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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 16, 1995
FRONTIER CORPORATION
(Exact name of registrant as specified in its charter)
New York 1-4166 16-0613330
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
180 South Clinton Avenue, Rochester, New York 14646
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 777-7100
Item 2 Acquisition or Disposition of Assets
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On August 16, 1995, the Registrant and ALC Communications
Corporation ("ALC") completed the closing of the merger of
Frontier Subsidiary One, Inc., a wholly-owned subsidiary of
the Registrant, with and into ALC, creating the fifth largest
long distance carrier in U.S.
Item 7 Financial Statements
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Item 7. The Registrant and ALC Communications Corporation
have completed the closing of the merger on August 16, 1995.
The Registrant hereby files its 1994 Restated Supplementary
Consolidated Financial Statements and Supplementary Management's
Discussion and Analysis. These Supplementary Consolidated
Financial Statements and Supplementary Management's Discussion
and Analysis have been restated to account for the merger with
ALC Communications Corporation using "pooling of interests"
accounting treatment.
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The supplementary financial statements specifically include
the following:
Financial Statements
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Frontier Corporation
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Supplementary Management's Discussion of Results of Operations
and Analysis of Financial Condition
Supplementary Report of Independent Accountants
Supplementary Business Segment Information
Supplementary Consolidated Statement of Income
Supplementary Consolidated Balance Sheet
Supplementary Consolidated Statement of Cash Flows
Supplementary Consolidated Statement of Shareowners' Equity
Supplementary Notes to Consolidated Financial Statements
Exhibits
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23-1 Consent of Accountants (Price Waterhouse)
(Included in Report of Independent Accountants)
23-2 Consent of Accountants (Ernst & Young)
27 Financial Data Schedule
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Supplementary Management's Discussion of Results of
Operations and
Analysis of Financial Condition
DESCRIPTION OF BUSINESS
Frontier Corporation (formerly Rochester Telephone
Corporation) is a diversified telecommunications company,
serving more than 2 million customers throughout the United
States. Frontier Corporation's principal lines of business
are reported in two segments: Telecommunication Services and
Telephone Operations. Telecommunication Services includes
Frontier's long distance operations, cellular and paging
operations, and telecommunications equipment sales.
Telephone Operations is comprised of 36 local telephone
companies providing service to over 900,000 access lines in
the Northeast, Midwest and South.
1994 OVERVIEW
Frontier Corporation (the Company) completed a landmark
year in 1994, both financially and organizationally.
Revenues increased 16.0 percent to exceed $1.6 billion, and
operating income rose to $329 million, representing record
earnings for the Company. Earnings per share increased 39.8
percent in 1994 to $1.16 per share, before the impact of a
change in accounting for certain employee benefits.
Significantly, late in 1994, the Company secured state
regulatory and shareowner approval of an unprecedented plan
to open the Rochester, New York local service market to
competition in return for local service "price cap"
regulation in the Rochester market and approval for the
formation of a holding company. The new regulatory plan for
Rochester, New York removes the limit on earnings that was
present under "rate of return" regulation for the duration
of the plan. Finally, in recognition of the changing nature
and expanding geographic presence of the Company, our
shareowners approved changing the name of our company to
Frontier Corporation.
Financial Highlights
The Company continued its recent pattern of substantial
growth, driven mainly by its competitive long distance
business which had revenues of $1.0 billion in 1994, an
increase of $219.3 million, or 26.9 percent, over 1993.
Overall, Frontier Corporation's revenue mix has shifted away
from dependence upon regulated revenue sources and towards
non-regulated revenue streams, with the Telecommunication
Services segment accounting for 63.4 percent of total
revenue in 1994. This compares to 54.7 percent in 1992. As
a result of the diversification efforts of the Company over
the past several years, the Rochester, New York operating
telephone company accounted for only 18.3 percent of total
revenues in 1994, down from 46 percent as originally
reported in 1990.
Operating income for 1994 was $328.7 million, which
represents an increase of 28.2 percent over 1993.
Consolidated net income reached an all time high in 1994 at
a level of $180.1 million, a 48.6 percent increase over
1993. The percentage growth in net income was higher than
the corresponding percentage growth in operating income due
to the combined impact of lower borrowing costs, higher
investment income and the sale of our only regional
telephone company in North Dakota, which resulted in an
$11.3 million pre-tax gain. Including a one-time charge
relating to a change in the method of accounting for certain
postemployment benefits, earnings per share were $1.12 for
the year. Excluding both the one-time charge for the
accounting change and the gain from the sale of the
telephone company in North Dakota, earnings per share were
also $1.12, an increase of 34.9 percent over 1993.
On March 17, 1995, the Company finalized the
acquisition of all of the outstanding shares of American
Sharecom, Inc. (ASI), a long distance company headquartered
in Minneapolis, Minnesota. ASI was one of the largest
privately owned long distance companies in the country with
annual revenues of approximately $125 million. ASI's sales
operations are concentrated in the Midwest, Northwest and
California. The Company acquired all of the outstanding
shares of ASI in exchange for 8.7 million shares of Frontier
Corporation common stock.
On August 16, 1995, the Company merged its long
distance operations with ALC Communications Corporation
(ALC), a long distance company headquarted in Bingham Farms,
Michigan by acquiring all of its outstanding shares. The
merger with ALC, which had 1994 revenues of $568 million,
made Frontier the fifth largest long distance company in the
country. ALC is a nationwide provider of long distance
telecommunication service primarily to the small and medium
sized business market. The Company acquired all of the
outstanding shares of ALC in a two for one exchange of 69.2
million shares of Frontier Corporation common stock. In
addition, the 7.1 million ALC stock options and warrants
were converted into 14.2 million Frontier stock options and
warrants.
The ASI and ALC transactions were accounted using the
pooling of interest method of accounting, and all historical
financial information has been restated to reflect the
results of operations of these entities.
The increase in the number of common shares outstanding
in 1994 was impacted by two events. In February 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,
2.5 million new common shares were issued and sold directly
by the Company and 2.9 million shares were sold by C FON
Corporation, a subsidiary of Sprint Corporation. In April
1994, the Company implemented 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. All historical share and per share data have
been retroactively adjusted to reflect the split, unless
specifically indicated otherwise.
Corporate Name Change and Restructuring
In December 1994, upon receiving shareowner approval,
the Company reorganized as a holding company and changed its
name from Rochester Telephone Corporation to Frontier
Corporation. The new name reflects not only the pioneering
heritage of our past but also our willingness to embrace the
challenges of the future. The name also symbolizes the
change from a company focused primarily in Rochester, New
York to a company that is expanding geographically and
currently operates nationwide.
Also in December 1994, shareowners approved an
unprecedented and landmark restructuring plan, referred to
as the Open Market Plan Agreement, between the Company, the
staff of the New York State Public Service Commission (PSC),
and certain other interested parties. This seven year
Agreement, with an effective date of January 1, 1995, was
approved by the PSC on October 13, 1994 and allowed the
Company to permanently reorganize into a holding company
structure. The restructuring into a holding company allows
the Company to pursue acquisitions and diversification
initiatives without many of the financial and regulatory
constraints present under its prior corporate status. Under
the Agreement, the Rochester, New York local exchange market
has been opened to competition. The Rochester, New York
operating company, which formerly was subject to rate of
return regulation, will operate under "price" regulation for
the life of the agreement. This removes the limit on the
Rochester operating company's earnings that was present
under rate of return regulation.
Frontier Corporation (formerly Rochester Telephone
Corporation) now owns directly or indirectly all of the
stock of:
(1) Rochester Telephone Corp., a new regulated
telephone and network transport company which holds
virtually all of the local service assets used in the
Rochester, New York market. Rochester Telephone offers
retail local telephone service and also markets wholesale
network services and other services to other retail
providers of telecommunication services in the Rochester
market,
(2) Frontier Communications of Rochester, Inc.,
a new retail provider of telecommunication services to
residential and business customers located in the Rochester,
New York market,
(3) Frontier Information Technologies Inc.
(formerly Distributed Solutions, Inc., or DSI), an existing
subsidiary of the Company, providing computer, billing and
other information processing services primarily to the
Company's affiliates,
(4) Frontier Communications International Inc.
(formerly RCI Long Distance, Inc.), an existing subsidiary
of the Company, and ALC, acquired in August 1995 in a stock
for stock exchange, providing long distance
telecommunication services to business and residential
customers nationwide, and
(5) the Company's other existing subsidiaries,
including our wireless operations and 35 companies which
provide local telephone service outside the Rochester, New
York market, as well as companies that provide
telecommunication equipment and services in the Rochester
market and other markets.
Renamed as Frontier Corporation after shareowner
approval on December 19, 1994, the Company is entitled to
issue securities and effect acquisitions or expand existing
lines of business without obtaining the approval of the PSC,
subject only to the same exceptions as any other holding
company operating in New York State. As a result, the
Company should be able to respond more quickly to customer
needs and new opportunities.
The establishment of Frontier Communications of
Rochester Inc. allows the Company to provide integrated
communications services to customers. Frontier
Communications of Rochester will buy network access from
Rochester Telephone Corp. or other carriers, and package
these services with its own and others' product lines such
as long distance, wireless, data services and voice mail.
Initially, Frontier Communications of Rochester's customer
base includes Centrex and digital private line customers
previously serviced by the former Rochester local operating
company. Beginning on January 1, 1995, Frontier
Communications of Rochester and other competitors were
authorized to compete for local service customers from
Rochester Telephone Corp.'s current customer base. Frontier
Communications of Rochester intends to create value by
becoming the single point of contact for sales and service
for its customers. The Company anticipates that competitive
strength will be enhanced due to its ability to create
market-demanded packages of telecommunications products and
services, and to provide a single bill for all of these
services. While its services will initially be limited to
customers in the Rochester, New York market, Frontier
Communications anticipates that it may offer its services
elsewhere.
Certain Considerations Related to the Open Market Plan
Management believes there are significant market and
business opportunities associated with the Company's Open
Market Plan. However, there are also uncertainties
associated with the Plan and the corporate restructuring.
In our opinion, these are the most significant:
(a) Increased Competition in the Rochester, New York
Market. The Open Market Plan is expected to hasten
local telephone competition in the Rochester, New York
market by providing for (1) the full interconnection of
competing local networks including reciprocal
compensation for terminating traffic, (2) equal access
to network databases, (3) access to local telephone
numbers and (4) telephone number portability. Some
competitors 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, and that new revenue
will offset, to some extent, the loss of revenues from
end-user customers. Increased competition may also
lead to additional price decreases for services of the
Company, adversely impacting the Company's margins.
However, price cap regulation will not require
Rochester Telephone Corp. to rebate any additional
earnings achieved through operating efficiencies that
previously would have been shared with customers.
Moreover, services in the Rochester, New York market
are already subject to competition. This trend will
probably continue with or without the Open Market Plan.
The Open Market Plan allows the Company to anticipate
the 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.
(b) Risk of Rate Stabilization Plan. The Rate
Stabilization Plan incorporated in the Open Market Plan
Agreement provides for a total of $21 million in rate
reductions for Rochester Telephone Corp. over the life
of the Agreement. During this time, the rates charged
by Rochester Telephone Corp. for basic residential and
business telephone service may not be increased for any
reason. But, since Rochester Telephone Corp. will
operate under a price cap environment with no rate of
return regulation, the Company will be able to retain
the full value of any cost savings it introduces over
the life of the plan. Even though the rates provided
in the Rate Stabilization Plan were designed to permit
the Company to recover its costs and to earn a
reasonable rate of return, there is no assurance that
this will occur. The effect on the Company's results
of operations cannot be predicted because of
uncertainty about Rochester Telephone Corp.'s network
usage and its costs.
(c) Restraints on the Company's Control of Rochester
Telephone Corp. The Open Market Plan Agreement limits
the number of inside directors on the Board of
Directors of Rochester Telephone Corp. and the ways in
which its officers and senior management employees are
compensated. The Open Market Plan also prohibits
payment of dividends by Rochester Telephone Corp. to
Frontier Corporation if (i) Rochester Telephone Corp.'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. Dividends paid
to the parent, Frontier Corporation, also are
prohibited unless Rochester Telephone Corp.'s directors
certify that such dividends will neither impair
Rochester Telephone Corp.'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". Other financial covenants exist
to ensure that Rochester Telephone Corp. will have the
financial strength to provide quality service. The
Company believes that these conditions will not affect
the opportunities for either Frontier Corporation or
Rochester Telephone Corp.
(d) Holding Company Structure. The Company no longer
directly owns any material assets other than its
interest in the capital stock of its subsidiaries. As
noted above, dividends from Rochester Telephone Corp.
to Frontier Corporation are subject to the financial
covenants of the Open Market Plan.
(e) Potential Diversification Risk. The Company is
now 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.
The Company may pursue opportunities with both greater
potential profits and greater business risk than it
could pursue as a telephone company subject to the
authority of the PSC. There can be no assurance that
any expansion of the Company's business will be
successful. However, it is the current intention of
the Company to engage only in telecommunications-
related businesses.
(f) Other Considerations. (i) The Open Market Plan
Agreement precludes the PSC from seeking royalties for
the next seven years. After that, the PSC may be able
to assert its authority to do so. (ii) Because
Rochester Telephone Corp. and Frontier Communications
of Rochester will, at least initially, be competing for
the same customers, there may be some duplication of
sales and service expenses in the consolidated company.
Over time, this duplication is expected to reach
minimal levels.
INDUSTRY OUTLOOK AND STRATEGIES
As evidenced by the revolutionary change occurring in
the Company's Rochester, New York market, the Company
believes competition will increasingly be recognized and
promoted in public policy, and that consumers will
increasingly have opportunities to make real choices for
their telecommunications needs. The Company believes that
regulation has created artificial distinctions among local,
long distance, wireless and cable services, and that
convergence among these industry segments is unavoidable.
The Company expects the overall marketplace to expand as
customers increasingly rely on communications products and
services to improve productivity and profitability in their
businesses, as well as to add convenience and time to
their personal lives. The Company's objective is to serve
our customers as their single source for integrated
telecommunications solutions.
Frontier Corporation's Vision is to become the premier
company in the telecommunications industry by providing
products, services and applications that delight our
customers, by being a team of qualified employees committed
and accountable to this Vision, and by delivering
exceptional returns to shareowners. Our goal is to expand
our role as a "value creator" -- that is, to enhance the
benefits that all of our stakeholders obtain from their
ongoing relationships with us. We realize that changes in
the industry are occurring rapidly and that this will
continue for the foreseeable future. We believe that
Frontier Corporation's strong operating performance and our
marketing and regulatory initiatives have firmly positioned
the Company as a leader in our industry.
One important challenge for the Company over the
remainder of the decade is to increase significantly the
size of our business. We want to grow. Such growth will
give us the opportunity to provide more services to more
customers, while taking advantage of size and scale
economies. Frontier Corporation will continue to focus on
expanding its existing customer and revenue base.
