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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) April 12, 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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The Registrant previously announced its agreement to acquire all of
the outstanding shares of American Sharecom, Inc. ("ASI"), a long
distance company headquartered in Minneapolis, Minnesota. ASI is
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. Under the agreement, the Registrant will acquire all
of the outstanding shares of ASI in exchange for 8.7 million shares
(valued at $184 million at December 31, 1994) of Frontier common
stock. The transaction will be accounted for as a pooling of
interests, is subject to regulatory approval and the completion of
appropriate due diligence. The transaction is expected to close in
the first quarter of 1995.
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Item 7 Financial Statements
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The Registrant hereby files by this Report on Form 8-K its 1994
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
acquisition of ASI using "pooling of interests" accounting
treatment. These supplementary financial statements specifically
include the following:
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 Consent of Accountants (Price Waterhouse)
(Included in Report of Independent Accountants)
27 Financial Data Schedule (Filed herewith)
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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/ Barbara J. LaVerdi
Dated: April 12, 1995 By: ------------------------
Barbara J. LaVerdi
Assistant Secretary
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EXHIBIT INDEX
Exhibit Number Description
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23 Consent of Accountants (Included in Report of
Independent Accountants)
27 Financial Data Schedule (Filed herewith)
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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 1.5 million customers in 41 states 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
10.0 percent to exceed $1.1 billion, and operating income rose to
$245 million, representing record earnings for the Company.
Earnings per share increased 29.3 percent in 1994 to $1.50 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 $457 million in 1994, an increase of $93.2
million, or 25.6 percent, over 1993. Overall, Frontier
Corporation's revenue mix continues to shift away from dependence
upon regulated revenue sources and more toward non-regulated
revenue streams, with the Telecommunication Services segment
accounting for 45 percent of total revenue in 1994. This compares
to 36 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 28 percent of total
revenues in 1994, down from 46 percent as originally reported in
1990.
Operating income for 1994 was $245.1 million, which represents
an increase of 19.4 percent over 1993. Consolidated net income
reached an all time high in 1994 at a level of $115.7 million, a
29.5 percent increase over 1993. The percentage growth in net
income was significantly 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 $1.41 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 $1.41, an increase of 21.6 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. The transaction has been accounted for as a pooling
of interests, and all historical financial information has been
restated to reflect the results of operations of ASI.
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 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. 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 in 41 states.
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 providing long distance telecommunication services
to business and residential customers, 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 us 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. Its competitive strength will be the 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) Although the royalty order
discussed below, under Regulatory Matters, remains in
litigation, the Open Market Plan Agreement precludes the PSC
from seeking royalties for the next seven years. After that,
subject to the outcome of the pending litigation, 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. We believe
that regulation has created artificial distinctions among local,
long distance, wireless and cable services, and that convergence
among these industry segments is unavoidable. We expect 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. Our 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. In 1994, the Company served customers in
41 states. In 1995, we expect to become a truly national company
by serving customers in virtually every state in the union. Since
1990, the Company's revenue has grown on average by 14.7 percent
per year. Frontier Corporation will continue to focus on expanding
its existing customer and revenue base.
We are proactively seeking acquisition opportunities and
strategic alliances that can enhance our overall network and
service offerings. Acquisitions are a function of both price and
opportunity. Frontier is interested in acquisition opportunities
that will significantly add to shareowner value. The areas that we
believe have the strongest growth potential are long distance and
wireless communications. We acknowledge the increasing importance
of video technology and video services in the marketplace and are
evaluating opportunities to participate more actively in the video
arena in the future. We also maintain our interest in additional
local exchange properties, particularly where we believe there are
synergistic opportunities with our existing operations, or where
the opportunity exists to add new concentrations of customers who
are candidates for Frontier integrated services solutions. We have
evaluated the potential benefits of Personal Communication Services
(PCS), which is a short-range wireless service similar to cellular.
We want to find value-conscious ways to use additional wireless
spectrum to serve customers. Our current focus is on growing the
Company in the continental U.S., but we are reviewing many
international opportunities as well, as we expect our long-term
growth will move us beyond domestic boundaries.
