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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, 1996
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 163,535,517 as of
July 31, 1996
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FRONTIER CORPORATION
Form 10Q
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Business Segment Information for the
three months ended June 30, 1996
and June 30, 1995 and for the six months
ended June 30, 1996 and June 30, 1995 3
Consolidated Statements of Income for the
three months ended June 30, 1996 and
June 30, 1995 and for the six months ended
June 30, 1996 and June 30, 1995. 4
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and
June 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security
Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Index to Exhibits 28
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FRONTIER CORPORATION
Business Segment Information
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands of dollars 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Long Distance Communications Services
Revenues $497,756 $ 338,267 $ 983,858 $636,146
Operating Income:
Operating Income Before Acquisition Related $ 72,871 $ 48,864 $ 136,126 $ 96,017
Charges
Acquisition Related Charges - - - (4,750)
- ----------------------------------------------------------------------------------------
Total Operating Income $ 72,871 $ 48,864 $ 136,126 $ 91,267
Depreciation and Amortization $ 20,495 $ 11,524 $ 40,013 $ 22,674
Capital Expenditures $ 24,755 $ 10,464 $ 61,985 $ 14,448
Identifiable Assets (1) $1,181,293 $ 769,557 $1,181,293 $769,557
========================================================================================
Local Communications Services
Revenues:
Rochester, NY Operations $ 82,176 $ 78,450 $ 163,850 $ 155,931
Regional Operations 79,207 76,724 155,975 151,940
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Total Revenues $161,383 $ 155,174 $ 319,825 $ 307,871
Operating Income:
Operating Income Before Other Charge:
Rochester, NY Operations $ 21,057 $ 20,922 $ 40,665 $ 40,972
Regional Operations 32,133 28,034 63,376 56,022
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Total Operating Income $ 53,190 $ 48,956 $ 104,041 $ 96,994
Depreciation and Amortization:
Rochester, NY Operations $ 13,567 $ 13,823 $ 26,714 $ 27,978
Regional Operations 11,896 12,266 23,898 24,579
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Total Depreciation and Amortization $ 25,463 $ 26,089 $ 50,612 $ 52,557
Capital Expenditures $ 21,654 $ 15,596 $ 41,116 $ 29,577
Identifiable Assets (1) $1,140,490 $1,238,167 $1,140,490 $1,238,167
========================================================================================
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Corporate Operations and Other
Revenues $ 11,140 $ 13,479 $ 21,745 $ 21,943
Operating Loss $ (3,360) $ (1,506) $ (5,614) $ (4,666)
Depreciation and Amortization $ 1,068 $ 1,054 $ 2,089 $ 1,627
Capital Expenditures $ 5,877 $ 4,202 $ 11,185 $ 7,481
Identifiable Assets (1) $409,613 $ 508,643 $ 409,613 $ 508,643
=======================================================================================
Consolidated
Revenues $670,279 $ 506,920 $1,325,428 $ 965,960
Operating Income:
Operating Income Before Acquisition
Related Charges $122,701 $ 96,314 $ 234,553 $ 188,345
Acquisition Related Charges - - - (4,750)
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Total Operating Income $122,701 $ 96,314 $ 234,553 $ 183,595
Depreciation and Amortization $ 47,026 $ 38,667 $ 92,714 $ 76,858
Capital Expenditures $ 52,286 $ 30,262 $ 114,286 $ 51,506
Identifiable Assets $2,184,024 $2,173,961 $2,184,024 $2,173,961
========================================================================================
(1) Includes intercompany accounts that are eliminated in
consolidation of $547,372, and $342,406 in 1996 and
1995, respectively.
See accompanying Notes to Consolidated Financial Statements
</TABLE>
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FRONTIER CORPORATION
Consolidated Statements of Income
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands, except per share data 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Revenues $670,279 $506,920 $1,325,428 $965,960
Costs and Expenses
Operating expenses 487,882 359,737 973,710 676,942
Depreciation and amortization 47,026 38,667 92,714 76,858
Taxes other than income taxes 12,670 12,202 24,451 23,815
Acquisition related charges - - - 4,750
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Total Costs and Expenses 547,578 410,606 1,090,875 782,365
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Operating Income 122,701 96,314 234,553 183,595
Interest expense 11,818 13,783 23,456 27,330
Other income and expense:
Gain on sale of assets - - 4,976 4,826
Equity earnings from unconsolidated
wireless interests 1,685 1,163 3,140 1,559
Interest income 781 3,576 1,304 7,551
Other expense 262 970 989 1,572
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Income Before Taxes and Cumulative Effect of
Change in Accounting Principle 113,087 86,300 219,528 168,629
Income taxes 43,881 33,231 85,181 63,910
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Income Before Cumulative Effect of Change
in Accounting Principle 69,206 53,069 134,347 104,719
Cumulative effect of change in
accounting principle - - (8,018) -
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Net Income 69,206 53,069 126,329 104,719
Dividends on preferred stock 296 296 589 593
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Income Applicable to Common Stock $68,910 $52,773 $125,740 $104,126
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Dividends declared on common stock $35,346 - $ 69,826 $ 16,990
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Earnings Per Common Share
Income before cumulative effect of change in
accounting principle $ .42 $ .33 $ .82 $ .65
Cumulative effect of change in
accounting principle - - (.05) -
- ------------------------------------------------------------------------------------------
Earnings Per Common Share $ .42 $ .33 $ .77 $ .65
==========================================================================================
Average Common Shares Outstanding(in thousands) 164,078 160,967 163,803 160,946
==========================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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FRONTIER CORPORATION
Consolidated Balance Sheets
June 30, December 31,
In thousands of dollars, 1996 1995
except share data (Unaudited)
- ------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 28,459 $ 31,449
Accounts receivable, (less
allowance for uncollectibles
of $30,008 and $28,515,
respectively) 430,617 404,081
Materials and supplies 16,238 12,928
Deferred income taxes 26,400 43,588
Prepayments and other 29,052 31,089
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Total Current Assets 530,766 523,135
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Property, plant and equipment, net 905,266 881,309
Goodwill and customer base 554,665 550,081
Deferred and other assets 193,327 154,067
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Total Assets $2,184,024 $2,108,592
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LIABILITIES AND SHAREOWNERS'EQUITY
Current Liabilities
Accounts payable $ 414,873 $ 381,680
Dividends payable 35,003 33,247
Debt due within one year 6,232 14,871
Taxes accrued 40,344 26,842
Other liabilities 13,803 47,561
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Total Current Liabilities 510,255 504,201
Long-Term debt 561,781 618,867
Deferred income taxes 6,046 15,644
Deferred employee benefits
obligation 64,524 58,385
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Total Liabilities 1,142,606 1,197,097
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Shareowners' Equity
Preferred stock 22,761 22,769
Common stock, par value $1.00,
authorized 300,000,000
shares; 163,346,178 shares and
158,063,387 shares
issued in 1996 and 1995 163,346 158,063
Capital in excess of par value 492,245 420,172
Retained earnings 372,444 317,149
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1,050,796 918,153
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Less -
Treasury stock, 6,375 shares in 147 147
1996 and 1995, at cost
Unearned compensation -
restricted stock plan 9,231 6,511
- ------------------------------------------------------------
Total Shareowners' Equity 1,041,418 911,495
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Total Liabilities and
Shareowners' Equity $2,184,024 $2,108,592
============================================================
See accompanying Notes to Consolidated Financial
Statements.
