<PAGE>
<PAGE>
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 September 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 163,688,560 as of
October 31, 1996
<PAGE>
<PAGE>
FRONTIER CORPORATION
Form 10Q
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Business Segment Information for the
three months ended September 30, 1996
and September 30, 1995 and for the
nine months ended September 30, 1996 and
September 30, 1995 3
Consolidated Statements of Income for
the three months ended September 30, 1996
and September 30, 1995 and for the nine
months ended September 30, 1996 and
September 30, 1995. 4
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996
and September 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 26
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Index to Exhibits 31
<PAGE>
<PAGE>
<TABLE>
FRONTIER CORPORATION
Business Segment Information
(Unaudited)
3 Months Ended September 30, 9 Months Ended September 30,
In thousands of dollars 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long Distance Communications Services
Revenues $ 496,011 $ 404,414 $1,479,869 $1,040,560
Operating Income (Loss):
Operating Income Before Acquisition Related Charges $ 76,409 $ 55,019 $ 212,535 $ 151,036
Acquisition Related Charges - (86,698) - (91,448)
- ----------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ 76,409 $ (31,679) $ 212,535 $ 59,588
Depreciation and Amortization $ 21,026 $ 18,637 $ 61,039 $ 41,312
Capital Expenditures $ 21,191 $ 30,209 $ 83,176 $ 44,657
Identifiable Assets $ 1,000,369 $ 945,156 $1,000,369 $ 945,156
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Local Communications Services
Revenues:
Rochester, NY Operations $ 80,853 $ 78,804 $ 244,703 $ 234,735
Regional Operations 79,923 78,167 235,898 230,107
- -----------------------------------------------------------------------------------------------------------
Total Revenues $ 160,776 $ 156,971 $ 480,601 $ 464,842
Operating Income:
Operating Income Before Acquisition Related Charges:
Rochester, NY Operations $ 20,331 $ 18,899 $ 60,996 $ 59,871
Regional Operations 34,386 30,030 97,762 86,052
- -----------------------------------------------------------------------------------------------------------
Operating Income Before Acquisition Related Charges $ 54,717 $ 48,929 $ 158,758 $ 145,923
Acquisition Related Charges:
Rochester, NY Operations - (1,589) - (1,589)
Regional Operations - (8,660) - (8,660)
- -----------------------------------------------------------------------------------------------------------
Total Operating Income $ 54,717 $ 38,680 $ 158,758 $ 135,674
Depreciation and Amortization:
Rochester, NY Operations $ 13,686 $ 13,778 $ 40,400 $ 41,756
Regional Operations 11,752 12,597 35,650 37,176
- -----------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 25,438 $ 26,375 $ 76,050 $ 78,932
Capital Expenditures $ 25,670 $ 20,631 $ 66,786 $ 50,208
Identifiable Assets $ 931,217 $ 959,201 $ 931,217 $ 959,201
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Corporate Operations and Other
Revenues $ 12,282 $ 10,001 $ 34,027 $ 31,944
Operating Loss:
Operating Loss Before Acquisition Related Charges $ (1,908) $ (2,140) $ (7,522) $ (6,806)
Acquisition Related Charges - (12,542) - (12,542)
- -----------------------------------------------------------------------------------------------------------
Total Operating Loss $ (1,908) $ (14,682) $ (7,522) (19,348)
Depreciation and Amortization $ 1,076 $ 1,271 $ 3,165 $ 2,897
Capital Expenditures $ 5,210 $ 5,530 $ 16,395 $ 13,011
Identifiable Assets $ 252,872 $ 198,298 $ 252,872 $ 198,298
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Consolidated
Revenues $ 669,069 $ 571,386 $1,994,497 $1,537,346
Operating Income (Loss):
Operating Income Before Acquisition Related Charges $ 129,218 $ 101,808 $ 363,771 $ 290,153
Acquisition Related Charges - (109,489) - (114,239)
- -----------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ 129,218 $ (7,681) $ 363,771 $ 175,914
Depreciation and Amortization $ 47,540 $ 46,283 $ 140,254 $ 123,141
Capital Expenditures $ 52,071 $ 56,370 $ 166,357 $ 107,876
Identifiable Assets $ 2,184,458 $2,102,655 $2,184,458 $2,102,655
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
FRONTIER CORPORATION
Consolidated Statements of Income
(Unaudited)
3 Months Ended September 30, 9 Months Ended September 30,
In thousands of dollars, except per share data 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues and Sales $669,069 $ 571,386 $ 1,994,497 $1,537,346
- -------------------------------------------------------------------------------------------------
Costs and Expenses
Operating expenses 479,496 411,147 1,453,206 1,088,089
Depreciation and amortization 47,540 46,283 140,254 123,141
Taxes other than income taxes 12,815 12,148 37,266 35,963
Acquisition related charges - 109,489 - 114,239
- -------------------------------------------------------------------------------------------------
Total Costs and Expenses 539,851 579,067 1,630,726 1,361,432
- -------------------------------------------------------------------------------------------------
Operating Income (Loss) 129,218 (7,681) 363,771 175,914
Interest expense 10,167 13,547 33,623 40,877
Other income and expense:
Gain on sale of assets - - 4,976 4,826
Equity earnings from unconsolidated wireless
interests 2,601 1,311 5,741 2,870
Interest income 380 1,317 1,684 8,868
Other expense - 1,051 989 2,623
- -------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes, Extraordinary Items and
Cumulative Effects of Changes in Accounting
Principle 122,032 (19,651) 341,560 148,978
Income taxes 48,255 (1,203) 133,436 62,707
- -------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Items and
Cumulative Effects of Changes in Accounting
Principle 73,777 (18,448) 208,124 86,271
Extraordinary items - (117,987) - (117,987)
Cumulative effect of changes in accounting
principles - (1,477) (8,018) (1,477)
- -------------------------------------------------------------------------------------------------
Consolidated Net Income (Loss) 73,777 (137,912) 200,106 (33,193)
Dividends on preferred stock 297 297 886 890
