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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 171,498,589 shares as of July 31, 1998
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FRONTIER CORPORATION
Form 10-Q
Index
Page Number
Part I. FINANCIAL INFORMATION -----------
Item 1. Financial Statements
Business Segment Information for the three
months ended and for the six months
ended June 30, 1998 and June 30, 1997 3
Consolidated Statements of Income for the three
months ended and for the six months ended
June 30, 1998 and June 30, 1997 4
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and June 30, 1997 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion of Results of Operations
and Analysis of Financial Condition 12-22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 22-24
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 25
Signatures 26
Index to Exhibits 27-28
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FRONTIER CORPORATION
Business Segment Information
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands of dollars 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Integrated Services
- -------------------
<S> <C> <C> <C> <C>
Revenues $ 464,664 $ 412,251 $ 914,210 $ 817,550
Costs and Expenses 444,943 396,369 878,296 791,464
- ------------------------------------------------------------------------------
Operating Income (Loss):
Operating Income Before
Other Charge $ 19,721 $ 15,882 $ 35,914 $ 26,086
Other Charges - - (6,528) (96,600)
- ------------------------------------------------------------------------------
Total Operating
Income (Loss) $ 19,721 $ 15,882 $ 29,386 $ (70,514)
Depreciation and Amortization $ 25,176 $ 22,312 $ 51,111 $ 45,251
Capital Expenditures $ 85,639 $ 37,457 $ 140,924 $ 94,928
Identifiable Assets $1,488,341 $1,177,903 $1,488,341 $1,177,903
==============================================================================
Local Communications Services
- -----------------------------
Revenues $ 175,105 $ 166,987 $ 348,203 $ 330,317
Costs and Expenses 109,993 107,036 219,499 210,652
- ------------------------------------------------------------------------------
Operating Income $ 65,112 $ 59,951 $ 128,704 $ 119,665
Depreciation and Amortization $ 28,167 $ 27,375 $ 56,511 $ 54,660
Capital Expenditures $ 39,589 $ 28,208 $ 62,558 $ 43,564
Identifiable Assets $ 970,943 $ 897,082 $ 970,943 897,082
==============================================================================
Corporate Operations and Other
- ------------------------------
Revenues $ 8,547 $ 10,878 $ 17,901 $ 19,825
Costs and Expenses 12,545 12,691 27,142 23,522
- ------------------------------------------------------------------------------
Operating Loss $ (3,998) $ (1,813) $ (9,241) $ (3,697)
Depreciation and Amortization $ 628 $ 903 $ 1,589 $ 1,765
Capital Expenditures $ 8,413 $ 5,242 $ 15,664 $ 11,975
Identifiable Assets $ 258,725 $ 221,425 $ 258,725 $ 221,425
==============================================================================
Consolidated
- ------------
Revenues $ 648,316 $ 590,116 $1,280,314 $1,167,692
Costs and Expenses 567,481 516,096 1,124,937 1,025,638
- ------------------------------------------------------------------------------
Operating Income:
Operating Income Before
Other Charge $ 80,835 $ 74,020 $ 155,377 $ 142,054
Other Charges - - (6,528) (96,600)
- ------------------------------------------------------------------------------
Total Operating Income $ 80,835 $ 74,020 $ 148,849 $ 45,454
Depreciation and Amortization $ 53,971 $ 50,590 $ 109,211 $ 101,676
Capital Expenditures $ 133,641 $ 70,907 $ 219,146 $ 150,467
Identifiable Assets $2,718,009 $2,296,410 $2,718,009 $2,296,410
===============================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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FRONTIER CORPORATION
Consolidated Statements of Income
(Unaudited)
In thousands of dollars, 3 Months Ended June 30, 6 Months Ended June 30,
except per share data 1998 1997 1998 1997
- ---------------------------------------------------------------------------
Revenues $648,316 $590,116 $1,280,314 $1,167,692
- ---------------------------------------------------------------------------
Costs and Expenses
Operating expenses 498,302 449,702 984,036 895,153
Depreciation and amortization 53,971 50,590 109,211 101,676
Taxes other than income taxes 15,208 15,804 31,690 28,809
Other charges - - 6,528 96,600
- ---------------------------------------------------------------------------
Total Costs and Expenses 567,481 516,096 1,131,465 1,122,238
- ---------------------------------------------------------------------------
Operating Income 80,835 74,020 148,849 45,454
Interest expense 12,558 11,772 25,989 22,390
Other income:
Gain on sale of assets 14,551 - 14,551 18,765
Equity earnings from