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FRONTIER CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
6 Months Ended June 30,
In thousands of dollars 1996 1995
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Operating Activities
Net income $126,329 $104,719
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Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in
accounting principle 12,396 -
Acquisition related charges - 4,750
Depreciation and amortization 92,714 76,858
Gain on sale of assets (4,976) (4,826)
Equity earnings from unconsolidated
wireless interests (3,140) (1,559)
Other, net 1,724 372
Changes in operating assets and liabilities, exclusive
of impacts of purchase acquisitions:
Increase in accounts receivable (26,413) (38,395)
Increase in materials and supplies (3,310) (89)
Decrease in prepayments and other assets 1,333 5,790
Increase in deferred and other assets (23,613) (11,439)
Decrease in accounts payable (720) (18,680)
Increase in taxes accrued and other
liabilities 59,054 3,992
Increase in deferred employee benefits
obligation 6,139 5,671
Increase (decrease) in deferred income taxes 7,590 (810)
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Total adjustments 118,778 $ 21,635
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Net cash provided by operating activities 245,107 $126,354
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Investing Activities
Expenditures for property, plant and equipment (114,319) (51,694)
Decrease in short-term investments - 8,757
Investment in cellular partnerships (25,273) (12,539)
Purchase of companies, net of cash acquired (9,118) (155,598)
Other investing activities 10,441 (6,106)
- ------------------------------------------------------------------------
Net cash used in investing activities (138,269) (217,180)
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Financing Activities
Proceeds from issuance of long-term debt - 39,568
Repayments of debt (70,717) (104,503)
Dividends paid (68,659) (32,764)
Treasury stock, net - (10,041)
Issuance of common stock, net 29,556 2,008
Distribution to shareowners of pooled company - (2,287)
Other financing activities (8) (8)
- ------------------------------------------------------------------------
Net cash used in financing activities (109,828) (108,027)
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Net Decrease in Cash and Cash Equivalents (2,990) (198,853)
Cash and Cash Equivalents at Beginning of Period 31,449 359,309
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Cash and Cash Equivalents at End of Period $ 28,459 $160,456
========================================================================
See accompanying Notes to Consolidated Financial Statements.
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Note 1: Consolidation
The consolidated financial information includes the
accounts of Frontier Corporation and its affiliates (the
"Company" or "Frontier"). In the opinion of management,
the financial statements reflect all adjustments of a
normal and recurring nature which are necessary to present
fairly the financial positions, results of operations and
cash flows for the interim periods. Preparation of
financial statements in conformity with generally accepted
accounting principles requires the use of management
estimates.
In the beginning of 1996, Frontier simplified its
business segment reporting to reflect the predominance of
its two major operating segments, long distance and local
communications services. The Company now reports its
operating results in three segments: Long Distance
Communications Services, Local Communications Services and
Corporate Operations and Other. The Company's majority
interest in two wireless properties, which were previously
reported as a Wireless Communications Segment, have been
consolidated under Corporate Operations and Other. The
change in the definition of the Company's segments has
been made to better reflect the changing scope of the
businesses in which Frontier operates.
Certain prior year amounts have been reclassified to
conform to the current year presentation.
Note 2 : Pooling of Interests Transactions
On August 16, 1995, the shareowners of the Company and
ALC Communications Corporation (ALC) approved a merger of
the two companies. ALC, through its subsidiary Allnet
Communication Services, Inc. (renamed Frontier
Communications Services Inc.), provides long distance
products and services primarily to small and medium-sized
business customers and carrier customers nationwide. Under
the terms of the merger agreement, the Company exchanged
two shares of its common stock for each of ALC's common
shares. The total shares issued by the Company to effect
the merger were 69.2 million. At the time of the merger,
ALC had 3.9 million stock options and 3.3 million stock
warrants outstanding providing for the purchase of an
equal number of its shares on exercise. As a result of
the merger, each of these options and warrants was
converted into an option or warrant for two shares of the
Company's stock. The transaction has been accounted for
as a pooling of interests and the consolidated financial
statements have been restated for all periods prior to the
merger to include the accounts and operations of ALC.
On March 17, 1995, the Company acquired American
Sharecom, Inc. (ASI), a long distance company
headquartered in Minneapolis, Minnesota. 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. Subsequent to the
acquisition, 117,336 shares of Frontier common stock were
returned to the Company in settlement of a pre-acquisition
liability and retired. The transaction has been accounted
for as a pooling of interests and the consolidated
financial statements have been restated for all periods
prior to the merger to include the accounts and operations
of ASI.
Note 3: Purchase Acquisitions
In March 1996, the Company acquired a 55 percent
interest in the New York RSA No. 3 Cellular Partnership
(RSA No. 3). RSA No. 3 is a provider of cellular mobile
telephone service in the New York State Rural Service Area
No. 3. RSA No. 3 encompasses much of the Southern Tier
Area of New York State. The Company's interest in RSA No.
3 is managed by Frontier Cellular, a 50/50 owned joint
venture with Bell Atlantic/NYNEX Mobile and the operating
results are reported using the equity method of
accounting. The Company paid $25.3 million in cash for
its interest in RSA No. 3.
In November 1995, the Company acquired the assets of
LINK-VTC, Inc. (LINK-VTC), a Boulder, Colorado based
telecommunications company specializing in video
conferencing services. The Company paid $13.4 million in
cash for LINK-VTC, including a payment of $4.3 million
made in June 1996 as settlement of the original earn-out
agreement.
In August 1995, Frontier acquired Schneider
Communications, Inc. (SCI) and SCI's 80.8 percent interest
in LinkUSA Corporation (LinkUSA) for $130 million in cash.
SCI provides telecommunications services in the Midwest.
LinkUSA develops software applications for
telecommunications firms. On February 2, 1996, the Company
acquired the remaining 19.2 percent interest in LinkUSA
for $2.3 million in cash.