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. It is expected that this acquisition will be completed in
early 1995. In March 1995, the Company finalized its acquisition
of American Sharecom, Inc. and accounted for this transaction as a
pooling of interests. All historical data have been restated to
reflect the American Sharecom acquisition. The combination of WCT
and American Sharecom with Frontier Communications International
will bring Frontier's annual long distance revenues to over $550
million, establish our coast-to-coast network and make Frontier the
seventh largest long distance company in the country. In July,
1994, the Company agreed to purchase the Minnesota 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 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 a predominant base in
local telephony to one that is more heavily focused on the long
distance segment and on achieving communications services
integration. In 1995, we expect that a significant majority of our
total revenues will come from sources that no longer fall under
traditional rate of return regulation.
RESULTS OF OPERATIONS
Consolidated
Consolidated revenues and sales were $1,108.1 million in 1994,
a $100.7 million, or 10.0 percent, increase over 1993. This
performance followed a 14.5 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 $863.0 million, $802.1 million, and $699.2
million in 1994, 1993 and 1992, respectively, reflecting 7.6
percent and 14.7 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 20.6 percent in
1992 and 20.7 percent in 1993 to 22.1 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 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.
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. Tax Rate Change
The 1993 income tax provision includes the retroactive impact of
the federal income tax rate increase from 34 percent to 35 percent.
The overall impact of the tax rate change was approximately $2
million and includes approximately $400,000 attributable to years
prior to 1993. (See Note 9 to the Consolidated Financial
Statements.)
4. 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 5 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 5 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 45 percent of total revenue,
up from 36 percent only two years ago. Similarly, operating income
from this business segment accounted for 25 percent of the
Company's total, as compared with 16 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 $498.4 million in 1994,
up $84.9 million, or 20.5 percent, over 1993. This compares to an
increase of $100.7 million, or 32.2 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 recently acquired American
Sharecom, accounted for as a pooling of interests. Revenues in our
Network Systems and Services line of business, which includes long
distance, rose 23.5 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 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 $436.6 million, reflecting an increase of 17.2 percent over
1993. The increase for 1993 versus 1992 was 31.2 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 continue to decrease as we improve the efficiency
of our network and as the charges from local telephone companies
and other access providers continue to decline. 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
12.4 percent in 1994, following a margin of 9.9 percent in 1993 and
9.3 percent in 1992. The gain in 1994 results is driven by better
long distance margins which rose to 12.4 percent in 1994. Wireless
operating margins were adversely affected by the accounting change
for cellular properties in New York.
TELEPHONE OPERATIONS
Telephone Operations produced the majority of the Company's
overall revenues and income in 1994. 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. The Company remains committed to the
local telephone business and will consider additional acquisitions
of local telephone properties if they are consistent with the
Company's overall growth strategy. In 1994, Telephone Operations
generated 55 percent of total revenues and 75 percent of operating
income for the total company. Comparatively, as reported in 1992,
Telephone Operations generated 64 percent of total revenues and 84
percent of operating income.
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. We expect that this price decline will
continue as competition increases. 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 .7
percent in 1994 and increased 3.5 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 were flat in 1994 after increasing 2.7 percent 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 30.1 percent
in 1994, 28.2 percent in 1993 (after adjusting for the software
write-off) and 26.8 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 6.2 percent in 1994 and 7.1 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 $115.4
million of debt.
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 6.4 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 $21.7 million, an increase of
$8.1 million over 1992's net other expenses. This was due to
administrative expenses associated with the Company's
reorganization petition with the New York State Public Service
Commission, debt refinancing expenses, and acquisition costs.
Income Taxes
The effective federal tax rate in 1994 was 34.5 percent,
compared to 35.5 percent in 1993 and 34.4 percent in 1992. (See
Note 9 to the Consolidated Financial Statements.)
FINANCIAL CONDITION
Management's overall objective is to maximize shareowner
value. While increasing net income is an important component of the
process, management believes that the primary source of value over
the long term is cash generation over and above investment
requirements. Key management decisions are made based on the value
added to our shareowners' investment. Corporate performance,
strategies, capital projects and acquisitions are evaluated and
measured using cash flow analysis and investments are expected to
provide a return that exceeds the risk-adjusted cost of capital of
the Company, or specific business unit, as appropriate.
There are a number of key financial metrics that can be used
to monitor management's performance. While several of these
metrics provide information on the Company's financial condition at
a specific time, others, such as shareowner return, are somewhat
dependent on the overall financial markets and are often more
useful when viewed over an extended period of time.
