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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
(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 81,873,596 shares as of July 31, 1995
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FRONTIER CORPORATION
Part I - Financial Information
Item 1 - Financial Statements
Presented on the following pages are the consolidated
financial statements of Frontier Corporation. In the
opinion of management, the consolidated financial
information reflects all adjustments necessary for a fair
presentation of the financial statements for the interim
periods included herein. There have been no adjustments
made in the interim financial statements which are not of
a normal recurring nature.
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FRONTIER CORPORATION
Consolidated Statement of Income
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands,
except per share data 1995 1994 1995 1994
- ----------------------------------------------------------------------------
Revenues and Sales $311,773 $282,564 $595,191 $554,667
- ----------------------------------------------------------------------------
Costs and Expenses
Operating expenses 200,265 178,016 379,574 349,893
Cost of goods sold 7,056 5,533 11,189 11,914
Depreciation 29,557 30,982 59,468 60,521
Taxes other than income taxes 11,919 12,481 22,547 24,567
Acquisition-related charges - - 4,750 -
- ----------------------------------------------------------------------------
Total Costs and Expenses 248,797 227,012 477,528 446,895
- ----------------------------------------------------------------------------
Operating Income 62,976 55,552 117,663 107,772
Interest expense 11,937 10,957 23,641 21,937
Other income and expense:
Allowance for funds used
during construction 210 280 536 556
Gain on sale of subsidiaries - 12,933 4,826 12,933
Equity earnings from
unconsolidated wireless
interests 1,163 286 1,559 483
Interest income 3,243 1,593 6,503 2,044
Other income (expense), net (1,696) (982) (3,008) (2,270)
- ----------------------------------------------------------------------------
Income Before Taxes and Cumulative
Effect of Change in
Accounting Principle 53,959 58,705 104,438 99,581
Income taxes 21,106 20,636 39,910 35,999
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Income Before Cumulative Effect of
Change in Accounting Principle 32,853 38,069 64,528 63,582
Cumulative Effect of Change in
Accounting Principle-accounting
for postemployment benefits - - - (7,197)
- ----------------------------------------------------------------------------
Consolidated Net Income 32,853 38,069 64,528 56,385
Dividends on preferred stock 296 296 593 593
- ----------------------------------------------------------------------------
Income Applicable to Common Stock $ 32,557 $ 37,773 $ 63,935 $ 55,792
============================================================================
Dividends declared on common
stock $ - $ 14,815 $ 16,990 $ 29,630
Average common shares
outstanding 81,940 81,937 81,936 80,620
Earnings Per Common Share
Income before cumulative effect of
change in accounting principle $ .40 $ .46 $ .78 $ .78
Cumulative effect of change in
accounting principle - - - (.09)
- ----------------------------------------------------------------------------
Net Earnings Per Common Share $ .40 $ .46 $ .78 $ .69
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
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FRONTIER CORPORATION
Business Segment Information
(Unaudited)
3 Months Ended 6 Months Ended
June 30, June 30,
Dollars in thousands 1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Long Distance Communications Services
Revenues $142,914 $110,020 $264,940 $216,446
Operating Income:
Operating Income Before Acquisition-
Related Charges $15,043 $13,326 $28,934 $25,107
Acquisition - Related Charges - - (4,750) -
- ------------------------------------------------------------------------------
Total $15,043 $13,326 $24,184 $ 25,107
Depreciation $3,492 $ 4,127 $ 7,244 $ 7,696
Capital Expenditures $1,570 $10,843 $ 3,554 $ 14,892
Identifiable Assets $427,748 $197,336 $427,748 $197,336
==============================================================================
Local Communications Services
Revenues:
Rochester, NY Operations $78,525 $77,770 $156,104 $152,458
Regional Operations 76,724 77,134 151,940 153,445
- ------------------------------------------------------------------------------
Total $155,249 $154,904 $308,044 $305,903
Operating Income:
Rochester, NY Operations $20,922 $18,983 $40,972 $36,298
Regional Operations 28,517 26,694 57,173 52,988
- ------------------------------------------------------------------------------
Total $49,439 $45,677 $98,145 $89,286
Depreciation:
Rochester, NY Operations $13,630 $14,020 $27,625 $28,045
Regional Operations 11,196 11,463 22,479 22,866
- ------------------------------------------------------------------------------
Total $24,826 $25,483 $50,104 $50,911
Capital Expenditures $15,596 $13,151 $29,577 $25,998
Identifiable Assets $1,238,167 $1,233,819 $1,238,167 $1,233,819
==============================================================================
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<S> <C> <C> <C> <C>
Wireless Communications Services
Revenues $3,369 $11,799 $5,656 $20,895
Operating Income $806 $919 $1,117 $1,595
Depreciation $514 $1,275 $788 $1,724
Capital Expenditures $298 $461 $641 $787
Identifiable Assets $103,234 $68,366 $103,234 $68,366
==============================================================================
Corporate Operations and Other
Revenues $10,241 $5,841 $16,551 $11,423
Operating Income $(2,312) $(4,370) $(5,783) $(8,216)
Depreciation $725 $97 $1,332 $190
Capital Expenditures $3,904 $1,679 $6,840 $3,976
Identifiable Assets $63,003 $153,837 $63,003 $153,837
==============================================================================
Consolidated
Revenues $311,773 $282,564 $595,191 $554,667
Operating Income $62,976 $55,552 $117,663 $107,772
Depreciation $29,557 $30,982 $59,468 $60,521
Capital Expenditures $21,368 $26,134 $40,612 $45,653
Identifiable Assets $1,832,152 $1,653,358 $1,832,152 $1,653,358
==============================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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FRONTIER CORPORATION
Consolidated Balance Sheet
June 30, December 31,
1995 1994
In thousands of dollars (Unaudited)
- -------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 157,581 $ 317,898
Short-term investments 40 9,047
Accounts receivable 220,254 182,602
Material and supplies 8,667 8,585
Prepayments and other 27,277 25,947
- -------------------------------------------------------------
Total Current Assets 413,819 544,079
- -------------------------------------------------------------
Property, Plant and Equipment
Total Property, Plant and Equipment 1,835,161 1,777,946
Less-Accumulated depreciation 840,270 802,662
- -------------------------------------------------------------
Net property, plant and equipment 994,891 975,284
- -------------------------------------------------------------
Goodwill 251,576 140,455
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Deferred and Other Assets 171,866 126,680
- -------------------------------------------------------------
Total Assets $1,832,152 $1,786,498
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LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 213,856 $ 160,447
Notes payable 55 106
Advance billings 11,143 12,719
Dividends payable 307 15,487
Long-term debt due within one year 5,951 4,627
Taxes accrued 19,229 14,233
Interest accrued 12,619 12,305
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Total Current Liabilities 263,160 219,924
- -------------------------------------------------------------
Long-Term Debt 553,898 579,083
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Deferred Income Taxes 86,811 108,646
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Deferred Benefits 51,915 46,001
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Minority Interests 617 252
- -------------------------------------------------------------
Shareowners' Equity
Common stock 81,879 81,871
Capital in excess of par value 258,586 259,662
Retained earnings 512,664 468,282
- -------------------------------------------------------------
853,129 809,815
Less-Treasury stock, at cost 147 -
- -------------------------------------------------------------
Common Shareowners' Equity 852,982 809,815
Preferred stock 22,769 22,777
- -------------------------------------------------------------
Total Shareowners' Equity 875,751 832,592
Total Liabilities and
Shareowners' Equity $1,832,152 $1,786,498
=============================================================
See accompanying Notes to Consolidated Financial Statements.
