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FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
Commission file number 1-4166
FRONTIER CORPORATION
(Previously Rochester Telephone Corporation)
(Exact name of registrant as specified in its charter)
New York 16-0613330
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
180 South Clinton Avenue, Rochester, NY 14646-0700
Address of principal executive offices) (Zip Code)
(716) 777-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
$1.00 Par Value Common Stock 81,870,674 shares
as of April 30, 1995
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FRONTIER CORPORATION
THE REGISTRANT HEREBY AMENDS THE FOLLOWING ITEMS, FINANCIAL
STATEMENTS, EXHIBITS OR OTHER PORTIONS OF ITS QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1995 (THE "FORM 10-
Q") AS SET FORTH BELOW:
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 2 is hereby amended and restated in its entirety as follows:
Three Months Ended March 31, 1995 and 1994
DESCRIPTION OF BUSINESS
Frontier Corporation (formerly Rochester Telephone
Corporation) is a diversified telecommunications service company,
serving more than 1.5 million customers in 41 states throughout
the United States. Frontier Corporation's principal lines of
business include Long Distance Communications Services, Local
Communications Services (comprised of 34 local telephone
companies providing service to over 900,000 access lines in the
Northeast, Midwest, and South), cellular and paging operations,
and telecommunications equipment sales.
RESULTS OF OPERATIONS
Consolidated
Net income for the first quarter of 1995 amounted to $31.7
million, a $13.4 million increase, or 72.9 percent, over the
comparable period in 1994. Earnings per share were $.38 in 1995
versus $.23 in 1994. The results in 1994 included a $7.2 million
after-tax charge ($.09 per share) for the adoption of Financial
Accounting Standards Board Statement No. 112 (FAS 112),
"Employers' Accounting for Postemployment Benefits," related to
the accounting for certain employee benefits costs. Excluding
this charge in 1994, net income rose 24.2 percent and earnings
per share rose 18.8 percent.
The results for 1995 also included certain one-time items --
a $4.8 million non-taxable gain on the sale of a telephone
subsidiary and a $4.8 million pre-tax charge ($3.1 million after
taxes) for one-time costs associated with the acquisition of a
long distance company completed in March 1995. Excluding all of
the one-time items, 1995's first quarter net income rose $4.4
million, or 17.4 percent, to $30.0 million, and earnings per
share rose 12.5 percent in the first quarter to $.36 per share in
1995 from $.32 per share in 1994. The number of average common
shares outstanding increased 2.6 million shares to 81.9 million
shares in the first quarter of 1995 as a result of the Company's
equity offering in February 1994.
Consolidated revenues and sales for the first quarter of 1995
were $283.4 million, up $11.3 million, or 4.2 percent, over the
comparable period in 1994. Operating income was $54.7 million
for the three months ended March 31, 1995, up $2.5 million, or
4.7 percent, from the same three months in 1994.
During the first quarter of 1995, two key events occurred that
impacted the financial results for prior periods. First, the
Company reorganized in holding company form in conjunction with
the implementation of its Open Market Plan. (See Note 11 in Notes
to Consolidated Financial Statements.) As a result, certain
corporate costs that previously were reported in the "Other
income and expense" section have been reclassified and are now
being reported in costs and expenses above the "Operating Income"
line. Total corporate costs reclassified in the first quarter of
1994 amounted to $5.0 million.
In addition to this expense reclassification, the Company has
redefined its business segments to better distinguish its primary
lines of business. The Company is now reporting its operating
results in four segments: Long Distance Communications Services,
Local Communications Services, Wireless Communications Services,
and Corporate Operations and Other. This classification replaces
the previous manner of reporting which reflected only two groups,
Telephone Operations and Telecommunications Services.
The second event was related to the Company's acquisition in
March 1995 of American Sharecom, Inc. (ASI), a long distance
company headquartered in Minneapolis, Minnesota. The Company
issued approximately 8.7 million new shares of its common stock
in exchange for all of the outstanding shares of ASI. The
transaction has been accounted for as a pooling of interests and,
accordingly, all historical results have been restated to reflect
the results of operations of ASI. ASI's revenues and operating
income for the first three months in 1994 were $30.3 million and
$5.2 million, respectively.