<PAGE>
Key Financial Data
($'s in millions, except per share data)
- ---------------------------------------------------------
1994 1993 1992
- ----------------------------------------------------------
Total debt $ 584 $ 499 $ 595
Total capital $1,416 $1,184 $1,219
Debt ratio 41.2% 42.1% 48.8%
Operating margin 22.1% 20.4% 20.6%
Pre-tax interest coverage 5.2x 4.1x 3.3x
Capital expenditures $ 91 $ 108 $ 127
Dividends declared
per share $ .815 $ .795 $ .775
Dividends paid per share $ .810 $ .790 $ .770
Dividend yield 3.9% 3.6% 4.4%
Dividend payout ratio 57.4% 68.1% 81.1%
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 $231.0 million in 1994,
a decrease of $3.8 million from 1993. In 1993, cash from
operations was $234.9 million, an increase of $10.2 million over
1992. In 1994, higher net income and depreciation and amortization
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 net income,
depreciation and amortization coupled with a small impact from an
increase in accounts payable caused by the timing of purchases
associated with the Company's capital expenditures from 1992.
Cash Flows from Investing Activities
Cash used for investing activities decreased $61.3 million in
1994, from $115.3 million to $54.0 million. In 1993, cash used for
investing activities decreased $11.8 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 $89.8 million, a decrease of $14.5 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 decline in 1993's investing activities was
caused by lower capital spending offset in part by an increased
usage of cash related to acquisitions.
Cash Flows from Financing Activities
Cash flows from financing activities amounted to an inflow of
$108.7 million in 1994, compared with outflows of $157.6 million in
1993 and $72.6 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 $90 million of debt in
December 1994 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
$4.6 million for 1995, $5.1 million for 1996 and $4.5 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 $125 million. The total capital program
represents an increase of $34 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 American Sharecom, Inc.
(ASI) that was completed in March 1995 and for which historical
financial results have been restated, the Company had two
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. For the pending acquisition of WCT Communications
Inc. in California, we plan to expend approximately $79.8 million
in cash. 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.
As a result of the transaction with ASI, the two largest
shareowners of ASI (Steven C. Simon, president, and James J.
Weinert, vice president) became the largest individual shareowners
of Frontier Corporation. Together they hold a combined 10.6
percent of the outstanding common shares of the Company.
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 case is now being briefed before the Court of Appeals.
The Open Market Plan temporarily resolves the royalty issue in
that the PSC has agreed that the royalty will not be imposed by the
PSC against the Company or Rochester Telephone 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 it intends to pursue the case to conclusion.
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
of 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 12 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 11 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."
In our opinion, based upon our audits of the
accompanying supplementary consolidated
balance sheets and the related supplementary consolidated
statements of income, shareowners' equity and of 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
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 described in Note 2 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.
Rochester, NY
January 16, 1995, except as to the pooling
of interests with American Sharecom, Inc.
which is as of March 17, 1995
<PAGE>
<PAGE>
Supplementary Business Segment Information
In thousands of dollars Years ended December 31,
1994 1993 1992
- -----------------------------------------------------------------------------
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 $ 183,259 $ 164,271 $ 152,032
=============================================================================
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 $ 473,386 $ 383,691 $ 291,725
Affiliate 8,032 6,036 1,511
Wireless Communications 24,623 29,586 21,113
Eliminations (7,610) (5,790) (1,480)
- -----------------------------------------------------------------------------
Total Sales $ 498,431 $ 413,523 $ 312,869
=============================================================================
Operating Income
Network Systems and Services $ 60,461 $ 37,719 $ 24,771
Wireless Communications 1,307 3,256 4,110
Eliminations 74 74 74
- -----------------------------------------------------------------------------
Total Operating Income $ 61,842 $ 41,049 $ 28,955
=============================================================================
Depreciation $ 17,355 $ 16,496 $ 14,990
=============================================================================
Construction $ 30,650 $ 17,783 $ 11,903
=============================================================================
Identifiable Assets (1) $ 336,307 $ 308,012 $ 214,569
=============================================================================
(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.