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FRONTIER CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
6 Months Ended June 30,
In thousands of dollars 1995 1994
- ---------------------------------------------------------------------
Cash Flows from Operating Activities
Income before cumulative effect of change
in accounting principle $ 64,528 $ 63,582
Cumulative effect of change in accounting
principle - (7,197)
- ----------------------------------------------------------------------
Net Income 64,528 56,385
- ---------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 66,309 63,800
Gain on sale of assets (4,826) (9,915)
Equity earnings from
unconsolidated wireless interests (1,559) (483)
Cumulative effect of change in
accounting principle - 11,072
Minority interests 372 267
Changes in operating assets and
liabilities, exclusive of impacts of
purchase acquisitions:
(Increase) in accounts
receivable (18,902) (7,413)
(Increase) decrease in
material and supplies (8) 530
Decrease in prepayments and
other current assets 4,624 509
(Increase) in deferred and
other assets (12,153) (13,424)
(Decrease) in accounts payable (24,233) (18,147)
(Decrease) in advance billings (1,582) (2,207)
Increase in accrued interest
and taxes 1,205 4,951
Increase in deferred
employee benefits obligation 5,671 1,515
(Decrease) in deferred income taxes (803) (2,470)
- ---------------------------------------------------------------------
Total Adjustments 14,115 28,585
- ---------------------------------------------------------------------
Net Cash Provided by Operating Activities 78,643 84,970
- ---------------------------------------------------------------------
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Cash Flows from Investing Activities
Expenditures for property, plant and equipment (40,800) (45,459)
Decrease in investment securities 8,757 197
Investment in cellular (12,539) 1,174
Investment in nonaffiliated entities (5,925) -
Purchase of companies (78,066) -
Proceeds from sale of company - 55,689
Cash disposed of in sale of company (196) -
- ---------------------------------------------------------------------
Net Cash (Used in) Provided by
Investing Activities (128,769) 11,601
- ---------------------------------------------------------------------
Cash Flows from Financing Activities
Net (Decrease) in notes payable (164) (197)
Proceeds from long-term debt 47,327 7,021
Repayments of long-term debt (111,981) (20,370)
Dividends paid (32,764) (29,206)
Issuance (purchases) of treasury stock (10,041) 2,302
Issuance of common stock, net (270) 103,862
Redemptions of preferred stock (8) (8)
Capital distribution to shareowners of
pooled company (2,290) (2,286)
- ---------------------------------------------------------------------
Net Cash (Used in) Provided by
Financing Activities (110,191) 61,118
- ---------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash
Equivalents (160,317) 157,689
Cash and Cash Equivalents at Beginning of
Period 317,898 32,151
- ---------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $157,581 $189,840
=====================================================================
See accompanying Notes to Consolidated Financial Statements.
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FRONTIER CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1: Consolidation
The consolidated financial information includes the
accounts of Frontier Corporation and its affiliates (the
"Company"). As of January 1995, the Company reports its
operations in four segments: Long Distance Communications
Services, Local Communications Services, Wireless
Communications Services and Corporate Operations and Other.
Prior to January 1995, the Company reported its operations
in only two segments, Telephone Operations and
Telecommunication Services. The change in the definition of
the Company's segments has been made to better reflect the
changing scope of the businesses in which the Company
operates. All historical data have been restated
accordingly to conform with the new presentation.
Intercompany transactions have been eliminated except for
intercompany profit on regulated company purchases
(affiliate sales) from non-regulated affiliates. In the
opinion of management, prices charged by the non-regulated
affiliates are comparable to prices the regulated companies
would be required to pay other suppliers.
Note 2: Acquisitions/Divestitures
On March 3, 1995, the Company completed the sale of
Ontonagon County Telephone Company in Michigan and its
subsidiary, Midway Telephone Company, to Mid-South
Communications. The sale resulted from the Company's plans
to expand in areas other than Michigan's Upper Peninsula.
Annual revenues for Ontonagon and Midway amounted to $3.9
million in 1994, and net income was $.6 million. The sale
resulted in a non-taxable gain of $4.8 million, which has
been recorded in the "Other income and expense" section of
the Consolidated Statement of Income.
On March 17, 1995, the Company finalized its acquisition
of American Sharecom, Inc. (ASI), a long distance company
headquartered in Minneapolis, Minnesota. ASI had been one
of the largest privately owned long distance companies in
the country, with revenues and net income of $123 million
and $13 million, respectively, in the 12 month period ended
December 31, 1994. 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 approximately 8.7 million shares of Frontier common
stock. The transaction has been accounted for as a pooling
of interests and all historical financial data have been
restated accordingly. In conjunction with this acquisition,
a $4.8 million one-time charge related to various transition
and transaction costs of the newly combined companies was
recorded in the determination of Operating Income in March 1995.
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On March 29, 1995, the Company completed its purchase of
Minnesota Southern Cellular Telephone Company (MSCTC). A
total of approximately 867,000 shares of Frontier common
stock were reissued from treasury in exchange for all of the
shares of MSCTC. MSCTC is the non-wireline cellular
provider of service in Minnesota Rural Service Area #10 and
serves a population of 227,000 in an area south of
Minneapolis. The acquisition has been accounted for as a
purchase transaction.
On May 18, 1995, the Company completed its purchase of
WCT Communications, Inc. WCT is a facilities-based long
distance carrier with service in 45 states and switches in
Los Angeles, San Francisco, Chicago, Dallas, Philadelphia,
Atlanta, and Seattle. WCT has annualized revenues of
approximately $150 million and will be merged with
Frontier's long distance operation, Frontier Communications
International. The Company paid approximately $80 million
for all of the outstanding shares of WCT. The transaction
has been accounted for as a purchase acquisition.
On May 20, 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. In 1993, annual revenues for Minot amounted
to $13.3 million and net income was $2.8 million.
Note 3: Upstate Cellular Network
In July 1994, Frontier Corporation and NYNEX Corporation
combined cellular interests and formed a 50/50 joint venture
to operate a cellular network in upstate New York.
Financial results for the joint venture have been reported
on the equity method of accounting, reflecting Frontier's
proportionate share of the joint venture's earnings in the
"Other income and expense" section of the Consolidated
Statement of Income. Previously, revenues and expenses for
these New York State wireless properties had been
consolidated.
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Note 4: Income Taxes
The Company files a consolidated federal income tax return.
The provision for income taxes consists of the following
(in thousands):
3 Months Ended 6 Months Ended
June 30, June 30,
1995 1994 1995 1994
- -----------------------------------------------------------
Federal:
Current $19,949 $19,058 $37,668 $34,028
Deferred (1,911) (591) (3,009) (2,159)
- -----------------------------------------------------------
$18,038 $18,467 $34,659 $31,869
- -----------------------------------------------------------
State:
Current $ 3,222 $ 2,329 $5,364 $4,451
Deferred (154) (160) (113) (321)
- -----------------------------------------------------------
3,068 2,169 5,251 4,130
- -----------------------------------------------------------
Total $21,106 $20,636 $39,910 $35,999
===========================================================
Deferred income taxes associated with Local Communications
Services have not been provided for certain temporary
differences where regulatory agencies permit only taxes
actually paid to be recognized. At June 30, 1995, the
cumulative balance of tax reductions not previously offset
by provisions for deferred federal income taxes amounted to
$37 million. Similarly, the cumulative balances of tax
reductions not previously offset by provisions for deferred
state income taxes amounted to $18 million at June 30, 1995.
Consistent with the provisions of Financial Accounting
Standards Board Statement No. 109 (FAS 109), "Accounting for
Income Taxes," a deferred tax liability and a long-term
deferred asset have been recorded to reflect the impact
applicable to these cumulative reductions and the future
revenue to be recovered when these taxes become payable.