- -------------------------------------------------------------------------------------------------
Income (Loss) Applicable to Common Stock $ 73,480 $(138,209) $199,220 $(34,083)
=================================================================================================
Dividends declared on common stock $ 34,814 $ 49,402 $104,640 $ 66,392
Average common shares outstanding 164,273 152,972 163,960 150,742
Earnings (Loss) Per Common Share
Income (Loss) before extraordinary items and
cumulative effects of change in accounting
principle $ .45 $ (.12) $ 1.27 $ .56
Extraordinary items - (.77) - (.78)
Cumulative effect of changes in
accounting principles - (.01) (.05) (.01)
- -------------------------------------------------------------------------------------------------
Earnings (Loss) Per Common Share $ .45 $ (.90) $ 1.22 $ (.23)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
FRONTIER CORPORATION
Consolidated Balance Sheets
September 30, December 31,
1996 1995
In thousands of dollars, except share data (Unaudited)
- -----------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 30,118 $ 31,449
Accounts receivable, (less allowance for
uncollectibles of $33,269 and $28,515,
respectively) 417,797 404,081
Materials and supplies 15,430 12,928
Deferred income taxes 23,628 43,588
Prepayments and other 32,681 31,089
- ------------------------------------------------------------------
Total Current Assets 519,654 523,135
Property, plant and equipment, net 919,883 881,309
Goodwill and customer base 545,570 550,081
Deferred and other assets 199,351 154,067
- ------------------------------------------------------------------
Total Assets $2,184,458 $2,108,592
- ------------------------------------------------------------------
- ------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 355,284 $ 381,680
Dividends payable 35,098 33,247
Debt due within one year 6,100 14,871
Taxes accrued 55,215 26,842
Other liabilities 10,342 47,561
- ------------------------------------------------------------------
Total Current Liabilities 462,039 504,201
Long-Term debt 570,025 618,867
Deferred income taxes - 15,644
Deferred employee benefits obligation 65,810 58,385
- ------------------------------------------------------------------
Total Liabilities 1,097,874 1,197,097
- ------------------------------------------------------------------
Shareowners' Equity
Preferred stock 22,761 22,769
Common stock, par value $1.00, authorized
300,000,000 shares; 163,670,469 shares and
158,063,387 shares issued in 1996 and 1995 163,670 158,063
Capital in excess of par value 497,527 420,172
Retained earnings 411,156 317,149
- ------------------------------------------------------------------
1,095,114 918,153
Less -
Treasury stock, 6,375 shares in 1996 and
1995, at cost 147 147
Unearned compensation - restricted stock plan 8,383 6,511
- ------------------------------------------------------------------
Total Shareowners' Equity 1,086,584 911,495
- ------------------------------------------------------------------
Total Liabilities and Shareowners'
Equity $2,184,458 $2,108,592
- ------------------------------------------------------------------
- ------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
FRONTIER CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
9 Months Ended September 30,
In thousands of dollars 1996 1995
- ------------------------------------------------------------------------
Operating Activities
Net income (loss) $200,106 $(33,193)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary items - 189,977
Cumulative effect of changes in accounting
principles 12,396 2,272
Acquisition related charges - 114,239
Depreciation and amortization 140,254 123,141
Gain on sale of assets (4,976) (4,826)
Equity earnings from unconsolidated
wireless interests (5,741) (2,870)
Other, net 2,830 531
Changes in operating assets and liabilities, exclusive
of impacts of purchase acquisitions:
Increase in accounts receivable (11,888) (69,713)
Increase in materials and supplies (2,502) (2,286)
Increase in prepayments and other assets (2,295) (28,531)
Increase in deferred and other assets (22,894) (32,905)
Decrease in accounts payable (65,973) (23,406)
Increase (decrease) in taxes accrued and
other liabilities 76,709 (79,666)
Increase in deferred income
taxes 7,425 46,311
(Decrease) increase in deferred employee
benefits obligation (1,723) 9,021
- ------------------------------------------------------------------------
Total adjustments 121,622 241,289
- ------------------------------------------------------------------------
Net cash provided by operating activities 321,728 208,096
- ------------------------------------------------------------------------
Investing Activities
Expenditures for property, plant and equipment (164,773) (87,838)
Decrease in short-term investments - 8,259
Investment in cellular partnerships (26,203) (12,539)
Purchase of companies, net of cash acquired (9,118) (312,761)
Other investing activities 10,441 (5,871)
- ------------------------------------------------------------------------
Net cash used in investing activities (189,653) (410,750)
- ------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt - 138,138
Repayments of debt (62,595) (212,343)
Dividends paid (103,675) (50,063)
Treasury stock, net - (10,041)
Issuance of common stock, net 32,872 25,026
Distribution to shareowners of pooled company - (2,290)
Other financing activities (8) (8)
- ------------------------------------------------------------------------
Net cash used in financing activities (133,406) (111,581)
- ------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (1,331) (314,235)
Cash and Cash Equivalents at Beginning of Period 31,449 359,311
- ------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 30,118 $ 45,076
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
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 related 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 September 30, 1996, 436 employees have been paid a
total of $13.4 million in severance benefits which were
charged to the reserve. The remaining reserve balance is
approximately $39.0 million and is primarily for redundant
facilities currently being retired.