<PAGE>
<PAGE>
Supplementary Consolidated Statement of Income
In thousands of dollars, except per share data
Years ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------
Revenues and Sales
Telephone Operations $ 609,678 $593,871 $567,272
Telecommunication Services 498,431 413,523 312,869
- --------------------------------------------------------------------------
Total Revenues and Sales 1,108,109 1,007,394 880,141
- --------------------------------------------------------------------------
Costs and Expenses
Operating expenses 677,856 613,988 516,891
Cost of goods sold 18,850 20,819 21,634
Depreciation 119,252 116,491 115,682
Taxes other than income taxes 47,050 47,476 44,947
Software write-off - 3,300 -
- --------------------------------------------------------------------------
Total Costs and Expenses 863,008 802,074 699,154
- --------------------------------------------------------------------------
Operating Income 245,101 205,320 180,987
Interest expense 43,741 46,648 50,217
Other income and expense:
Allowance for funds used during construction 1,096 1,330 1,309
Gain on sale of assets 10,063 4,449 -
Equity earnings (loss) from unconsolidated
wireless interests 3,185 1,296 (661)
Other income (expense), net (20,277) (21,656) (13,524)
- --------------------------------------------------------------------------
Income Before Taxes, Extraordinary Item and
Cumulative Effect of
Change in Accounting Principle 195,427 144,091 117,894
Income taxes 72,503 54,758 44,067
- --------------------------------------------------------------------------
Income Before Extraordinary Item and
Cumulative Effect of
Change in Accounting Principle 122,924 89,333 73,827
Extraordinary item, net of income taxes - - (1,072)
Cumulative effect of change in accounting
principle for postemployment benefits (7,197) - -
- --------------------------------------------------------------------------
Consolidated Net Income 115,727 89,333 72,755
Dividends on preferred stock 1,186 1,187 1,188
- --------------------------------------------------------------------------
Income Applicable to Common Stock $ 114,541 $ 88,146 $ 71,567
- --------------------------------------------------------------------------
Earnings Per Common Share
Primary:
Income before extraordinary item and
cumulative effect of
change in accounting principle $ 1.50 $ 1.16 $ 0.96
Extraordinary item - - (.01)
Cumulative effect of change in
accounting principle (.09) - -
- --------------------------------------------------------------------------
Earnings Per Common Share-Primary $ 1.41 $ 1.16 $ 0.95
==========================================================================
<PAGE>
<PAGE>
Fully Diluted:
Income before extraordinary item
and cumulative effect of
change in accounting principle $ 1.49 $ 1.15 $ 0.96
Extraordinary item - - (.01)
Cumulative effect of change in
accounting principle (.09) - -
- --------------------------------------------------------------------------
Earnings Per Common Share-Fully Diluted $ 1.40 $ 1.15 $ 0.95
==========================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
Supplementary Consolidated Balance Sheet
In thousands of dollars December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 317,898 $ 32,151 $ 70,190
Short-term investments 9,047 349 634
Accounts receivable 182,602 171,223 145,124
Material and supplies 8,585 11,208 15,892
Prepayments and other 25,947 21,649 21,842
- -----------------------------------------------------------------------------
Total Current Assets 544,079 236,580 253,682
- -----------------------------------------------------------------------------
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 186,960 169,616 154,032
Less-Accumulated depreciation 88,793 79,323 67,137
- -----------------------------------------------------------------------------
Net Telecommunications Property 98,167 90,293 86,895
- -----------------------------------------------------------------------------
Goodwill 140,455 167,169 136,962
- -----------------------------------------------------------------------------
Deferred and Other Assets 126,680 100,968 102,016
- -----------------------------------------------------------------------------
Total Assets $1,786,498 $1,536,512 $1,536,477
- -----------------------------------------------------------------------------
<PAGE>
<PAGE>
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 160,447 $ 162,221 $ 140,929
Notes payable 106 303 6,194
Advance billings 12,719 12,572 12,546
Dividends payable 15,487 14,058 13,462
Long-term debt due within one year 4,627 4,267 60,072
Taxes accrued 14,233 16,206 13,808
Interest accrued 12,305 13,583 16,434
- -----------------------------------------------------------------------------
Total Current Liabilities 219,924 223,210 263,445
- -----------------------------------------------------------------------------
Long-Term Debt 579,083 494,108 528,494
- ----------------------------------------------------------------------------
Deferred Income Taxes 108,646 114,472 118,088
- -----------------------------------------------------------------------------
Deferred Employee Benefits Obligation 46,001 16,121 -