Consistent with this growth strategy, the Company
announced several acquisitions during 1994. In October, we
announced our intent to acquire California-based WCT
Communications, Inc., a long distance company which has
annualized revenues in excess of $100 million. This
acquisition was finalized in May 1995. In July, 1994, the
Company agreed to purchase the Minnesota Southern Cellular
Telephone Company, a non-wireline cellular telephone service
provider whose territory is located in an area south of
Minneapolis. This acquisition was finalized on March 29,
1995. In March 1995, the Company finalized its acquisition
of American Sharecom, Inc. and accounted for this
transaction as a pooling of interests. In August 1995, the
Company merged its long distance operations with ALC and
accounted for this transaction as a pooling of interests.
All historical data have been restated to reflect the
acquisitions accounted for as a pooling of interests. The
combination of ALC and American Sharecom with Frontier
Communications International will bring Frontier's annual
long distance revenues to over $1 billion, establish our
coast-to-coast network and make Frontier the fifth largest
long distance company in the country
In June 1994, we finalized the formation of the Upstate
Cellular Network (UCN), a wireless joint venture with NYNEX
Corporation that is managed by Frontier. The formation of
this joint venture allowed Frontier to significantly expand
its presence in the wireless sector. Through the Upstate
Cellular Network and our majority ownership interests in
several Rural Service Areas (RSA) in Alabama and New York,
the Company now manages cellular properties which have a
total coverage that reaches 4.2 million people.
Our pending acquisitions will further accelerate the
transformation of the Company from one with an original base
in local telephony to one that is more focused on the long
distance segment and on achieving communications services
integration. The majority of our total revenues come from
sources that no longer fall under traditional rate of return
regulation.
RESULTS OF OPERATIONS
Consolidated
Consolidated revenues and sales were $1,667.5 million
in 1994, a $230.1 million, or 16.0 percent, increase over
1993. This performance followed a 14.8 percent increase in
1993 over 1992. The primary factor in these increases has
been the rapid growth in the Company's long distance
business, which has been driven by both increased market
penetration and acquisitions. Consolidated costs and
expenses were $1,338.9 million, $1,181.1 million, and
$1,042.5 million in 1994, 1993 and 1992, respectively,
reflecting 13 percent increases in 1994 and 1993. The
Company continued to focus its efforts on cost containment,
process redesign and operating synergies during 1994, as
reflected in the improvement in consolidated operating
margins from 16.8 percent in 1992 and 18.1 percent in 1993
to 19.7 percent in 1994, excluding the impact of a $3.3
million software write-off in 1993.
Several one-time events have occurred during the past
three years that have impacted the comparability of the
Company's results from operations. These items are
summarized below.
1. Acquisitions/Divestitures
In August 1995, the Company issued 69.2 million common
shares to merge with ALC Communications Corporation, a long
distance company headquarted in Bingham Farms, Michigan.
The transaction was accounted for using the pooling of
interests method and all historical financial information
has been restated accordingly.
In March 1995, the Company issued 8.7 million common
shares to acquire all of the outstanding common shares of
American Sharecom, Inc., a long distance company
headquartered in Minneapolis, Minnesota. The transaction
was accounted for as a pooling of interests and all
historical financial information has been restated
accordingly.
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
Frontier'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. (See Note 3 to the Consolidated
Financial Statements.)
In May 1994, we sold our only telephone operating
company in North Dakota, Minot Telephone, for cash. Minot
served approximately 27,000 access lines. The transaction
resulted in a pre-tax gain of $11.3 million.
In December 1993, the Company increased its cellular
ownership from 50.6 percent to 69.6 percent in the South
Alabama cellular partnership. This transaction gave the
Company the right to manage the two cellular properties,
Alabama RSA #4 and #6, which serve a territory with a
population of approximately 252,000. As a result of this
increased ownership, we began reporting the South Alabama
cellular interests on a consolidated basis of accounting in
1994, whereas previously this partnership had been accounted
for on the equity method.
In September 1993, Frontier Communications of the Mid
Atlantic, Inc. (formerly Mid Atlantic Telecom, Inc.). was
acquired using 143,587 shares of treasury stock (before the
1994 stock split). In June 1993, we acquired Budget Call
Long Distance, Inc. for $7.5 million in cash. Both
transactions were accounted for as purchase acquisitions.
Also in September 1993, the Company sold its interest
in the S&A Telephone Company in Kansas (approximately 800
access lines) and its related minority cellular interest.
In addition, the Company sold a substantial portion of its
investment in a Canadian long distance company in November
1993. These sales resulted in pre-tax gains totaling $4.4
million.
During July 1993, the Company acquired the specialized
800 customer base of Call Home America, Inc. (CHA) for $15.5
million plus a payment of $4.2 million made in August 1994
which was based on certain 800 customer base revenue
generated by the customers in April, May and June 1994. The
Company also acquired additional customers from CHA under a
marketing agreement from August 1993 through 1994. Under
this agreement, an additional $9.0 million and $4.1 million
was paid for customers acquired during 1994 and 1993,
respectively, and has been allocated to the purchase price
for the related customers acquired during the respective
years.
In April 1993, we acquired a 70 percent ownership
interest in the Utica-Rome Cellular Partnership by issuing
702,737 shares of the Company's common stock (before the
1994 stock split). We recorded this transaction using the
purchase method of accounting.
In August 1992, we acquired Frontier Communications of
Georgia (formerly Statesboro Telephone Company), a company
with more than 15,000 access lines. A total of 1.5 million
shares of common stock were issued in the transaction
(before the 1994 stock split), which was accounted for as a
pooling of interests.
2. Accounting for Postemployment Benefits
The Company changed its method of accounting for
certain employee benefits in 1994. This change was
necessitated by the Financial Accounting Standards Board,
the authoritative body for accounting rules. This new rule,
referred to as Financial Accounting Standards Board
Statement No. 112 (FAS 112), "Employers' Accounting for
Postemployment Benefits," addresses the manner in which
companies must record expenses for postemployment benefits,
including payments for disability, pre-pension leave (salary
continuation) and severance pay. FAS 112 requires that
projected future costs of providing postemployment benefits
be recognized as an expense as employees render service
rather than when the benefits are paid. This accounting
change is very similar to the change made in 1993 for
postretirement benefits, which was addressed by FAS 106,
"Employers' Accounting for Postretirement Benefits Other
than Pensions." Adoption of FAS 112 required the Company to
calculate, and record in 1994, the cumulative effect of the
change in accounting methodology for all years prior to
1994. The cumulative effect of the change in accounting
methodology for FAS 112 amounted to an after-tax charge of
$7.2 million, net of taxes of $3.9 million. As required by
the pronouncement, the Company reported this one-time charge
as a special line item on the Consolidated Statement of
Income in 1994. This accounting change does not have a
material impact on the Company's cash flows or its earnings
from continuing operations.
3. Software Write-Off
In 1993, the Company recorded a $3.3 million pre-tax
charge to write-off certain deferred costs associated with a
project to redesign customer account records, order flow and
customer billing systems. (See Note 4 to the Consolidated
Financial Statements.)
4. Loss Related to Early Retirement of Debt
In 1993, the Company completed an offering of $85.0
million 9.0% Senior Subordinated Notes. The net proceeds
were used to repay outstanding 11 7/8% Senior Subordinated
Notes and to reduce other short term borrowings. The early
retirement of 11 7/8% Senior Subordinated Notes resulted in
an extraordinary loss of $7.5 million, net of income taxes.
(See Note 4 to the Consolidated Financial Statements).
5. First Mortgage Bond Refinancing
In 1992, the Company recorded an extraordinary,
after-tax charge of $1.1 million relating to costs incurred
for the early extinguishment of its Series H, 9 1/2% first
mortgage bonds. The bonds were retired using internally
generated cash and the private placement of $35 million of
debt at a telephone subsidiary. (See Note 4 to the
Consolidated Financial Statements.)
TELECOMMUNICATION SERVICES
The Telecommunication Services segment is comprised of
the Company's long distance business, wireless operations
(where the Company has sufficient ownership to report on a
consolidated basis), and equipment sales. This segment is
the fastest growing part of the Company, as evidenced by its
increasing contribution to our overall financial results.
In 1994, revenues from Telecommunication Services comprised
63.4 percent of total revenue, up from 54.7 percent only two
years ago. Similarly, operating income from this business
segment accounted for 49.7 percent of the Company's total,
as compared with 32.3 percent in 1992.
Telecommunication Services revenues include long
distance usage and fixed monthly fee revenues, wireless
access and usage charges, and sales of telecommunication
systems and services. Principal expenses associated with
these revenues consist of costs for leasing of transmission
facilities and the payment of local access charges for our
long distance business, charges for interconnection of
cellular and paging operations with telephone companies,
costs of cellular telephones and paging units sold, cost of
telecommunications equipment sold, and labor.
Revenues and expenses derived from our majority-owned
cellular operations are reflected in the consolidated
financial statements. Our minority interests, including the
50/50 joint venture with NYNEX in upstate New York that was
formed in July 1994, are accounted for using the equity
method. This method of accounting results in the Company's
proportionate share of earnings (losses) being reflected in
a single line item below operating income on the Company's
Consolidated Statement of Income, entitled "Equity earnings
(loss) from unconsolidated wireless interests." Prior to
the formation of the wireless joint venture with NYNEX in
July 1994, the revenues and expenses of our wireless
operations in upstate New York had been consolidated. (See
Note 3 to the Consolidated Financial Statements for
additional information concerning our wireless operations.)
Telecommunication Services sales were $1,057.9 million
in 1994, up $214.3 million, or 25.4 percent, over 1993.
This compares to an increase of $158.6 million, or 23.2
percent, the previous year. This growth in both years was
driven by our long distance operation, Frontier
Communications International, (formerly RCI Long Distance),
and the impact from our recently acquired acquisitions, ALC
Communications Corporation and American Sharecom, accounted
for as a pooling of interests. Revenues in our Network
Systems and Services line of business, which includes long
distance, rose 27.0 percent in 1994 due to sales of services
to additional customers, greater usage, growth in consumer
services, price changes and the impact of the acquisitions
of the Call Home America customer base beginning in July
1993, Budget Call Long Distance in July 1993 and Frontier
Communications of the Mid Atlantic, Inc. (formerly Mid
Atlantic Telecom, Inc.) in September 1993. Another factor
for the growth in the long distance operation is our Visions
Long Distance subsidiary, which resells services from
Frontier Communications International to customers of a
number of our local telephone subsidiaries under the brand
name used by the local telephone company.
Revenues from our Wireless Communications line of
business decreased $5.0 million, or 16.8 percent, in 1994
because of the change in the method of accounting for the
upstate New York cellular operation in July 1994. Through
the first six months of 1994, the period prior to the
adoption of equity accounting for the Upstate Cellular
partnership, the Company's wireless revenues had increased
68.5 percent to $20.9 million from $12.4 million in 1993.
In 1993, wireless revenues rose $8.5 million, or 40.1
percent, over 1992. Despite the change in the manner of
reporting wireless operations, we are very committed to this
business as indicated by the growth of our proportionate
share of wireless revenues for properties we manage, which
rose 30.2 percent in 1994, reaching $35.6 million. Although
prices were relatively stable for cellular service in 1994,
new customers generated a lower average volume of calls
resulting in a 7.2 percent decrease in average revenue per
customer. This is consistent with industry trends. The
40.1 percent increase in Wireless Communications revenues in
1993 over 1992 was a result of the combination of the
acquisition of the Utica-Rome partnership in April 1993,
price increases and a growing customer base.
Costs and expenses for Telecommunication Services in
1994 totaled $894.5 million, reflecting an increase of 21.5
percent over 1993. The increase for 1993 versus 1992 was
19.3 percent. The increases in both years are primarily due
to the increased volume of long distance traffic carried by
the Company and the associated costs to originate and
terminate the traffic on local telephone company facilities,
in addition to the impact of acquisitions completed during
1993. Marketing and selling expenses have also risen in
line with sales. As a percentage of sales, long distance
costs of access remained stable due to price erosion and a
higher percent of reseller revenue, offset by the improved
efficiency of our network and decreasing charges from local
telephone companies and other access providers. The increase
in 1994 expenses was partially offset by the change in the
method of reporting cellular results for the upstate New
York joint venture.
Operating margins for Telecommunication Services
improved to 15.4 percent in 1994, following a margin of 12.7
percent in 1993 and 9.9 percent in 1992. The gain in 1994
results is driven by better long distance margins which rose
to 15.7 percent in 1994. Wireless operating margins were
adversely affected by the accounting change for cellular
properties in New York.
The Company's long distance revenue is subject to
certain limited seasonal variations. Because most of the
Company's long distance revenue is generated by commercial
customers, the Company traditionally experiences decreases
in long distance usage and revenue in vacation and holiday
periods. Since 1992, the impact of commercial traffic
seasonal variations has been more than offset by strong year
over year traffic growth as well as carrier growth in
residential traffic. However, the effect of commercial
seasonality is still evidenced by lower sequential traffic
growth in the fourth quarter.
TELEPHONE OPERATIONS
This segment, which is comprised of our local exchange
telephone companies, continues to be very important to the
Company. In addition to providing strong cash and overall
financial returns, the local companies serve a large
customer base that represents service integration sales
opportunities. For several years the Company complemented
the internal growth of telephone revenues with acquisitions
in order to diversify its regulatory risks and increase the
size of its customer base. The Company has further refined
this strategy by disposing of certain telephone operating
subsidiaries that no longer fit the Company's overall
expansion plans. Both the sale of Minot Telephone in North
Dakota in May 1994 and the divestiture of Ontonagon
Telephone in Michigan in March 1995 are results of the
limited opportunity to expand the Company's presence in the
respective geographic areas.
Revenues for this segment are derived from local
telephone service and access fees from long distance
companies, directory advertising, billing services and other
services such as sales of telephone equipment and voice
mail. As a result of recent regulatory reforms, traditional
rate of return regulation is no longer applicable to much of
our telephone revenues. Increasingly, a more flexible form
of regulation called price, or price cap, regulation is
replacing rate of return regulation, focusing on price
levels as opposed to earnings levels. Telephone Operations
expenses are mainly related to the development and
maintenance of the local exchange networks. Additional
expenses include the costs associated with customer service
and billing.