unconsolidated wireless interests 4,178 2,783 6,636 4,273
Interest income 1,191 775 2,389 1,509
Other income 1,002 529 1,894 616
- ---------------------------------------------------------------------------
Income Before Taxes and Cumulative
Effect of Change in Accounting
Principle 89,199 66,335 148,330 48,227
Income tax expense 41,536 27,001 66,753 24,795
- ---------------------------------------------------------------------------
Income Before Cumulative Effect of
Change in Accounting Principle 47,663 39,334 81,577 23,432
Cumulative effect of change in
accounting principle (1,755) - (1,755) -
- ---------------------------------------------------------------------------
Consolidated Net Income 45,908 39,334 79,822 23,432
Dividends on preferred stock 252 257 503 511
- ---------------------------------------------------------------------------
Basic Income Applicable to
Common Stock 45,656 39,077 79,319 22,921
Diluted earnings adjustment 90 90 180 180
- ---------------------------------------------------------------------------
Diluted Income Applicable to
Common Stock $ 45,746 $ 39,167 $ 79,499 $ 23,101
===========================================================================
Basic Earnings Per Common Share
Income before cumulative effect
of change in
accounting principle $ .28 $ .23 $ .48 $ .14
Cumulative effect of change
in accounting principle (.01) - (.01) -
- ---------------------------------------------------------------------------
Basic Earnings Per Common Share $ .27 $ .23 $ .47 $ .14
Weighted Average Shares
Outstanding 170,390 168,461 170,230 168,422
===========================================================================
Diluted Earnings Per Common Share
Income before cumulative effect
of change in accounting principle $ .27 $ .23 $ .47 $ .14
Cumulative effect of change
in accounting principle (.01) - (.01) -
- ---------------------------------------------------------------------------
Diluted Earnings Per Common Share $ .26 $ .23 $ .46 $ .14
Weighted Average Shares
Outstanding 174,093 169,421 173,449 169,188
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
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FRONTIER CORPORATION
Consolidated Balance Sheets
June 30, December 31,
1998 1997
In thousands of dollars, except share data (Unaudited)
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 76,935 $ 26,302
Accounts receivable, (less allowance for
uncollectibles of $28,554 and $25,100,
respectively) 433,264 380,324
Materials and supplies 13,622 12,312
Deferred income taxes 30,311 33,948
Prepayments and other 32,342 37,419
- ---------------------------------------------------------------------------
Total Current Assets 586,474 490,305
Property, plant and equipment, net 1,206,969 1,046,884
Goodwill and customer base 486,601 517,754
Deferred and other assets 437,965 446,574
- ---------------------------------------------------------------------------
Total Assets $2,718,009 $2,501,517
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 410,035 $ 343,606
Dividends payable 38,554 36,798
Debt due within one year 6,451 6,443
Taxes accrued 61,248 16,023
Other liabilities 54,685 90,108
- ---------------------------------------------------------------------------
Total Current Liabilities 570,973 492,978
Long-term debt 1,020,956 934,681
Deferred income taxes 30,173 10,927
Deferred employee benefits obligation 102,040 88,562
- ---------------------------------------------------------------------------
Total Liabilities 1,724,142 1,527,148
- ---------------------------------------------------------------------------
Shareholders' Equity
Preferred stock 20,126 20,126
Common stock, par value $1.00, authorized
300,000,000 shares; 171,367,406 shares
and 170,503,300 shares
issued in 1998 and 1997, respectively 171,367 170,503
Capital in excess of par value 562,580 544,066
Retained earnings 256,340 253,435
Accumulated other comprehensive income 4,300 3,418
- ---------------------------------------------------------------------------
1,014,713 991,548
Less -
Treasury stock, 10,976 shares in 1998 and 10,849
shares in 1997, at cost 244 231
Unearned compensation - restricted stock plan 20,602 16,948
- ---------------------------------------------------------------------------
Total Shareholders' Equity 993,867 974,369
- ---------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,718,009 $2,501,517
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
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 1998 1997
- ---------------------------------------------------------------------------
Operating Activities
Net income $ 79,822 $ 23,432
Adjustments to reconcile net income to net cash
provided by operating activities:
Other charges 6,528 96,600
Cumulative Effect of Change in
Accounting Principle 1,755 -
Depreciation and amortization 109,211 101,676