In July 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. ETI provides service in the Midwest and
Northwest states. Frontier paid approximately $29 million
in cash for ETI.
In May 1995, the Company completed its purchase of WCT
Communications, Inc. (WCT). WCT is a facilities-based long
distance carrier providing commercial and residential
services in 45 states. The Company paid approximately $80
million for all of the outstanding shares of WCT.
In March 1995, the Company, through ALC, completed its
acquisition of ConferTech International, Inc.
(ConferTech), a telecommunications company specializing in
teleconferencing services and audio bridge equipment. ALC
paid approximately $66 million in cash for ConferTech.
In March 1995, the Company completed its purchase of the
cellular partnership 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 the two corporate
partners of MSCTC. The treasury shares were acquired from
the sale of Ontonagon County Telephone Company and open
market purchases. MSCTC is the non-wireline provider of
cellular service in Minnesota Rural Service Area No. 10.
Note 4 : Acquisition Related Charges
In connection with the August 1995 merger with ALC,
Frontier recorded a one-time pre-tax acquisition related
charge of $109.5 million in the third quarter of 1995. A
one-time pre-tax acquisition charge of $4.8 million was
recorded in the first quarter of 1995 as a result of the
acquisition of ASI. The integration of the acquired
companies resulted in instances of redundant facilities,
equipment and staffing. The acquisition related charges
include investment banker fees, legal fees and other
direct costs resulting from the merger with ALC and the
ASI transaction.
The acquisition related charges were reported as a
separate component of operating expenses for the 1995
results. Through a combination of attrition and force
reductions, the Company has reduced its number of
employees in the Long Distance and administrative areas.
As of June 30, 1996, 385 employees have been paid $11.7
million in severance benefits which were charged to the
reserve. The Company believes that the reserve balance of
$40.8 million at June 30, 1996 is adequate for the
completion of the integration activities. The accrual for
acquisition related charges is included in "Other
liabilities" and "Property, plant and equipment" on the
consolidated balance sheets.
Note 5 : Long - Lived Assets to Be Disposed Of
Effective January 1, 1996, the Company adopted Financial
Accounting Standards No. 121 (FAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". FAS 121 requires that certain
long-lived assets and identifiable intangibles be written
down to fair value whenever an impairment review indicates
that the carrying value cannot be recovered on an
undiscounted cash flow basis. The statement also requires
that certain long-lived assets and identifiable
intangibles to be disposed of be reported at fair value
less selling costs. The Company's adoption of this
standard resulted in a non-cash charge of $8.0 million
(net of a tax benefit of $4.4 million) and is reported in
the Consolidated Statement of Income as a cumulative
effect of a change in accounting principle. The charge
represents the cumulative adjustment required by FAS 121
to remeasure the carrying amount of certain assets held
for disposal as of January 1, 1996.
These assets held for disposal consist principally of
telephone switching equipment in the Company's Local
Communications Services segment as a result of
management's commitment, in late 1995, to a central office
switch consolidation project primarily at the Rochester
Telephone Corp. and Frontier Communications of New York
subsidiaries.
Note 6 : Discontinuance of Regulatory Accounting
As of September 30, 1995, the Company discontinued the
application of FAS 71, "Accounting for the Effects of
Certain Types of Regulation" for its local communications
companies. The Company discontinued the use of FAS 71
because of changes in regulation and increasingly rapid
advancements in telecommunications technology. The
discontinuance of regulatory accounting methods resulted
in a post-tax extraordinary charge of $112.1 million, net
of applicable income taxes of $68.3 million, primarily
caused by the reduction in the recorded value of long-
lived telephone plant assets.
Note 7: Gain on Sale of Assets
In March 1996, Frontier sold its minority investment in
a Canadian long distance company for a pre-tax gain of
$5.0 million.
In March 1995, the Company sold Ontonagon County
Telephone Company in Michigan and its subsidiary, Midway
Telephone Company. The sale, which was based on the
Company's plans to expand in areas other than Michigan's
Upper Peninsula, resulted in a non-taxable gain of $4.8
million or $.03 per share. The Company received 437,158
shares of its stock as a result of the transaction.
Note 8: Cash Flows
For purposes of the Statement of Cash Flows, the Company
considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Cash flows from financing activities include $29.6
million of cash proceeds from stock options and warrants
exercised during the first half of 1996. The resultant
tax benefit realized from the exercise of stock options of
$43.8 million is reflected as an adjustment to capital in
excess of par value and taxes accrued.
Actual interest paid was $21.1 million and $27.0
million for the six month period ended June 30, 1996, and
June 30, 1995, respectively. In addition, actual income
taxes paid were $23.7 million for the six months ended
June 30, 1996, and $61.6 million for the six months ended
June 30, 1995.
Note 9: Major Customer
The Company's 1996 revenues include the impact of a
major carrier customer whose revenues comprise
approximately 18% of consolidated revenues for the six
month period ended June 30, 1996.
Note 10: Commitments and Contingencies
It is anticipated that the Company will expend
approximately $225 million to $250 million for additions
to property, plant and equipment during 1996. In
connection with this capital program, the Company has made
certain commitments for the purchase of material and
equipment. In addition, the Company is considering
entering certain commitments in the near future for the
purchase or construction of additional network facilities
not included in the $225 million to $250 million.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended June 30, 1996 and 1995
DESCRIPTION OF BUSINESS
Frontier Corporation (the "Company" or "Frontier") is a
diversified telecommunications company, serving more than
2 million customers throughout the United States and in
several foreign countries. Frontier Corporation's
principal lines of business are long distance and local
communications. The Company's other lines of business
include cellular and paging operations and
telecommunications equipment sales.
RESULTS OF OPERATIONS
Consolidated
Revenues for the second quarter of 1996 were $670.3
million, up $163.4 million or 32.2% over the comparable
period in 1995. The increase in revenue is driven
primarily by significant growth in the Company's long
distance segment. Revenue growth is due to the
significant increase in traffic volume in the long
distance segment and from billable minutes and access line
growth in the local communications segment. Operating
income was $122.7 million for the three months ended June
30, 1996, up $26.4 million or 27.4% from the same three
months in 1995. The improvement in operating income is
attributable to revenue growth and improved operating
efficiencies.
Business Segments
The Company simplified its business segment reporting
at the beginning of 1996 to reflect the predominance of
its two major operating segments, long distance and local
communications services. The Company now reports its
operating results in three segments: Long Distance
Communications Services, Local Communications Services
and Corporate Operations and Other. The company's
majority interests in two wireless properties, which were
previously reported as a Wireless Communications Services
segment, have been consolidated under Corporate Operations
and Other. A review of the 1996 and 1995 second quarter
results of each business segment follows.