Telephone Operations revenues increased $15.8 million
to $609.7 million in 1994, representing an increase of 2.7
percent over 1993. For 1993 versus 1992, revenues increased
4.7 percent to $593.9 million. Revenue growth resulted from
increases in access lines, higher feature revenue, and rate
increases at our regional telephone companies, offset
partially by the sale of Minot Telephone in North Dakota
which was completed in May 1994. Access line growth was 3.0
percent in 1994 and 2.3 percent in 1993, after adjusting for
acquisitions and divestitures. The average revenue per
employee for Telephone Operations in 1994 was $193,181, an
increase of 12 percent over the prior year. Growth in toll
revenues, primarily in network access service which
represents fees charged to long distance companies for the
use of our network, also contributed to the segment's
revenue increase. Minutes of use related to long distance
traffic increased 9.5 percent in 1994 and 7.7 percent in
1993. In general, prices being charged to long distance
companies for access service usage have declined slightly
over the past two years in order to address the need of our
local telephone operating companies to remain competitive in
their respective markets and due to certain regulatory
requirements. We expect that this price decline
will continue as competition increases and regulatory
controls are released. Telephone
Operations revenues were reduced by $8.2 million in 1994
when compared with 1993 as a result of the divestitures made
during the past two years.
During 1994 and 1993, we continued to gain increased
market penetration of enhanced services such as custom
calling features and advanced number identification products
like Caller ID. Revenue growth was also positively impacted
in both years by rate increases at our regional telephone
companies (see Regulatory Proceedings caption). Regulatory
revenue reductions at our Rochester, New York operating
company partially offset these increases.
Costs and expenses for Telephone Operations decreased
.1 percent in 1994 and increased 4.6 percent in 1993. The
divestitures in 1993 and 1994 accounted for a reduction in
expenses of $5.9 million in 1994. After adjusting for the
impacts from divestitures and the $3.3 million software
write-off in 1993, costs and expenses increased 2.0 percent
in 1994, a decrease from the 3.8 percent increase between
1993 and 1992. In 1994, the Company continued to achieve
benefits from redesigning work processes and combining
administrative operations throughout the Telephone
Operations segment. In addition, an early retirement
program in March 1994 and lower employee benefits costs
helped to contain expenses. Aside from the one-time
software write-off, the primary reasons for expense
increases in 1993 were higher wages and benefits, increased
severance and other expenses associated with streamlining
operations to arrive at a reduced cost structure, and an
increase in right-to-use fees associated with network
software upgrades.
Operating margins for Telephone Operations were 27.1
percent in 1994, 25.7 percent in 1993 (after adjusting for
the software write-off) and 25.0 percent in 1992. The
composite depreciation rate for this segment was 6.4 percent
in 1994, compared with 6.2 percent in 1993 and 6.4 percent
in 1992. Through its interaction with regulatory
authorities, the Company continues to pursue better
alignment of depreciation rates with the economic lives of
depreciable property.
A common measure of the efficiency for telephone
companies is the number of employees per 10,000 access
lines. We continue to make efficiency improvements as
evidenced by the decrease in this metric from 43 in 1992 and
38 in 1993, to 34 in 1994, near the best in our industry.
OTHER INCOME STATEMENT ITEMS
Interest Expense
Interest expense decreased 11.6 percent in 1994 and
15.0 percent in 1993 due to lower levels of debt outstanding
throughout the year. In February 1994, we retired $9.4
million of debt at our regional telephone subsidiaries. In
December 1994, as a part of our Open Market Plan
implementation, we issued $120 million of debt and
repurchased $30 million of outstanding debentures. These
December transactions did not have a significant impact on
1994's interest expense. During 1993, we recalled a total
of $172.4 million of debt, including the 11 7/8%
subordinated notes which had an effective interest rate of
13.6%. In addition, line of credit borrowings were
decreased in 1994 and 1993 due to improved cash from
operations.
Gain on Sale of Assets
The gain on sales of assets in 1994 amounted to $10.1
million, a $5.6 million increase when compared to 1993. The
1994 amount resulted mainly from the sale of our only
telephone property in North Dakota in May 1994. In 1993, we
recognized gains on sales of our only telephone property in
Kansas, S&A Telephone Company, and a portion of our minority
investment in a Canadian long distance company.
Equity Earnings (Loss) from Unconsolidated Wireless
Interests
Equity earnings from the Company's interests in
wireless partnerships in 1994 were $3.2 million, an increase
of $1.9 million over 1993. This increase was the result of
the change in accounting related to the formation of our
50/50 joint venture in July 1994 with NYNEX Corporation in
order to operate a unified cellular network in upstate New
York. Financial results for the joint venture have been
reported on the equity method of accounting, reflecting our
proportionate share of the joint venture's earnings.
Previously, the Company's revenues and expenses associated
with its Rochester and Utica-Rome cellular partnerships in
New York State had been fully consolidated.
Other Income (Expense), Net
In 1994, other income (expense), on a net basis,
improved $1.4 million, or 27.1 percent, over 1993. This
improvement is primarily related to higher interest income
associated with increased cash balances, offset in part by
higher business development and strategic planning
activities and costs, and administrative expenses associated
with the Company's restructuring.
In 1993, net other expenses were $5.1 million, an
increase of $.8 million over 1992's net other expenses.
This was due to administrative expenses associated with the
Company's reorganization petition with the New York State
Public Service Commission, debt refinancing expenses, and
acquisition costs.
Income Taxes
The effective tax rate in 1994 was 36.8 percent,
compared to 36.4 percent in 1993 and 23.6 percent in 1992.
The effective tax rate in 1992 was lower primarily due to
the utilization of operating loss carryforwards under FAS
109. FAS 109 requires that the tax benefit of tax net
operating loss carryforwards ("NOLs") be recorded as an
asset to the extent that management assesses that the
realization of such NOLs is "more likely than not".
Management believes that the realization of the benefit of
the NOLs beyond a three-year period is difficult to predict
and, therefore, has recorded a valuation allowance which has
the effect of limiting the recognition of future NOL
benefits to those expected to be realized within the three
year period.
The Internal Revenue Code provides that if an ownership
change occurs, the taxable income of a corporation available
for offset by NOLs will be subject to an annual limitation
("Section 382 Limitation").
The transfer of ALC Common Stock, Class B preferred and
Class C Preferred by CTI, the Company's former parent, to
certain banks in August 1992 resulted in an ownership change
with a section 382 Limitation of approximately $10 million
per annum. As a result of this annual limitation, along
with the 15 year carryforward limitation, the maximum
cumulative NOLs which can be utilized for federal income tax
purposes in 1995 and future years are limited to an
aggregate of approximately $108 million.
Future events beyond the control of the Company could
reduce or eliminate the Company's ability to utilize the tax
benefit of its NOLs. The tax benefit of NOLs would be
eliminated if the Company fails to meet the continuity of
business requirements. (See Note 8 to the Consolidated
Financial Statements.)
FINANCIAL CONDITION
Management's overall objective is to maximize
shareowner value. While increasing net income is an
important component of the process, management believes that
the primary source of value over the long term is cash
generation over and above investment requirements. Key
management decisions are made based on the value added to
our shareowners' investment. Corporate performance,
strategies, capital projects and acquisitions are evaluated
and measured using cash flow analysis and investments are
expected to provide a return that exceeds the risk-adjusted
cost of capital of the Company, or specific business unit,
as appropriate.
There are a number of key financial metrics that can be
used to monitor management's performance. While several of
these metrics provide information on the Company's financial
condition at a specific time, others, such as shareowner
return, are somewhat dependent on the overall financial
markets and are often more useful when viewed over an
extended period of time.
Key Financial Data
($'s in millions, except per share data)
- ----------------------------------------------------------
1994 1993 1992
Total debt $ 667 $ 587 $ 695
Total capital $1,616 $1,314 $1,321
Debt ratio 41.3% 44.7% 52.6%
Operating margin 19.7% 17.8% 16.8%
Pre-tax interest coverage 6.8x 4.5x 3.1x
Capital expenditures $ 114 $ 124 $ 137
Dividends declared
per share $ .815 $ .795 $ .775
Dividends paid per share $ .810 $ .790 $ .770
Dividend yield 3.9% 3.6% 4.4%
Total shareowner return (2.8%) 31.1% 15.7%
Year-end stock price $21.13 $22.57 $17.82
Cash Flows from Operating Activities
Cash flows from operations amounted to $305.5 million
in 1994, an increase of $13.2 million from 1993. In 1993,
cash from operations was $292.2 million, an increase of
$42.5 million over 1992. In 1994, higher net income was
offset in part by increased working capital requirements for
our rapidly growing businesses. Cash from operations was
negatively impacted by taxes associated with the gain on the
sale of the Minot property in North Dakota in May 1994. The
cash proceeds from this sale appears in the "Cash Flows from
Investing Activities" section of the Consolidated Statement
of Cash Flows. In 1993, the increase was the result of
increases in revenue coupled with the impact of increased
interest and taxes payable caused by the timing of payments
as compared to 1992.
Cash Flows from Investing Activities
Cash used for investing activities decreased $61.5
million in 1994, from $151.2 million to $89.7 million. In
1993, cash used for investing activities increased $13.6
million versus 1992. Capital expenditures continue to be
the single-largest recurring use of the Company's funds. In
1994, capital spending, net of salvage, amounted to $112
million, a decrease of $8.3 million from 1993. An increase
in the Company's liquid investments that have maturities of
greater than three months but less than one year also
resulted in a use of funds in 1994. Offsetting these cash
outflows in 1994 were the proceeds from the sale of our
telephone property in North Dakota. The increase in 1993's
investing activities was caused by an increased usage of
cash related to acquisitions.
Cash Flows from Financing Activities
Cash flows from financing activities amounted to an
inflow of $109.6 million in 1994, compared with outflows of
$177.4 million in 1993 and $87.4 million in 1992. The
increase for 1994 resulted from $106 million in proceeds
from the Company's equity offering in February 1994 and the
net increase of $70.9 million of debt as a part of the
Company's reorganization, offset in part by the payment of
dividends to shareowners and the retirement of certain high
cost debt earlier in the year. The decreases for 1993 and
1992 resulted from the retirement of long-term debt and the
payment of dividends.
Liquidity and Capital Resources
The Company must generate adequate amounts of cash to
meet both short-term and long-term needs. The Company's
liquidity is a function of our capital spending program,
debt service requirements, internal generation of funds and
access to securities markets.
Management has emphasized the importance of cash
throughout the organization by providing training and
establishing cash measures that are critical in the
determination of performance-based compensation. The Company
closely monitors the components of its working capital in
order to maximize cash flows. However, the timing of
purchases for capital additions has a significant impact on
the balance of accounts payable until refinanced or
liquidated using internally generated funds.
During 1994, we entered the capital markets on several
occasions to finance the growth of our businesses (including
acquisitions and new product development), as well as to
retire certain high cost debt. In February 1994, new shares
of common stock were issued that netted proceeds of $106
million. In August 1994, $125 million in committed credit
facilities were negotiated with five commercial banks to
provide the Company with sources of funds for the backup of
its short-term commercial paper program, as well as for
general corporate purposes. At year end, the Company had
not borrowed against these facilities. In December 1994, a
$160 million revolving credit facility with seven banks was
established in order to provide debt for the Rochester, New
York operating company as required under the Open Market
Plan Agreement with the New York State Public Service
Commission. At year end, $120 million was borrowed under
this facility. A portion of the proceeds were used to
retire other more costly long-term debt.
At a special shareowners' meeting in December 1994,
shareowners approved an increase in the number of authorized
shares of common stock from 100 million shares to 300
million shares. Additionally, shareowners gave their
approval to authorize 4 million shares of a new class of
preferred stock which have been designated as Class A
Preferred Stock. The Company proposed these changes so as
to provide greater flexibility to raise capital and to
structure acquisition transactions.
At December 31, 1994, aggregate debt maturities
amounted to $4.9 million for 1995, $6.6 million for 1996 and
$5.3 million for 1997. During 1994 the Company met
individually with its debt rating agencies to review the
Company's financial performance. In May 1994, Duff and
Phelps upgraded the Company's senior unsecured bond rating
from A- to A. In January 1995, Standard and Poor's upgraded
its rating on the Company's senior unsecured debt from A to
A+, Moody's upgraded from A3 to A2 and Fitch upgraded from A
to A+.
The financing requirements associated with the
Company's network modernization programs have remained
relatively stable. We have in place a switching network
that is essentially 100 percent digital, while a significant
amount of fiber has been installed throughout our telephone
and long distance operating territories. Total gross
expenditures for property, plant and equipment in 1995 are
anticipated to be $163.0 million. The total capital program
represents an increase of $49.0 million over 1994. The
increase is largely driven by capital requirements
associated with the growth of our long distance and wireless
operations and the integration of our pending long distance
acquisitions.
Notwithstanding the acquisition of ALC Communications
Corporation (ALC) in August 1995 and American Sharecom, Inc.
(ASI) in March 1995, for which historical financial results
have been restated, the Company had three acquisitions
pending at the end of 1994, each of which will play an
important strategic role in the growth of the Company.
Approximately .9 million shares of common stock were used
for the acquisition of the Minnesota Cellular properties
which was completed in March 1995 and accounted for as a
purchase transaction. WCT Communications Inc. in California
was acquired for $80.0 million in cash in May 1995. The
ConferTech International, Inc. acquisition was completed in
March 1995 at a cash price of $66.0 million. It is expected
that acquisitions will continue to be a significant factor
in the growth of the Company, as will building alliances
through partnering or forming joint ventures. Any investment
opportunity will have the ultimate goal of improving
shareowner value.
In December 1994, the Board of Directors increased the
quarterly dividend paid on common stock to 20.75 cents per
share, payable February 1, 1995, to shareowners of record on
January 13, 1995. This 2.5 percent increase raises the
annualized common stock dividend to $0.83 per share. This
represents the 35th consecutive annual increase in our
dividend.
REGULATORY MATTERS
Open Market Plan
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) and subsequently issued a written Order
in November 1994. As previously discussed in more detail in
the section entitled "Corporate Name Change and
Restructuring," the Open Market Plan was approved by
shareowners in December 1994 and became effective on January
1, 1995.
During the seven year period of the Open Market Plan
Agreement, rate reductions of $21 million will be
implemented for Rochester area consumers and rates charged
for basic residential and business telephone service may not
be increased. Although these rates have been designed to
permit Rochester Telephone Corp. to recover its costs and to
earn a reasonable rate of return, there is no assurance that
this will actually happen. Also, under the Open Market Plan
Agreement, Rochester Telephone Corp. will no longer be
subject to rate of return regulation and thus the company is
able to retain any expense savings or any additional revenue
from the sale of increased services or usage. In addition,
a total of $17 million will be credited to the depreciation
reserve over the seven year life of the plan.
Although Rochester Telephone Corp. is a wholly-owned
subsidiary of Frontier Corporation, Frontier's ability to
control the management and operations of Rochester Telephone
Corp. are partially restricted by various provisions of the
Open Market Plan. The Plan contains certain financial
covenants that are intended to insure that Rochester
Telephone Corp. will not lack the financial strength to
provide quality service, including covenants relating to
dividends that may be paid to the parent company and the
level of debt that may be maintained at the subsidiary
company.