Gain on sale of assets (14,551) (18,765)
Equity earnings from unconsolidated
wireless interests (6,636) (4,273)
Other, net 2,876 904
Changes in operating assets and liabilities,
exclusive of impacts of dispositions
and acquisitions:
Increase in accounts receivable (53,628) (11,458)
Increase in materials and supplies (1,515) (1,521)
Decrease (increase) in deferred
income taxes 22,848 (33,040)
Decrease (increase) in prepayments
and other current assets 5,032 (2,824)
Increase in deferred and other assets (14,270) (18,307)
Increase (decrease) in accounts payable 62,133 (55,260)
Increase (decrease) in taxes accrued
and other liabilities 18,709 (12,173)
Increase (decrease) in deferred employee
benefits obligation 2,034 (395)
- ---------------------------------------------------------------------------
Total adjustments 140,526 41,164
- ---------------------------------------------------------------------------
Net cash provided by operating activities 220,348 64,596
- ---------------------------------------------------------------------------
Investing Activities
Expenditures for property, plant and equipment (165,796) (108,664)
Deposit for capital projects (92,781) (38,893)
Proceeds from asset sales 41,543 32,889
Other investing activities (264) 3,275
- ---------------------------------------------------------------------------
Net cash used in investing activities (217,298) (111,393)
- ---------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 131,181 300,935
Repayments of debt (12,698) (191,716)
Dividends paid (74,704) (71,871)
Treasury stock, net (277) (2,468)
Issuance of common stock, net 4,094 614
Other financing activities (13) (2,499)
- ---------------------------------------------------------------------------
Net cash provided by financing activities 47,583 32,995
- ---------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 50,633 (13,802)
Cash and Cash Equivalents at Beginning of Period 26,302 37,411
- ---------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 76,935 $ 23,609
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
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FRONTIER CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1: Consolidation
The consolidated financial statements of Frontier
Corporation (the "Company" or "Frontier") included herein,
are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission
regulations. Certain information and footnote disclosures
normally included in financial statements prepared in
accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and
regulations. 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 position, results of operations and cash flows for
the interim periods. These financial statements should be
read in conjunction with the Annual Report of the Company on
Form 10-K for the year ended December 31, 1997.
The consolidated financial information includes the
accounts of Frontier Corporation and its majority-owned
subsidiaries after elimination of all significant
intercompany transactions. Investments in entities in which
the Company does not have a controlling interest are
accounted for using the equity method.
Preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Certain prior year amounts have been reclassified to
conform with current year presentation.
Note 2: Acquisitions
On February 27, 1998, the Company acquired GlobalCenter,
Inc. (renamed "Frontier GlobalCenter, Inc." or
"GlobalCenter"), a leading provider in digital distribution,
Internet and data services headquartered in Sunnyvale,
California. Under the terms of the merger agreement, the
Company acquired all of the outstanding shares of
GlobalCenter. The total number of shares issued by the
Company to effect the merger was 6.4 million. At the time
of the merger, GlobalCenter had 1.1 million stock options
and warrants outstanding as converted into Frontier
equivalents. This transaction has been accounted for as a
pooling of interests and, accordingly, historical
information has been restated to include GlobalCenter.
Combined and separate results of Frontier Corporation and
GlobalCenter were as follows:
Frontier
In Millions Corporation GlobalCenter Combined
- --------------------------------------------------------------
One month ended January 31, 1998
(unaudited)
Revenues $ 205.5 $ 2.5 $ 208.0
Net income $ 14.7 $ (1.0) $ 13.7
==============================================================
Six months ended June 30, 1997
(unaudited)
Revenues $ 1,158.1 $ 9.6 $ 1,167.7
Net income $ 28.9 $ (5.5) $ 23.4
==============================================================
In February 1997, the Company completed its purchase of
R.G. Data Incorporated (renamed "Frontier Network Systems
Corp." or "FNSC"), a privately held upstate New York based
computer and data networking equipment and services company.