Note 5: Postemployment Benefits
In January 1994, the Company adopted the provisions of
Financial Accounting Standards Board Statement No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS
112). FAS 112 requires that projected future costs of
providing postemployment, pre-retirement benefits, such as
disability, pre-pension leave (salary continuation) and
severance pay, be recognized as an expense as employees
render service rather than when the benefits are paid. The
Company 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.
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Note 6: Earnings Per Share
Average common shares outstanding include amounts for
common stock equivalents resulting from stock options
outstanding at June 30, 1995 and June 30, 1994.
Primary earnings per common share amounts are calculated
by dividing Income Applicable to Common Stock by the
weighted average common shares and common share equivalents
outstanding, as applicable, during each period. Earnings
per share on a fully diluted basis are computed as set forth
in Exhibit 11.
Note 7: Stock Split
In November 1993, the Board of Directors approved a
2-for-1 split of the Company's common stock effected in the
form of a 100 percent stock dividend with no change in the
$1.00 per share par value. The New York State Public
Service Commission (NYSPSC) approved the split in March of
1994. The record date for the split was April 15, 1994, and
distribution of certificates began on April 29, 1994.
Historical share and per share data have been retroactively
adjusted to reflect the split where appropriate.
Note 8: Stock Offering
In February of 1994, the Company sold 5.4 million shares
of its common stock at $42 per share in a public offering.
As part of the offering, 2,549,000 new primary shares were
issued and sold directly by the Company and 2,885,000 shares
were sold by C FON Corporation, a wholly-owned subsidiary of
Centel Corporation, which is a wholly-owned subsidiary of
Sprint Corporation. All share and per share data referred
to in this Note are prior to the 2-for-1 stock split in
April of 1994.
Note 9: Stock Incentive Plans
At the April 26, 1995 Annual Meeting of Common
Shareowners, two proposals were approved modifying the
Restated Executive Stock Option Plan and the Directors Stock
Option Plan.
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The Restated Executive Stock Option Plan was amended and
renamed the Management Stock Incentive Plan. Under the
amended Plan, both stock options and shares of restricted
stock may be granted to key employees. The exercise price
of the options is not less than the fair market value of the
common stock at the time the option is granted. Options
become exercisable proportionately over three years from the
grant date and expire if not exercised within ten years
following the date of grant. Restricted stock grants may be
granted to key employees and are subject to certain
conditions and restrictions. These conditions and
restrictions may include the achievement of certain
performance goals and/or continued employment with the
Company through a specified restricted period. For grants
not related to performance goals, the vesting period will be
a minimum of three years duration. The total number of
shares available in aggregate for awards under this Plan
during any calendar year shall not exceed one percent (1%)
of the number of issued shares of the Company's common
stock, including treasury shares. The aggregate number of
shares which may be issued under restricted stock grants at
any one time during the life of the Plan may not exceed
three percent (3%) of the number of issued shares, including
treasury shares, of the Company's common stock. At June 30,
1995, there were no outstanding restricted stock awards.
In addition, the Directors Stock Option Plan was amended
and renamed the Directors Stock Incentive Plan. A maximum
of 1,000,000 shares may be issued under the Plan. Under the
amended Plan, non-employee directors of Frontier receive
annually 4,000 options, non-employee directors of Frontier
subsidiaries receive annually 3,000 options, and non-
employee Frontier directors receive annually a stock grant
of 500 shares. New non-employee Frontier directors receive,
additionally, a one-time grant of 1,000 shares which they
must retain during their tenure on the Board. The exercise
price is equal to the fair market value of common stock at
the time the option is granted. New options granted under
the Plan may become exercisable proportionately over three
years from the grant date, and expire if not exercised
within ten years following the date of grant.
At June 30, 1995, outstanding stock grants and options
available for future grants totaled 856,985.
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Information with respect to options under the above Plans
follows:
Option Price
Shares Per Share
- -----------------------------------------------------------
Outstanding at
March 31, 1995 1,114,171
Second Quarter Activity:
Granted 50,667 $19.875-$22.875
Exercised (1,182) $19.063-$19.313
Canceled (5,000) $21.875
----------
Outstanding at
June 30, 1995 1,158,656
=========
Exercisable at
June 30, 1995 331,651 $15.688-$22.688
=========
Note 10: 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 $23.3 million and $21.9 million
for the six month periods ended June 30, 1995, and June 30,
1994, respectively. In addition, actual income taxes paid
were $39.9 million for the six months ended June 30, 1995,
and $42.2 million for the six months ended June 30, 1994.
Note 11: Open Market Plan and Corporate Restructuring
At its public meeting in October 1994, the New York State
Public Service Commission (NYSPSC) 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, including the change
of the Registrant's name from Rochester Telephone
Corporation to Frontier Corporation, was approved by
shareowners in December 1994 and became operational on
January 1, 1995.
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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 lightly
regulated telecommunications company which provides 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
more heavily regulated and provides services to the new
competitive subsidiary company and all other
telecommunications providers on an equal basis. The network
company also continues 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 is being opened to full competition.
Over the course of the seven year Open Market Plan period,
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 NYSPSC has agreed
that a royalty will not be imposed by the NYSPSC against the
Company or Rochester Telephone Corp. during the seven year
period of the Plan, subject to limited exceptions. However,
the NYSPSC is not precluded from seeking any royalties
pursuant to the Royalty Order, on a prospective basis only,
as it may be modified as a result of judicial appeal,
subsequent to the expiration of the Open Market Plan. Under
the Open Market Plan, the Company is permitted to continue
its litigation challenging the Royalty Order, and the
Company intends to pursue it to conclusion.
The Company has also reorganized into a holding company
structure as allowed under the Open Market Plan Agreement.
This structure provides additional financing flexibility to
continue the acquisition and diversification efforts
necessary for the long-term growth of the business. In
conjunction with this restructuring, certain corporate
expenses that had previously been reported in the "Other
income and expense" section of the Consolidated Statement of
Income have been reclassified as costs and expenses above
the "Operating Income" line. In order to be consistent with
this change, historical data have also been reclassified.
Total corporate expenses that were reclassified for the
three and six month periods ending June 30, 1994 were $5.9
million and $10.9 million, respectively.
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Note 12: Commitments and Contingencies
It is anticipated that the Company will expend
approximately $125 million for additions to property, plant,
and equipment during 1995. In connection with this capital
program, the Company has made certain commitments for the
purchase of material and equipment.
On April 10, 1995, the Company announced it had signed a
definitive agreement to enter into a business combination
with ALC Communications Corporation, creating the fifth-
largest long distance company in the U.S. ALC, through its
wholly-owned subsidiary Allnet Communication Services, Inc.
provides long distance products and services to small and
medium-sized business customers nationwide. ALC,
headquartered in Bingham Farms, Michigan, is a publicly-held
company whose stock trades on the American Stock Exchange.
The combined company is expected to generate consolidated
revenues of approximately $2 billion. Under the terms of
the merger agreement, each shareholder of ALC will receive
2.0 shares of Frontier stock for each share of ALC stock,
for a total of approximately 80 million shares of Frontier
common stock as of the record date of July 10, 1995. The
transaction is subject to approval of shareowners of
Frontier and ALC and other necessary regulatory approvals
and customary conditions. The transaction, which will be
accounted for as a pooling of interests, is expected to
close in the third quarter of 1995. At a Special Meeting of
Shareowners of Frontier Corporation to be held on August 16,
1995, shareowners will be asked to approve the issuance of a
sufficient number of common shares in order for Frontier to
fulfill its obligations under the merger agreement. A joint
proxy statement was filed July 14, 1995.