During its seven year duration, the Open Market Plan
Agreement resolves certain financial questions that are
linked to the royalty proceeding, a contested proceeding
that has been in litigation for several years. In 1984, the
PSC 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 July 1993, the PSC imposed a royalty in the
amount of two percent of the total capitalization of
Frontier Corporation's unregulated operations. Based upon
an initial interpretation of the PSC's Order, the Company
estimated that the effect of the Order was in the range of
$2 million per year. The Company vigorously disagreed with
the PSC's determination and is pursuing judicial review of
the PSC's Opinion and Order. The Appellate Division, on
June 30, 1994, confirmed the PSC's Order and the Company
appealed to the New York State Court of Appeals. On
December 8, 1994, the Court of Appeals accepted the
Company's appeal.
The Open Market Plan temporarily resolves certain
financial questions that are linked to a royalty proceeding.
On October 31, 1995, the New York Court of Appeals, in
general, confirmed the Commission's authority to utilize a
royalty as a ratemaking adjustment in certain defined
circumstances.
Incentive Regulation
Prior to the Open Market Plan Agreement which became
effective in January 1995, an incentive regulation agreement
had been in effect for the Rochester, New York operating
company. As part of that agreement, Rochester Telephone
Corp. agreed to share with ratepayers 50 percent of earnings
above a threshold rate of return. In addition, the
company's revenue requirement was reduced by $5 million in
1993 and $9.5 million in 1994. The 1993 sharing amount was
refunded through customer billing credits. The 1994 revenue
requirement reduction, plus interest, was credited to the
company's depreciation reserve to alleviate a reserve
deficiency rather than refunding cash to ratepayers. There
was no 1994 sharing amount.
Rate Awards
In 1994, two of the Company's telephone subsidiaries
completed rate increase proceedings with state regulatory
agencies that were initiated in 1993. In February 1994, the
Iowa State Utilities Board approved a $2.9 million annual
revenue increase for Frontier Communications of Iowa
(formerly Vista Telephone Company of Iowa), effective
retroactively to November 1993. In April 1994, Frontier
Communications of Minnesota (formerly Vista Telephone
Company of Minnesota) was granted the authority by the
Minnesota Public Service Commission to increase annual
revenues by $4.4 million. Frontier Communications of
Minnesota had previously increased rates temporarily in May
1993.
Regulatory Accounting
As discussed in Note 1 of the Notes to the Consolidated
Financial Statements, the Company's regulated telephone
operations comply with the provisions of Financial
Accounting Standards Board Statement No. 71 (FAS 71),
"Accounting for the Effects of Certain Types of Regulation."
FAS 71 requires regulated entities to apply special
accounting treatment to certain revenues and expenses that
are recoverable through rates (prices) to be set by
regulators in future periods. The applicability of FAS 71
is appropriate only if the Company expects that rates will
be designed to recover costs from customers. The Company
periodically reviews the criteria that would result in the
discontinuance of FAS 71, including changes in the level of
competition or a significant change in the manner in which
rates are set by regulators. At this time, the Company
believes that FAS 71 continues to be appropriate. However,
if in the future it determines that FAS 71 is no longer
applicable, the resulting impact to the Company's Statement
of Income could be a material, extraordinary non-cash charge
to earnings.
OTHER ITEMS
The information presented in this Supplementary Management's
Discussion of Results of Operations and Analysis of Financial
Condition should be read in conjunction with the Company's
Supplementary financial statements and accompanying
Supplementary Notes for the three years ended December 31,
1994.
<PAGE>
<PAGE>
Report of Independent
Accountants
To the Shareowners of
Frontier Corporation
In our opinion, the consolidated balance sheets and the
related consolidated statements of income, shareowners'
equity and cash flows, appearing in the Frontier Corporation
1994 Proxy Statement-Financial Review, present fairly, in
all material respects, the financial position of Frontier
Corporation (formerly Rochester Telephone Corporation) and
its subsidiaries at December 31, 1994, 1993 and 1992, and
the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted
auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion
expressed above.
As discussed in Note 11 to the financial statements,
during the first quarter of 1994 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment
Benefits."
As discussed in Note 10 to the financial statements,
during the first quarter of 1993 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions."
As described in Note 2 to the financial statements, on
March 17, 1995, Frontier Corporation acquired American
Sharecom, Inc. in a transaction accounted for as a pooling
of interests. The accompanying supplementary consolidated
financial statements give retroactive effect to the
acquisition by Frontier Corporation of American Sharecom,
Inc.
<PAGE>
<PAGE>
As described in Note 2 to the financial statements, on
August 16, 1995, Frontier Corporation merged with ALC
Communications Corporation in a transaction accounted for as
a pooling of interests. The accompanying supplementary
consolidated financial statements give retroactive effect to
the merger of Frontier Corporation with ALC Communications
Corporation.
In our opinion, based upon our audits and the reports
of other auditors, the accompanying supplementary
consolidated balance sheets and the related supplementary
consolidated statements of income, shareowners' equity and
cash flows present fairly, in all material respects, the
financial position of Frontier Corporation and its
subsidiaries at December 31, 1994, 1993 and 1992, and the
results of their operations and their cash flows for the
three years then ended in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the
financial statements of ALC Communications Corporation,
which statements reflect total assets of $284,725,000,
$193,541,000 and $143,266,000 at December 31, 1994, 1993 and
1992, respectively, and total revenues of $567,824,000,
$436,432,000 and $376,064,000 for the years ended December
31, 1994, 1993 and 1992, respectively. Those statements
were audited by other auditors whose reports thereon have
been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for ALC
Communications Corporation, is based solely on the reports
of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
Rochester, NY
January 16, 1995, except as to the pooling
of interests with American Sharecom, Inc.
which is as of March 17, 1995, and except as
to the pooling of interests with ALC Communications
Corporation which is as of August 16, 1995.
<PAGE>
<PAGE>
<TABLE>
Supplementary Business Segment Information
In thousands of dollars
Years ended December 31,1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
TELEPHONE OPERATIONS
Revenues
Local service $ 240,687 $ 231,676 $ 214,181
Network access service 230,938 220,196 203,768
Long distance network service 25,619 26,978 29,210
Directory advertising, billing services,
and other 118,221 120,459 123,112
Less: Uncollectibles 5,787 5,438 2,999
- -----------------------------------------------------------------------------
Total Revenues $ 609,678 $ 593,871 $ 567,272
=============================================================================
Operating Income $ 165,301 $ 149,219 $ 142,052
=============================================================================
Depreciation $ 101,897 $ 99,995 $ 100,692
=============================================================================
Construction $ 60,711 $ 89,823 $ 114,930
=============================================================================
Identifiable Assets (1) $1,655,379 $1,398,019 $1,416,630
=============================================================================
TELECOMMUNICATION SERVICES
Sales
Network Systems and Services:
Non-Affiliate $1,032,822 $ 813,745 $ 663,828
Affiliate 8,032 6,036 1,511
Wireless Communications 24,623 29,586 21,113
Eliminations (7,610) (5,790) (1,480)
- -----------------------------------------------------------------------------
Total Sales $1,057,867 $ 843,577 $ 684,972
=============================================================================
Operating Income
Network Systems and Services $ 161,987 $ 103,804 $ 63,558
Wireless Communications 1,307 3,256 4,110
Eliminations 74 74 74
- -----------------------------------------------------------------------------
Total Operating Income $ 163,368 $ 107,134 $ 67,742
=============================================================================
Depreciation $ 28,782 $ 26,273 $ 24,528
=============================================================================
Construction $ 53,024 $ 34,018 $ 22,344
=============================================================================
Identifiable Assets (1) $ 608,520 $ 489,716 $ 357,835
=============================================================================
(1) Includes intercompany accounts that are eliminated in consolidation of
$205,188, $169,519, and $94,722 in 1994, 1993 and 1992, respectively.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Supplementary Consolidated Statement of Income
In thousands of dollars,
except per share data
Years ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues and Sales $1,667,545 $1,437,448 $1,252,244
- ------------------------------------------------------------------------------
Costs and Expenses
Operating expenses 1,140,338 979,959 849,367
Cost of goods sold 18,850 20,819 21,634
Depreciation 130,679 126,268 125,220
Taxes other than income taxes 49,009 50,749 46,229
Software write-off - 3,300 -
- ------------------------------------------------------------------------------
Total Costs and Expenses 1,338,876 1,181,095 1,042,450
- ------------------------------------------------------------------------------
Operating Income 328,669 256,353 209,794
Interest expense 51,312 58,022 68,243
Other income and expense:
Allowance for funds used during construction 1,096 1,330 1,310
Gain on sale of subsidiaries 10,063 4,449 0
Equity earnings (loss) from unconsolidated
wireless interests 3,185 1,296 (661)
Interest Income 8,364 1,867 2,217
Other income (expense), net (3,733) (5,120) (4,298)
- ------------------------------------------------------------------------------
Income Before Taxes, Extaordinary Item and
Cumulative Effect of Change
in Accounting Principle 296,332 202,153 140,119
Income taxes 109,078 73,509 33,094
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Income Before Extraordinary
Item and Cumulative
Effect of Change in Accounting Principle 187,254 128,644 107,025
Extraordinary Item, net of income taxes 0 (7,490) (1,072)
Cumulative effect of change in accounting
principle for postemployment benefits (7,197) 0 0
- ------------------------------------------------------------------------------
Consolidated Net Income 180,057 121,154 105,953
Dividends on preferred stock 1,187 1,640 4,442
- ------------------------------------------------------------------------------
Income Applicable to Common Stock $ 178,870 $119,514 $ 101,511
- ------------------------------------------------------------------------------
Earnings Per Common Share
Primary:
Income before extraordinary
item and cumulative effect
of change in accounting principle $1.16 $0.83 $0.75
Extraordinary item - (.05) (.01)
Cumulative effect of change
in accounting principle (.04) - -
- ------------------------------------------------------------------------------
Earnings Per Common Share-Primary $1.12 $0.78 $0.74
- ------------------------------------------------------------------------------
Fully Diluted:
Income before extraordinary
item and cumulative effect
of change in accounting principle $1.16 $0.83 $0.75
Extraordinary item - (.05) (.01)
Cumulative effect of change
in accounting principle (.04) - -
- ------------------------------------------------------------------------------
Earnings Per Common Share-Fully Diluted $1.12 $0.78 $0.74
- ------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<PAGE>
Supplementary Consolidated Balance Sheet
- ---------------------------------------------------------------------------
In thousands of dollars December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 359,309 $ 33,970 $ 70,303
Short-term investments 9,047 349 634
Accounts receivable 263,815 229,984 190,450
Material and supplies 8,586 11,208 15,892
Prepayments and other 30,986 24,594 24,843
- ---------------------------------------------------------------------------
Total Current Assets 671,743 300,105 302,122
- ---------------------------------------------------------------------------
Property, Plant and Equipment
Telephone plant in service 1,554,856 1,561,032 1,577,985
Telephone plant under construction 36,130 33,048 36,619
- ---------------------------------------------------------------------------
1,590,986 1,594,080 1,614,604
Less-Accumulated depreciation 713,869 652,578 657,682
- ---------------------------------------------------------------------------
Net Telephone Plant 877,117 941,502 956,922
- ---------------------------------------------------------------------------
Telecommunications property 323,632 287,875 259,847
Less-Accumulated depreciation 166,307 149,242 131,009
- ---------------------------------------------------------------------------
Net Telecommunications Property 157,325 138,633 128,838
- ---------------------------------------------------------------------------
Goodwill 187,722 215,962 187,278
- ---------------------------------------------------------------------------
Deferred and Other Assets 164,804 122,014 104,583
- ---------------------------------------------------------------------------
Total Assets $2,058,711$1,718,216$1,679,743
===========================================================================
<PAGE>
<PAGE>
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 230,702 $ 211,532 $ 183,674
Notes payable 106 303 6,194
Advance billings 12,719 12,573 12,546
Dividends payable 15,487 14,057 13,462
Long-term debt due within one year 4,860 4,659 84,452
Taxes accrued 28,070 28,439 24,476
Interest accrued 13,502 15,366 17,457
- ---------------------------------------------------------------------------
Total Current Liabilities 305,446 286,929 342,261
- ---------------------------------------------------------------------------
Long-Term Debt 661,549 581,707 604,157
- ---------------------------------------------------------------------------
Deferred Income Taxes 96,134 102,634 104,588
- ---------------------------------------------------------------------------
Deferred Employee Benefits Obligation 46,001 16,121 -
- ---------------------------------------------------------------------------
Minority interests 252 3,100 2,701
- ---------------------------------------------------------------------------
Redeemable Preferred Stock, $0.01 par value;
authorized - 2,500,000 shares; issued and
outstanding 356,000 shares, aggregate
redemption value of $7,119,000
less discount of $364,000 plus accrued
but undeclared dividends of $2,904,000 - - 9,659
- ---------------------------------------------------------------------------
Shareowners' Equity
Common stock 149,294 108,630 89,616
Capital in excess of par value 379,404 308,649 279,710
Retained earnings 397,854 289,852 224,238
- ---------------------------------------------------------------------------
926,552 707,131 593,564
Less-Treasury stock, at cost - 2,191 -
- ---------------------------------------------------------------------------
Common Shareowners' Equity 926,552 704,940 593,564
Preferred stock 22,777 22,785 22,813
- ---------------------------------------------------------------------------
Total Shareowners' Equity 949,329 727,725 616,377
- ---------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $2,058,711$1,718,216$1,679,743
- ---------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
<TABLE>
Supplementary Consolidated Statement of Cash Flows
In thousands of dollars
Years ended December 31, 1994 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $180,057 $121,154 $105,953
- ----------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 157,987 151,710 137,124
Gain on sale of assets (10,076) (4,415) 772
Equity (earnings)/loss from unconsolidated
wireless interests (3,185) (1,296) 661
Extraordinary item - 11,490 1,564
Cumulative effect of change in
accounting principle 11,072 - -
Minority interests 511 399 183
Changes in operating assets and
liabilities, exclusive
of impacts of purchase acquisitions:
(Increase) in accounts receivable (37,691) (28,831) (16,229)
Decrease in material and supplies 1,824 4,728 3,253
(Increase) decrease in prepayments
and other current assets (2,434) (61) 3,082
(Increase) in deferred and other assets (22,142) (4,112) (966)
Increase in accounts payable 32,369 21,453 21,971
(Decrease) increase in advance billings 188 27 72
(Decrease) increase in accrued interest
and taxes (746) 4,422 (1,934)
Increase in deferred employee
benefits obligation 6,958 14,302 -
(Decrease) increase in deferred
income taxes (9,227) 1,263 (5,743)
- ----------------------------------------------------------------------------
Total Adjustments 125,408 171,079 143,810
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net Cash Provided by Operating Activities 305,465 292,233 249,763
- ----------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant
and equipment (112,162) (120,497) (137,250)
(Increase) decrease in investment securities (11,386) 8,610 2,980
Investment in cellular (3,939) (4,342) (665)
Proceeds from asset sales 1,009 1,033 21
Investment in nonaffiliated entities (713) (1,161) -
Purchase of companies (18,546) (35,072) (2,626)
Proceeds from sale of company 55,689 - -
Other investing activities 343 264 -
- ----------------------------------------------------------------------------
Net Cash Used in Investing Activities (89,705) (151,165) (137,540)
- ----------------------------------------------------------------------------
Cash Flows from Financing Activities
Net (decrease) increase in notes payable (197) (5,806) 184
Proceeds from long-term debt 135,412 151,296 20,917
Repayments of long-term debt (64,551) (269,980) (53,092)
Dividends paid (59,388) (54,492) (51,582)
Issuance (purchase) of treasury stock 2,302 (2,744) -
Issuance of common stock 107,244 13,175 50
Redemption of Class A preferred stock - (7,119) -
Payment of dividends on Class A
preferred stock - (3,357) (1,286)
Redemptions of preferred stock (8) (8) (10)
Distribution to shareowners of pooled
company (11,235) - -
Repurchase of stock by pooled company - - (2,577)
Capital contribution of pooled company - 1,634 -
- ----------------------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities 109,579 (177,401) (87,396)
- ---------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 325,339 (36,333) 24,827
Cash and Cash Equivalents at Beginning of Year 33,970 70,303 45,476
- ----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $359,309 $ 33,970 $ 70,303
============================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Supplementary Consolidated Statement of Shareowners' Equity
In thousands of dollars, except share data 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock
300,000,000 shares authorized,par value $1.00
Balance, January 1 (shares issued 1994-108,630,517:
1993-89,616,301; 1992-76, 475,166) $108,630 $ 89,616 $ 76,475
Equity Offering (1994-2,549,087) 2,549 - -
Stock Split (1994-36,573, 619) 36,574 - -
Retirement of treasury stock (1992-63 shares) - - -
Other subsidiary acquisitions (1993-697,623 shares;
1992-4,850 shares) - 698 (5)
Exercise of stock options (1994-713,025 shares;
1993-1,511,639 shares; 1992-346,690 shares) 713 1,511 347
Exercise of warrants (1994-828,000 shares;
1993-9,206,000 shares) 828 9,206 -
Conversion of:
4 3/4 % Convertible debentures (1993-6,857 shares;
1992-691 shares) - 7 1
Conversion of ALC Class A Preferred to Common Stock - 1 12,798
Conversion of ALC Class B Preferred to Common Stock - 3,796 -
Conversion of ALC Class C Preferred to Common Stock - 3,796 -
- ---------------------------------------------------------------------------------
Balance, December 31 (shares issued 1994-149,294,195;
1993-108,630,517, 1992-89,616,301) 149,294 108,630 89,616
- ---------------------------------------------------------------------------------
Capital in Excess of Par Value
Balance, January 1 308,649 279,710 228,450
Equity offering 101,565 - -
Stock split (36,574) - -
Stock issuance expenses (545) - (620)
Issuance/retirement of treasury stock 111 - (2)
Other subsidiary acquisitions/divestitures - 27,259 (137)
Repurchase of stock by pooled company - - (448)
Capital contribution of pooled company - 1,634 -
Conversion of ALC Class A Preferred Stock to Common Stock - - 44,091
Conversion of ALC Class B Preferred Stock to Common Stock - (3,786) -
Conversion of ALC Class C Preferred Stock to Common Stock - (3,786) -
Issuance of warrants - - 3,400
Repricing of warrants - - 4,709
Exercise of warrants 1,242 766 -
Exercise of stock options 894 1,328 260
Tax benefit from exercis of stock options 4,062 5,452 -
Conversion of:
4 3/4% Convertible debentures - 72 7
- ----------------------------------------------------------------------------------
Balance, December 31, 379,404 308,649 279,710
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Retained Earnings
Balance, January 1 289,852 224,238 175,792
Net Income 180,057 121,154 105,953
Distribution to shareowners of pooled company (11,236) - -
Repurchase of stock by pooled company - - (2,129)
Dividends declared in cash:
Preferred stock at required rates (1,187) (1,640) (4,442)
Common stock (59,632) (53,900) (50,936)
- ----------------------------------------------------------------------------------
Balance, December 31, 397,854 289,852 224,238
- ----------------------------------------------------------------------------------
Less-Treasury Stock, at Cost
Balance, January 1 (1994-56,413; 1992-63) 2,191 - 2
Common shares repurchased for acquisitions
(1993-304,720) 12,572 - -
Retirement of treasury shares (1992-63) - - (2)
Common shares resissued for acquisition/equity
offering (1994-56,413; 1993-248,307) (2,191) (10,381) -
- -----------------------------------------------------------------------------------
Balance December 31 (1993-56,413) - 2,191 -
- -----------------------------------------------------------------------------------
Preferred Stock
Balance, january 1 (shares outstanding 1994-227,848;
1993-2,227,928; 1992-2,228,028) 22,785 22,813 22,823
Redemptions (8) (28) (10)
- ------------------------------------------------------------------------------------
Balance, December 31 (shares outstanding 1994-227,768;
1993-227,848; 1992-2,227,928) 22,777 22,785 22,813
- ------------------------------------------------------------------------------------
Total Shareowners' Equity $949,329 $727,725 $616,377
====================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation-The consolidated financial statements
include the accounts of Frontier Corporation, formerly
Rochester Telephone Corporation, and its affiliates (the
Company). 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.
Basis of Accounting-The accounting policies of Frontier
Corporation and its affiliates are in conformity with
generally accepted accounting principles. In accordance
with the provisions of Financial Accounting Standards Board
Statement No. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation," the Company conforms to the
accounting principles as prescribed by federal and various
state regulatory bodies, where applicable. The provisions
of FAS 71 require, among other things, that regulated
enterprises reflect rate actions of regulators in their
financial statements, when appropriate. These rate actions
can provide reasonable assurance of the existence of an
asset, reduce or eliminate the value of an asset, or impose
a liability on a regulated enterprise.
Material and Supplies-Material and supplies are stated
at the lower of cost or market, based on weighted average
unit cost. The caption "Cost of Goods Sold" relates to
certain sales of Telecommunication Services equipment which
amounted to $28.0 million, $29.5 million and $32.2 million
in 1994, 1993, and 1992, respectively.
Telephone Plant-Additions to and replacements of
telephone plant are capitalized at original cost, including
the costs for benefits and supervision applicable to
construction labor. The cost of depreciable property units
retired, plus removal costs, less salvage is charged to
accumulated depreciation. Replacements, renewals and
betterments of units of property are capitalized.
Replacement of items not considered units of property and
all repairs and maintenance are charged to operating
expense.
Telecommunication Property-Property is recorded at
cost. Improvements that significantly add to productive
capacity or extend useful life are capitalized, while
maintenance and repairs are expensed. Upon retirement or
disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and the gain or
loss, if any, is reflected in earnings for the period.
Depreciation-Depreciation is computed on the
straight-line method using estimated service lives of the
various classes of plant. The range of service lives for
property, plant and equipment is as follows:
- ---------------------------------------------------------
Furniture and fixtures 3 to 20 years
Central office, switches and
network equipment 5 to 20 years
Local and toll service lines 27 to 35 years
Station equipment 10 to 21 years
Buildings and building
improvements 5 to 35 years
- ---------------------------------------------------------
Goodwill-The excess of the cost of companies purchased
over the net assets acquired is being amortized on a
straight-line basis over 20 to 40 years. Accumulated
amortization is $26.9 million, $19.2 million and $12.6
million at the end of 1994, 1993, and 1992, respectively.
Management continually reviews the appropriateness of the
carrying value of the excess acquisition cost of its
subsidiaries and the related amortization periods.
Customer Base and Other Intangible Assets - The
purchase price of customer bases and other intangible assets
acquired are being amortized on a straight-line basis over 5-
7 years.
Service Pensions and Benefits-The Company has
contributory and noncontributory plans providing for service
pensions and certain death benefits for substantially all
employees. The plans also provide disability pensions and
sickness, accident and death benefits (resulting from
accidents occurring during employment) for all employees,
which are paid and charged to current operating expense.
The Company's provisions for service pensions and certain
death benefits are remitted, at least annually, to the
trustees. In addition to providing pension benefits, the
Company provides health care, life insurance, and certain
other retirement benefits for many of its employees.
Fair Value of Financial Instruments-Cash and cash
equivalents are valued at their carrying amounts, which are
reasonable estimates of fair value. The fair value of
long-term debt is estimated using rates currently available
to the Company for debt with similar terms and maturities.
The fair value of all other financial instruments
approximates cost as stated.
Federal Income Taxes-Effective as of January 1, 1992,
the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, the liability method is used in
accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when those
differences are expected to reverse.
The Company provides a valuation allowance for its
deferred tax assets when it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
Tax deferrals resulting from the elimination of gross
profit on intercompany sales in the consolidated tax return
are amortized to offset income taxes to be paid over the
cost recovery periods of telephone plant.
Deferred income taxes are provided by the unregulated
operations on items recognized for financial reporting
purposes in different periods than are recognized for income
tax purposes. Deferred income taxes are recorded by
regulated operations in compliance with the normalization
provisions of current tax law and regulatory orders. The
major temporary differences reflected in the deferred tax
liability are depreciation and investment tax credits.
Excess deferred taxes applicable to Telephone Operations are
amortized in compliance with the normalization provisions of
current tax law and regulatory orders. This amortization is
normalized over the same time period as the related asset
generating the deferral.
Deferred income taxes have not been provided by
Telephone Operations for the flow-through of temporary
differences where the regulatory agencies permit only income
taxes actually paid to be recognized. At December 31, 1994,
the cumulative balance of tax reductions not previously
offset by provisions for deferred federal income taxes
amounted to $42 million. Similarly, the cumulative balance
of tax reductions not previously offset by provision for
deferred state income taxes amounted to $19 million at
December 31, 1994. 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.
Allowance for Funds Used During Construction-The
Company includes in its telephone plant accounts an imputed
cost of debt and equity funds used for the construction of
telephone plant and credits such amounts to other income.
The rates used in determining the allowance for funds used
during construction are based on the assumption that
construction funds are provided from sources of capital in
the same proportion as each telephone company's capital
structure.
The rates used to calculate the allowance for funds
used during construction for companies in Telephone
Operations during 1994 ranged from 6 percent to 10.68
percent.
Earnings Per Share-Primary earnings applicable to each
share of common stock and common stock equivalent are based
on the weighted average number of shares outstanding during
each year. The average number of common shares outstanding
for each period was: 160,353,266 in 1994, 153,230,418 in
1993 and 136,180,011 in 1992.
Computations of earnings per share on a fully diluted
basis are determined by increasing the average outstanding
common shares for contingent issuances that would reduce
earnings per share. In computing the per share effect of
the assumed conversions, convertible debenture interest (net
of income taxes) has been added to income applicable to
common stock. The number of common shares used to compute
earnings per share on a fully diluted basis for each period
was: 160,856,257 in 1994, 153,733,409 in 1993 and
136,706,829 in 1992.
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 $56.1 million in 1994, $59.3
million in 1993 and $64.1 million in 1992. Actual income
taxes paid were $107.9 million in 1994, $57.9 million in
1993 and $41.6 million in 1992.
American Sharecom, Inc. (ASI) elected as of August 1,
1993, to be taxed as a Subchapter S corporation under the
Internal Revenue Code whereby the shareholders will include
ASI's income in their own taxable incomes. Had ASI
continued operating as a C corporation rather than electing
S corporation status beginning August 1, 1993, actual income
taxes paid would have increased by $7.9 million in 1994 and
$3.5 million in 1993.
Stock Split-In November 1993, the Board of Directors
approved a 2-for-1 split of the common stock of the Company
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 (PSC) approved the stock split in
March 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.
Reclassifications-Certain prior year amounts have been
reclassified to conform to current year presentation.
2. Acquisitions
In August 1995, the Company merged with ALC
Communications Corporation (ALC). The business combination
was accounted for as a pooling of interests. ALC, through
its wholly-owned subsidiary Allnet Communication Services,
Inc. provides long distance services to small and medium-
sized business customers nationwide. ALC, headquartered in
Bingham Farms, Michigan, is a publicly held company whose
stock is traded on the American Stock Exchange. Under the
terms of the merger agreement, each shareholder of ALC
received 2.0 shares of Frontier stock for each share of ALC
stock, for a total of 69.2 million shares of Frontier stock
as of the effective date of August 16, 1995. Revenues for
ALC for 1994, 1993 and 1992 were $567.8 million, $436.4
million and $376.1 million, respectively. Net income for
1994, 1993 and 1992 was $64.3 million, $45.7 million and
$20.8 million, respectively. The financial statements for
all years presented have been restated to reflect the
accounts and operations of ALC.
In March 1995, the Company acquired American Sharecom,
Inc. (ASI), a long distance company headquartered in
Minneapolis, Minnesota, and accounted for the acquisition as
a pooling of interests. A total of 8.7 million shares of
common stock were exchanged for all of the outstanding stock
of ASI. Revenues for ASI for 1994, 1993 and 1992 were
$122.6 million, $100.9 million and $76.1 million,
respectively. Net Income for ASI for 1994, 1993 and 1992
was $13.0 million, $6.6 million and $3.3 million,
respectively. The financial statements for all years
presented have been restated to reflect the accounts and
operations of ASI.
In April 1993, the Company acquired 70 percent
ownership of the Utica-Rome Cellular Partnership using
702,737 shares of original issue common stock (prior to the
April 1994 stock split). The transaction was accounted for
as a purchase acquisition. In addition, the
Telecommunication Services group acquired Budget Call Long
Distance, Inc. in June 1993 for $7.5 million in cash and
acquired Frontier Communications of the Mid Atlantic, Inc.
(formerly Mid Atlantic Telecom, Inc.) in September 1993
using 143,587 shares of treasury stock (prior to the April
1994 stock split). Both transactions were accounted for as
purchase acquisitions.
During July 1993, the Company acquired the specialized
800 customer base of Call Home America, Inc. (CHA) for $15.5
million plus a payment of $4.2 million made in August 1994
which was based on certain 800 customer base revenue
generated by customers in April, May and June 1994.
The Company also acquired additional customers from CHA
under a marketing agreement from August 1993 through 1994.
Under this agreement, an additional $9.0 million and $4.1
million was paid for customers acquired during 1994 and
1993, respectively, and has been allocated to the purchase
price for the related customers acquired during the
respective years.
In 1992, the Company acquired Frontier Communications
of Georgia (formerly Statesboro Telephone Company) and
accounted for the acquisition as a pooling of interests.
Revenues and net income for the period January 1, 1992 to
the acquisition date for Frontier Communications of Georgia
were $6.1 million and $1.2 million, respectively. A total
of 1.5 million shares of common stock (prior to the April
1994 stock split) were exchanged for all of the outstanding
stock of Frontier Communications of Georgia.