A total of 110,526 shares of Frontier common stock held in
treasury were reissued in exchange for all of the shares of
R.G. Data Incorporated. The treasury shares were acquired
through open market purchases. This transaction was
accounted for as a purchase.
Note 3 : Other Charges
In the first quarter of 1998, the Company recorded a $6.5
million pre-tax acquisition related charge associated with
the GlobalCenter transaction. These charges include
investment banker, legal fees and other direct costs and
were subsequently liquidated in the second quarter of 1998.
In October 1997, the Company recorded a pre-tax charge of
$86.8 million consisting of a restructuring charge of $43.0
million and a provision for asset and lease impairments of
$43.8 million. These reserves are included in the "Other
liabilities" caption in the Consolidated Balance Sheets.
The remaining restructuring reserve balance of $5.1 million
at June 30, 1998, which primarily relates to program and
cancellation activities, is adequate to cover the exit
activities. The provision for asset and lease impairments
primarily relates to long term assets and certain lease
obligations the Company is in the process of disposing of,
or exiting.
In March 1997, the Company recorded a $96.6 million pre-
tax charge primarily related to the write-off of certain
network facilities no longer required as a result of the
migration of the Company's major carrier customer's one-plus
traffic volume to other networks and the Company's overall
network integration efforts. The Company completed the
decommissioning of these redundant facilities during the
first quarter of 1998.
Note 4: Gain on Sale of Assets
In April 1998, the Company completed the sale of Minnesota
Southern Cellular Telephone Company ("Minnesota RSA No.
10"), a wholly owned cellular partnership, and certain other
properties. The sale of these properties resulted in a
combined pre-tax gain of $14.6 million and an after-tax gain
of $2.5 million. The income tax effect on these gains of
$12.1 million is primarily impacted by the sale of Minnesota
RSA No. 10 which resulted in nondeductible goodwill. On
January 31, 1997, the Company completed the sale of its
69.5% equity interest in the South Alabama Cellular
Communications Partnership. The sale resulted in a pre-tax
gain of $18.8 million. The Company decided to redeploy these
resources into more strategic assets as the assets sold were
not critical to the achievement of the Company's overall
business strategy.
Note 5: Earnings Per Share
The Company adopted the provisions of Financial Accounting
Standards Board ("FAS") Statement No. 128, "Earnings Per
Share" ("EPS") effective December 31, 1997. This statement
simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No.
15, "Earnings Per Share", and makes them comparable to
international earnings per share standards. Basic EPS are
based on the weighted average number of shares of common
stock outstanding during the period. Diluted EPS are based
on the weighted average number of shares of common stock and
common stock equivalents (options, warrants and convertible
debentures) outstanding during the period, computed in
accordance with the treasury stock method. Historical
earnings per share have been restated to conform with the
provisions of FAS 128.
The following is a reconciliation of the denominator used
in the computation of diluted earnings per share:
3 Months Ended June 30, 6 Months Ended June 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------
Weighted Average Shares
Outstanding 170,390 168,461 170,230 168,422
Options and Warrants 3,200 457 2,716 263
Convertible Debentures 503 503 503 503
- ---------------------------------------------------------------------------
Weighted Average Shares
Outstanding 174,093 169,421 173,449 169,188
===========================================================================
Note 6: Comprehensive Income
The Company adopted the provisions of FAS 130, "Reporting
Comprehensive Income" as of January 1, 1998. This statement
establishes standards for reporting and display of
comprehensive income and its components. This statement
requires reporting, by major components and as a single
total, the change in net assets during the period from
nonshareholder sources. Adoption of this standard did not
materially impact the Company's consolidated financial
position, results of operations or cash flow. The
reconciliation of net income to comprehensive net income is
as follows:
3 Months Ended June 30, 6 Months Ended June 30,
In thousands of dollars 1998 1997 1998 1997
- -------------------------------------------------------------------------
Net income $45,908 $39,334 $79,822 $23,432
Foreign currency translation
adjustment 437 (309) 882 (520)
- -------------------------------------------------------------------------
Total comprehensive income $46,345 $39,025 $80,704 $22,912
=========================================================================
At June 30, 1998 and December 31, 1997, "Accumulated other