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 $32.8
million of cash proceeds from stock options and warrants
exercised through the third quarter of 1996. The
resultant tax benefit realized from the exercise of stock
options of $46.0 million is reflected as an adjustment to
capital in excess of par value and taxes accrued.
Actual interest paid was $33.2 million and $44.0
million for the nine month period ended September 30, 1996
and 1995, respectively. In addition, actual income taxes
paid were $44.8 million for the nine months ended
September 30, 1996, and $86.4 million for the nine months
ended September 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 nine
month period ended September 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 October 1996, the Company announced plans to
build a nationwide fiber optic network. Frontier will be
investing approximately $500 million in this project over
the next two year period. The network expansion will
increase 1996 capital expenditures by approximately $75
million to $100 million above the $225 million to $250
million for the Company's base capital program.
Note 11: Subsequent Events
On October 23, 1996, the Company announced that a
definitive agreement has been signed with Alltel to sell
its 69.5% equity interest in the South Alabama Cellular
Communications Partnership. The partnership provides
cellular service to customers in Alabama RSA No. 4 and
Alabama RSA No. 6. The Company anticipates that this
transaction, which is subject to board of directors and
regulatory approval, will be finalized in the fourth
quarter of 1996 or early 1997. The Company expects to
recognize a gain as a result of this transaction.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended September 30, 1996 and 1995
DESCRIPTION OF BUSINESS
Frontier Corporation (the "Company" or "Frontier") is a
diversified telecommunications company, serving more than
two 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
The Company's most significant business segment, Long
Distance Communications Services, continued to provide
strong revenue growth and improved operating margins for
the third quarter of 1996 in comparison to third quarter
of 1995. Long Distance generated a 22.6% increase in
revenue over the same quarter in the prior year, driving
the $97.7 million or 17.1% increase in consolidated
revenue growth for the quarter. This growth in revenue is
largely attributable to increased traffic volume and
billable minutes in the long distance business segment.
Operating margins, after adjusting for certain
nonrecurring items recorded in the third quarter of 1995,
improved to 19.3% on a consolidated basis as compared to
17.8% for the same quarter a year ago. Net income for the
third quarter of 1996 increased $16.6 million, or 29.1%,
over the third quarter of 1995, excluding the one-time
items summarized below. The improvement in operating
results reflects the impact of the synergies achieved
through the ongoing integration of the long distance
companies acquired during 1995, the consolidation of the
long distance switch network and the continuing operating
efficiencies attained by the local communications
operations.
Operating results for the third quarter of 1995 were
adversely affected by a number of nonrecurring items.
These nonrecurring items were related to acquisitions and
changes in accounting policies and caused the Company to
incur a net loss of $137.9 million for the quarter. Net
income for the quarters, normalized for nonrecurring
charges and share equivalents, can be summarized as
follows:
(All dollars, except per share 3 Months Ended September 30,
amounts, are in thousands) 1996 1995
- ----------------------------------------------------------------------
Dollars Per share Dollars Per share
Earnings available for common,
as stated $ 73,480 $ .45 $(138,209) $(.85)
- ----------------------------------------------------------------------
Adjustments, net of taxes:
Acquisition related charges $ 75,656 $ .46
Early extinguishment of debt 5,839 .04
Regulatory accounting change 112,148 .69
New accounting standard 1,477 .01
- ----------------------------------------------------------------------
Total adjustments $ 195,120 $1.20
- ----------------------------------------------------------------------
Normalized earnings $ 73,480 $ .45 $ 56,911 $ .35
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
The nonrecurring charges and share equivalents are
described in greater detail below.