In addition to the above-mentioned items, several one-time
events have taken place in 1994 and 1995 that have impacted the
comparability of the financial results. These are summarized as
follows:
1. 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
these wireless operations in New York had been consolidated.
Revenues included in the first quarter of 1994 for these
wireless properties were $8.8 million, while associated
operating income was $1.3 million.
2. In May 1994, the Company sold its only telephone
operating company in North Dakota, Minot Telephone, for cash.
In the first quarter of 1994, Minot's revenues and operating
income were $3.4 million and $1.1 million, respectively.
3. In early March 1995, the Company sold Ontonagon County
Telephone Company and its subsidiary, Midway Telephone, due to
the Company's plans to expand in areas other than Michigan's
Upper Peninsula. A non-taxable gain of $4.8 million resulted
from the sale and was reported in the "Other income and
expense" section of the Consolidated Statement of Income.
March 1994's revenues and operating income associated with
these properties were $.3 million and $.1 million,
respectively.
4. In March 1995, the Company recorded a $4.8 million
charge associated with its acquisition of ASI. This one-time
charge related to various transition and transaction costs
associated with the assimilation of the newly combined
companies, including a provision for redundant equipment, bank
and legal fees and projected integration expenses.
Adjusting for these items, consolidated revenues and operating
income rose 9.2 percent and 19.3 percent, respectively, for the
first three months of 1995 when compared with the same period in
1994.
Long Distance Communications Services
Long Distance Communications Services is comprised of the
Company's long distance operations, including Frontier
Communications International Inc. (formerly RCI Long Distance,
Inc.), American Sharecom, Inc., Frontier Communications of the
Mid Atlantic, Inc. (formerly Mid Atlantic Telecom, Inc.),
Frontier Communications of New England, Inc. (formerly Long
Distance North), and Frontier Long Distance (formerly Visions
Long Distance). ASI joined this business unit in March 1995,
continuing with the growth strategy of expanding nationwide. The
acquisition, which was accomplished by issuing approximately 8.7
million shares of Frontier stock in exchange for all of the
shares of ASI, was accounted for as a pooling of interests and
resulted in the addition of $32.2 million in revenues in the
first three months of 1995 versus $30.3 million in the same
period in 1994.
Long distance revenues totaled $122.0 million in the first
quarter of 1995, a $15.6 million increase, or 14.7 percent, over
the same quarter in 1994. Long Distance Communications Services
comprised 43 percent of consolidated revenues in the first
quarter of 1995. The primary factor behind this increase was
continued strong growth in the retail and wholesale long distance
revenue at Frontier Communications International.
Costs and expenses for long distance operations increased $13.5
million, excluding the $4.8 million one-time charge related to
the acquisition costs for ASI. This increase is the result of
related increases in access costs due to higher sales ($8.4
million), and higher marketing and sales expenses ($4.3 million).
Access costs as a percentage of revenues were approximately 58
percent in 1995 as compared with 59 percent in 1994.
Excluding the $4.8 million acquisition charge, operating income
for long distance rose 17.9 percent to $13.9 million for the
first three months of 1995. Without ASI, long distance operating
income rose 21.2 percent, reflecting Frontier's continuing focus
on improving operating margins. ASI's lower growth rate was
partially due to a revenue rate reduction in California that
became effective in January 1995. Operating margins increased to
11.4 percent in 1995, excluding the one-time acquisition-related
charge, an increase over 1994's operating margin of 11.1 percent.
Local Communications Services
Local Communications Services is comprised of the Company's
local telephone operations, consisting of the Rochester, New York
operation and the regional telephone operations, which is made up
of 33 other telephone operating subsidiaries in 13 states. In
addition, the local service revenues and associated expenses
generated from the efforts of Frontier Communications of
Rochester, the newly formed competitive telecommunications
company that provides an array of services on a retail basis in
the Rochester marketplace, are included with the Rochester, New
York operation. The non-local service revenues resulting from
the sales efforts of Frontier Communications of Rochester, such
as those associated with long distance and wireless services, are
reported in other segments as appropriate. Consequently, the
Local Communications Services segment includes both wholesale and
retail local service associated with the Rochester market.
