Proceedings
On June 11, 1992, a group of corporate plaintiffs
consisting of Cooper Industries, Inc., Keystone
Consolidated Industries, Inc., The Monarch Machine
Tool Company, Niagara Mohawk Corporation, and Overhead
Door Corporation commenced an action in the United
States District Court for the Northern District of New
York seeking contribution from Rotelcom Inc., a
wholly-owned subsidiary of the registrant held through
intervening subsidiaries ("Rotelcom"), and fourteen
other corporate defendants for environmental "response
costs" incurred by the plaintiffs pursuant to a decree
entered into by plaintiffs with the United States
Environmental Protection Agency (the "EPA"). Two
additional defendants were named earlier this year.
In addition to Rotelcom, the current defendants are:
Agway, Inc., BMC Industries, Inc.; Borg-Warner
Corporation; Elf Atochem North America, Inc.; Mack
Trucks, Inc.; Motor Transportation Services, Inc.;
Pali Trinity Micro Corporation; The Raymond
Corporation; Redding-Hunter, Inc.; Smith Corona
Corporation; Sola Basic Industries, Inc.; Wilson
Sporting Goods Company; Philip A. Rosen; Harvey M.
Rosen; City of Cortland; and New York State Electric &
Gas Corporation.
The consent decree concerned the clean-up of an
environmental Superfund site located in Cortland, New
York. It is alleged that the corporate defendants
disposed of hazardous substances at the site and are
therefore liable under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA").
The Company anticipates that a final Record of
Decision ("ROD") will be issued by the EPA in March
1995 and will prescribe the remediation requirements
for the site. The aggregate amount of remediation
costs to be incurred by the plaintiffs will be based
on the requirements of the ROD. The total cost of
remediation at the site is uncertain, although
estimates have recently ranged from $25 million and
$100 million. There has been no allocation of
liability as among or between the plaintiffs or
defendants. The extent to which plaintiffs can
recover any of these costs from the defendants,
including Rotelcom, will be determined at a trial
which is scheduled to begin in July 1995. The action
is currently in discovery. Rotelcom has been
vigorously defending this lawsuit. However, the
Company is unable to predict the outcome at this time.
<PAGE>
<PAGE>46
In its Opinion and Order in Case 87-C-8959, issued
July 6, 1993, the NYSPSC, by a three-to-two vote,
imposed a royalty upon the Company in the amount of
two percent of the total capitalization of the
Company's unregulated operations. The NYSPSC
justified the royalty on two grounds: first, that
ratepayers are entitled to protection from the
potential for cost misallocations and increased risk
that accompany diversification of the Company's basic
telephone business; and second, that the Company's
unregulated operations benefit from their use of the
Rochester name and reputation. The NYSPSC rejected
the Company's statutory and constitutional defenses
and concluded that it possessed the authority under
the Public Service Law to impose a royalty and that
its imposition is not unconstitutional. Based upon an
initial interpretation of the Order, the Company
estimates that its potential effect is in the range of
$2 million per year. The royalty, if implemented,
would be an imputation against the Rochester, New York
operating company's revenue requirement from regulated
intrastate operations. The NYSPSC ordered the
Rochester, New York operating company to file, by
August 5, 1993, an accounting plan to account for the
royalty amount, together with a plan for returning
such amount to ratepayers. Although the Rochester,
New York operating company requested the NYSPSC to
waive this requirement, the NYSPSC denied this
request. In compliance with the order of the NYSPSC,
on August 5, 1993, the Rochester, New York operating
company filed its plan.
On August 6, 1993, the Rochester, New York operating
company filed with Supreme Court, Albany County, its
petition pursuant to Article 78 of the New York Civil
Practice Law and Rules seeking judicial review of the
NYSPSC's Opinion and Order. By order dated October 7,
1993, this proceeding was transferred to the Appellate
Division, Third Department. The Company filed its
Brief on December 16, 1993. Respondents' briefs were
filed on February 28, 1994, and reply briefs were
filed on March 16, 1994. Oral argument was held on
April 26, 1994. On June 30, 1994, the Appellate
Division unanimously upheld the Commission's Order.