3. Upstate Cellular Network
In March 1993, the Company signed a definitive
agreement with a subsidiary of NYNEX Corporation to form a
cellular supersystem joint venture in upstate and western
New York State to provide cellular telephone customers with
expanded geographic coverage. The supersystem includes the
cellular markets in Buffalo, Rochester, Syracuse, Utica-Rome
and New York Rural Service Area #1, which includes
Jefferson, St. Lawrence, and Lewis counties. The structure
of the transaction is a 50/50 joint venture partnership,
with Frontier as the managing partner. The Upstate Cellular
Network (UCN) joint venture began operating on July 1, 1994.
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 percent. The formation of UCN
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 of 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 table sets forth unaudited, summarized financial
data for this business segment. This table reflects both a
full 100 percent consolidation and a proportionate share
consolidation of entities in which the Company has a
significant ownership interest or acts as managing partner.
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).
<PAGE>
<PAGE>
<TABLE>
Total Properties Managed Frontier
Assuming 100% Ownership Proportionate Share (a)
- -----------------------------------------------------------------------------------------------
Dollars in thousands
(Unaudited) 1994 1993 1992 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues - Wireless $67,125 $36,900 $25,943 $35,602 $27,352 $19,767
Operating Expenses 38,203 21,361 14,903 20,074 15,319 10,826
Cost of Goods Sold 9,787 6,590 4,205 5,582 5,078 3,231
Depreciation 6,688 3,648 2,620 3,276 2,165 1,654
Taxes Other Than Income Taxes 2,580 1,409 1,079 1,303 1,086 847
- -----------------------------------------------------------------------------------------------
Total Costs and Expenses 57,258 33,008 22,807 30,235 23,648 16,558
- -----------------------------------------------------------------------------------------------
Operating Income - Wireless $ 9,867 $ 3,892 $ 3,136 $ 5,367 $ 3,704 $ 3,209
===============================================================================================
Number of Customers 146,614 58,097 37,616 60,357 44,869 30,397
Total POPs 4,198,000 2,081,705 1,733,968 1,710,625 1,328,980 1,088,885
===============================================================================================
</TABLE>
(a) At December 31, 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
December 31, 1993, the Company's proportionate
ownership interests were 85% of Rochester, 70% of Utica-
Rome, 100% of PageCo, 70% of Alabama RSA #4 and #6, and
22.5% of NY RSA #3. At December 31, 1992, the
Company's proportionate ownership interests were 85% of
Rochester, 50% of Alabama RSA #4 and #6, 100% of PageCo
and 20% of NY RSA #3.
4. Extraordinary and Unusual Items
In May 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 $7.1 million after-tax gain, or $.04 per share.
As part of the Rochester, New York operating company's
Settlement Agreement with the PSC finalized in the third
quarter of 1993, the Company agreed to write-off one-half of
the costs ($3.3 million) previously deferred as part of a
project to redesign customer account records, order flow and
customer billing systems. The costs were incurred from
January 1990 to December 1992 and the project was abandoned
after it was determined that the cost to complete it was
substantially greater than initially estimated. The
remaining one-half of the costs previously deferred are
being amortized to expense and recovered in rates. This
charge is reflected on the Consolidated Statement of Income
in the caption "Software write-off."
In May 1993, the Company completed an offering of $85.0
million 9.0% Senior Subordinated Notes. The net proceeds of
$84.3 million were used to repay the outstanding 11 7/8%
Senior Subordinated Notes and to reduce the amount
outstanding under the short term Revolving Credit Facility.
The early retirement of the 11 7/8% Notes resulted in an
extraordinary loss of $7.5 million, net of the related taxes
of $4.0 million.
In December 1992, the Executive Committee of the Board
of Directors approved the refinancing of the $40 million
Series H, 9 1/2 percent first mortgage bonds. The Company
recorded a charge of $1.1 million (net of taxes of $.5
million) in 1992 relating to the write-off of the call
premium, the remaining initial discount and associated
expenses of the transaction. The bonds were retired in
January 1993 using internally generated cash and the private
placement of $35 million of debt at a telephone subsidiary.
5. Property, Plant and Equipment
Major classes of property, plant, and equipment are
summarized below:
- ---------------------------------------------------------
In thousands of dollars 1994 1993 1992
- ---------------------------------------------------------
Land and Buildings $103,235 $ 107,165 $ 105,928
Local and Toll
Service Lines 752,366 743,028 718,866
Central Office Equipment 584,434 583,928 572,507
Station Equipment 33,926 34,740 96,549
Switching and Network
Facilities 234,433 207,952 180,445
Furniture, Office Equipment,
Vehicles, Tools, etc. 170,094 172,094 163,537
Plant Under Construction 36,130 33,048 36,619
Less: Accumulated
Depreciation 880,176 801,820 788,691
- ----------------------------------------------------------
$1,034,442 $1,080,135 $1,085,760
==========================================================
6. Notes Payable and Lines of Credit
At December 31, the Company had outstanding notes payable as
follows:
- --------------------------------------------------------
In thousands of dollars Amount Interest Rate
- --------------------------------------------------------
1992 $6,194 4.00% - 9.00%
1993 $ 303 6.00% - 9.00%
1994 $ 106 9.00%
- --------------------------------------------------------
At December 31, 1994, the Company had $214.5 million of
unused bank lines of credit, which were available for
general corporate purposes. Of the $214.5 million, $125
million is available to provide support for commercial paper
borrowings and $5.6 million has been allocated to
outstanding letters of credit. No compensating balances are
required and the commitment fees range from .375 percent to
.05 percent of the unused portion of the facilities.
In January 1995, the Company entered into a $105
million unsecured facility with First Union National Bank of
North Carolina and Bank One, Columbus, NA as Co-Managing
Agents. A $40.0 million facility was simultaneously
terminated. A commitment fee of .25 percent per annum is
charged on the unused portion of the line.
<PAGE>
<PAGE>
7. Long-Term Debt
- ---------------------------------------------------------------
In thousands of dollars
At December 31, 1994 1993 1992
- ---------------------------------------------------------------
First Mortgage Bonds
Series E, 4 3/4%, due
September 1, 1993 - - $ 12,000 (a)
Series F, 4 1/2%, due
May 1, 1994 - - 18,000 (a)
Series G, 7 5/8%, due
March 1, 2001 - - 30,000 (a)
Series H, 9 1/2%, due
March 1, 2005 - - 40,000 (b)
Frontier Communications of Minnesota, Inc.
(formerly Vista Telephone Company of
Minnesota) Senior Notes, 7.61%,
due February 1, 2003 $ 35,000 $ 35,000 -
Rural Electrification
Administration debt, 2%-9%
due 1993 to 2026 77,045 80,667 85,048
Other debt issued by
affiliates, 7.5%-12 3/4% - - 15,840
- ---------------------------------------------------------------
112,045 (c) 115,667 200,888
- ---------------------------------------------------------------
Debentures
4 3/4% Convertible, due
March 1, 1994 - - 137 (d)
10.46% Convertible, due
October 27, 2008 5,300 (e) 5,300 5,300
9%, due January 1, 2020 69,785 (f) 100,000 100,000
9%, due August 15, 2021 100,000 100,000 100,000
- ---------------------------------------------------------------
175,085 205,300 205,437
- ---------------------------------------------------------------
9.0% Senior Subordinated Notes,
due 2003 80,000 (i) 85,000 (h)
11.875% Senior Subordinated
Notes, due 1999 72,380 (h)
Medium-Term Notes, 8.77% - 9.3%,
due 2000 to 2004 179,000 179,000 179,000
Promissory Note, 12%, due
June 30, 1995 12,566
Revolving Credit and Term
Loan Agreements 120,000 (g) - 18,002
Other debt issued by affiliates 585 1,858 3,474
Capitalized Lease Obligations
and Other Debt 3,280 3,656 10,692
- ---------------------------------------------------------------
Sub-total 669,995 (j) 590,481 702,439
Less-Discount on long-term
debt, net of premium 3,586 4,115 13,830
Current portion of
long-term debt 4,860 4,659 84,452
- ---------------------------------------------------------------
Total Long-Term Debt $661,549 $581,707 $604,157
===============================================================
(a) In July 1993, the Company redeemed all of its
Series E, F and G First Mortgage Bonds.
(b) In December 1992, the Company entered into an
agreement to repurchase its Series H $40 million, 9
1/2%, First Mortgage Bonds on January 15, 1993. The
bonds were originally due March 1, 2005. As such,
these bonds were reclassified from long-term to
short-term at December 31, 1992. (See Note 4.)
(c) Certain assets of Telephone Operations are pledged
as security for Mortgage Bonds, Rural Electrification
Administration debt and other debt.
(d) In December 1992, the Company called its 4 3/4%
convertible debentures. As such, they were
reclassified from long-term to short-term debt at
December 31, 1992. The redemption of these debentures
occurred in January 1993. Prior to redemption, the
debentures were convertible at any time into common
stock at $5.75 per share subject to certain
adjustments. During 1993, $79,000 face value of the
debentures were converted into 13,714 shares of common
stock and in 1992, $8,000 face value of the debentures
were converted into 1,382 shares.
(e) The debenture is convertible into common stock at
any time after October 26, 1998 for $10.5375 per share.
A total of 502,966 shares of common stock are reserved
for such conversion.
(f) In December 1994, the Company redeemed $30.2
million of its 9% debentures due January 1, 2020. This
redemption was consummated through an open market
purchase at a price of 99 percent of face value.
(g) On December 19, 1994, the Company entered into a
Revolving Credit Agreement with seven commercial banks
as part of its implementation of the Open Market Plan
Agreement. The agreement established a $160 million
secured line of credit until December 18, 1999. The
debt is secured by the assets owned as of January 1,
1995 by Rochester Telephone Corp. Commitment fees
during the revolving loan period are .08 percent per
year on the outstanding commitment. Interest on
amounts drawn down are based on either the prime rate,
the London Interbank Offered Rate (LIBOR) plus .17
percent, or a competitive bid rate. On December 29,
1994, the Company drew down $120 million under this
facility at LIBOR plus .17 percent, which resets
monthly over the five year period of the loan.
(h) In May 1993, the Company completed an offering of
$85.0 million 9.0% Senior Subordinated Notes. The
Notes, which will mature on May 15, 2003 are redeemable
in whole or in part on or after May 15, 1998. The net
proceeds of $84.3 million were used to repay the
outstanding 11.875% Senior Subordinated Notes and to
reduce the amount outstanding under the short term
Revolving Credit Facility.
(i) In April 1994, the Company acquired $5.0 million
of the 9.0% Senior Subordinated Notes at the Company's
approximate book value.
(j) In accordance with Financial Accounting Standards
Board Statement No. 107 (FAS 107), "Disclosures about
Fair Value of Financial Instruments," the Company
estimates that the fair value of the debt, based on
rates currently available to the Company for debt with
similar terms and remaining maturities, is $677.9
million.
At December 31, 1994, aggregate debt maturities were:
- ---------------------------------------------------------------
In thousands of dollars 1995 1996 1997 1998 1999
- ---------------------------------------------------------------
$4,860 $6,642 $5,323 $4,875 $124,693
- ---------------------------------------------------------------
8. Income Taxes
The provision for income taxes consists of the following:
- ---------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- ---------------------------------------------------------------
Federal:
Current $105,189 $64,939 $38,839
Deferred (9,120) 398 (11,014)
- ---------------------------------------------------------------
96,069 65,337 27,825
- ---------------------------------------------------------------
State:
Current 13,116 7,307 6,746
Deferred (107) 865 (1,477)
- ---------------------------------------------------------------
13,009 8,172 5,269
- ---------------------------------------------------------------
Total income taxes $109,078 $73,509 $33,094
===============================================================
The reconciliation of the federal statutory income tax
rate with the effective income tax rate reflected in the
financial statements is as follows:
- --------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- --------------------------------------------------------------------
Federal income tax
expense at statutory
rate $99,163 35.0% $67,894 35.0% $45,849 34.0%
Accelerated
depreciation 2,699 .9 2,656 1.4 2,415 1.8
Investment tax
credit (1,964) (.7) (2,044) (1.0) (2,223) (1.7)
Utilization of net
operating
loss carryforward (3,431) (1.2) (3,431) (1.8) (18,850) (14.0)
Miscellaneous (398) (.1) 262 .1 634 .5
- ---------------------------------------------------------------------
Total federal
income tax $96,069 33.9% $65,337 33.7% $27,825 20.6%
=====================================================================
Deferred tax liabilities (assets) are comprised of the following
at December 31:
- -------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- -------------------------------------------------------------
Accelerated depreciation $151,069 $153,910 $152,230
Investment tax credit 5,354 6,828 8,047
Miscellaneous 11,799 10,533 11,137
- -------------------------------------------------------------
Gross deferred tax
liabilities 168,222 171,271 171,414
- -------------------------------------------------------------
Basis adjustment - purchased
telephone companies (31,851) (42,741) (45,368)
Employee benefits obligation(12,955) (5,415) -
Deferred compensation (2,864) (2,548) (1,981)
Net operating loss
carryforwards (42,000) (44,700) (44,700)
Other (10,918) (8,133) (7,977)
- -------------------------------------------------------------
Gross deferred tax assets (100,588) (103,537) (100,026)
Valuation allowance
for deferred tax assets 28,500 34,900 33,200
- -------------------------------------------------------------
Total deferred tax assets (72,088) (68,637) (66,826)
- -------------------------------------------------------------
Net Deferred Tax
Liabilities $96,134 $102,634 $104,588
=============================================================
ALC has tax net operating loss, alternative tax net
operating loss and investment tax credit ("ITC")
carryforwards which can be utilized annually to offset its
stand alone future taxable income. Because of the
"ownership changes" which occurred in 1989, 1992 and 1993
under provisions of Internal Revenue Code Section 382, the
utilization of carryforwards is presently limited to
approximately $10 million per year through 2005. This
annual limitation, coupled with the 15 year carryforward
limitation, results in a maximum cumulative NOL and ITC
carryforward which may be utilized of approximately $108
million, $118 and $128 million as of December 31, 1994,
December 31, 1993, and December 31, 1992, respectively. The
Company has established valuation allowances primarily for
net operating loss carryforwards generated by ALC. As a
result of the uncertainties surrounding ALC's ability to
generate taxable income in the future, a valuation allowance
was established for the entire balance of the net operating
losses as of January 1, 1992. In the fourth quarter of
1992, the Company reduced its valuation allowance by $20.5
million. The adjustment resulted from ALC's generation of
taxable income. Because it is difficult to predict the
realization of the NOL benefit beyond a period of three
years, the Company has established valuation allowances of
$28.5 million, $34.9 million, and $33.2 million, as of
December 31, 1994, December 31, 1993, and December 31, 1992,
respectively.