Long Distance Communications Services
Long Distance Communications Services is the Company's
largest segment in terms of size and growth, accounting
for 74.3% of the Company's 1996 second quarter revenues,
as compared to 66.7% for the same period in 1995.
Long distance revenues totaled $497.8 million in the
second quarter of 1996, a $159.5 million, or 47.1%,
increase over the same quarter in 1995. The increase in
long distance revenues is attributed to significant
traffic growth. Traffic in long distance reached 3.7
billion minutes in the second quarter, an increase of
63.6% over the same quarter in 1995. Adjusting for
purchase acquisitions, internal growth in traffic
increased 42.6% for the quarter. Revenue growth was also
impacted by the continued success of Frontier's unified
product set, Clear Value, which was introduced to small
and mid-sized businesses nationwide in October 1995.
Reported revenue growth was also aided by the impact of
1995 purchase acquisitions. Adjusting for the impact of
these acquisitions, revenues grew approximately 29.4% in
the quarter as compared to the prior year.
Revenue growth continues to be impacted positively by a
major carrier customer whose traffic has increased
substantially throughout the year and represents
approximately 19% of second quarter 1996 consolidated
revenues. Effective June 17, 1996, the Company entered
into a new agreement with this customer which eliminates
the customer's existing minimum monthly commitment for 1+
service in exchange for an extension of the exclusivity
for the Company to carry the customer's enhanced services
traffic. As a result of this new agreement, the customer
will be diversifying its 1+ traffic distribution to one or
more additional carriers this year. However, the Company
expects to retain significant traffic volumes and the
contractual changes negotiated in June are not expected to
materially impact operating income.
The results of operations for the second quarter include
the impact of operating synergies achieved as a result of
the ongoing integration of the long distance companies
acquired during 1995 and the consolidation of the
Company's long distance switch network.
Costs and expenses for long distance operations,
excluding nonrecurring charges, increased $135.5 million
in the second quarter of 1996. This increase is primarily
driven by the increased traffic volumes resulting from
internal growth and purchase acquisitions. Operating
costs, excluding purchase acquisitions, increased by
$107.2 million over the comparable period in 1995. Cost of
access represented 62.1% of total revenue for the second
quarter of 1996, versus 58.2% in the prior year quarter.
The increase in cost of access is attributable in part to
a contract with one of the Company's major customers which
provides the customer with lower prices as a result of the
increased volume of traffic carried. Increased
depreciation, amortization, selling and administrative
expenses accounted for $20.7 million of the increased
operating costs.
Operating income for long distance rose 49.1% to $72.9
million for the three months ended June 30, 1996.
Operating margin as a percent of revenue was 14.6% for the
second quarter of 1996, up from 14.4% for the same period
in 1995 and 13.0% for the first quarter of 1996. The
sequential improvement in operating margin is a direct
result of the continued realization of operating
efficiencies gained through the integration of several
long distance acquisitions completed during 1995.
Local Communications Services
Local Communications Services includes the Company's
local telephone operations, consisting of the Rochester,
New York operation and the regional telephone operations,
which are comprised of 33 telephone operating subsidiaries
in 13 states. Also included with the Rochester, New York
operation are the local service revenues and associated
expenses generated from the efforts of Frontier
Communications of Rochester, a competitive
telecommunications company formed on January 1, 1995 that
provides an array of services on a retail basis in the
Rochester marketplace. Consequently, the Local
Communications Services segment includes both wholesale
and retail local service associated with the Rochester,
New York market.
Revenues for Local Communications Services were $161.4
million in the three month period ended June 30, 1996, an
increase of $6.2 million or 4.0% over the comparable
period in 1995. This increase is the result of a 3.6%
increase in access lines, a 6.5% increase in minutes of
use and ongoing sales of enhanced features and services.
The Rochester, New York operation continued its solid
growth with a 4.7% increase in revenues over the second
quarter of the prior year. This growth is attributable in
part to aggressive marketing, new products and higher
demand for services in the open market environment. See
discussion of the Open Market Plan on page 22.
Costs and expenses in the second quarter of 1996 for
Local Communications Services were $108.2 million,
relatively consistent with the second quarter in 1995.
The Rochester, New York operation continued to incur costs
relating to the contract negotiations with Communications
Workers of America, Local 1170, (the "Union") as discussed
in the first quarter results of operations. During the
second quarter, these costs were primarily for enhanced
security coverage and are included in operating expenses.
The contract negotiations are currently at an impasse and
the Rochester company has implemented the terms of its
final offer as of April 9, 1996. The Union filed unfair
labor practice complaints with the National Labor
Relations Board (the "NLRB"). In June, Frontier received
a favorable determination after review within the agency
which rejected all unfair labor practice claims that could
have impacted the declaration of impasse. The Union has
appealed these decisions within the NLRB. In addition, the
Rochester telephone operation experienced increased costs
and expenses during the second quarter of 1996 as a result
of an increased repair load due to the wet weather
conditions in the spring. The increased costs and
expenses at the Rochester telephone operation were
partially offset by reduced costs and expenses at the
regional telephone operations as a result of continued
operating efficiencies.
During late 1995, management committed to a major switch
consolidation plan at its Rochester Telephone and Frontier
Communications of New York subsidiaries. The three-year
plan to consolidate host switches by over 60% is projected
to improve network efficiency and reduce the cost of
maintenance and software upgrades.
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, legal services and business
development. The Other category is comprised of the
Company's majority ownership interest in wireless
operations and Frontier Network Systems ("FNS"). As of
June 30, 1996, wireless operations included the Alabama
RSAs No. 4 and No. 6, in which the Company has a 70%
interest, and Minnesota RSA No. 10, in which the Company
acquired a 100% interest in late March 1995. This latter
acquisition was accounted for as a purchase transaction.
FNS markets and installs telecommunications systems and
equipment.
Revenues in the second quarter of 1996 decreased $2.3
million or 17.4% as compared to the second quarter of
1995. This decrease is primarily due to a large equipment
sale in the second quarter of 1995 by FNS.
Other Income Statement Items
Interest Expense
Interest expense was $11.8 million in the second quarter
of 1996, a $2.0 million decline from the second quarter of
1995. This decrease is attributed to lower debt levels
and a higher proportion of variable rate debt outstanding.
The Company refinanced over $140 million of 9% fixed rate
debt in the third and fourth quarters of 1995 with
variable rate debt, which carried lower interest rates
having a positive effect on interest expense in the second
quarter of 1996.