- -----------------------------------------------------------------------------
Minority interests 252 3,100 2,701
- -----------------------------------------------------------------------------
Shareowners' Equity
Common stock 81,871 42,735 42,029
Capital in excess of par value 259,662 194,875 165,876
Retained earnings 468,282 427,297 393,051
- -----------------------------------------------------------------------------
809,815 664,907 600,956
Less-Treasury stock, at cost - 2,191 -
- -----------------------------------------------------------------------------
Common Shareowners' Equity 809,815 662,716 600,956
Preferred stock 22,777 22,785 22,793
- -----------------------------------------------------------------------------
Total Shareowners' Equity 832,592 685,501 623,749
- -----------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $1,786,498 $1,536,512 $1,536,477
=============================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
Supplementary Consolidated Statement of Cash Flows
In thousands of dollars
Years ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $115,727$ 89,333 $ 72,755
- --------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 140,603 138,074 125,927
Gain on sale of assets (10,063) (4,449) -
Equity (earnings)/loss from unconsolidated
wireless interests (3,185) (1,296) 661
Extraordinary item - - 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 (15,239) (15,396) (13,881)
Decrease in material and supplies 1,824 4,728 3,253
(Increase) decrease in prepayments and other
current assets (341) 184 4,207
(Increase) in deferred and other assets (14,112) (2,423) (360)
Increase in accounts payable 11,485 11,138 23,411
Increase in advance billings 188 26 72
Increase (decrease) in accrued interest
and taxes (5,829) 647 (854)
Increase in deferred employee benefits
obligation 6,958 14,302 -
Increase (decrease) in deferred
income taxes (8,553) (399) 7,757
------------------------------------------------------------------------
Total Adjustments 115,319 145,535 151,940
- --------------------------------------------------------------------------
Net Cash Provided by Operating Activities 231,046 234,868 224,695
- --------------------------------------------------------------------------
<PAGE>
<PAGE>
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (89,788)(104,262) (126,809)
(Increase) decrease in investment securities (11,386) 8,610 2,980
Investment in cellular (3,939) (4,342) (665)
Proceeds from asset sales 866 1,006 -
Investment in nonaffiliated entities (713) (1,161) -
Purchase of companies (5,109) (15,462) (2,626)
Proceeds from sale of company 55,689 - -
Other investing activities 343 264 -
- ---------------------------------------------------------------------------
Net Cash (Used in) Investing Activities (54,037)(115,347) (127,120)
- ---------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in notes payable (197) (5,806) 184
Proceeds from long-term debt 135,403 66,960 19,628
Repayments of long-term debt (59,262) (163,139) (38,281)
Dividends paid (59,388) (54,492) (51,582)
(Purchase) issuance of treasury stock 2,302 (2,744) -
Issuance of common stock 103,812 35 -
Redemptions of preferred stock (8) (8) (10)
Distribution to shareowners of pooled company (13,924) - -
Repurchase of stock by pooled company - - (2,577)
Capital contribution of pooled company - 1,634 -
- ---------------------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities 108,738 (157,560) (72,638)
- ---------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 285,747 (38,039) 24,937
Cash and Cash Equivalents at Beginning of Year 32,151 70,190 45,253
- ---------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $317,898 $ 32,151 $70,190
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
Supplementary Consolidated Statement of Shareowners' Equity
In thousands of dollars, except share data 1994 1993 1992
- -------------------------------------------------------------------------
Common Stock
300,000,000 shares authorized, par value $1.00
Balance, January 1 (shares issued
1994-42,734,532; 1993-42,028,943;
1992-42,033,165) $42,735 $ 42,029 $ 42,033
Equity offering (1994-2,549,087) 2,549 - -
Stock split (1994-36,573,619 shares) 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 (1994-13,595 shares;
1993-1,109 shares) 13 1 -
Conversion of:
4 3/4% Convertible debentures (1993-6,857 shares;
1992-691 shares) - 7 1
- -----------------------------------------------------------------------------
Balance, December 31 (shares issued 1994-81,870,833;
1993-42,734,532; 1992-42,028,943) 81,871 42,735 42,029
- -----------------------------------------------------------------------------
Capital in Excess of Par Value
Balance, January 1 194,875 165,876 166,456
Equity offering 101,565 - -
Stock split (36,574) - -
Stock issuance expenses (545) - -
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 -
Exercise of stock options 230 34 -
Conversion of:
4 3/4% Convertible debentures - 72 7
- -----------------------------------------------------------------------------
Balance, December 31 259,662 194,875 165,876
- -----------------------------------------------------------------------------