The tax benefit realized from the exercise of stock
options of $4.1 million in 1994 and $5.5 million in 1993
was added to capital in excess of par value and is not
reflected in operations.
Gross profit on affiliate sales to telephone
companies is deferred by Telecommunication Services and is
amortized to offset income taxes to be paid over the cost
recovery periods of the telephone plant. The amortization
of gross profit deferred in prior years exceeded current
year deferrals by $332,000 in 1994, $558,000 in 1993 and
$927,000 in 1992 resulting in deferred tax reversals of
$116,000, $195,000 and $315,000, respectively.
9. Service Pensions and Benefits
The Company provides retirement benefits for
substantially all employees through various contributory and
non-contributory defined benefit pension plans. Benefits,
in general, are based on years-of-service and average
salary.
The majority of the Company's pension plans have plan
assets that exceed accumulated benefit obligations. There
are certain plans, however, with accumulated benefit
obligations which exceed plan assets. The following tables
summarize the funded status of the Company's pension plans
and the related amounts that are recognized in the
Consolidated Balance Sheet.
<PAGE>
<PAGE>
Plans for Plans for
which assets which
exceed accumulated
December 31, 1994 accumulated benefits
In thousand of dollars benefits exceed
assets Total
- ---------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefit
obligation $294,140 $ 15,494 $309,634
Accumulated benefit
obligation $308,432 $ 17,223 $325,655
- ---------------------------------------------------------------
Plan assets at fair value,
primarily fixed income
securities and common
stock $373,446 $ 6,641 $380,087
Projected benefit
obligation (326,858) (20,774) (347,632)
- ---------------------------------------------------------------
Funded status 46,588 (14,133) 32,455
Unrecognized net
(gain)/loss (23,244) 2,980 (20,264)
Unrecognized net
transition asset (3,935) 18 (3,917)
Unrecognized prior
service cost 6,563 5,240 11,803
Adjustment required to
recognize minimum liability - (4,728) (4,728)
- ---------------------------------------------------------------
Pension asset (liability) reflected
in Consolidated
Balance Sheet $ 25,972 $(10,623) $ 15,349
===============================================================
<PAGE>
<PAGE>
Plans for Plans for
which assets which
exceed accumulated
December 31, 1993 accumulated benefits
In thousand of dollars benefits exceed
assets Total
- -------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefit
obligation $280,941 $2,626 $283,567
Accumulated benefit
obligation $304,359 $2,657 $307,016
- ---------------------------------------------------------------
Plan assets at fair value,
primarily fixed income
securities and common
stock $395,698 $2,143 $397,841
Projected benefit
obligation (350,946) (3,119) (354,065)
- ---------------------------------------------------------------
Funded status 44,752 (976) 43,776
Unrecognized net
(gain)/loss (29,311) 582 (28,729)
Unrecognized net
transition asset (5,291) (151) (5,442)
Unrecognized prior
service cost 9,018 209 9,227
- ---------------------------------------------------------------
Pension asset (liability) reflected
in Consolidated
Balance Sheet $ 19,168 $ (336) $ 18,832
===============================================================
Plans for Plans for
which assets which
exceed accumulated
December 31, 1992 accumulated benefits
In thousand of dollars benefits exceed
assets Total
- ---------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefit
obligation $240,147 $ 3,160 $243,307
Accumulated benefit
obligation $254,592 $ 3,301 $257,893
Plan assets at fair value,
primarily fixed income
securities and
common stock $367,841 $ 2,870 $370,711
Projected benefit
obligation (312,169) (4,166) (316,335)
- ---------------------------------------------------------------
Funded status 55,672 (1,296) 54,376
Unrecognized net
(gain)/loss (42,977) 405 (42,572)
Unrecognized net
transition asset (4,732) (209) (4,941)
Unrecognized prior
service cost 6,058 1,013 7,071
- ---------------------------------------------------------------
Pension asset (liability)
reflected
in Consolidated
Balance Sheet $14,021 $ (87) $ 13,934
===============================================================
The net periodic pension cost consists of the following:
- ---------------------------------------------------------------
In thousands of dollars
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------
Service cost-benefits earned
during the period $ 7,934 $ 7,758 $ 7,033
Interest cost on projected
benefit obligation 25,565 23,932 23,123
Actual return on plan
assets 2,229 (40,484) (24,860)
Net amortization and
deferral (37,863) 7,623 (9,033)
- ---------------------------------------------------------------
Net periodic pension cost
determined under FAS 87 (2,135) (1,171) (3,737)
Amount expensed due to
regulatory agency actions(1,743) (1,537) 6,787
- ---------------------------------------------------------------
Net periodic pension
cost (benefit)
recognized ($3,878) ($2,708) $ 3,050
The projected benefit obligation at December 31, 1994
was determined using an assumed weighted average discount
rate of 8.5 percent and an assumed weighted average rate of
increase in future compensation levels of 5.5 percent. The
weighted average expected long-term rate of return on plan
assets was assumed to be 9.0 percent. The unrecognized net
transition asset as of January 1, 1987 is being amortized
over the estimated remaining service lives of employees,
ranging from 12 to 26 years.
The Company's funding policy is to make contributions
for pension benefits based on actuarial computations which
reflect the long-term nature of the pension plan. However,
under Financial Accounting Standards Board Statement No. 87
(FAS 87), "Employers' Accounting for Pensions," the
development of the projected benefit obligation essentially
is computed for financial reporting purposes and may differ
from the actuarial determination for funding due to varying
assumptions and methods of computation.
During 1994, 1993 and 1992, the Company funded $ 1.0
million, $.2 million and $4.8 million, respectively, for
employees' service pensions and certain death benefits.
On November 30, 1992, a voluntary pension incentive
plan was offered to the Rochester, New York operating
company's employees who were pension-eligible and retired on
or before December 31, 1992. A 7.5 percent additional
pension benefit will supplement the normal pension benefit
for up to five years or until age 65, whichever is earlier.
Accordingly, pension costs for the fourth quarter of 1992
included a one-time charge of $.8 million. Payments will be
made from pension plan assets.
The Company has established a rabbi trust separate from
the pension plan assets to provide funding for the benefits
payable under its Supplemental Management Pension Plan
("SMPP"). The SMPP is a defined benefit plan under which
the Company will pay supplemental pension benefits to key
executives in addition to amounts received under the
Company's retirement plan. The trust is irrevocable and
assets contributed to the trust can only be used to pay such
benefits with certain exceptions. The assets held in trust
at December 31, 1994 amounted to $7.1 million consisting of
primarily fixed income securities and common stock.
The Company also sponsors a number of defined
contribution plans. The most significant plan covers
substantially all non-union employees, who make
contributions through payroll deduction. The Company
matches up to 75 percent of that contribution up to 6
percent of gross compensation. The total cost recognized
for all defined contribution plans was $5.6 million for 1994
and $4.7 million for 1993.
10. Postretirement Benefits Other Than Pensions
The Company provides health care, life insurance, and
certain other retirement benefits for substantially all
employees. Effective January 1, 1993, the Company adopted
Financial Accounting Standards Board Statement No. 106 (FAS
106), "Employers' Accounting for Postretirement Benefits
Other Than Pensions." FAS 106 requires that employers
reflect in current expenses an accrual for the cost of
providing postretirement benefits to current and future
retirees. Prior to 1993, the Company recognized these costs
as they were paid. Plan assets consist principally of life
insurance policies and money market instruments.
In adopting FAS 106, the Company elected to defer the
recognition of the accrued obligation of $125 million over a
period of twenty years. For 1993, the adoption of this
standard resulted in additional operating expenses in the
amount of $7.8 million, net of a deferred income tax benefit
of $4.1 million.
However, a substantial portion of this increase was
offset by a change in accounting for pensions for rate
making purposes at the Rochester, New York operating
company. The change requires that the company amortize,
over a ten year period, the cumulative amount of pension
funding from January 1, 1987 over the amount of pension
expense which would have been recognized through December
31, 1992 under FAS 87, reducing pension expense throughout
the amortization period. The net impact of adopting FAS 106
and recording the accounting change for FAS 87 actually
resulted in $3.8 million of additional operating expenses,
net of the income tax benefit, in 1993.
The funded status of the plans is as follows:
In thousands of dollars
- ---------------------------------------------------------------
December 31, 1994 1993
- ---------------------------------------------------------------
Accumulated postretirement benefit
obligation (APBO) attributable to:
Retirees $ 79,935 $ 63,749
Fully eligible plan
participants 22,812 44,399
Other active plan participants 28,877 34,892
- ---------------------------------------------------------------
Total APBO 131,624 143,040
Plan assets at fair value 5,545 3,944
- ---------------------------------------------------------------
APBO in excess of plan assets 126,079 139,096
Unrecognized transition obligation (109,730) (117,706)
Unrecognized net prior service cost (6,003) (1,458)
Unrecognized net gain (loss) 15,502 (3,811)
- ---------------------------------------------------------------
Accrued postretirement benefit
obligation $25,848 $16,121
================================================================
The components of the estimated postretirement benefit
cost are as follows:
- ---------------------------------------------------------
In thousands of dollars
December 31, 1994 1993
- ---------------------------------------------------------
Service cost $ 1,323 $ 2,746
Interest on accumulated
postretirement 9,666 10,046
benefit obligation
Amortization of transition
obligation 6,094 6,241
Return on plan assets (385) (290)
Amortization of prior
service cost 383 -
Amortization of gains and losses (704) -
- ---------------------------------------------------------
Net postretirement
benefit cost $16,377 $18,743
=========================================================
To estimate these costs, health care costs were assumed
to increase 11.2 percent in 1995 with the rate of increase
declining consistently to 5.75 percent by 2006 and
thereafter. The weighted discount rate and salary increase
rate were assumed to be 8.5 percent and 5.5 percent,
respectively. The expected long-term rate of return on plan
assets was 9.0 percent. If the health care cost trend rates
were increased by one percentage point, the accumulated
postretirement benefit health care obligation as of December
31, 1994 would increase by $14.7 million while the sum of
the service and interest cost components of the net
postretirement benefit health care cost for 1994 would
increase by $1.3 million.
11. Postemployment Benefits
In 1992 the Financial Accounting Standards Board
released Statement No. 112 (FAS 112), "Employers' Accounting
for Postemployment Benefits" which was required to be
implemented by January 1, 1994. FAS 112 requires that the
projected future costs of providing postemployment, but
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 or the Company's cash flow.
12. Stock Offering
In February 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, 2.5 million new primary shares were
issued and sold directly by the Company and 2.9 million
shares were sold by C FON Corporation, a subsidiary of
Sprint Corporation. All share and per share data is prior
to the 2-for-1 stock split in April 1994.
13. 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 both Plans which increased the total number of
option shares to 1.5 million. The amendments also provided
for automatic increases in the number of shares that may be
issued as a result of a stock split. Consequently, since
the stock was split subsequent to the 1994 Annual Meeting,
there is currently a maximum of 3 million 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.
Information with respect to options under the above plans
follows:
Option Price
Shares Per Share Aggregate
- ----------------------------------------------------------
Outstanding at
August 1, 1992 - -
Granted in 1992 96,400 $15.75-$15.69 $1,515,925
- ---------------------------------------------------------------
Outstanding at
December 31, 1992 96,400 1,515,925
Granted in 1993 258,038 $19.75-$18.44 4,935,175
Cancelled in 1993 (9,500) $19.06-$15.75 (176,125)
Exercised in 1993 (2,218) $15.75-$15.69 (34,892)
- ---------------------------------------------------------------
Outstanding at
December 31, 1993 342,720 6,240,083
Granted in 1994 408,400 $22.69-$21.19 8,826,975
Cancelled in 1994 (36,820) $22.69-$15.75 (737,529)
Exercised in 1994 (13,595) $19.75-$15.69 (243,385)
- ---------------------------------------------------------------
Outstanding at
December 31, 1994 700,705 $14,086,144
===============================================================
At December 31, 1994, 129,069 shares were exercisable and
2,283,482 shares were available for future grant.
ALC has two Employee Stock Option Plans as well as a Non-
Employee Director Plan. The maximum number of shares for
which options may be granted under both employee plans is
12,000,000 (adjusted for certain events such as a
recapitalization). The plans provide for the granting of
stock options and stock appreciation rights to key
employees. The maximum number of shares which may be
granted under the Non-Employee Plan is 200,000 shares.
Information with respect to options under the above plans
follows:
Option Price
Shares Per Share Aggregate
- --------------------------------------------------------------
Outstanding at
January 1, 1992 5,603,432 $1.75-$2.20 $9,886,000
Granted in 1992 2,161,752 $2.19-$3.85 5,796,000
Cancelled in 1992 (144,438) $1.75-$2.94 (297,000)
Exercised in 1992 (346,690) $1.75 (607,000)
- ---------------------------------------------------------------
Outstanding at
December 31, 1992 7,274,056 14,778,000
Granted in 1993 3,261,000 $13.03-$13.13 40,973,000
Cancelled in 1993 (36,134) $1.75-$2.94 (94,000)
Exercised in 1993 (1,510,530) $1.75-$3.85 (2,803,000)
- ---------------------------------------------------------------
Outstanding at
December 31, 1993 8,988,392 52,854,000
Granted in 1994 99,500 $14.82-$16.63 1,543,000
Cancelled in 1994 (113,644) $1.75-$16.63 (970,000)
Exercised in 1994 (699,430) $1.75-$12.53 (1,362,000)
- ---------------------------------------------------------------
Outstanding at
December 31, 1994 8,274,818 $52,065,000
===============================================================
At December 31, 1994, 4,414,432 shares were exercisable.
Common Stock Warrants
As of December 31, 1994, warrants for the purchase of
856,180 shares of Common Stock at $1.00 per share, 5,527,756
shares at $2.50 per share and 1,320,000 shares at $31.88 per
share were outstanding. The warrants expire in June 2005,
June 1997 and December 1995, respectively. The $1.00 and
$2.50 warrants were issued in connection with the ALC's
refinancings and the difference between the exercise price
and the fair value of the warrants at the time of issuance
was recorded as a discount on the related notes and an
increase to capital in excess of par value.
<PAGE>
<PAGE>
14. Preferred Stock
- -----------------------------------------------------------------------
In thousands of dollars, except share data 1994 1993 1992
- -----------------------------------------------------------------------
Frontier Corporation-850,000 shares authorized; par value $100
5.00% Series-redeemable at $101 per share
Shares Outstanding 100,000 100,000 100,000
Amount Outstanding $ 10,000 $ 10,000 $ 10,000
5.65% Series-redeemable at $101 per share
Shares Outstanding 50,000 50,000 50,000
Amount Outstanding $ 5,000 $ 5,000 $ 5,000
4.60% Series-redeemable at $101 per share
Shares Outstanding 50,000 50,000 50,000
Amount Outstanding $ 5,000 $ 5,000 $ 5,000
Frontier Communications of New York, Inc.