Equity Earnings from Unconsolidated Wireless Interests
The Company's minority interests in wireless operations
and its 50% interest in the Frontier Cellular joint
venture with Bell Atlantic/NYNEX Mobile in upstate New
York and Pennsylvania are accounted for using the equity
method. This method of accounting results in the
Company's proportionate share of earnings being reflected
in a single line item below operating income.
Equity earnings from the Company's interests in wireless
partnerships in the second quarter of 1996 were $1.7
million, an increase of $.5 million over 1995. The
increase over the prior year is the result of significant
customer growth and increased minutes of use. A portion
of the growth is attributable to the expansion of the
Frontier Cellular joint venture into other areas of New
York and Pennsylvania. Adjusting for this network
expansion, customer base grew approximately 56% and
revenues increased 65% over the second quarter of 1995.
Interest Income
Interest income in the second quarter of 1996 amounted
to $.8 million, a decrease of $2.8 million from second
quarter 1995. This decrease is attributable to reduced
cash balances in 1996 as a result of the acquisition
program that took place throughout 1995.
Income Taxes
The effective income tax rate for the second quarter of
1996 is 38.8% versus 38.5% for the second quarter of 1995.
The increase in the effective rate is primarily due to an
increase in nondeductible goodwill amortization in the
first half of 1996 resulting from 1995 purchase
acquisitions.
Six Months Ended June 30, 1996 and 1995
RESULTS OF OPERATIONS
Consolidated
Revenues for the first six months of 1996 were $1.3
billion, up $359.5 million or 37.2 % over the comparable
period in 1995. The increase in revenue is primarily
driven by significant growth in the Company's long
distance segment. Revenue growth is due to a significant
increase in traffic volume in the long distance segment
and from billable minutes and access line growth in the
local communications segment. Operating income was $234.6
million for the six months ended June 30, 1996, up $51.0
million or 27.8% from the same six months in 1995. The
improvement in operating income is attributable to revenue
growth and improved operating efficiencies.
Income before the cumulative effect of adopting
Statement of Financial Accounting Standards No. 121 (FAS
121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" in the first
six months of 1996 amounted to $134.3 million, an increase
of a $29.6 million increase, or 28.3%, over the comparable
period in 1995. Earnings per share before the adoption of
FAS 121 were $.82 in 1996 versus $.65 in 1995.
The results for the first quarter of 1996 and 1995
include certain one time events. During the quarter ended
March 31, 1996, the Company sold its minority investment
in a Canadian long distance company for a pre-tax gain of
$5.0 million. This gain was partially offset by higher
operating costs in the Company's largest telephone
subsidiary pertaining to increased labor and related
expenses in connection with work stoppage preparation
costs for a bargaining unit contract. In March 1995, the
Company sold Ontonagon County Telephone Company in
Michigan and its subsidiary Midway Telephone Company. The
sale resulted in a non-taxable gain of $4.8 million.
Additionally, the Company recorded a $4.8 million pre-tax
charge for costs related to the acquisition of a long
distance company in March 1995. Earnings per share
normalized for these one time events amounted to $.81 and
$.64 for the six month periods ended June 30, 1996 and
1995, respectively.
Business Segments
The Company simplified its business segment reporting
at the beginning of 1996 to reflect the predominance of
its two major operating segments, long distance and local
communications services. The Company now reports its
operating results in three segments: Long Distance
Communications Services, Local Communications Services
and Corporate Operations and Other. The company's
majority interests in two wireless properties, which were
previously reported as a Wireless Communications Services
segment, have been consolidated under Corporate Operations
and Other. A review of the 1996 and 1995 six months
results of each business segment follows.
Long Distance Communications Services
Long distance revenues totaled $983.9 million in the
first half of 1996, a $347.7 million, or 54.7%, increase
over the same period in 1995. Revenues from the long
distance segment account for 74.2% of the Company's
consolidated 1996 revenues as compared to 65.9% for the
same period in 1995. The increase in long distance
revenues is driven by significant traffic growth. In the
first six months of 1996, long distance traffic reached
7.3 billion minutes, an increase of 74% over the same
period in 1995. Adjusting for purchase acquisitions,
internal growth in traffic increased 43.8% for the year.
Revenue growth continues to be impacted by the ongoing
success of Frontier's unified product set, Clear Value,
which was introduced to small and mid-sized businesses
nationwide in October 1995. Revenue growth, as reported,
was also positively impacted by 1995 purchase
acquisitions. Adjusting for the impact of these
acquisitions, revenues grew approximately 30.1% in the
first half of 1996.
Revenue growth was also impacted positively by a major
carrier customer whose traffic has increased substantially
throughout the year and represents approximately 18% of
1996 consolidated revenues. Effective June 17, 1996, the
Company entered into a new agreement with this customer
which eliminates the customer's existing minimum monthly
commitment for 1+ service in exchange for an extension of
the exclusivity for the company to carry the customer's
enhanced services traffic. As a result of this amended
agreement, the customer will be diversifying its traffic
distribution to one or more additional carriers this year.
However, the Company expects to retain significant traffic
volumes and the contractual changes negotiated in June are
not expected to materially impact operating income.
Costs and expenses for long distance operations,
excluding nonrecurring charges, increased $307.6 million
in the first half of 1996. This increase is primarily the
result of increased traffic volumes resulting from
internal growth and purchase acquisitions. Operating
costs, excluding purchase acquisitions, increased by
$248.6 million over the comparable period in 1995. Cost of
access represented 62.2% of total revenue for the first
two quarters of 1996, versus 57.7% in the comparable
period in 1995. The increase in cost of access is
attributable in part to a contract with one of the
Company's major customers which provides the customer with
lower prices as a result of the increased volume of
traffic carried. Selling and administrative expenses
accounted for $33.9 million of the increased operating
costs.
Operating income for long distance, excluding
nonrecurring charges, rose 41.8 % to $136.1 million for
the six months ended June 30, 1996. Operating margin,
before nonrecurring charges, decreased from 15.1% in the
first half of 1995 to 13.8% for the first half of 1996.
The reduction in operating margin in the first two
quarters of 1996 is partially the result of a contract
with one of the Company's major customers which was
amended in the fourth quarter of 1995 to give the customer
lower prices as a result of the increased volume of
traffic carried. Additionally, the Company made several
purchase acquisitions in 1995 that impact year-over-year
comparisons. Improved operating margins for sequential
quarters in 1996 reflect the realization of operating
efficiencies gained through the integration of these long
distance companies acquired.