On July 11, 1995, the Company completed its purchase of
Enhanced Telemanagement, Inc. (ETI), a privately-held
telecommunications company specializing in the integration
and resale of local, long distance, and ancillary telephone
services to small and medium-sized business customers.
Frontier paid approximately $29 million in cash for ETI.
ETI closed its fiscal year on June 30, 1995 with
approximately $31.5 million in revenues. The transaction
has been accounted for as a purchase acquisition.
On August 8, 1995, Frontier completed its acquisition of
Schneider Communications, Inc. (SCI) and SCI's 80.8
percent interest in LinkUSA Corporation (LinkUSA), two
Midwest telecommunications companies. SCI serves
approximately 11,000 long distance customers in the upper
Midwest and LinkUSA provides wholesale enhanced services
for the long distance industry. The combined annualized
revenue of SCI and LinkUSA is approximately $90 million.
Frontier paid cash of approximately $135 million for SCI
and the majority ownership in LinkUSA. The transaction
will be accounted for as a purchase acquisition.
<PAGE>
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended June 30, 1995 and 1994
- -----------------------------------------
DESCRIPTION OF BUSINESS
Frontier Corporation, formerly Rochester Telephone
Corporation, (the "Company") is a diversified
telecommunications service company, serving more than 1.5
million customers 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 second quarter of 1995 amounted to
$32.9 million, a $5.2 million decrease, or 13.7 percent,
over the comparable period in 1994. Earnings per share
were $.40 in 1995 versus $.46 in 1994. The results in
1994 included a $12.9 million pre-tax gain from the sale
of the Company's Minot Telephone property in North Dakota.
Adjusting for this one-time event, 1994's net income was
$28.6 million and earnings per share were $.34. Excluding
this gain, second quarter net income rose 15.0 percent and
earnings per share rose 17.6 percent in 1995 over the same
period in 1994.
Consolidated revenues and sales for the second quarter
of 1995 were $311.8 million, up $29.2 million, or 10.3
percent, over the comparable period in 1994. Operating
income was $63.0 million for the three months ended June
30, 1995, up $7.4 million, or 13.4 percent, from the same
three months in 1994.
As discussed in the results for the first quarter, the
Company reorganized in holding company form in January
1995 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
second quarter of 1994 amounted to $5.9 million.
<PAGE>
<PAGE>
In addition to this expense reclassification, the
Company redefined its business segments in the beginning
of 1995 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.
In addition to the above-mentioned items, certain one-
time events have taken place in 1994 and 1995 that have
impacted the comparability of the financial results.
These events include the following:
1. In May 1994, the Company sold its only telephone
operating company in North Dakota, Minot Telephone, for
cash. The second quarter 1994 included revenues and
operating income from Minot of $2.3 million and $.9
million, respectively.
2. 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 second quarter of 1994 for
these wireless properties were $8.7 million, while
associated operating income was $ 1.2 million.
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. Revenues and
operating income associated with these properties in the
second quarter 1994 were $.9 million and $.2 million,
respectively.
4. In late March 1995, the Company acquired Minnesota
Southern Cellular Telephone Company. The transaction
was accounted for as a purchase. Revenues and the
operating loss for this property for the three months
ended June 30, 1995 were $.8 million and $.2 million,
respectively.
5. During the second quarter of 1995, the Company
acquired WCT Communications, Inc., an interexchange
carrier based in California for approximately $80
million in cash. The transaction was accounted for as a
purchase, adding $16.4 million in revenues with a $1.2
million operating loss in the second quarter of 1995.
<PAGE>
<PAGE>
Adjusting for these items, consolidated revenues and
operating income rose 9.4 percent and 20.2 percent,
respectively, for the second quarter 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., American Sharecom, Inc.
(ASI), WCT Communications, Inc., Frontier Communications
of the Mid Atlantic, Inc., Frontier Communications of New
England, Inc., and Frontier Long Distance. ASI joined
this business unit in March 1995 and WCT joined in May
1995, continuing with the growth strategy of expanding
nationwide. The Company acquired WCT for approximately
$80 million in cash. The ASI 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
historical financial results have been restated
accordingly.
Long distance revenues totaled $142.9 million in the
second quarter of 1995, a $32.9 million increase, or 29.9
percent, over the same quarter in 1994. The Long Distance
Communications Services segment comprised 46 percent of
consolidated revenues in the second quarter of 1995. The
acquisition of WCT, accounted for as a purchase
transaction, resulted in an additional $16.4 million in
revenues for the period. The primary factor behind the
remaining increase was continued strong growth in the
retail and wholesale long distance revenue.
Costs and expenses for long distance operations
increased $31.2 million in 1995. This increase is the
result of added costs and expenses associated with WCT
($17.6 million), related increases in access costs due to
higher sales ($10.4 million), and higher marketing and
sales expenses ($4.1 million). Access costs as a
percentage of revenues were approximately 60 percent in
1995 as compared with 57 percent in 1994.
Operating income for long distance rose 12.9 percent to
$15.0 million for the three months ended June 30, 1995.
Without WCT, long distance operating income rose 22.0
percent, reflecting the Company's continuing focus on
improving operating margins. Operating margins excluding
the impact from WCT increased to 12.8 percent in 1995, an
increase over 1994's operating margin of 12.1 percent.
<PAGE>
<PAGE>
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 and expenses 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 $155.2
million in the three month period ended June 30, 1995, an
increase of $.3 million, or .2 percent. This segment
accounted for 50 percent of consolidated revenues in the
second quarter of 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 $3.3 million in
revenues in 1994's second quarter, revenues for Local
Communications Services rose 2.4 percent in the second
quarter of 1995. Revenues for Rochester, NY Operations
rose 1.0 percent and Regional Operations rose 3.9
(adjusted for dispositions) in the quarter driven by
higher local service and network access service revenues.
Total access lines (adjusted for the dispositions)
increased .9 percent during the second quarter of 1995 to
a total of 930,610. The Rochester market maintained its
strong growth from the first quarter when local
competition was introduced, with a .9 percent growth in
the second quarter. This was attributable to a higher
demand for services in the open market environment.
Costs and expenses in the second quarter 1995 for Local
Communications Services were $105.8 million, a decrease of
$3.4 million, or 3.1 percent over 1994. This decrease was
the result of the telephone company dispositions in the
Regional Operations ($2.1 million) and ongoing cost
controls.
Operating income for the second quarter 1995 was $49.4
million, an increase of $3.8 million, or 8.2 percent over
1994. Operating margins for the three month period
improved from 29.5 percent in 1994 to 31.8 percent in
1995, driven by improvements in both the Rochester
Operations and the Regional Operations.
<PAGE>
<PAGE>
Wireless Communications Services
Wireless Communications Services is comprised of the
Company's wireless operations where it has a greater than
50 percent ownership interest requiring it to report on a
consolidated basis. As of June 30, 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 $3.4 million
for the second quarter of 1995, down $8.4 million, or 71.4
percent, from the comparable period in 1994. The 1995
results include the operations of the recently-acquired
Minnesota cellular property, whereas the 1994 results
include revenues associated with the upstate New York
wireless properties that are no longer being consolidated
subsequent to the formation of the joint venture. Both
periods include the results of the Alabama cellular
properties. Total costs and expenses were $2.6 million in
the three months ended June 30, 1995, a decrease of 76.4
percent from 1994. This decrease is consistent with the
corresponding decrease in revenues. Operating income for
the second quarter of 1995 was $.8 million, a slight
decrease of $.1 million, or 12.3 percent, from 1994.