1. Acquisition Related Charges
During the third quarter of 1995, in conjunction with the
ALC merger and other acquisitions, the Company recorded an
acquisition related charge of $75.7 million, net of an
income tax benefit of $33.8 million, associated with the
integration of the Company's 1995 acquisitions as well as
merger related transaction costs.
2. Early Debt Retirement
The Company acquired, through a tender offer, $76.8
million of Allnet's 9% Senior Subordinated Notes for $83.5
million plus accrued interest during the third quarter of
1995. The early retirement of this debt resulted in an
extraordinary loss of $5.8 million net of applicable
income taxes of $3.7 million.
3. Regulatory Accounting Change
The Company discontinued the use of regulatory accounting,
FAS 71, "Accounting for the Effects of Certain Types of
Regulation" as of September 30, 1995 for its local
communications companies. This non-cash, extraordinary
write-off totaled $112.1 million, net of applicable income
taxes of $68.3 million and was primarily the result of a
reduction in the recorded values of long lived telephone
plant assets.
4. New Accounting Standard
The Company adopted FAS 116, "Accounting for
Contributions Received and Made" effective September 30,
1995. The cumulative effect of adopting FAS 116 was a
charge of $1.5 million, net of applicable income taxes of
$.8 million.
5. Common Share Equivalents
Earnings per share for the three months ended September
30, 1995 was calculated without the effect of common share
equivalents (stock options and warrants) as mandated by
APB 15, "Earnings Per Share", for situations in which a
company reports a net loss. Average common shares for the
nine month period totaled 162.0 million, with share
equivalents of 9.0 million.
The nonrecurring charges are not expected to significantly
impact future earnings or liquidity.
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 third quarter
results of each business segment follows.
Long Distance Communications Services
Revenues for this segment totaled $496.0 million in the
third quarter of 1996, a $91.6 million or 22.6% increase
over the same quarter in 1995. The increase in long
distance revenues is attributed to several factors,
including significant traffic growth and increased sales
and marketing efforts. Long Distance traffic reached 3.6
billion minutes in the third quarter, an increase of 29.7%
over the same quarter in 1995. Revenue growth was also
positively impacted by increases in the sales of 800
services, teleconferencing, prepaid calling card services
and other enhanced services.
During the third quarter of 1996, the Company's major
carrier customer began the anticipated migration of its 1+
long distance traffic from Frontier's network. Despite the
impact of the migration of its traffic, this customer
continued to have a significant impact on long distance
revenue for the quarter, accounting for approximately 23%
of long distance revenue for the current quarter, compared
to approximately 25% for the second quarter of 1996, and
approximately 15% for the third quarter of 1995. Migration
of this customer's 1+ traffic is expected to be completed
during the fourth quarter of 1996 and is not expected to
materially impact operating income. The Company expects to
retain significant traffic volumes relating to this
customer's higher margin enhanced services traffic. This
is a result of contractual changes negotiated in June
1996 which eliminated the customer's existing minimum
monthly commitment for 1+ services. Additionally, Frontier
was granted an extension on the exclusivity for the
Company to carry the customer's enhanced service traffic.
Costs and expenses for long distance operations,
excluding nonrecurring charges, totaled $419.6 million in
the third quarter of 1996, and increase of $70.2 million,
or 20.0%, over the same quarter in 1995. This increase is
driven primarily by increased traffic volumes resulting
from internal growth. Cost of access represented 60.9% of
total long distance revenue for the third quarter of 1996
versus 58.8% in the prior year quarter. The increase in
cost of access is attributable in part to a contract with
the Company's major customer which provides the customer
with lower prices as a result of the increased volume of
traffic carried. Increased selling, billing and collection
and depreciation and amortization expenses accounted for
$10.9 million of the increase in operating costs. The
increase in selling, general and administrative expenses
is driven by the additional headcount required to support
the growing number and size of revenue channels. The
increase in depreciation and amortization is driven by the
higher level of capital expenditures and additional
goodwill and customer base amortization resulting from the
1995 purchase acquisitions.
Excluding nonrecurring charges, operating income for
long distance rose 38.9% to $76.4 million for the three
months ended September 30, 1996. Operating income as a
percent of revenue was 15.4% for the third quarter of
1996, up from 13.6% for the same period in 1995 and 14.6%
for the second 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 and the consolidation of the
Company's long distance switch network.
Local Communications Services
Local Communications Services includes the Rochester,
New York telephone 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 by 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.
In the three month period ended September 30, 1996,
Local Communications Services revenue increased $3.8
million, or 2.4%, over the comparable period in 1995. This
increase is driven by a 3.3% increase in access lines and
a 5.6% increase in minutes of use. Revenues in the
Rochester, New York operation increased 2.6% over the
third quarter of the prior year. This growth is
attributable in part to marketing of new products and
higher demand for services in the open market environment.
See discussion of the Open Market Plan on pages 25 - 26.