Local Communications Services
Revenues for Local Communications Services were $319.8
million in the six month period ended June 30, 1996, an
increase of $12.0 million or 3.9% over the comparable
period in 1995. This segment accounted for 24.1% of
consolidated revenues in the first two quarters of 1996 as
compared to 31.9% for the same period in 1995. Total
access lines increased at an annualized rate of 2.7%
during the first six months of 1996. The Rochester market
continued its solid growth with a 5.1% increase in
revenues over the first half of the prior year. This
growth is attributable in part to aggressive marketing,
new products and a higher demand for services in the open
market environment. See discussion of the Open Market Plan
on page 22.
Costs and expenses in the first half of 1996 for Local
Communications Services were $215.8 million, an increase
of $4.9 million or 2.3% over the first half of 1995.
During the first quarter of 1996, the Rochester telephone
operation experienced increased costs and expenses related
to higher labor expenses resulting from work stoppage
preparation costs. These expenses, which were incurred in
connection with contract negotiations with Communications
Workers of America, Local 1170, (the "Union"), were
necessary to ensure continued high standards of customer
service in the event of a work stoppage. The Company
continued to incur additional expenses during the second
quarter, primarily relating to additional security
coverage. The contract negotiations are currently at an
impasse and the Rochester company has implemented the
terms of its final offer as of April 9, 1996. The Union
filed unfair labor practice complaints with the National
Labor Relations Board (the "NLRB"). In June, Frontier
received a favorable determination after review within the
agency, rejecting all unfair labor practice claims that
could have affected the declaration of impasse. The Union
has appealed these decisions within the NLRB. In addition,
the Rochester telephone operation experienced increased
costs and expenses during the second quarter of 1996 as a
result of an increased repair load due to the wet weather
conditions in the spring. The increased costs and
expenses at the Rochester telephone operation were
partially offset by reduced costs and expenses at the
regional telephone operations as a result of continued
operating efficiencies.
Operating income for the first two quarters of 1996 was
$104.0 million, an increase of $7.0 million, or 7.3% over
the first two quarters of 1995. Operating margins for
the six month period improved from 31.5% in 1995 to 32.5%
in 1996, driven by improvements in the Regional
Operations, whose operating margin increased to 40.6%.
During late 1995, management committed to a major switch
consolidation plan at its Rochester Telephone and Frontier
Communications of New York subsidiaries. The three-year
plan to consolidate host switches by over 60% is projected
to improve network efficiency and reduce the cost of
maintenance and software upgrades.
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, legal services and business
development. The Other category is comprised of the
Company's majority ownership interest in wireless
operations and Frontier Network Systems ("FNS"). As of
June 30, 1996, wireless operations included the Alabama
RSAs No. 4 and No. 6, in which the Company has a 70%
interest, and Minnesota RSA No. 10, in which the Company
acquired a 100% interest in late March 1995. This latter
acquisition was accounted for as a purchase transaction.
FNS markets and installs telecommunications systems and
equipment.
Other Income Statement Items
Interest Expense
Interest expense was $23.5 million in the first half of
1996, a $3.9 million decline from 1995. This decrease is
attributed to lower debt levels and a higher proportion of
variable rate debt outstanding. The Company refinanced
over $140 million of 9% fixed rate debt in the third and
fourth quarters of 1995 with variable rate debt, which
carried lower interest rates, having a positive effect on
interest expense in the first two quarters of 1996.
Equity Earnings from Unconsolidated Wireless Interests
The Company's minority interests in wireless operations
and its 50% interest in the Frontier Cellular joint
venture with Bell Atlantic/NYNEX Mobile in upstate New
York and Pennsylvania are accounted for using the equity
method. This method of accounting results in the
Company's proportionate share of earnings being reflected
in a single line item below operating income.
Equity earnings from the Company's interests in wireless
partnerships in the first half of 1996 were $3.1 million,
an increase of $1.6 million over 1995. The increase over
the prior year is the result of significant customer
growth and increased minutes of use. A portion of the
growth is attributable to the expansion of the Frontier
Cellular joint venture into other areas of New York and
Pennsylvania. Adjusting for this network expansion,
customer base grew approximately 56% and revenues
increased 62% over the first half of 1995.
Interest Income
Interest income in the first half of 1996 amounted to
$1.3 million, a decrease of $6.2 million from first half
1995. This decrease is due to lower cash balances as a
result of the Company's long distance acquisition program
subsequent to the first quarter of 1995.
Income Taxes
The effective income tax rate for the first six months
of 1996 is 38.8% versus 37.9% for the first half of 1995.
The increase in the effective rate was primarily due to
the nontaxable gain on the sale of Ontonagon Telephone in
March 1995 and an increase in nondeductible goodwill
amortization in the first half of 1996 resulting from 1995
purchase acquisitions.
FINANCIAL CONDITION
Review of Cash Flow Activity
At June 30, 1996, the Company had $28.5 million in cash
and cash equivalents compared with $160.5 million at June
30, 1995, a decrease of $132.0 million. Cash generated
from operations amounted to $245.1 million for the six
months ended June 30, 1996 as compared to $126.4 million
for the same period in 1995. Offsetting the cash provided
by operating activities in 1996 was a $138.3 million
outflow for investing activities (mainly capital
expenditures of $114.3 million and investment in cellular
properties of $25.3 million) and a $109.8 million outflow
for financing activities including debt retirements ($70.7
million), dividend payments ($68.7 million) and proceeds
from stock option exercises ($29.6 million). Cash flow
from operations generated in the first half of 1995 was
offset by a $217.2 million use of cash for investing
activities (primarily capital expenditures of $51.7
million and purchase acquisitions of $155.6 million) and a
$108.0 million outflow for financing activities including
net debt retirements ($64.9 million), dividend payments
($32.8 million) and purchases of treasury stock ($10.0
million). Also, see Note 3 to the Financial Statements for
cash spent on acquisitions during 1995 and 1996.
EBITDA
Earnings before interest, taxes, depreciation and
amortization (EBITDA) is a common measurement of a
company's ability to generate cash flow from operations.
EBITDA should be used as a supplement to, rather than in
place of, cash from operating activities. The Company's
EBITDA, normalized for certain one time events previously
discussed, was $330.1 million and $265.2 million for the
six month periods ending June 30, 1996 and 1995,
respectively. The increase in EBITDA is primarily
attributable to growth in the long distance segment.
Debt
At June 30, 1996, the Company's total debt amounted to
$568.0 million, a decrease of $65.7 million from December
31, 1995. This decrease is mainly the result of a $57.5
million net reduction in long-term revolving bank debt,
the repayment of an $8.0 million note payable related to
the November 1995 purchase of Link-VTC, Inc. and the
repayment of approximately $1.5 million of various issues
of Rural Utilities Service (RUS) and Rural Telephone Bank
(RTB) debt.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of
total capitalization) was 35.3% at June 30, 1996, as
compared with 41.0% at December 31, 1995. Pre-tax
interest coverage, excluding nonrecurring charges, was
10.7 times for the six months ended June 30, 1996, as
compared with 7.5 times for the same period in 1995.