With respect to the wireless joint venture with NYNEX,
revenues for the partnership interests in this operation
exceeded $18 million during the second quarter of 1995, an
increase of 14 percent over 1994. Operating income was
$2.4 million in the quarter, nearly double the amount
reflected in the prior year's second quarter. Operating
cash flow increased to $8.4 million as a result of
improved operating efficiencies. Depreciation expense
rose $1.6 million in the quarter, related to standardizing
and accelerating depreciation of certain wireless
equipment to better reflect the remaining useful lives.
<PAGE>
<PAGE>
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, the operating income
plus depreciation 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."
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 ("FNS"), external sales associated with the
Company's information technologies operation, Frontier
Information Technologies, and intersegment eliminations.
Revenues in the second quarter of 1995 were $10.2
million, an increase of $4.4 million, or 75.3 percent,
over 1994. Essentially all of these revenues pertain to
FNS. The increase is due primarily to a large equipment
sale completed in the second quarter of 1995 and higher
system installation revenue at FNS.
Total costs and expenses for this segment amounted to
$12.6 million, a $2.3 million increase, or 22.9 percent,
over 1994. Expenses at FNS rose in relation to the
increase in sales, while corporate operations expenses
decreased $.8 million due to lower corporate structure
costs.
Other Income Statement Items
Interest Expense
----------------
Interest expense was $11.9 million in the second quarter
of 1995, a $1.0 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 $12.9 million gain on sale of subsidiaries in 1994
resulted from the sale for cash of Minot County Telephone
Company, the Company's only telephone property in North
Dakota.
<PAGE>
<PAGE>
Equity Earnings from Unconsolidated Wireless Interests
------------------------------------------------------
Equity earnings from the Company's interests in wireless
partnerships in the second quarter of 1995 were $1.2
million, an increase of $.9 million over 1994. This
increase is the result of equity earnings associated with
the Company's joint venture with NYNEX.
Interest Income
---------------
Interest income in the second quarter of 1995 amounted
to $3.2 million, an increase of $1.7 million over 1994's
second quarter. This increase is due to higher interest
rates and higher cash balances related to the Company's
equity offering in early 1994, the sale of Minot Telephone
in May 1994 and the issuance of debt in December 1994.
Other Income (Expense), Net
---------------------------
Other expense in the second quarter of 1995 amounted to
$1.7 million, a $.7 million higher expense when compared
with the same period in 1994. This change was due to
higher amortization expense related to the change in
accounting for the wireless joint venture with NYNEX.
Income Taxes
------------
Consolidated income taxes increased $.5 million, or 2.3
percent, in the second quarter of 1995. This increase was
due to a lower effective tax rate in 1994 that resulted
from the sale of the Minot Telephone property in May 1994.
The effective income tax rate was 39.1 percent for the
three months ended June 30, 1995 as compared with 35.2
percent in 1994.
Six Months Ended June 30, 1995 and 1994
- ---------------------------------------
RESULTS OF OPERATIONS
Consolidated
Net income for the first six months of 1995 amounted to
$64.5 million, a $8.1 million increase, or 14.4 percent,
over the comparable period in 1994. Earnings per share
were $.78 in 1995 versus $.69 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
extraordinary charge in 1994, net income rose 1.5 percent
and earnings per share were flat in 1995 when compared to
the same period in 1994.
<PAGE>
<PAGE>
The results for 1995 and 1994 also included certain
other one-time items -- a $4.8 million non-taxable gain on
the sale of Ontonagon County Telephone in March 1995, a
$4.8 million pre-tax charge ($3.1 million after taxes) for
one-time costs associated with the acquisition of American
Sharecom, Inc. (ASI) completed in March 1995, and a $12.9
million pre-tax gain from the sale of Minot Telephone in
May 1994. Excluding all of the one-time items, 1995's
year-to-date net income rose $8.7 million, or 16.2
percent, to $62.8 million, and earnings per share rose
15.2 percent in the first six months to $.76 per share in
1995 from $.66 per share in 1994. The number of average
common shares outstanding increased 1.3 million shares to
81.9 million shares in the first six months of 1995 as a
result of the Company's equity offering in February 1994.
Consolidated revenues and sales for the six month period
ended June 30, 1995 were $595.2 million, up $40.5 million,
or 7.3 percent, over the comparable period in 1994.
Operating income was $117.7 million for the six months in
1995, up $9.9 million, or 9.2 percent, from the same six
months in 1994.
In early 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. 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 six months of
1994 amounted to $10.9 million.
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 six months in 1994 were
$61.0 million and $10.6 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 events include the following:
1. In May 1994, the Company sold its only telephone
operating company in North Dakota, Minot Telephone, for
cash. Minot's revenues and operating income included in
1994 amounted to $5.7 million and $2.0 million,
respectively.
<PAGE>
<PAGE>
2. 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 six months of 1994 for
these wireless properties were $17.6 million, while
associated operating income was $2.3 million.
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. Revenues and
operating income associated with these properties for
the period from March 1994 through June 1994 were $1.3
million and $.3 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.
5. In late March 1995, the Company acquired Minnesota
Southern Cellular Telephone Company. The transaction
was accounted for as a purchase. Revenues and the
operating loss for this property for the six months
ended June 30, 1995 were $.8 million and $.2 million,
respectively.
6. In May 1995, the Company acquired WCT
Communications, Inc., a California based interexchange
carrier. The transaction was accounted for as a
purchase, adding $16.4 million in revenues with a $1.2
million operating loss for the first six months in 1995.
Adjusting for these items, consolidated revenues and
operating income rose 9.0 percent and 18.7 percent,
respectively, for the first six months of 1995 when
compared with the same period in 1994.
<PAGE>
<PAGE>
Long Distance Communications Services
Long distance revenues totaled $264.9 million in the
first six months of 1995, a $48.5 million increase, or
22.4 percent, over the same period in 1994. Long Distance
Communications Services comprised 45 percent of
consolidated revenues in 1995 year-to-date. In addition
to the $16.4 million of revenues from the purchase
acquisition of WCT in May 1995, strong growth in retail
and wholesale long distance revenue continued to drive the
results. Excluding the WCT revenues, long distance
revenues rose 14.8 percent in the first six months of
1995.
Costs and expenses for long distance operations
increased $44.7 million, excluding the $4.8 million one-
time charge related to the acquisition costs for ASI in
the first quarter of 1995. This increase is the result of
additional costs associated with WCT ($17.6 million),
increases in access costs related to higher sales ($20.5
million), and higher marketing and sales expenses ($8.4
million). Access costs as a percentage of revenues were
approximately 59 percent in 1995 as compared with 58
percent in 1994.
Before the $4.8 million acquisition charge, operating
income for long distance rose 15.2 percent to $28.9
million for the first six months of 1995. Without WCT,
long distance operating income rose 20.1 percent.
Operating margins increased to 12.1 percent in 1995 year-
to-date (excluding the one-time acquisition-related charge
and the impact from the WCT acquisition), an improvement
over 1994's operating margin of 11.6 percent.
Local Communications Services
Revenues for Local Communications Services were $308.0
million in the six month period ended June 30, 1995, an
increase of $2.1 million, or .7 percent. This segment
accounted for 52 percent of consolidated revenues in the
first half of 1995. Adjusting for the impact from the
dispositions of the Minot and Ontonagon County Telephone
Companies, which amounted to additional revenues of $7.0
million in the first six months of 1994 when compared with
1995, revenues rose 3.1 percent. Adjusting for
dispositions, revenues for the Regional Operations and the
Rochester, NY Operations rose 3.7 percent and 2.4 percent,
respectively, in the first half of 1995, driven mainly by
higher local and network access service revenues. Total
access lines (adjusted for the dispositions) increased at
an annualized rate of 4.0 percent during the first six
months of 1995. The Rochester market showed a strong 4.4
percent annualized growth, reflecting a higher demand for
services in the open market environment.