<PAGE>
<PAGE>
Retained Earnings
Balance, January 1 427,297 393,051 374,549
Net income 115,727 89,333 72,755
Repurchase of stock by pooled company - - (2,129)
Distribution to shareowners of pooled company (13,924) - -
Dividends declared in cash:
Preferred stock at required annual rates (1,186) (1,187) (1,188)
Common stock (59,632) (53,900) (50,936)
- -----------------------------------------------------------------------------
Balance, December 31 468,282 427,297 393,051
- -----------------------------------------------------------------------------
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 stock (1992-63) - - (2)
Common shares reissued for acquisitions/equity
offering (1994-56,413; 1993-248,307) (2,191) (10,381) -
- ----------------------------------------------------------------------------
Balance, December 31 (1993-56,413 shares) - 2,191 -
- -----------------------------------------------------------------------------
Common Shareowners' Equity 809,815 662,716 600,956
- -----------------------------------------------------------------------------
Preferred Stock
Balance, January 1 (shares outstanding
1994-227,848; 1993-227,928; 1992-228,025) 22,785 22,793 22,803
Redemptions (8) (8) (10)
- -----------------------------------------------------------------------------
Balance, December 31 (shares outstanding
1994-227,768; 1993-227,848;
1992-227,928) 22,777 22,785 22,793
- -----------------------------------------------------------------------------
Total Shareowners' Equity $832,592 $685,501 $623,749
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
<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 $21.0 million,
$16.4 million and $11.1 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.
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-The Company files a consolidated federal
income tax return.
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: 81,285,206 in 1994, 76,163,438 in 1993 and 75,347,904 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: 81,531,707 in 1994, 76,682,016 in 1993 and
75,875,512 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 $45.0 million in 1994, $49.6 million
in 1993 and $48.5 million in 1992. Actual income taxes paid were
$77.6 million in 1994, $50.4 million in 1993 and $39.7 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.
2. Acquisitions
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.
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).
Total Properties Managed Frontier
Assuming 100% Ownership Proportionate Share (a)
Dollars in thousands
(Unaudited) 1994 1993 1992 1994 1993 1992
Net Revenues -
Wireless $67,125 $36,900 $25,943 $35,602 $27,353 $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 2,580 1,409 1,079 1,303 1,086 847
Income Taxes
- ---------------------------------------------------------------------------
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
(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. Other Income (Expense), Net
The major components included in this caption are as follows
(amounts in thousands):
Income(Expense)
1994 1993 1992
- ----------------------------------------------------------
Interest income $6,706 $ 1,713 $ 2,257
Joint venture income 749 727 1,682
Goodwill amortization (3,078) (3,928) (3,692)
Corporate expenses (20,066) (14,707) (10,267)
Miscellaneous income
(expense), net (4,588) (5,461) (3,504)
Total ($20,277) ($21,656) ($13,524)
5. 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
$.09 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 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.
6. 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 134,603 119,478 103,000
Furniture, Office
Equipment, Vehicles,
Tools, etc. 133,252 142,309 135,167
Plant Under Construction 36,130 33,048 36,619
Less: Accumulated
Depreciation 802,662 731,901 724,819
- ----------------------------------------------------------
$975,284 $1,031,795 $1,043,817
==========================================================
7. 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%
Also at December 31, 1994, the Company had $174.5 million of
unused bank lines of credit, which were available for general
corporate purposes. Of the $174.5 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 are
.05 percent of the unused portion of the $125 million facility.
8. 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
Medium-Term Notes, 8.77% - 9.30%,
due 2000 to 2004 179,000 179,000 179,000
Revolving Credit and Term Loan Agreements 120,000(g) - 3,200
Other debt issued by affiliates 585 1,858 3,474
- ------------------------------------------------------------------------
Sub-total 586,715(h)501,825 591,999
Less-Discount on long-term debt,
net of premium 3,005 3,450 3,433
Current portion of long-term debt 4,627 4,267 60,072
- ------------------------------------------------------------------------
Total Long-Term Debt $579,083 $494,108 $528,494
(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 5.)
(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 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 $597.9 million.