Local Communications Services costs and expenses in the
third quarter of 1996 for were $106.1 million, a decrease
of $2.0 million, or 1.8%, from the third quarter in 1995.
This reduction in costs and expenses is primarily the
result of increased operating efficiencies and a reduction
in depreciation. The cost savings are partially offset by
the continuing expenses associated with the contract
negotiations at the Rochester, New York operation, as
discussed in the first and second quarter results of
operations. The costs incurred during the third quarter
were primarily for contractors, enhanced security coverage
and overtime. 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. A
decision on these appeals is expected soon; both parties
have an opportunity for further appeals. 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 Local Communications, excluding
nonrecurring charges, increased $5.8 million, or 11.8%, to
$54.7 million in the third quarter of 1996. Operating
margin as a percentage of revenue was 34.0% for the three
months ended September 30, 1996, as compared to 31.2% for
the same period in the prior year. The improved operating
results are reflective of the continuing centralization of
administrative operations within the local communications
segment.
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 includes the Company's
majority ownership interest in wireless operations and
Frontier Network Systems ("FNS"). As of September 30,
1996, wireless operations included the Alabama RSAs No. 4
and No. 6, in which the Company has a 69.5% 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 third quarter of 1996 increased $2.3
million or 22.8% as compared to the third quarter of 1995.
The increase in revenue is attributed to growth in
wireless operations and equipment sales by FNS.
On October 23, 1996, the Company signed a definitive
agreement to sell its 69.5% interest in the Alabama RSAs
No. 4 and No. 6. See additional discussion on page 26.
Other Income Statement Items
Interest Expense
Interest expense was $10.2 million in the third quarter
of 1996, a $3.4 million decline from the third quarter of
1995. This decrease is attributed to lower debt levels
and a higher proportion of lower cost 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 carries lower interest
rates, having a positive effect on interest expense in the
third 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 third quarter of 1996 were $2.6
million, an increase of $1.3 million over 1995. The
significant customer growth and increase in minutes of
use experienced through the first two quarters of 1996
continued into the third quarter. 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, the
customer base grew approximately 50.5% and revenues
increased 31.2% over the third quarter of 1995.
Interest Income
Interest income in the third quarter of 1996 amounted to
$.4 million, a decrease of $.9 million from the third
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 third quarter of
1996 was 39.5% versus 38.8% excluding the income tax
benefit for nonrecurring charges for the third quarter of
1995. The increase in the effective rate is primarily due
to a decrease in the benefit yielded by tax exempt
interest income in the third quarter of 1996 as compared
to the same quarter in 1995. The reduction in the tax
exempt interest income is driven by the decrease in cash
in 1996 as compared to 1995 as a result of the 1995
acquisition program.
Nine Months Ended September 30, 1996 and 1995
RESULTS OF OPERATIONS
Consolidated
Revenues increased $457.2 million, or 29.7% for the
first nine months of 1996 over the same nine months in
1995. This growth is primarily driven by the Company's
long distance segment, which accounted for 96% of the
revenue increase. Local Communications accounted for the
remainder of the increase. The growth in revenue 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 after adjusting for certain nonrecurring items,
increased $76.5 million or 26.4% over the first nine
months of 1995. The improvement in operating results is
attributable to revenue growth, the synergies achieved
through the ongoing integration of the long distance
companies acquired during 1995, the long distance switch
consolidation and the continuation of improved operating
efficiencies at the local communications segment.
Operating results for the nine month periods ending
September 30, 1996 and 1995 were impacted by a number of
nonrecurring items. Net income for these periods,
normalized for nonrecurring charges and share equivalents,
can be summarized as follows:
(All dollars, except per share 9 Months Ended September 30,
amounts, are in thousands) 1996 1995
- ---------------------------------------------------------------------
Dollars Per share Dollars Per share
- ----------------------------------------------------------------------
Earnings available for common,
as stated $199,220 $1.22 $ (34,083) $ (.21)
Adjustments, net of taxes:
Third quarter adjustments
(previously discussed) $195,120 $ 1.21
Acquisition related charges 3,108 .02
Gain on sale of assets $ (3,029) $(.02) (4,826) (.03)
New accounting standard 8,018 .05
Union contract negotiations 1,861 .01
- ---------------------------------------------------------------------
Total adjustments $ 6,850 $ .04 $193,402 $ 1.20
- ---------------------------------------------------------------------
Normalized earnings $206,070 $1.26 $159,319 $ .99
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
1. Acquisition Related Charges
During March 1995, the Company acquired ASI, a long
distance company headquartered in Minneapolis, Minnesota.
In conjunction with this transaction, the Company recorded
a $4.8 million charge ($3.1 million after taxes) primarily
for the transaction costs and the loss on the retirement
of a redundant switch.
2. Gain on Sale of Assets
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. 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.
3. New Accounting Standard
Results in 1996 included a $12.4 million pretax charge for
the adoption 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." The
assets held for disposal consist principally of telephone
switching equipment in the Local Communications segment as
a result of the central office switch consolidation
project.