<PAGE>
<PAGE>
Costs and expenses in the first half of 1995 for Local
Communications Services were $209.9 million, a decrease of
$6.7 million, or 3.1 percent from 1994. This decrease was
the result of the telephone company dispositions in the
Regional Operations ($4.7 million) and ongoing cost
controls. Employees per 10,000 access lines, a common
measure of efficiency for telephone companies, were 32 as
of June 30, 1995, versus 33 a year earlier.
Operating income was $98.1 million, an increase of $8.9
million, or 9.9 percent over 1994. Operating margins
improved from 29.2 percent in 1994 to 31.9 percent in
1995, driven by improvements in both the Rochester
Operations and the Regional Operations.
Wireless Communications Services
Revenues for Wireless Communications were $5.7
million for the first six months of 1995, down $15.2
million, or 72.9 percent, from the comparable period in
1994. The 1995 results reflect the operations of the
Alabama and Minnesota cellular properties, whereas the
1994 results reflect the operations associated with the
Alabama cellular properties as well as the upstate New
York wireless properties that are no longer being
consolidated subsequent to the formation of the joint
venture in July 1994. The Minnesota cellular property was
acquired at the end of March 1995 and accounted for as a
purchase transaction. Total costs and expenses were $4.5
million in the six months ended June 30, 1995, a decrease
of 76.5 percent from 1994. This decrease is consistent
with the corresponding decrease in revenues. Operating
income for the first half of 1995 was $1.1 million, a
decrease of $.5 million, or 30.0 percent, from 1994.
Revenues for the wireless joint venture with NYNEX were
$36.0 million during the first half of 1995, an increase
of 15.1 percent over 1994. Operating income rose 75.7
percent to 2.4 million for the first six months of 1995
and operating cash flow doubled to $8.4 million from
better operating efficiencies. As a result of
standardizing and accelerating depreciation of certain
wireless equipment to better reflect the remaining useful
lives, depreciation expense increased 111.0 percent to
$5.9 million in 1995. The operating results of this joint
venture are accounted for on the equity method and are
included in the "Other income and expense" section of the
Consolidated Statement of Income.
Corporate Operations and Other
Revenues in the first half of 1995 were $16.6 million,
an increase of $5.1 million, or 44.9 percent, over 1994.
Essentially all of these revenues pertain to FNS. The
increase is due to higher system installation revenue and
lower intersegment sales eliminations.
<PAGE>
<PAGE>
Total costs and expenses for this segment amounted to
$22.3 million, a $2.7 million increase, or 13.7 percent,
over 1994. Expenses at FNS rose in relation to the
increase in sales, while corporate operations expenses
decreased $.7 million from the prior year as a result of
lower corporate structure costs.
Other Income Statement Items
Interest Expense
----------------
Interest expense was $23.6 million in the first six
months of 1995, a $1.7 million increase over 1994. This
increase is the result of higher balances of long-term
debt outstanding related to 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.
The $12.9 million gain on sale in 1994 resulted from the
sale for cash of Minot Telephone Company.
Equity Earnings from Unconsolidated Wireless Interests
------------------------------------------------------
Equity earnings from the Company's interests in wireless
partnerships in the first half of 1995 were $1.6 million,
an increase of $1.1 million over 1994. This increase is
mainly the result of equity earnings from the Company's
wireless joint venture with NYNEX that began operations in
July 1994.
Interest Income
---------------
Interest income in the first six months of 1995 amounted
to $6.5 million, an increase of $4.5 million over 1994's
first half. This increase is primarily the result of
higher cash balances and higher interest rates. Interest
income in the second half of 1995 is expected to decline
substantially due to the use of cash for acquisitions.
Other Income (Expense), Net
---------------------------
Other expense in the first half of 1995 amounted to $3.0
million, a $.7 million higher expense when compared with
the same period in 1994. This change was due to higher
amortization expense related to the change in accounting
for the wireless joint venture with NYNEX.
<PAGE>
<PAGE>
Income Taxes
------------
Consolidated income taxes increased $3.9 million, or
10.9 percent, in the first six months of 1995. This
increase was due to a lower effective tax rate in 1994
that resulted from dispositions of subsidiaries. The
effective income tax rate was 38.2 percent for the first
half of 1995 as compared with 36.2 percent in 1994 for the
same period in 1994.
FINANCIAL CONDITION
Cash and Cash Equivalents
At June 30, 1995, the Company had $157.6 million in cash
and cash equivalents compared with $317.9 million at
December 31, 1994, a decrease of $160.3 million. Cash
generated from operations amounted to $78.6 million in the
first six months of 1995. Offsetting this was a $128.8
million outflow for investing activities (mainly capital
expenditures of $40.8 million and purchase acquisitions of
$78.1 million) and a $110.2 million outflow for financing
activities including debt retirements ($64.7 million, net
of proceeds), dividend payments ($32.8 million) and
treasury stock purchases ($10.0 million). See the
Consolidated Statement of Cash Flows for additional
information.
Debt
As a result of Frontier Corporation's announcement to
acquire ALC Communications Corp. in April 1995, the
Company's debt rating agencies issued various reports on
the ratings of its senior unsecured debt and short-term
commercial paper. The agencies acknowledged 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, Duff &
Phelps reaffirmed Frontier's A credit rating for
outstanding notes and debentures. On April 12, 1995,
Fitch placed the Company's A+ outstanding medium-term
notes and senior debentures on FitchAlert with negative
implications. On June 9, 1995, Standard & Poors
downgraded Frontier Corporation's senior unsecured debt
rating from A+ to A, but reaffirmed Rochester Telephone
Corp.'s AA rating of its senior unsecured debt. On June
29, 1995, Moody's downgraded Frontier's senior unsecured
debt rating from A2 to A3 and also downgraded Frontier's
commercial paper rating from P1 to P2.
<PAGE>
<PAGE>
At June 30, 1995, the Company's total debt, including
notes payable, amounted to $559.9 million, a decrease of
$23.9 million from December 31, 1994. This decrease is
mainly the result of a $60.0 million reduction in a bank
revolver and the retirement of $7.0 million of 9%
debentures (due 2020), offset, in part, by the issuance of
$40.0 million in medium-term notes.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of
total capitalization) was 39.0 percent at June 30, 1995 as
compared with 41.2 percent at December 31, 1994. Pre-tax
interest coverage was 5.4 times for the first six months
of 1995, as compared with 5.0 times for the same period in
1994.
Capital Spending
During the first quarter of 1995, gross capital
expenditures amounted to $40.6 million. The Company plans
to spend a total of approximately $125 million on its
capital program during the full year in 1995, before
considering the impact from the pending merger with ALC
Communications Corporation. 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 July 6, 1995, the Board of Directors declared the
second quarter 1995 dividend of 20.75 cents per share on
the Company's common stock, payable August 1, 1995 to
shareowners of record on July 14, 1995.
<PAGE>
<PAGE>
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 six months 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 11 to the Consolidated
Financial Statements. However, there are also
uncertainties associated with the Plan and the corporate
restructuring. In our opinion, the most significant
issues relate to increased competition in the Rochester,
New York market, the risk inherent in the Rate
Stabilization Plan incorporated in the Open Market Plan
Agreement, restraints on the Company's control of
Rochester Telephone Corp., and potential diversification
risk. Additional details about these risks can be found
in Management's Discussion of Results of Operations and
Analysis of Financial Condition in Exhibit No. 13 to the
Company's Form 10-K filed for the fiscal year ended
December 31, 1994.