Revenues for Local Communications Services were $152.8 million
in the three month period ended March 31, 1995, an increase of
$1.8 million, or 1.2 percent. This segment accounted for 54
percent of consolidated revenues in 1995. Results in 1995 were
adversely impacted by the dispositions of Minot Telephone in May
1994, and Ontonagon County Telephone and its subsidiary, Midway
Telephone, in March 1995. Adjusting for these items, which
amounted to an additional $3.7 million in 1994's first quarter,
revenues rose 3.7 percent in the first three months of 1995.
Revenues for Rochester, NY Operations rose 3.9 percent in the
quarter, driven mainly by higher local service revenues. This
increase resulted from lower revenue sharing with customers as
was required under the previous form of regulation. Total access
lines (adjusted for the dispositions) increased 1.0 percent
during the first quarter of 1995 to a total amounting to more
than 922,000. The Rochester market showed a strong 1.3 percent
growth, primarily a result of higher demand for services in the
open market environment.
Costs and expenses in the first quarter 1995 for Local
Communications Services were $104.1 million, a decrease of $3.3
million, or 3.1 percent over 1994. This decrease was the result
of the telephone company dispositions in the Regional Operations
($2.6 million) and ongoing cost controls. Employees per 10,000
access lines, a common measure of efficiency for telephone
companies, was 31 as of March 31, 1995, a significant improvement
from 34 a year earlier.
Operating income was $48.7 million, an increase of $5.1
million, or 11.7 percent over 1994. Operating margins improved
from 28.9 percent in 1994 to 31.9 percent in 1995, driven by
improvements in both the Rochester Operations and the Regional
Operations.
Wireless Communications Services
Wireless Communications Services is comprised of the Company's
wireless operations where it has a sufficient ownership interest
to report on a consolidated basis. As of March 31, 1995, this
segment included the Alabama RSA's #4 and #6, of which the
Company has a 70 percent interest, and Minnesota RSA #10, of
which the Company acquired a 100 percent interest in late March
1995 and accounted for as a purchase transaction.
The Company's minority interests, including the 50/50 joint
venture with NYNEX in upstate New York that was formed in July
1994, are accounted for on 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. Prior to the formation of the wireless joint
venture with NYNEX in July 1994, the revenues and expenses of the
wireless operations in upstate New York had been consolidated.
Revenues for Wireless Communications were $2.3 million for the
first quarter of 1995, down $6.8 million, or 74.9 percent, from
the comparable period in 1994. The 1995 results reflect only the
operations of the Alabama cellular properties, whereas the 1994
results reflect revenues associated with the upstate New York
wireless properties that are no longer being consolidated
subsequent to the formation of the joint venture. Total costs
and expenses were $2.0 million in the three months ended March
31, 1995, a decrease of 76.5 percent over 1994. This decrease is
consistent with the corresponding decrease in revenues.
Operating income for the first quarter of 1995 was $.3 million, a
decrease of $.4 million, or 54 percent, over 1994.
The Company's proportionate share of wireless revenues,
reflecting the ownership percentage of wireless interests
consolidated for financial reporting purposes and the Company's
ownership percentage of its significant unconsolidated wireless
interests (which are accounted for on the equity method for
financial reporting purposes), was $9.1 million in 1995, an
increase of 4.7 percent over the comparable quarter in 1994. The
Company's proportionate share of operating income for these
properties was $.5 million in 1995, a decrease of 59 percent over
1994. The proportionate share of operating cash flow for these
properties, defined as operating income plus depreciation, was up
2.2 percent.
Operating cash flow, defined as operating income plus
depreciation, is a measure used by the Company to provide a
reasonable approximation of cash generated from normal
operations. Since depreciation is typically a large non-cash
item that is readily disclosed, this measure is widely used by
investment analysts as a proxy for the operating cash flows of a
business. The Company acknowledges that this measure excludes,
among other things, impacts from changes in working capital.