(formerly Highland Telephone Company)
-40,000 shares authorized; par value $100
5.875% Series A-redeemable at par
Shares Outstanding 18,694 18,694 18,694
Amount Outstanding $ 1,869 $ 1,869 $ 1,869
7.80% Series B-redeemable at $100.80-$105.00 per share
Shares Outstanding 6,320 6,400 6,480
Amount Outstanding $ 632 $ 640 $ 648
Frontier Communications of AuSable Valley, Inc.
(formerly AuSable Valley Telephone Company, Inc.)
-4,000 shares authorized; par value $100
5.50% Series-redeemable at par
Shares Outstanding 2,754 2,754 2,754
Amount Outstanding $ 276 $ 276 $ 276
ALC Communications Corporation
Preferred Stock
14,784,000 shares authorized; par value $.01
Shares Outstanding 0 0 0
Amount Outstanding $ 0 $ 0 $ 0
Class B Preferred Stock
1,000,000 shares authorized; par value $.01
Shares outstanding 1,000,000
Amount outstanding $ 10
Class C Preferred Stock
1,000,000 shares authorized; par value $.01
Shares outstanding 1,000,000
Amount outstanding $ 10
Total Shares Outstanding 227,768 227,848 $2,227,928
- -----------------------------------------------------------------------
Total Amount Outstanding $ 22,777 $ 22,785 $ 22,813
At the special meeting in December 1994, Frontier
Corporation shareowners authorized 4 million shares of a new
class of preferred stock, having a value of $100.00 per
share and designated as Class A Preferred Stock. This class
of stock will rank junior to the cumulative preferred stock
as to dividends and distributions, and upon the liquidation,
dissolution or winding up of the Company.
15. Leases and License Agreements
The Company leases buildings, land, office space, fiber
optic network, computer hardware and other equipment, and
has license agreements for rights-of-way for the
construction and operation of a fiber optic communications
system. Total rental expense amounted to $68.7 million in
1994, $66.2 million in 1993 and $69.6 million in 1992.
Minimum annual rental commitments under non-cancellable
operating leases and license agreements in effect on
December 31, 1994 were as follows:
In thousands of dollars
- ---------------------------------------------------------------
Transmission/
Non-Cancellable Leases License
Years Buildings Equipment Agreements
- ---------------------------------------------------------------
1995 $13,996 $ 5,904 $ 33,487
1996 12,941 5,063 25,434
1997 12,363 2,085 19,778
1998 9,995 363 16,110
1999 6,988 1 12,925
2000 and
thereafter 23,766 0 21,128
- ---------------------------------------------------------------
Total $80,049 $13,416 $128,862
- ---------------------------------------------------------------
In August 1994, the Company completed a series of
contracts which will result in a reduction of the Company's
Michigan network costs by over $2 million per year. The
transactions included loans totaling $9.2 million in
exchange for notes receivable to be repaid over 5 years and
a 15 percent minority ownership position in a company owning
a Michigan-based digital fiber optic network.
16. Open Market Plan and Corporate Restructuring
Effective December 19, 1994, upon receiving shareowner
approval, the Company changed its name from Rochester
Telephone Corporation to Frontier Corporation. The new name
reflects not only the pioneering heritage of our past but
our willingness to embrace the challenges of the future.
The name also symbolizes the change from a company focused
in Rochester, New York to a nationwide company.
At its public meeting in October 1994, the New York
State Public Service Commission (PSC) unanimously approved
the Company's Open Market Plan and Corporate Restructuring
(Open Market Plan) and subsequently issued a written order
in November 1994. This landmark decision resulted in
opening up the Rochester, New York local exchange market to
competition and simultaneously allowed the Company to form a
holding Company. The Open Market Plan was approved by
shareowners in December 1994 and became operational on
January 1, 1995.
As a result of the Open Market Plan, two new companies
have been formed from the operating assets of the former
Rochester operating telephone company. One company
(Frontier Communications of Rochester, Inc.) is a
competitive telecommunications company which will provide an
array of services on a retail basis in the Rochester
marketplace. This company has the flexibility to price and
introduce services as necessary to compete. The second
company (Rochester Telephone Corp.) is a network company
which is regulated and will provide services to the new
competitive subsidiary company and all other
telecommunications providers on an equal basis. The network
company also will continue to provide services to individual
retail customers. This configuration has been established
to better meet the current and emerging competition in the
marketplace.
For the seven-year period of the Open Market Plan,
Rochester Telephone Corp. will no longer be subject to rate
of return regulation. In its place, the company will be
subject to price regulation. The local market for telephone
service in Rochester will be opened 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.
The Open Market Plan temporarily resolves certain
financial questions that are linked to the royalty
proceeding, a contested proceeding that has been in
litigation since 1984. In particular, the PSC has agreed
that a royalty will not be imposed by the PSC against the
Company or Rochester Telephone Corp. during the seven year
period of the Plan, subject to limited exceptions. However,
the PSC is not precluded from seeking any royalties pursuant
to the Royalty Order, on a prospective basis only, as it may
be modified as a result of judicial appeal, subsequent to
the expiration of the Open Market Plan. Under the Open
Market Plan, the Company is permitted to continue its
litigation challenging the Royalty Order, and the Company
intends to pursue it to conclusion.
The Company has also reorganized into a holding company
structure as allowed under the Open Market Plan Agreement.
This structure provides additional financing flexibility to
continue the acquisition and diversification efforts
necessary for the long-term growth of the business. (See
"Management's Discussion and Analysis of Results of
Operations and Financial Condition" for additional
information regarding the Open Market Plan.)
17. Commitments and Contingencies
It is anticipated that the Company will expend $163.0
million for additions to property, plant, and equipment
during 1995. In connection with this construction program,
the Company has made certain commitments for the purchase of
material and equipment.
In January 1995, the Company announced plans to acquire
ConferTech International, Inc. (ConferTech), a leading
provider of teleconferencing services and audio bridge
equipment. The Company entered a definitive agreement to
acquire all the shares of ConferTech in a transaction valued
at $66 million. The Company completed a cash tender offer
at $8.00 per share in March 1995. The acquisition was
financed through cash from operations as well as utilization
of the Company's line of credit. The transaction was
accounted for as a purchase acquisition.
In July 1994, the Company signed a definitive agreement
to purchase the Minnesota Southern Cellular Telephone
Company (MSCTC) in a tax-deferred stock-for-stock
transaction. MSCTC is the non-wireline cellular provider of
service in Minnesota Rural Service Area #10. The
transaction was finalized in March 1995, and has been
accounted for using the purchase method of accounting.
In September 1994, the Company announced its intent to
sell Ontonagon County Telephone Company and its subsidiary,
Midway Telephone, to Mid-South Telecommunications. The
pending sale is the result of the Company's plans to expand
in areas other than Michigan's Upper Peninsula. The sale
was completed in March 1995.
On November 8, 1994, the Company signed a definitive
agreement 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. Under the definitive
agreement, as amended, each public WCT shareowner received
$5.875 per share pursuant to a cash merger, with the
exception of Richard Frockt, WCT's chairman and 24 percent
shareholder, who received $3.75 per share. Mr. Frockt and
Christopher Edgecomb, WCT's Executive Vice President and 7
percent shareholder, agreed to vote their shares in favor of
the merger. The total cash consideration paid by Frontier
Corporation for all the outstanding shares of WCT was $80
million. When the transaction was consummated, WCT's
interexchange operations, which generated $102 million of
revenues in its fiscal year ended June 30, 1994, were merged
into Frontier Corporation's long distance operation,
Frontier Communications International. The transaction was
accounted for as a purchase acquisition and closed in May
1995.
The following unaudited pro forma summary reflects the
results of operations of the Company for its pending
acquisition of WCT and ConferTech. The unaudited pro forma
results of operations include WCT and ConferTech for 1994
only as this acquisition will be accounted for using the
purchase method of accounting. The unaudited pro forma
results have been prepared for comparative purposes only and
are not necessarily indicative of results that would have
been achieved had the transaction been consummated at the
beginning of 1994 or of results which may occur in the
future. The unaudited pro forma results for 1994 (in
thousands of dollars, except per share data) were as
follows: Revenues and Sales - $1,840,271; Consolidated Net
Income - $161,393 and Primary Earnings Per Common Share -
$1.00.
Prior to Frontier's acquisition of American Sharecom,
Inc., (ASI) a legal action had been filed by certain former
ASI shareholders against the company. The following
paragraphs summarize the events associated with this action.
After receiving approval from the shareholders of both
companies, Sharecom Holdings, Inc. (Holdings), whose stock
was owned by two officers of American Sharecom, Inc. (ASI),
was merged into ASI during May 1992. All outstanding shares
and options of ASI not owned by Holdings or the two officers
were converted into the right to receive $17,695 in cash,
less the exercise price of the option, if applicable. In
reviewing the merger prior to submitting it to the
shareholders for approval, ASI's Board of Directors
considered, among other things, an independent valuation
study of the company, and a separate fairness opinion.
Prior to the merger, the two officers contributed their
86 shares of ASI Common Stock to Holdings in exchange for
100,000 shares of Holdings Common Stock, which upon
completion of the merger, were converted into 100,000 shares
of ASI Common Stock. The two officers' outstanding options
to purchase ASI Common Stock were unaffected by the merger.
Former holders of 57 shares of ASI Common Stock
(dissenters) have exercised their rights under Minnesota law
to challenge the amount they received for their shares; they
have also requested the court to nullify certain stock
options previously granted to the two officers. In November
1994, the Minnesota District Court directed ASI to pay an
additional $4,618,500 to the dissenters plus interest and
legal fees. The Company has recorded a $2.5 million
contingent liability as of December 31, 1994 representing
its proportionate share of the liability. Both ASI and the
dissenters have appealed the District Court decision to the
Minnesota Appellate Court.
18. Business Segment Information
Revenues and sales, operating income, depreciation,
construction and identifiable assets by business segment are
set forth in the Business Segment Information.
<PAGE>
<PAGE>
<TABLE>
20. Interim Data (Unaudited)
Selected Quarterly Data follow:
In thousands except per share data
- --------------------------------------------------------------------------------------------
Revenues
and Sales Income Per Share
- --------------------------------------------------------------------------------------------
Earnings
Before Extra-
Tele- Operat- Ordinary Items
communication Telephone ing Net and Cumulative Market Price
Services Operations Total Income Income Effect Earnings High Low
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 First 248,455 150,999 399,454 76,834 32,962 (1) 0.25 0.21 $22.44 $20.25
Quarter
Second 261,862 154,905 416,767 80,446 52,909 0.33 0.33 $25.25 $20.81
Quarter
Third 271,354 150,149 421,503 85,265 47,407 0.29 0.29 $24.75 $21.63
Quarter
Fourth 276,196 153,625 429,821 86,124 46,779 0.29 0.29 $24.63 $20.50
Quarter
- -----------------------------------------------------------------------------
Full 1,057,867 609,678 1,667,545 328,669 180,057 1.16 1.12
Year
=============================================================================
1993 First 189,365 144,574 333,939 58,245 27,432 0.18 0.18 $19.44 $17.32
Quarter
Second 201,314 148,303 349,617 61,730 22,016 (2) 0.19 0.14 $21.75 $18.25
Quarter
Third 221,248 147,763 369,011 65,935 32,850 0.21 0.21 $24.38 $20.50
Quarter
Fourth 231,650 153,231 384,881 70,443 38,856 0.25 0.25 $25.13 $21.69
Quarter
- -----------------------------------------------------------------------------
Full 843,577 593,871 1,437,448 256,353 121,154 0.83 0.78
Year
=============================================================================
1992 First 164,505 137,708 302,213 46,657 32,450 0.24 0.24 $17.00 $15.07
Quarter
Second 167,711 140,677 308,388 50,883 21,681 0.15 0.15 $16.88 $14.57
Quarter
Third 174,047 142,116 316,163 55,636 24,499 0.17 0.17 $16.44 $15.13
Quarter
Fourth 178,709 146,771 325,480 56,618 27,323 (3) 0.19 0.18 $17.88 $15.32
Quarter
- -----------------------------------------------------------------------------
Full 684,972 567,272 1,252,244 209,794 105,953 0.75 0.74
Year
=============================================================================
(1) Includes cumulative effect charge related to change in accounting principle of $7.2
million. See Note 11.
(2) Includes extraordinary loss on retirement of debt of $7.50 million. See Note 4.
(3) Includes extraordinary loss on retirement of debt of $1.1 million. See Note 4.
</TABLE>
<PAGE>
<PAGE>
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 of the undersigned hereunto duly authorized.
Frontier Corporation
(Registrant)
/s/ Richard A. Smith
Dated: November 13, 1995 By: ------------------------
Richard A. Smith
Corporate Controller
(and principal accounting officer)
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Reference
- -------------- ------------ ---------
23-1 Consent of Accountants (Included Herewith
in Report of Independent
Accountants) (Price Waterhouse)
23-2 Consent of Accountants Herewith
(Ernst & Young)
27 Financial Data Schedule Herewith
<PAGE>
EXHIBIT 23-2
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration
Statements on Form S-3 (File Nos. 33-40824, 33-69420, 33-61784 and
33-57895), Form S-4 (File Nos. 33-61992 and 33-61047) and in the
Registration Statements on Form S-8 (File Nos. 33-67430, 33-67432,
44-67324, 33-51331, 33-51885, 33-52025, 33-54511, 33-54519,
33-59579 and 33-61855) of Frontier Corporation of our reports
dated January 20, 1995 and January 25, 1994 with respect to the
consolidated financial statements of ALC Communications Corporation
and subsidiary which are included in the Form 10-K's of ALC
Communications Corporation filed with the Securities and Exchange
Commission on March 24, 1995 and March 30, 1994, respectively, which
Form 10-K's are incorporated by reference in the Current Report on
Form 8-K of Frontier Corporation dated November 13, 1995.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Detroit, Michigan
November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from
Frontier Corporation's supplementary financial statements for the year
ended December 31, 1994 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000084567
<NAME> FRONTIER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 359,309
<SECURITIES> 9,047
<RECEIVABLES> 263,815
<ALLOWANCES> 0
<INVENTORY> 8,586
<CURRENT-ASSETS> 671,743
<PP&E> 1,914,618
<DEPRECIATION> 880,176
<TOTAL-ASSETS> 2,058,711
<CURRENT-LIABILITIES> 305,446
<BONDS> 661,549
<COMMON> 149,294
0
22,777
<OTHER-SE> 777,258
<TOTAL-LIABILITY-AND-EQUITY> 2,058,711
<SALES> 1,667,545
<TOTAL-REVENUES> 1,667,545
<CGS> 18,850
<TOTAL-COSTS> 1,338,876
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,312
<INCOME-PRETAX> 296,332
<INCOME-TAX> 109,078
<INCOME-CONTINUING> 187,254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (7,197)
<NET-INCOME> 180,057
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
</TABLE>