<PAGE>
<PAGE>
Part II - Other Information
===========================
Item 1 - Legal Proceedings
On June 11, 1992, a group of corporate plaintiffs
consisting of Cooper Industries, Inc., Keystone
Consolidated Industries, Inc., The Monarch Machine Tool
Company, Niagara Mohawk Corporation, and Overhead Door
Corporation commenced an action in the United States
District Court for the Northern District of New York
seeking contribution from Rotelcom Inc., a wholly-owned
subsidiary of the registrant held through intervening
subsidiaries (now named Frontier Network Systems Inc. or
"FNS") and fourteen other corporate defendants for
environmental "response costs" in the approximate amount
of $1.5 million incurred by the plaintiffs pursuant to a
decree entered into by plaintiffs with the United States
Environmental Protection Agency (the "EPA"). Two
additional defendants were named in 1994. In addition to
FNS, the current defendants are: Agway, Inc., BMC
Industries, Inc.; Borg-Warner Corporation; Elf Atochem
North America, Inc.; Mack Trucks, Inc.; Motor
Transportation Services, Inc.; Pall Trinity Micro
Corporation; The Raymond Corporation; Redding-Hunter,
Inc.; Smith Corona Corporation; Sola Basic Industries,
Inc.; Wilson Sporting Goods Company; Philip A. Rosen;
Harvey M. Rosen; City of Cortland; and New York State
Electric & Gas Corporation.
The consent decree concerned the clean-up of an
environmental Superfund site located in Cortland, New
York. It is alleged that the corporate defendants
disposed of hazardous substances at the site and are
therefore liable under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"). The
Company anticipates that a final Record of Decision
("ROD") will be issued by the EPA which will prescribe the
remediation requirements for the site. The aggregate
amount of remediation costs to be incurred by the
plaintiffs will be based on the requirements of the ROD.
The total cost of remediation at the site is uncertain,
although estimates have recently ranged from $25 million
and $100 million. There has been no allocation of
liability as among or between the plaintiffs or
defendants. The extent to which plaintiffs can recover
any of these costs from the defendants, including FNS,
will be determined at a trial. FNS has been vigorously
defending this lawsuit. Discovery proceedings against FNS
have now been completed and a possible motion for summary
judgment is being evaluated by FNS counsel. The Company
believes that it will ultimately be successful, but it is
unable to predict the outcome with any certainty at this
time.
<PAGE>
<PAGE>
In its Opinion and Order in Case 87-C-8959, issued July 6,
1993, the NYSPSC, by a three-to-two vote, imposed a
royalty upon the Company in the amount of two percent of
the total capitalization of the Company's unregulated
operations. The NYSPSC justified the royalty on two
grounds: first, that ratepayers are entitled to
protection from the potential for cost misallocations and
increased risk that accompany diversification of the
Company's basic telephone business; and second, that the
Company's unregulated operations benefit from their use of
the Rochester name and reputation. The NYSPSC rejected
the Company's statutory and constitutional defenses and
concluded that it possessed the authority under the Public
Service Law to impose a royalty and that its imposition is
not unconstitutional. Based upon an initial
interpretation of the Order, the Company estimates that
its potential effect is in the range of $2 million per
year. The royalty, if implemented, would be an imputation
against the Rochester, New York operating company's
revenue requirement from regulated intrastate operations.
The NYSPSC ordered the Rochester, New York operating
company to file, by August 5, 1993, an accounting plan to
account for the royalty amount, together with a plan for
returning such amount to ratepayers. The NYSPSC denied a
request for waiver and, on August 5, 1993, the Rochester,
New York operating company filed its plan.
On August 6, 1993, the Rochester, New York operating
company filed with Supreme Court, Albany County, its
petition seeking judicial review of the NYSPSC's Opinion
and Order. By order dated October 7, 1993, this
proceeding was transferred to the Appellate Division,
Third Department. On June 30, 1994, the Appellate
Division unanimously upheld the Commission's Order. On
July 29, 1994, the Company filed a Notice of Appeal and a
Motion for Leave To Appeal with the New York Court of
Appeals. On December 8, 1994, the Court of Appeals
accepted the Company's appeal and denied the Motion for
Leave To Appeal as unnecessary. Briefs were filed between
February and April 1995. On February 27, 1995, the NYSPSC
moved to dismiss the appeal as moot as a result of the
Open Market Plan Settlement. The Company filed its
opposition to that motion on March 13, 1995. On April 4,
1995, the Court denied the Commission's motion to dismiss
without prejudice to renew at oral argument and set the
case for oral argument on September 21, 1995. The Company
is vigorously contesting this case and is of the opinion
that it will ultimately prevail, but cannot predict the
outcome with any certainty at this time. This royalty
issue has been settled for the Rochester, New York
operating company for the duration of the Rate Period of
the Rate Stabilization Plan, which is part of the Open
Market Plan.
<PAGE>
<PAGE>
Prior to the Company's acquisition of American Sharecom,
Inc. (ASI) in March 1995, an appraisal proceeding entitled
American Sharecom, Inc. v. LDB International et al,
Minnesota Court of Appeals File No. C9-94-2419 was
commenced in connection with a merger which occurred in
1992. In this proceeding, former holders of 57 shares of
ASI Common Stock (dissenters) exercised their rights under
Minnesota law to challenge the amount they received for
their shares in the merger. In November 1994, a Minnesota
District Court directed ASI to pay an additional $4.6
million to the dissenters, plus interest and legal fees.
ASI recorded a $5.3 million contingent liability during
the fourth quarter of 1994. The Minnesota Court of
Appeals affirmed the trial court and on August 1, 1995,
the Minnesota Supreme Court refused to grant an appeal
from that judgment. The Company does not plan to appeal.
There are five suits in Hennepin County (Minnesota)
District Court in which, variously, ASI, its former
principal shareholders, Steven Simon and James Weinert,
Frontier and other associated parties, including ASI's
legal counsel, are named as defendants. One of the cases
has been pending since May of 1994, and was served (but
not filed) in connection with the dissenters rights which
is the subject of the appraisal proceeding described
above. The other 4 actions were filed over the period
beginning in February 1995 and ending in June 1995.
The plaintiffs are dozens of former ASI shareholders.
One of the complaints asserts class action allegations on
behalf of all former shareholders, and a motion has been
filed in another case to amend the complaint to add class
claims. No class has yet been certified.
The causes of action asserted are common law fraud,
breach of fiduciary duty and violations of certain
provisions of the Minnesota Business Corporation Act,
which require shareholders in a closely held corporation
to act fairly to one and other and to refrain from
corporate waste and misappropriation. Finally, some of
the complaints assert shareholder derivative rights.
The suits allege, generally, that Simon and Weinert,
with and through ASI, embarked upon a scheme using false
and insufficient information to gain control of ASI and
ultimately acquire for inadequate consideration all the
stock of ASI. The one complaint that names the Company as
a defendant alleges that the Company holds the ASI stock
and controls Frontier stock in trust for the benefit of
plaintiffs.
Although it is too early to determine the outcome of
these suits, Frontier, ASI and the other defendants
believe they have valid defenses and intend to contest
vigorously the claims asserted in these suits.
<PAGE>
<PAGE>
On April 10 and 11, 1995, three lawsuits were commenced
against ALC Communications Corporation as a result of its
announced merger with Frontier Corporation. In two of
those actions, each filed in the Court of Chancery of the
State of Delaware, in and for New Castle County by Martin
Mayers and Mordecai Cohen, respectively, Frontier
Corporation has been named as a defendant, although not
yet served with process. The lawsuits purport to be class
actions brought on behalf of all ALC stockholders against
ALC and its directors. Among other things, the complaints
seek to enjoin the business combination and/or to obtain
an award of damages. Frontier Corporation believes these
actions to be without merit and will defend itself
vigorously if and when it has been served with process.