This measure should not be viewed as a precise substitute for,
nor should it be considered in isolation to, Operating Income and
Cash Flows from Operating Activities as prescribed by Financial
Accounting Standards Board Statement No. 95 (FAS 95), "Statement
of Cash Flows."
With respect to the wireless joint venture with NYNEX, revenues
for the partnership interests in this operation exceeded $17
million during the first quarter of 1995, an increase of 17
percent over 1994. Although operating income was relatively flat
year over year, operating cash flow doubled to $3.1 million as a
result of standardizing and accelerating depreciation of certain
wireless equipment to better reflect the remaining useful lives.
Corporate Operations and Other
Corporate Operations is comprised of the expenses traditionally
associated with a holding company, including executive and board
of directors expenses, corporate finance and treasury, investor
relations, corporate planning and business development. The
Other category is comprised primarily of Frontier Network
Systems, or FNS (formerly Rotelcom Inc.), external sales
associated with the Company's information technologies operation,
Frontier Information Technologies, and intersegment eliminations.
Revenues in the first quarter of 1995 were $6.3 million, an
increase of $.7 million, or 13.0 percent, over 1994.
Essentially all of these revenues pertain to FNS. The increase
is due to higher system installation revenue ($.4 million) and
lower intersegment sales eliminations ($.3 million).
Total costs and expenses for this segment amounted to $9.8
million, a $.4 million increase, or 3.7 percent, over 1994.
Expenses at FNS rose in relation to the increase in sales, while
corporate operations expenses were steady at $4.4 million for
each of the corresponding three month periods.
Other Income Statement Items
Interest Expense
Interest expense was $11.7 million in the first quarter of
1995, a $.7 million increase over 1994. This increase is the
result of higher balances of long-term debt outstanding,
primarily as a result of debt issued as part of the
implementation of the Open Market Plan.
Gain on Sale of Subsidiaries
The $4.8 million gain on sale of subsidiaries in 1995 resulted
from the sale of Ontonagon County Telephone Company and its
subsidiary, Midway Telephone, due to the Company's plans to
expand in areas other than Michigan's Upper Peninsula. The
Company acquired shares of its own common stock in the
transaction, in exchange for all the shares of Ontonagon and
Midway. The gain of $4.8 million was non-taxable.
Equity Earnings from Unconsolidated Wireless Interests
Equity earnings from the Company's interests in wireless
partnerships in the first quarter of 1995 were $.4 million, an
increase of $.2 million over 1994. This increase is the result
of higher equity earnings from two minority partnerships in
Georgia and New York. The equity earnings associated with the
Company's joint venture with NYNEX were negligible in the first
quarter of 1995, due to changes in depreciation expense that were
made to standardize lives across the various partnerships.
Interest Income
Interest income in the first quarter of 1995 amounted to $3.3
million, an increase of $2.8 million over 1994's first quarter.
This increase is primarily the result of higher cash balances
related to the equity offering in early 1994, the sale of Minot
Telephone in May 1994 and the issuance of debt in December 1994.
Income Taxes
Consolidated income taxes increased $3.4 million, or 22.4
percent, in the first quarter of 1995. This increase was
primarily due to higher pre-tax income. The effective income tax
rate was 37.3 percent for the first three months of 1995 as
compared with 37.6 percent in 1994.
FINANCIAL CONDITION
Cash and Cash Equivalents
At March 31, 1995, the Company had $316.4 million in cash and
cash equivalents compared with $317.9 million at December 31,
1994, a modest decrease of $1.5 million. Cash generated from
operations amounted to $54.3 million in the first three months of
1995. Offsetting this was a $14.2 million outflow for investing
activities (mainly capital expenditures) and a $41.7 million
outflow for financing activities such as debt retirements ($13.2
million, net of proceeds), dividend payments ($15.7 million) and
treasury stock purchases ($10.0 million). See the Consolidated
Statement of Cash Flows for additional information.