comprehensive income," as reflected in the Consolidated
Balance Sheets is comprised of the following:
June 30, December 31,
1998 1997
Foreign currency translation adjustment $1,318 $ 436
Minimum pension liability 2,982 2,982
- ------------------------------------------------------------------
Accumulated other comprehensive income $4,300 $3,418
==================================================================
Note 7: New Accounting Pronouncements
The Company will adopt the provisions of FAS 131, "
Disclosures about Segments of an Enterprise and Related
Information," effective December 31, 1998. This statement
establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about
its products, services, geographic areas and major
customers. Adoption of this statement will not impact the
Company's consolidated financial position, results of
operations or cash flows. In the initial year of
application, comparative information for earlier years will
be restated. The Company is currently evaluating the
disclosures that will be required by this statement.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5") which
requires that start-up costs be expensed as incurred. The
Company adopted the provisions of SOP 98-5 in the second
quarter of 1998. Accordingly, $1.8 million, net of
applicable income taxes of $.8 million of unamortized start-
up costs at December 31, 1997, has been expensed in the
accompanying Consolidated Statements of Income and is
reported as a cumulative effect of a change in accounting
principle. These start-up costs are primarily related to
product development costs associated with new business
ventures.
On June 17, 1998, the Financial Accounting Standards board
issued FAS 133, "Accounting for Derivative Instruments and
Hedging Activities ("FAS 133") effective for fiscal years
beginning after June 15, 1999. This statement standardizes
the accounting for derivatives and hedging activities and
requires that all derivatives be recognized in the statement
of financial position as either assets or liabilities at
fair value. Changes in the fair value of derivatives that
do not meet the hedge accounting criteria are to be reported
in earnings. Adoption of this standard is not expected to
have a material effect on the Company's financial position,
results of operations or cash flows.
Note 8: Cash Flows
For purposes of the Statements of Cash Flows, the Company
considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Actual interest paid was $35.0 million and $25.8 million
for the six month periods ended June 30, 1998 and June 30,
1997, respectively. Income taxes paid totaled $21.8 million
and $54.1 million for the periods ended June 30, 1998 and
June 30, 1997, respectively. Interest costs associated with
the construction of capital assets, including the national
fiber optic network, are capitalized. Total amounts
capitalized for the first six months of 1998 and 1997
totaled $8.9 million and $5.5 million, respectively.
Note 9: Commitments and Contingencies
In connection with the Company's capital program, certain
commitments have been made for the purchase of materials and
equipment . In October 1996, construction began on the
national fiber optic network. Total capital expenditures
for 1998 are currently projected to be in the range of
$590.0 million to $625.0 million. Through June 30, 1998,
cumulative capital expenditures relating to the national
fiber optic network totaled $350.0 million. At June 30,
1998 and December 31, 1997, respectively, $245.8 million and
$238.2 million of deposits for the network build are
included in the "Deferred and other assets" caption in the
Consolidated Balance Sheets.
Item 2 - Management's Discussion of Results of Operations
and Analysis of Financial Condition
For the Three and Six Months Ended June 30, 1998 and 1997
The matters discussed throughout this Form 10-Q, except
for historical financial results contained herein, may be
forward-looking in nature or "forward-looking statements."
Actual results may differ materially from the forecasts or
projections presented. Forward-looking statements are
identified by such words as "expects," "anticipates,"
"believes," "intends," "plans" and variations of such words
and similar expressions. The Company believes that its
primary risk factors include, but are not limited to:
changes in the overall economy, the nature and pace of
technological change, the number and size of competitors in
the Company's market, changes in law and regulatory policy
and the mix of products and services offered in the
Company's markets. Any forward-looking statements in this
June 30, 1998 Form 10-Q should be evaluated in light of
these important risk factors. For additional disclosure
regarding risk factors refer to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
DESCRIPTION OF BUSINESS
Frontier Corporation (the "Company" or "Frontier")
provides integrated telecommunications services to business,
carrier and targeted residential customers nationwide, in
Canada and the United Kingdom.