On July 12, 1995, a Complaint was filed by Christopher
E. Edgecomb, a former officer, director and employee of
WCT Communications, Inc. ("WCT") against Frontier, WCT's
current President, Michael Coghill, and fifty unidentified
additional defendants, in the California Superior Court
for Santa Barbara. Edgecomb has alleged that Frontier and
WCT violated the terms of a non-compete agreement,
executed by Edgecomb, by failing to make payments to
Edgecomb in accordance with the agreement. Edgecomb has
also alleged that the defendants violated an implied duty
of good faith and fair dealing in the agreement and
engaged in unfair competition in violation of California
law. In addition, the complaint alleges that the
defendants slandered Edgecomb. The complaint seeks
rescission of the non-compete agreement, compensatory
damages in excess of $80 million, punitive damages,
injunctive relief restraining further unfair competition,
court costs and attorneys' fees. Although it is too early
to determine the outcome of this matter, Frontier believes
the allegations in the complaint to be without merit and
will defend the litigation vigorously.
The Regulatory Matters discussion in Management's
Discussion and Analysis of Financial Condition and Results
of Operations in Part I, Item 2 of this document is
incorporated herein by reference.
Item 4 - Submission of Matters to a Vote of Security
Holders
The Annual Meeting of Shareowners was held on April
26, 1995 for the purpose of electing a board of directors,
approving the appointment of auditors, and voting on the
proposals described below.
<PAGE>
<PAGE>
All of management's nominees for Directors as listed
in the proxy statement were elected with the following
vote:
For Against
---------- ---------
1. Patricia C. Barron 62,211,578 457,924
2. Ronald L. Bittner 62,215,176 454,326
3. Raul E. Cesan 62,156,481 513,021
4. Brenda E. Edgerton 62,206,804 462,698
5. Jairo A. Estrada 62,238,592 430,910
6. Daniel E. Gill 62,140,081 529,421
7. Alan C. Hasselwander 62,246,883 422,620
8. Douglas H. McCorkindale 62,249,055 420,447
9. Leo J. Thomas 62,239,541 429,961
The appointment of Price Waterhouse, LLP as
independent auditor for the fiscal year 1995 was approved
with the following vote:
Broker
For Against Abstain Non-Votes
- -----------------------------------------------------------
62,032,774 323,538 313,190 None
The Management Stock Incentive Plan proposal, to expand
the group of key employees eligible to participate and add
restricted stock as a component of compensation, was
approved with the following vote:
Broker
For Against Abstain Non-Votes
- -----------------------------------------------------------
48,168,430 7,616,112 1,189,580 5,695,380
The Directors Stock Incentive Plan proposal, to expand
the group of eligible participants to include non-employee
Directors of the Company's subsidiaries and to authorize
the award of stock grants to the Directors of the Company
(but not Directors of its subsidiaries), was approved with
the following vote:
Broker
For Against Abstain Non-Votes
- -----------------------------------------------------------
56,936,612 4,450,812 1,272,409 None
<PAGE>
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings per Share of Common
Stock on a Fully Diluted Basis (Unaudited)
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter.
May 19, 1995 - The following event was reported:
- ------------------------------------------------
Item 5. Frontier Corporation ("Frontier") announced on
May 18, 1995, that on May 17, 1995, the shareholders of
WCT Communications, Inc. ("WCT") approved WCT's merger
with Frontier.
The following financial statements were filed with this
report: None
June 6, 1995 - The following event was reported:
- ------------------------------------------------
Item 5. The Registrant has announced and entered into
proposed acquisitions which in the aggregate exceed the
significant subsidiary test under Rule 1-02(w) of
Regulation S-X.
The following financial statements were filed with this
report:
Unaudited Pro Forma Combined Financial Information
Frontier Corporation, WCT Communications, Inc.,
Enhanced TeleManagement,Inc., Schneider
Communications, Inc. and ALC Communications Corporation
- Unaudited Pro Forma Combined Balance Sheet: As of
March 31, 1995
Frontier Corporation, WCT Communications, Inc.,
Enhanced TeleManagement, Inc. and Schneider
Communications, Inc.
- Unaudited Pro Forma Combined Statement of Income:
For the Three Months Ended March 31, 1995 and 1994
Frontier Corporation, WCT Communications, Inc.,
Enhanced TeleManagement, Inc. and Schneider
Communications, Inc.
- Unaudited Pro Forma Combined Statement of Income:
For the Year Ended December 31, 1994
Frontier Corporation Pro Forma and ALC Communications
Corporation
- Unaudited Pro Forma Combined Statement of Income:
For the Three Months Ended March 31, 1995 and 1994
Frontier Corporation Pro Forma and ALC Communications
Corporation
- Unaudited Pro Forma Combined Statement of Income:
For the Year Ended December 31, 1994
Frontier Corporation and ALC Communications Corporation
- Unaudited Pro Forma Combined Statement of Income:
For the Years Ended December 31, 1993 and 1992
Frontier Corporation - Notes to Unaudited Pro Forma
Combined Financial Statements
July 17, 1995 - The following event was reported:
- -------------------------------------------------
Item 2. As previously reported, Frontier Corporation
finalized the acquisition of American Sharecom, Inc. on
March 17, 1995. The Stock Acquisition Agreement
("Agreement") was filed in redacted form on Form 8-K on
March 22, 1995. A Form 8-K/A was filed on May 9, 1995
to include Amendments 1 and 2 and various schedules to the
previously filed Agreement, all in redacted form.
Confidential treatment requests were filed for both the 8-
K and 8-K/A. This filing revises information in Schedule
3.22 to the Agreement pursuant to the Confidential
treatment request.
The following financial statements were filed with this
report: None
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned
thereunto duly authorized.
FRONTIER CORPORATION
--------------------------------------
(Registrant)
Dated: August 11, 1995 By/s/Richard A. Smith
--------------------------------
Richard A. Smith
Corporate Controller
(and Principal Accounting Officer)
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
11 Statement re: Computation of Earnings Filed herewith
per Share of Common Stock on a
Fully Diluted Basis (Unaudited)
27 Financial Data Schedule
Exhibit 11
Frontier Corporation
Computation of Earnings per Share of Common Stock
on a Fully Diluted Basis (Unaudited)
3 Months Ended 6 Months Ended
June 30, June 30,
(In thousands, except per share data) 1995 1994 1995 1994
- -----------------------------------------------------------------------
Income applicable to common stock $32,557 $37,773 $63,935 $55,792
Add: Interest on convertible
debentures 138 138 277 277
----------------------------------
32,695 37,911 64,212 56,069
Less: Increase in related federal
income taxes 49 49 97 97
----------------------------------
Adjusted income applicable to
common stock $32,646 $37,862 64,115 $55,972
==================================
Average Common Shares Outstanding 81,870 81,860 81,870 80,556
(excluding common stock equivalents)
Adjustments for:
Convertible Debentures 503 503 503 503
Stock Options 158 84 142 78
----------------------------------
Adjusted common shares assuming
conversion of outstanding Convertible
Debentures and Stock Options at
beginning of each 82,531 82,447 82,515 81,137
period ===================================
Earnings per share of common stock
on a fully diluted basis $ .40 $ .46 $ .78 $ .69
===================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS
</LEGEND>
<CIK> 0000084567
<NAME> FRONTIER CORPORATION
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