At December 31, 1994, aggregate debt maturities were:
In thousands of
dollars 1995 1996 1997 1998 1999
------------------------------------------------------
$4,627 $5,146 $4,511 $4,408 $124,500
9. Income Taxes
The provision for income taxes consists of the following:
In thousands of dollars 1994 1993 1992
- ---------------------------------------------------------
Federal:
Current $73,434 $50,221 $30,764
Deferred (8,545) (1,034) 8,009
- ---------------------------------------------------------
64,889 49,187 38,773
- ---------------------------------------------------------
State:
Current 7,622 4,936 5,121
Deferred (8) 635 173
7,614 5,571 5,294
- ---------------------------------------------------------
Total income taxes $72,503 $54,758 $44,067
=========================================================
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 $65,735 35.0% $48,482 35.0% $38,284 34.0%
Accelerated depreciation 2,699 1.4 2,656 1.9 2,415 2.1
Investment tax credit (1,964) (1.0) (2,044) (1.5) (2,223) (2.0)
Miscellaneous (1,581) (0.9) 93 0.1 297 0.3
- -----------------------------------------------------------------------
Total federal
income tax $64,889 34.5% $49,187 35.5% $38,773 34.4%
=======================================================================
As a result of the Revenue Reconciliation Act of 1993, the
1993 income tax provision includes the impact of the federal tax
rate increase from 34 percent to 35 percent. The impact amounts to
approximately $2 million, of which approximately $400,000 is
attributable to prior years.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
In thousands of dollars 1994 1993 1992
- -------------------------------------------------------------
Accelerated depreciation $150,069 $153,910 $152,230
Investment tax credit 5,354 6,828 8,047
Miscellaneous 7,399 9,033 10,137
- -------------------------------------------------------------
Gross deferred tax
liabilities 162,822 169,771 170,414
- -------------------------------------------------------------
Basis adjustment - purchased
telephone companies (31,851) (42,741) (45,368)
Employee Benefits Obligation(12,955) (5,415) -
Deferred compensation (1,664) (1,648) (1,081)
Other (7,706) (5,495) (5,877)
- -------------------------------------------------------------
Gross deferred tax assets (54,176) (55,299) (52,326)
- -------------------------------------------------------------
Total Deferred Income
Taxes $108,646 $114,472 $118,088
=============================================================
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.
<PAGE>
<PAGE>
10. 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.
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
===========================================================
<PAGE>
<PAGE>
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
=========================================================
<PAGE>
<PAGE>
The net periodic pension cost consists of the following:
In thousands of dollars
Year 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
==========================================================
<PAGE>
<PAGE>
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 $4.9 million for 1994
and $4.2 million for 1993.
<PAGE>
<PAGE>
11. 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.
<PAGE>
12. 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.
13. 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.
14. 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
<PAGE>
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.
<PAGE>
<TABLE>
15. Preferred Stock (Cumulative)-Par Value $100
In thousands of dollars, except share data 1994 1993 1992
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Frontier Corporation-850,000 shares
authorized
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
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
5.50% Series-redeemable at par
Shares Outstanding 2,754 2,754 2,754
Amount Outstanding $ 276 $ 276 $ 276
Total Shares Outstanding 227,768 227,848 227,928
- ----------------------------------------------------------------------
Total Amount Outstanding $ 22,777 $ 22,785 $ 22,793
======================================================================
</TABLE>
<PAGE>
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.
16. 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 $18.8 million in
1994, $16.3 million in 1993 and $17.3 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
Non-Cancellable Leases License
Years Buildings Equipment Agreements
- ------------------------------------------------------------
1995 $ 6,823 $ 5,080 $ 8,625
1996 6,388 4,544 8,853
1997 6,226 1,786 9,097
1998 5,806 333 9,326
1999 5,479 1 9,557
2000 and
thereafter 20,167 0 21,128
- ----------------------------------------------------------
Total $50,889 $11,744 $66,586
==========================================================
17. 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
<PAGE>
in Rochester, New York to a company that is expanding
geographically and currently has customers in 32 states.
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.
<PAGE>
<PAGE>
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.)
18. Commitments and Contingencies
It is anticipated that the Company will expend $125.0 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 July 1994, the Company signed a definitive agreement to
purchase the Minnesota Cellular Telephone Company (MSCTC) in a tax-
deferred stock-for-stock transaction. MSCTC is the non-wireline
cellular provider of service in Minnesota 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 will receive $5.875 per share pursuant to a cash merger,
with the exception of Richard Frockt, WCT's chairman and 24 percent
shareholder, who will receive $3.75 per share. Mr. Frockt and
Christopher Edgecomb, WCT's Executive Vice President and 7 percent
shareholder, have agreed to vote their shares in favor of the
merger. The total cash consideration to be paid by Frontier
Corporation for all the outstanding shares of WCT will be
approximately $79.8 million. When the transaction is consummated,
WCT's interexchange operations, which generated $102 million of
revenues in its fiscal year ended June 30, 1994, will be merged
into Frontier Corporation's long distance operation, Frontier
Communications International. The transaction will be accounted
for as a purchase acquisition and is subject to necessary
regulatory approvals. The expected closing date for the
acquisition is in 1995.