Capital Spending
Through June 1996, gross capital expenditures amounted
to approximately $114.3 million as compared to $51.5
million in the prior year. The Company plans to spend a
total of approximately $225 million to $250 million on its
capital program during the full year in 1996. The full
year capital program could represent an increase of up to
$87.4 million over the 1995 level. The capital increase
in 1996 is required to keep pace with the Company's
growth. Specific projects include the placement of a
Competitive Local Exchange Carrier (CLEC) switch in New
York City, the purchase of certain facilities to service
international traffic, the placement of switches with
expanded capacity in the network and the expansion of
Enhanced Services platforms.
A primary network strategy of the Company in recent
years has been to obtain capacity through leases of
facilities on a fixed price basis. Due to rapid growth in
its traffic volumes and changes in the long distance
market, the Company has been reassessing the relative
advantages of owning facilities in comparison to leasing
capacity from other carriers. The Company's assessment of
strategic and financial considerations may lead it to
enter into agreements for ownership rights to circuits in
place or to facilities to be built on long distance
routes, if the Company concludes that, on balance, such
ownership will better contribute to long term
competitiveness in critical areas such as transmission
cost, new service provision, broadband applications or
overall quality of service.
Dividends
On June 17, 1996, the Board of Directors declared the
second quarter 1996 dividend of 21.25 cents per share on
the Company's common stock, payable August 1, 1996 to
shareowners of record on July 15, 1996.
OTHER ITEMS
Open Market Plan
The Rochester, New York subsidiary (Rochester Telephone)
began its second year of operations under the Open Market
Plan. The Open Market Plan promotes telecommunications
competition in the Rochester, New York market by
providing for (1) 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) service provider
telephone number portability. The inherent risk associated
with opening the Rochester market to competition is that
some customers are able to purchase services from
competitors, which reduces the number of retail customers
and potentially causes a decrease in the revenues and
profitability for Rochester Telephone. However, results in
1995 and in the first six months of 1996, indicate that a
stimulation of demand in the use of the network and new
product revenue can offset the loss of retail customers.
Increased competition may also lead to additional price
decreases for services, adversely impacting Rochester
Telephone's margins. During the seven year period of the
Open Market Plan Agreement, rate reductions of $21.0
million, $11.5 million of which occurred through 1995 and
an additional $2.5 million which commenced in January
1996, will be implemented for Rochester area consumers and
rates charged for residential and business telephone
service may not be increased. The Open Market Plan does
not require Rochester Telephone to rebate any additional
earnings achieved through operating efficiencies that
previously would have been shared with customers.
AT&T Communications of New York filed a complaint with
the PSC for reconsideration of the Open Market Plan on
October 3, 1995. The complaint primarily seeks changes in
the wholesale discount, the minutes of use surcharge and
changes in a number of operational and support activities.
Some of these issues are also being considered in other
states in other unrelated local competition proceedings.
On July 18, 1996, the NYSPSC issued an order establishing
a temporary wholesale discount of 13.5% and eliminating
the minutes of use surcharge. The temporary discount is
subject to increase or decrease, retroactive to July 24,
1996, when permanent wholesale rates are set. The NYSPSC
has indicated that it plans to set permanent wholesale
rates in October 1996. In addition, on August 1, 1996, the
Federal Communications Commission (the "FCC") adopted a
First Report and Order (the "First Report and Order") in a
core rulemaking proceeding to implement the
Telecommunications Act of 1996 (the "Act"). That First
Report and Order established rules and guidelines to
promote local competition, affecting the Company and all
other competitors in local telecommunications markets.
The FCC's action is subject to reconsideration and to
appellate review. The Company is considering its options
with respect to the July 18th Order and the First Report
and Order and cannot predict the outcome of these matters.
Part II - Other Information
Item 1 - Legal Proceedings
On June 11, 1992, after incurring environmental response
costs of approximately $1.5 million pursuant to a consent
decree with the United States Environmental Protection
Agency (the "EPA"), a group of five corporate plaintiffs
commenced an action in the United States District Court
for the Northern District of New York seeking contribution
from 15 corporate defendants, including Rotelcom Inc., a
wholly-owned subsidiary of the registrant held through
intervening subsidiaries (now named Frontier Network
Systems Inc. or "FNS"). Two additional defendants were
named in 1994.
The plaintiffs' 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 will
be issued by the EPA which will prescribe the remediation
requirements for the site. The total cost of remediation
at the site is uncertain, although estimates have recently
ranged from $25 million to $100 million. There has been
no allocation of liability 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. The Company believes that it will
ultimately be successful, but it is unable to predict the
outcome with any certainty at this time.
From February 1994 to October 1995, a total of nine
complaints were filed in Hennepin County (Minnesota)
District Court by various former shareowners of ASI.
Included among the defendants are ASI, its former
principal shareowners Steven Simon and James Weinert, ASI
legal counsel and Frontier. Class action suits allege
generally that Simon and Weinert, with and through ASI,
embarked upon a scheme to gain control of ASI and acquire
all of its stock through common law fraud, breach of
fiduciary duty and certain violations of the Minnesota
Business Corporation Act. This Act requires shareowners in
a closely held corporation to act fairly to one another
and refrain from misappropriation. Some of the complaints
assert shareowner derivative rights. The one complaint
that names Frontier alleges that Frontier holds the ASI
stock and that it should be required to hold certain
Frontier stock that was issued to Messrs. Simon and
Weinert in Frontier's acquisition of ASI in trust for the
benefit of the plaintiffs. Although it is too early to
determine the outcome of these suits, Frontier, ASI and
the other defendants each are contesting the claims
asserted, and the parties have had discussions to resolve
the litigation. To date, no settlement has been reached
for the claims asserted against Frontier and discovery in
the actions is continuing. In connection with the
acquisition of ASI by Frontier, Simon and Weinert agreed
to indemnify the Company for these claims.
On April 10 and 11, 1995, three lawsuits were commenced
against ALC Communications Corporation as a result of its
announced merger with the Company. 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 was
named as a defendant, although it has not yet been 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 sought
to enjoin the business combination and/or to obtain an
award of damages. On June 9, 1995, the Delaware Court
entered an order consolidating the three cases for all
purposes. Under the terms of that order, Mayers v. Irwin,
et al., C.A. No. 14196 is designated as the consolidated
complaint and the defendants are required to respond to
the consolidated complaint. On July 10, 1995, ALC and its
directors answered the consolidated complaint. The
Company believes these actions to be without merit and
will defend vigorously the claims asserted in the
consolidated suit.