4. Union Contract Negotiations
During the first quarter of 1996, the Company's operating
costs increased $2.8 million (pretax) at its largest
telephone subsidiary due to increased labor and related
expenses in connection with union contract negotiations at
one of the Company's subsidiaries, Rochester Telephone
Corp.
5. Common Share Equivalents
Earnings per share for the nine months ended September 30,
1995 were calculated without the effect of common share
equivalents (stock options and warrants) as mandated by
APB 15, "Earnings Per Share", for situations in which a
company reports a net loss. Average common shares for the
nine month period totaled 161.3 million, with share
equivalents of 10.6 million.
The nonrecurring charges are not expected to significantly
impact future earnings or liquidity.
Long Distance Communications Services
Long distance revenues for this period totaled $1.5
billion, a $439.3 million, or 42.2%, increase over the
same period in 1995. Significant traffic growth, increased
sales and marketing efforts and increased sales of
enhanced service products were the primary drivers of the
revenue growth for 1996 as compared to 1995. In the first
nine months of 1996, long distance traffic reached 10.9
billion minutes, an increase of 56.5% over the same period
in 1995. Adjusting for purchase acquisitions, internal
growth in traffic increased 38.3% for the period. Revenue
growth continues to be positively 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 was also impacted positively by a major
carrier customer. Revenue from this customer represents
approximately 18% of consolidated revenues for the first
nine months of 1996, compared to approximately 8% of
consolidated revenues for the first nine months of 1995.
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 higher margin
enhanced services traffic. The customer began the
migration of its 1+ traffic to other carriers during the
third quarter of 1996. It is anticipated that the
migration of the 1+ traffic relating to this customer will
be completed during the fourth quarter, 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 $377.8 million,
or 42.5%, in the first nine months of 1996 as compared to
the same period in 1995. This increase is primarily the
result of increased traffic volumes resulting from
internal growth and purchase acquisitions. Operating
costs, excluding purchase acquisitions, increased by
$291.7 million or 36.9% over the comparable period in
1995. Cost of access represented 61.8% of total revenue
for the first three quarters of 1996, versus 58.2% 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, administrative and depreciation
and amortization expenses accounted for $61.4 million of
the increased operating costs. Selling expenses increased
during the first nine months of 1996 as compared to 1995
as a result of the 1995 purchase acquisitions and
increased headcount required to support the growing number
and size of revenue channels. The variance in depreciation
and amortization is driven by increased capital
expenditures and additional goodwill and customer base
amortization resulting from the 1995 purchase
acquisitions.
Operating income for long distance, excluding
nonrecurring charges, rose 40.7% to $212.5 million for
the nine months ended September 30, 1996. Operating
margin, before nonrecurring charges, decreased from 14.5%
in the first nine months of 1995 to 14.4% for the first
nine months of 1996. The reduction in operating margin in
the first nine months 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. Operating margin improvements for the
sequential quarters in 1996 as compared to the same period
in 1995 are reflective of the continuing realization of
operating efficiencies gained through the integration of
several long distance companies acquired during 1995 and
the consolidation of the Company's long distance switch
network.
Local Communications Services
Revenues for this segment were $480.6 million for the
nine month period ended September 30, 1996, an increase of
$15.7 million, or 3.4%, over the comparable period in
1995. Total access lines increased at an annualized rate
of 2.6% during the first nine months of 1996. Revenue
growth in the Rochester, New York market continued to
drive the local communications segment with an increase of
4.2% over the same nine month period in the prior year.
This growth is attributable in part to the marketing of
new products and a higher demand for services in the open
market environment. See discussion of the Open Market Plan
on pages 25 - 26.
Local Communications Services costs and expenses before
nonrecurring charges were $319.0 million in the first nine
months of 1996, relatively unchanged from the same period
in the prior year. During the first three quarters of
1996, the Rochester telephone operation experienced
increased costs and expenses related to higher labor
expenses resulting from union contract negotiations. 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. 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. A decision on these appeals is
expected soon; both parties have an opportunity for
further appeals. In addition, the Rochester telephone
operation experienced increased costs and expenses as a
result of an increased repair load due to the wet weather
conditions during the second quarter. The increased costs
incurred at the Rochester operation were partially offset
by reduced costs and expenses at the regional telephone
operations as a result of continued operating efficiencies.
Normalized operating income for the first nine months of
1996 was $161.6 million, an increase of $15.7 million, or
10.8% over the same period in 1995. Operating margins for
the nine month period improved from 31.4% in 1995 to 33.6%
in 1996, reflecting the positive impact achieved through
the continuing centralization of administrative operations
within the local communications segment.
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 includes the Company's
majority ownership interest in wireless operations and
Frontier Network Systems ("FNS"). As of September 30,
1996, wireless operations included the Alabama RSAs No. 4
and No. 6, in which the Company has a 69.5% 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 for the first nine months of 1996 increased $2.1
million, or 6.5%, as compared to the same period in 1995.