RESULTS OF OPERATIONS
Consolidated revenues for the second quarter of 1998 and
on a year-to-date basis were $648.3 million and $1.3 billion
respectively, representing increases of $58.2 million or
9.9% and $112.6 million or 9.6% for the three and six month
periods ended June 30, 1998. Excluding nonrecurring items,
operating income was $80.8 million for the three months
ended June 30, 1998 and $155.4 million for the six month
period ended June 30, 1998 as compared to $74.0 million and
$142.1 million for the three and six month periods ended
June 30, 1997. Operating results continue to be positively
impacted by revenue growth in several areas including
Carrier Services, data revenue and Competitive Local
Exchange Carrier ("CLEC") services. The most significant
growth continues to be generated by the Carrier Services
business. Carrier Services revenues grew $56.8 million or
56.5% over the second quarter of 1997, and $86.4 million or
41.0% over the first half of 1997. The Carrier Services
group growth reflects a growing base of customers such as
Level 3 Communications. The Company's agreement with Level
3 Communications provides Level 3 Communications additional
bandwidth for IP-based applications and is expected to
generate $165.0 million in incremental revenue for the
Company over the five year term of the agreement.
On a quarter-to-date and year-to-date basis, excluding
nonrecurring charges, consolidated operating margins were
consistent with 1997. Normalized for other charges, costs
and expenses grew $51.4 million or 10.0% for the quarter
ended period and $99.3 million or 9.7% for the year-to-date
period. Increased expenses were primarily caused by revenue
growth, a higher cost of access in our integrated services
segment associated with the interim overlap of leased and
owned facilities as the Company installs its national fiber
optic network and additional funding required for data and
CLEC initiatives. These increases are offset by
improvements in selling, general and administrative expenses
as a percent to revenue due to implementation of the
restructuring plans announced in the fourth quarter of 1997,
which resulted in the exiting of the prepaid business, the
phase down of the Integrated Services consumer base and a
refocusing of the Company's core product offerings.
Operating results for 1998 and 1997 were affected by
certain one-time events. In April 1998, the Company
completed the sale of Minnesota Southern Cellular Telephone
Company ("Minnesota RSA No. 10"), a wholly owned cellular
partnership, and certain other properties. The sale of
these properties resulted in a combined after-tax gain of
$2.5 million, or $.01 per share. The income tax effect on
the gain of $12.1 million is significantly impacted by the
sale of Minnesota RSA No. 10 which resulted in nondeductible
goodwill. In the first quarter of 1997, the Company also
completed the sale of its 69.5% equity interest in the South
Alabama Cellular Communications Partnership. The sale
resulted in an after-tax gain of $11.2 million or $.07 per
share. These cellular properties were not considered areas
of key strategic focus by the Company.
Results for the second quarter of 1998 also include the
adoption of Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities." ("SOP 98-5"). The cumulative
effect of adopting SOP 98-5 was an after-tax charge of $1.8
million, net of applicable income taxes of $.8 million or
$.01 per share. The charge is primarily attributed to
unamortized start-up costs related to the product
development costs associated with new business ventures.
During the first quarter of 1998, the Company acquired
GlobalCenter Inc., ("GlobalCenter") a leader in digital
distribution, Internet and data services and recorded a pre-
tax acquisition related charge of $6.5 million ($5.8 million
after-tax) associated with the transaction. These charges
include investment banker, legal fees and other direct
costs.
In March 1997, the Company recorded a $62.8 million
charge, net of a tax benefit of $33.8 million, primarily
related to the write-off of certain network costs no longer
required for long distance traffic volumes. As a result of
the decline in long distance traffic, an evaluation of the
existing network was performed and facilities deemed no
longer necessary to support the Company's revenue and
traffic levels were identified.
Excluding one-time events, diluted earnings per share for
the quarter ended June 30, 1998 and six months ended June
30, 1998 was $.26 and $.49, respectively, as compared to
$.23 and $.44 for the comparable 1997 periods. Consolidated
net income for the same quarter-to-date and year-to-date
periods was $45.2 million and $84.9 million in 1998 and
$39.3 million and $75.0 million in 1997.
Integrated Services
The Integrated Services segment provides domestic and
international voice, data products, video and audio
communications, digital distribution services, Internet
service and other communications products to primarily small
to mid-size business customers, carrier customers and
targeted consumer markets. Results for this segment also
include CLEC services, currently available in approximately
30 states, providing Frontier the ability to offer
integrated local and long distance telephone service to
approximately 70% of the United States.