The Open Market Plan discussion in the 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
24, 1996 for the purpose of electing a board of directors,
approving the appointment of auditors, and voting on the
proposals described below.
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 139,252,234 518,413
2. Ronald L. Bittner 139,192,349 578,298
3. Raul E. Cesan 139,254,741 515,906
4. Brenda E. Edgerton 139,263,785 506,862
5. Jairo A. Estrada 139,240,520 530,127
6. Michael E. Faherty 139,258,172 512,475
7. Daniel E. Gill 138,850,783 919,864
8. Alan C. Hasselwander 139,227,604 543,043
9. Robert J. Holland, Jr. 139,236,808 533,839
10. Douglas H. McCorkindale 139,232,879 537,768
11. Marvin C. Moses 139,226,693 543,954
12. Leo J. Thomas 139,238,795 531,851
13. Richard J. Uhl 139,254,765 515,881
The appointment of Price Waterhouse, LLP as
independent auditor for the fiscal year 1996 was approved
with the following vote:
Broker
For Against Abstain Non-Votes
139,009,462 451,837 309,347 -
The Employees' Stock Option Plan proposal, to provide a
broad-based stock option plan available to employees other
than senior executives, was approved with the following
vote:
Broker
For Against Abstain Non-Votes
135,724,950 3,333,840 706,705 5,152
The Directors Stock Incentive Plan proposal, to amend
the Directors Stock Incentive Plan to increase the annual
stock grants to non-employee Directors of the Company and
its subsidiaries so that their retainers will be paid
entirely in Company common stock, was approved with the
following vote:
Broker
For Against Abstain Non-Votes
126,865,484 11,661,419 1,238,591 5,152
Item 5 - Other Information
First Report and Order
The Act, enacted into law in February 1996, requires
the FCC and state commissions to remove barriers protecting
telecommunications monopolies and to affirmatively promote
competition. FCC and state commission action to implement
the Act has been ongoing.
On August 1, 1996, the FCC adopted a First Report and
Order in a core proceeding to implement the local
competition provisions of the Act. The FCC order provides
minimum requirements for local telephone companies to
follow to permit competitors to enter local markets, to use
the services and facilities of the large incumbent carrier,
and to compete directly. These requirements will be
administered by the FCC itself, in some instances, and by
the states, in other instances. For example, the FCC order
addresses requirements that local telephone companies,
including Rochester Telephone Corp., provide
interconnection, access to unbundled elements and discounts
to other carriers to resell local services. The order also
provides methods of obtaining interconnection and access to
unbundled elements, as well as pricing methodologies for
such interconnection and unbundled elements. The Company
cannot predict what the impact of the 1996 Act and the
First Report and Order will be at this time.
Item 6 - Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K filed during the quarter:
SEC Filing Date Item No. Financial Statements
April 2, 1996 5 None
April 16, 1996 5 None
June 19, 1996 5 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 13, 1996 /s/Richard A. Smith
By:--------------------------------
Richard A. Smith
Vice President and Controller
(principal accounting officer)
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Restated Certificate of Incorporation Incorporated by
reference to
Exhibit 3.1 to Form 10-K
for the year ended
December 31, 1995.
3.2 Amendment to Restated Certificate Incorporated by reference
of Incorporation to Exhibit 3.2 to
Form 10-K for the year
ended December 31, 1995.
3.3 Bylaws Incorporated by reference to
Exhibit 3 to Form 10-Q for the
quarter ended March 31,
1995.
10.3 Amendment No. 2 to restated
Management Filed herewith
Pension Plan
11 Statement re: Computation of Earnings
per Share of Common Stock on a
Fully Diluted Basis (Unaudited) Filed herewith
27 Financial Data Schedule Filed herewith
FRONTIER CORPORATION
MANAGEMENT PENSION PLAN
Amendment No. 2 to 1995 Restatement
Pursuant to Article XI, Section 3.1 of the Plan is
amended, effective January 1, 1996, by deleting the last
sentence of Section 3.1 and substituting in its place the
following:
A Participant in this Plan whose employment is
transferred on or after January 1, 1996, from the
Employer or another Participating Company that has
adopted this Plan to any Affiliated Company that has not
adopted this Plan or any other defined benefit pension
plan shall remain a Participant in this Plan. The
Participant's service and compensation with the non
participating Affiliated Company shall be credited
under this Plan for all purposes as if it were earned
during employment with a Participating Company.
IN WITNESS WHEREOF, the Employer has caused its duly
authorized officer to execute this amendment on its behalf
this 6th day of February, 1996.
FRONTIER CORPORATION
By: /s/Barbara J. LaVerdi
------------------------
Title: Assistant Secretary
-----------------------
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) 1996 1995 1996 1995
- -------------------------------------------------------------------------
Income applicable to common stock $68,909 $52,773 $125,740 $104,126
Add: Interest on convertible
debentures 139 139 277 277
- -------------------------------------------------------------------------
69,048 52,912 126,017 104,403
Less: Increase in related
federal income taxes 49 49 97 97
- -------------------------------------------------------------------------
Adjusted income applicable to
common stock $68,999 $52,863 $125,920 $104,306
=========================================================================
Average Common Shares Outstanding 162,873 149,714 161,525 149,506
(excluding common stock
equivalents)
Adjustments for:
Convertible Debentures 503 503 503 503
Stock Options 1,307 11,369 2,364 11,528
Adjusted common shares assuming
conversion of outstanding Convertible
Debentures and Stock
Options at beginning of each
period 164,683 161,586 164,392 161,537
==========================================================================
Earnings per share of common stock
on a fully diluted basis $ .42 $ .33 $ .77 $ .65
==========================================================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE
SIX MONTH PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000084567
<NAME> FRONTIER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 28,459
<SECURITIES> 0
<RECEIVABLES> 460,625
<ALLOWANCES> 30,008
<INVENTORY> 15,284
<CURRENT-ASSETS> 530,766
<PP&E> 2,182,445
<DEPRECIATION> 1,277,179
<TOTAL-ASSETS> 2,184,024
<CURRENT-LIABILITIES> 510,255
<BONDS> 561,781
0
22,761
<COMMON> 163,346
<OTHER-SE> 855,311
<TOTAL-LIABILITY-AND-EQUITY> 2,184,024
<SALES> 0
<TOTAL-REVENUES> 1,325,428
<CGS> 26,264
<TOTAL-COSTS> 547,578
<OTHER-EXPENSES> 989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,456
<INCOME-PRETAX> 219,528
<INCOME-TAX> 85,181
<INCOME-CONTINUING> 134,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (8,018)
<NET-INCOME> 126,329
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