The increase in revenue is attributed to growth in
wireless operations and equipment sales by FNS.
Subsequent to September 30, 1996, the Company signed a
definitive agreement to sell its 69.5% interest in the
Alabama RSAs No. 4 and No. 6. See additional discussion on
page 26.
Other Income Statement Items
Interest Expense
Interest expense was $33.6 million in the first nine
months of 1996, a $7.3 million decline from 1995. This
decrease is attributed to lower debt levels and a higher
proportion of lower cost 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 carries lower interest rates,
having a positive effect on interest expense in the first
nine months 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 nine months of 1996 were $5.7
million, an increase of $2.9 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 50.5% and
revenues increased 49.8% over the first nine months of
1995.
Interest Income
Interest income in the first nine months of 1996
amounted to $1.7 million, a decrease of $7.2 million from
same period in 1995. This decrease is due to lower cash
balances as a result of the financing of several long
distance acquisitions, which closed subsequent to the
first quarter of 1995.
Income Taxes
The effective income tax rate for the first nine months
of 1996 was 39.1% versus 39.4%, excluding the income tax
benefit for nonrecurring charges for the first nine months
of 1995.
FINANCIAL CONDITION
Review of Cash Flow Activity
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 $506.9 million and $413.3 million for the
nine month periods ending September 30, 1996 and 1995,
respectively. The increase in EBITDA is primarily
attributable to revenue growth in the long distance
segment and improved operating margins in the local
communications segment.
Cash flow from operations for the first nine months of
1996 increased $113.6 million or 54.6% as a result of
strong revenue growth and decreased working capital
requirements.
Cash used for investing activities decreased $221.1
million, or 53.8%, primarily due to the purchase of
several long distance companies in 1995. See Note 3 to the
Financial Statements for additional detail on cash spent
for acquisitions during 1995 and 1996. This decrease is
offset by an increase in capital expenditures of $76.9
million or 87.6% over the first nine months of 1995, as a
result of the network expansion and the update of network
capabilities necessary to meet customer demands for new
products and services.
Cash used for financing activities increased $21.8 million
or 19.6% in the first nine months of 1996 as compared to
1995. This increase is driven by increased dividend
payments resulting from the issuance of common shares that
were exchanged to effect the merger with ALC, offset by an
inflow of cash from stock options exercised during the
first nine months of 1996.
Debt
At September 30, 1996, the Company's total debt amounted
to $576.1 million, a decrease of $57.6 million from
December 31, 1995. This decrease is mainly the result of
a $47.3 million net reduction in variable rate debt and
the repayment of an $8.0 million note related to the
November 1995 purchase of Link-VTC, Inc.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of
total capitalization) was 34.6% at September 30, 1996, as
compared with 41.0% at December 31, 1995. Pre-tax
interest coverage, excluding nonrecurring charges, was
11.1 times for the period, as compared to 8.2 times for
the same period in 1995.
Capital Spending
Through September 1996, gross capital expenditures
amounted to approximately $166.4 million as compared to
$107.9 million in the prior year. The Company plans to
spend a total of approximately $225 million to $250
million on its base capital program during the full year
in 1996, representing an increase of up to $87.4 million
over the 1995 level. The increase in capital is required
to keep pace with the Company's growth. Specific projects
include the placement of an Alternative Local Exchange
Carrier (ALEC) 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.
In October 1996, the Company announced plans to invest
$500 million in conjunction with an agreement Qwest
Communications, a privately held national
telecommunications company based in Denver, Colorado, to
build a technologically advanced fiber optic network. The
multi-ring, SONET-based network is expected to
significantly reduce Frontier's network transmission costs
and improve overall network performance and reliability.
When complete, it is planned that Frontier's broadband
network will interconnect nearly 100 cities, encompass
more than 13,000 route miles and provide coast-to-coast
SONET network connectivity. The Company expects that
investment in this project will begin in the fourth
quarter of 1996 and continue into 1998. The SONET network
build will increase 1996 capital expenditures by
approximately $75 million to $100 million above the $225
million to $250 million for the base capital program. It
is projected that more than half of the investment costs
will be incurred in 1997. Frontier expects to finance the
project primarily with cash from operations and through
the issuance of short to medium term debt in the range of
$225 million to $250 million.
Dividends
On September 30, 1996, the Board of Directors declared a
third quarter 1996 dividend of 21.25 cents per share on
the Company's common stock, payable November 1, 1996 to
shareowners of record on October 15, 1996.