The following unaudited pro forma summary reflects the results
of operations of the Company for its pending acquisition of WCT.
The unaudited pro forma results of operations include WCT 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 - $1,239,306; Consolidated Net Income -
$105,777 and Primary Earnings Per Common Share - $1.30.
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 $5.3 million
contingent liability as of December 31, 1994. Both ASI and the
dissenters have appealed the District Court decision to the
Minnesota Appellate Court.
During 1994, the Company provided interconnection and billing
and collection services to AT&T which accounted for greater than
ten percent of consolidated gross revenues. There were no other
individual customers that accounted for greater than ten percent of
consolidated gross revenues.
19. 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:
Revenues and Sales Income Per Share
------------------- ------------------- ----------------------------
Earnings
Before
Extraor-
(In thousands of Tele- dinary
dollars, except commun- Items and
per share data ication Telephone Operating Net Cumulative Market Price
Services Operations Total Income Income Effect Erngs High Low
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 First Quarter $ 121,103 $150,999 $ 272,102 $ 57,257 $ 18,316(1) $ .32 $ .23 $22.44 $20.25
Second Quarter 127,660 154,905 282,565 61,414 38,069 .46 .46 $25.25 $20.81
Third Quarter 124,242 150,149 274,391 60,860 29,814 .36 .36 $24.75 $21.63
Fourth Quarter 125,426 153,625 279,051 65,570 29,528 .36 .36 $24.63 $20.50
Full Year $498,431 $609,678 $1,108,109 $245,101 $115,727 $1.50 $1.41
1993 First Quarter $ 88,672 $144,574 $ 233,246 $ 46,775 $ 19,451 $ .25 $ .25 $19.44 $17.32
Second Quarter 98,454 148,303 246,757 51,671 21,135 .27 .27 $21.75 $18.25
Third Quarter 109,942 147,763 257,705 51,707 22,019 .28 .28 $24.38 $20.50
Fourth Quarter 116,455 153,231 269,686 55,167 26,728 .34 .34 $25.13 $21.69
Full Year $413,523 $593,871 $1,007,394 $205,320 $ 89,333 $1.16 $1.16
1992 First Quarter $ 73,630 $137,708 $ 211,338 $ 41,986 $ 16,109 $ .21 $ .21 $17.00 $15.07
Second Quarter 76,348 140,677 217,025 44,957 17,621 .23 .23 $16.88 $14.57
Third Quarter 78,945 142,116 221,061 46,865 18,885 .25 .25 $16.44 $15.13
Fourth Quarter 83,946 146,771 230,717 47,179 20,140(2) .28 .26 $17.88 $15.32
Full Year $312,869 $567,272 $ 880,141 $180,987 $ 72,755 $ .96 $ .95
(1) Includes cumulative effect charge related to change in accounting principle of
$7.2 million (see Note 12).
(2) Includes extraordinary loss on retirement of debt of $1.1 million (see Note 5).
</TABLE>
<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>
<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> 317,898
<SECURITIES> 9,047
<RECEIVABLES> 182,602
<ALLOWANCES> 0
<INVENTORY> 8,585
<CURRENT-ASSETS> 544,079
<PP&E> 1,777,946
<DEPRECIATION> 802,662
<TOTAL-ASSETS> 1,786,498
<CURRENT-LIABILITIES> 220,407
<BONDS> 578,600
<COMMON> 81,871
0
22,777
<OTHER-SE> 727,186
<TOTAL-LIABILITY-AND-EQUITY> 1,786,486
<SALES> 0
<TOTAL-REVENUES> 1,108,109
<CGS> 18,850
<TOTAL-COSTS> 863,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,741
<INCOME-PRETAX> 195,427
<INCOME-TAX> 72,503
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (7,197)
<CHANGES> 0
<NET-INCOME> 115,727
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.40
</TABLE>