On July 29, 1994, the Company filed a Notice of Appeal
and a Motion for Leave To Appeal with the New York
Court of Appeals. The Company is vigorously
contesting this case and is of the opinion that it
will ultimately prevail, but cannot predict the
outcome with any certainty at this time.
The Company's Open Market Plan, which was approved
by the NYSPSC on October 13, 1994 as discussed
previously in Management's Discussion and Analysis of
Financial Condition and Results of Operations set
forth in Part I, Item 2, resolves the royalty issue
for the period of the Plan.
<PAGE>
<PAGE>47
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Computation of Earnings per Share of Common
Stock on a Fully Diluted Basis (Unaudited)
27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed six (6) Forms 8-K during the
quarter ended September 30, 1994 and through the
filing date of this Form 10-Q as follows:
Financial
SEC Filing Date Item No. Statements
July 1, 1994 5 None
July 14, 1994 5 None
October 11, 1994 5 None
October 13, 1994 5 None
October 14, 1994 5 None
October 15, 1994 5 None
<PAGE>
<PAGE>48
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCHESTER TELEPHONE CORPORATION
---------------------------------
(Registrant)
Dated: November 14, 1994 By /s/Louis L. Massaro
-----------------------------
Louis L. Massaro
Corporate Vice President and Treasurer
(and Principal Financial Officer)
<PAGE>
<PAGE>49
INDEX TO EXHIBITS
Exhibit
Number Description
11 Computation of Earnings Filed herewith
per Share of Common Stock
on a Fully Diluted Basis
(Unaudited)
27 Financial Data Schedule Filed herewith
Exhibit 11
Rochester Telephone Corporation
Computation of Earnings per Share of Common Stock
on a Fully Diluted Basis (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
(In thousands,
except per share data) 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Income applicable to common $25,903 $18,940 $75,411 $56,195
stock
Add: Interest on convertible
debentures 139 139 416 416
------- ------- ------- -------
26,042 19,079 75,827 56,611
Less: Increase in related
federal income taxes 49 49 145 145
------- ------- ------- -------
Adjusted income applicable to
common stock $25,993 $19,030 $75,682 $56,466
======= ======= ======= =======
Average Common Shares Outstanding
(excluding common stock
equivalents) 73,157 67,660 72,283 67,263
Adjustments for:
Convertible Debentures 252 503 252 503
Stock Options 91 88 66 76
------- ------- ------ ------
Adjusted common shares assuming
conversion of outstanding
Convertible Debentures and
Stock Options at beginning of
each period 73,500 68,251 72,601 67,842
======= ====== ====== =======
Earnings per share of common
stock on a fully diluted basis $ .35 $ .28 $ 1.04 $ .83
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ROCHESTER TELEPHONE CORPORATION'S FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1994 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 196,963
<SECURITIES> 9,057
<RECEIVABLES> 171,386
<ALLOWANCES> 0
<INVENTORY> 9,173
<CURRENT-ASSETS> 406,161
<PP&E> 1,740,343
<DEPRECIATION> 755,018
<TOTAL-ASSETS> 1,631,893
<CURRENT-LIABILITIES> 182,840
<BONDS> 490,023
<COMMON> 73,160
0
22,777
<OTHER-SE> 713,929
<TOTAL-LIABILITY-AND-EQUITY> 1,631,893
<SALES> 0
<TOTAL-REVENUES> 736,746
<CGS> 15,870
<TOTAL-COSTS> 573,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,886
<INTEREST-EXPENSE> 32,636
<INCOME-PRETAX> 131,191
<INCOME-TAX> 47,693
<INCOME-CONTINUING> 83,498
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (7,197)
<NET-INCOME> 76,301
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