OTHER ITEMS
Open Market Plan
The Rochester, New York subsidiary (Rochester Telephone)
is in 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 nine 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; however, that deadline is likely to
be extended significantly. The NYSPSC is also considering
the prices the Company may charge for "unbundled" service
elements such as links (the wire form the Company's switch
to the customers premises) and ports (the portion of the
Company's switch that terminates the link). The Company is
actively participating in this proceeding and expects the
NYSPSC to issue a decision on some service elements in
late 1996, and others in 1997. In addition, on August 8,
1996, the Federal Communications Commission (the "FCC")
released 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. On September 27, 1996, the U.S. Court of
Appeals for the 8th Circuit granted a stay of a
significant portion of the First Report and Order. The FCC
has appealed that decision to the Supreme Court. A
decision is pending. 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.
Planned Dispositions
On October 23, 1996, the Company announced that a
definitive agreement has been signed with Alltel for the
sale of its 69.5% equity interest in the South Alabama
Cellular Communications Partnership. The partnership
provides cellular service to customers in Alabama RSA #4
and Alabama RSA #6.. The Company anticipates that this
transaction, which is subject to board of directors and
regulatory approval, will be finalized in the fourth
quarter of 1996 or early in 1997. The Company anticipates
that a gain will be recognized as a result of this
transaction.
Cautionary Statement
Other than discussion of historical financial results
provided in this Quarterly Report on Form 10-Q, statements
included herein may be considered forward looking in
nature. Actual results may differ materially from those
projected in forward looking statements. Factors which
could cause actual results to differ materially from
projections include but are not limited to: changes in the
overall economy; technology; the number and size of
competitors in the Company's markets; law and regulatory
policy; and the mix of products and services offered in
the Company's target markets. Additional information
concerning these and other potentially important risk
factors can be found in the Company's various Securities
and Exchange Commission filings.
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 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 8, 1996, the FCC released 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. Certain
portions of the First Report and Order, primarily those
setting pricing rules, have been stayed pending appeal by
the 8th Circuit Court of Appeals, the Federal Court hearing
appeals of this Order.
Commencing in late August, a number of interested
parties, primarily state regulatory commissions and large
local telephone companies, sought reconsideration or
appellate review of the First Report and Order. On
September 27, 1996, the U.S. Circuit Court of Appeals for
the 8th Circuit in St. Louis issued a temporary stay of the
First Report and Order. The Court later continued its stay
after briefing and oral argument, but limited the stay to a
portion of the rules adopted by the FCC. However, these
rules are significant. The FCC and certain other parties
sought dissolution of the stay on October 23, 1996, but
were unsuccessful. This matter is now scheduled for
resolution on January 11, 1997, absent Supreme Court
intervention. In the interim, the FCC and state
commissions are continuing to implement those parts of the
Act not at issue.
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:
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: November 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
of Incorporation reference 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.
11 Statement re: Computation of Earnings Filed herewith
per Share of Common Stock on a
Fully Diluted Basis (Unaudited)
27 Financial Data Schedule Filed herewith
<PAGE>
<TABLE>
Exhibit 11
Frontier Corporation
Computation of Earnings per Share of Common Stock
on a Fully Diluted Basis (Unaudited)
3 Months Ended 9 Months Ended
September 30, September 30,
(In thousands, except per share data) 1996 1995 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income applicable to common stock $73,480 $(138,209) $199,220 $(34,083)
Add: Interest on convertible
debentures 139 139 416 416
- -----------------------------------------------------------------------------
73,619 (138,070) $199,636 $(33,667)
Less: Increase in related
federal income taxes 49 49 146 146
- -----------------------------------------------------------------------------
Adjusted income applicable to
common stock $73,570 $(138,119) $199,490 $(38,813)
==============================================================================
Average Common Shares Outstanding 163,561 152,972 162,204 150,742
(excluding common stock
equivalents)
Adjustments for:
Convertible Debentures (1) 503 - 503 -
Stock Options (1) 712 - 1,813 -
Adjusted common shares assuming
conversion of outstanding
Convertible Debentures and Stock
Options at beginning of each
period 164,776 152,972 164,520 150,742
===============================================================================
Earnings per share of common stock
on a fully diluted basis $ .45 $ (.90) $ 1.21 $ (.23)
===============================================================================
(1) Convertible debentures and common stock equivalents are not
applicable to the calculation when earnings are negative.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 30,118
<SECURITIES> 0
<RECEIVABLES> 451,066
<ALLOWANCES> 33,269
<INVENTORY> 15,430
<CURRENT-ASSETS> 519,654
<PP&E> 2,226,903
<DEPRECIATION> 1,307,020
<TOTAL-ASSETS> 2,184,458
<CURRENT-LIABILITIES> 462,039
<BONDS> 570,025
0
22,761
<COMMON> 163,670
<OTHER-SE> 900,153
<TOTAL-LIABILITY-AND-EQUITY> 2,184,458
<SALES> 0
<TOTAL-REVENUES> 1,994,497
<CGS> 40,997
<TOTAL-COSTS> 1,630,726
<OTHER-EXPENSES> 989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,623
<INCOME-PRETAX> 341,560
<INCOME-TAX> 133,436
<INCOME-CONTINUING> 208,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (8,018)
<NET-INCOME> 200,106
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.21
</TABLE>