Debt
In April 1995, three of the Company's debt rating agencies put
Frontier Corporation's senior unsecured debt under review for
potential downgrade. These actions occurred as a result of the
Company's announcement to acquire ALC Communications Corp. The
agencies acknowledge that although the merger will likely
strengthen Frontier's financial position, the increased exposure
to the higher risk long distance industry may adversely impact
its credit rating. Specifically, on April 11, 1995, Standard &
Poors put Frontier Corporation's A+ senior unsecured debt rating
on credit watch with negative implications and also put Rochester
Telephone Corp.'s AA senior unsecured debt rating on credit watch
with negative implications. Standard & Poors noted it is
unlikely that Rochester Telephone Corp.'s debt rating will fall
below AA-. Also on April 11, 1995, Moody's put Frontier
Corporation's A2 senior unsecured debt rating under review for
potential downgrade. On April 12, 1995, Fitch placed the
Company's A+ outstanding medium-term notes and senior debentures
on FitchAlert with negative implications. On April 11, 1995, the
Company's fourth debt rating agency, Duff & Phelps, reaffirmed
Frontier's A credit rating for outstanding notes and debentures.
At March 31, 1995, the Company's total debt, including notes
payable, amounted to $571.6 million, a decrease of $12.2 million
from December 31, 1994. This decrease is mainly the result of
the retirement of $7.0 million of 9% debentures (due 2020), and
the retirement of $4.5 million of debt associated with the
Minnesota wireless property that was acquired at the end of March
1995.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of total
capitalization) was 40.4 percent at March 31, 1995 as compared
with 41.2 percent at December 31, 1994. This change is due to
debt retirements made during the first quarter of 1995. Pre-tax
interest coverage was 5.3 times for the first three months of
1995, as compared with 3.7 times for the same period in 1994.
Capital Spending
During the first quarter of 1995, gross capital expenditures
amounted to $19.2 million. The Company plans to spend a total of
approximately $125 million on its capital program during the full
year in 1995. The total capital program represents an increase
of $36 million over 1994. The increase is largely driven by
capital requirements associated with the growth of the long
distance and wireless operations and the integration of long
distance acquisitions.
Dividends
On February 13, 1995, the Board of Directors declared the first
quarter 1995 dividend of 20.75 cents per share on the Company's
common stock, payable May 1, 1995 to shareowners of record on
April 14, 1995.
OTHER ITEMS
Regulatory Matters
During the seven year period of the Open Market Plan Agreement
which became effective on January 1, 1995, Rochester Telephone
Corp. (the operating telephone company in Rochester, New York)
will no longer be regulated by the monopoly standard of rate-of-
return regulation, but instead by pure price cap regulation. The
local market for telephone service in Rochester has been opened
up to full competition. Over the course of the seven year period
of the Open Market Plan, 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
during this seven year period. Rochester Telephone Corp. can
decide when to increase the depreciation reserve, provided that
by the end of the first year, the amount shall be at least $5
million and, by the end of the fifth year, the cumulative amount
shall be at least $15 million. During the first quarter of 1995,
no credits were taken against the depreciation reserve.
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,
described in Note 112 to the Consolidated Financial Statements.
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 hastening 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, such as AT&T, have already begun providing
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 over the long term,
and that new revenue will offset, to some extent, the loss
of revenues from end-user customers. In the first quarter of
1995, access line growth in Rochester was very encouraging
with a 1.3 percent growth, reflecting the stimulation of
demand as a result of competition. 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. 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.
(c) Restraints on the Company's Control of Rochester
Telephone Corp. The Open Market Plan 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) 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 NYSPSC
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 NYSPSC. 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.
(e) Other Considerations. Because Rochester Telephone
Corp. and Frontier Communications of Rochester will
sometimes compete 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.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned thereunto duly
authorized.
FRONTIER CORPORATION
--------------------------------
(Registrant)
Date:_________, 1995 By /s/ Richard A. Smith
--------------------------------
Richard A. Smith
Corporate Controller
(and Principal Accounting Officer)