Integrated Services revenue totaled $464.7 million in the
second quarter of 1998, an increase of $52.4 million or
12.7% as compared to the second quarter of 1997. On a year-
to-date basis, revenue totaled $914.2 million as compared to
$817.6 million in the same period in 1997. The increase in
revenue is attributed to a growing base of carrier
customers, CLEC services and data sales from Frontier
GlobalCenter. Revenue increases are being offset by the
sale of the prepaid business and de-emphasizing of consumer
segment programs.
During the second quarter of 1998, Carrier Services
revenue grew $56.8 million or 56.5% over the same prior year
period. On a year-to-date basis, Carrier Services revenue
grew $86.4 million or 41.0% over 1997 due to an increase in
the customer base and higher levels of usage. In March
1998, the Company entered into a significant fiber capacity
contract with Level 3 Communications valued at over $165.0
million over five years. This contract should begin to
yield revenue in the second half of 1998. As the national
fiber optic network is completed, the Company anticipates
further fiber capacity sales, swaps and exchanges.
Frontier provides local service as a CLEC on both a resale
and facility basis. The Company provides local services to
its customers when long distance services are also provided.
At the end of the first quarter of 1998, Frontier provided
local services in areas covering approximately 50% of the
business customers in the United States. Most of that
coverage was provided via resale of the incumbent local
exchange carriers. Within that footprint, CLEC service was
provided from Frontier's own switches in New York, Boston
and Minneapolis. During the second quarter of 1998,
Frontier expanded its coverage to approximately two-thirds
of the United States and turned up facilities based service
in Seattle, Denver, Atlanta and Chicago. The Company
anticipates providing facilities based service in thirteen
metro areas in the second half of 1998 and ten additional
cities during 1999. Facilities based service is being
offered in cities that are on the Company's national fiber
optic network, which will provide Frontier with the
opportunity to expand its offerings of combined local and
long distance services into additional markets and leverage
the national fiber optic network. As of June 30, 1998,
Frontier is serving in excess of 140,000 ANIs, or access
lines, predominantly through resale in markets where it is
not the incumbent local exchange carrier. At the end of the
first quarter of 1998, Frontier was serving in excess of
116,000 ANIs. Revenue growth was 106.6% and 98.4% for the
quarter ended and for the year ended June 30, 1998 as
compared to the same prior year periods.
Frontier GlobalCenter's revenue for the second quarter of
1998 was $10.4 million, an increase of $5.0 million, or
92.3% over the second quarter of 1997. On a year-to-date
basis, Frontier GlobalCenter's revenue was $18.9 million, an
increase of $9.3 million or 97.7% over the same period in
1997. Revenue growth continues to be driven by the digital
distribution product. Sales to new customers such as Ziff
Davis, the Washington Post, Newsweek, CNN/Sports
Illustrated, Lucas Films and Home Box Office as well as new
multi-year contracts from current customers, such as Yahoo!
and Electronic Arts, are driving digital distribution
revenue gains.
Cost of access represented 64.8% of total Integrated
Services revenue for the second quarter of 1998 as compared
to 61.5% for the same period in 1997. On a year-to-date
basis, cost of access represented 64.3% of total Integrated
Services revenue as compared to 62.9% for the same 1997
period. The higher cost of access percentage is driven by
an interim overlap of leased and owned facilities as the
Company installs its national fiber optic network, as well
as an increased mix of high volume carrier business.
Construction of the Company's national fiber optic network
is on schedule through the first half of 1998. However,
certain segment delays are anticipated in the Qwest
constructed portion of the Frontier network in the latter
half of 1998 that would move the expected completion date of
the national fiber optic network into the first half of
1999. The Company has further enhanced its national fiber
optic network by expanding geographic coverage. Through a
swap agreement with WTCI, Frontier will add 1,661 additional
route miles from Seattle to Denver. This agreement will
also provide the Company with a redundant SONET ring in the
northwest United States, which is expected to further
enhance the reliability and performance of the network. In
addition, in July 1998, Frontier entered into an agreement
with Williams Communications that will extend the national
fiber optic network into the southeast United States. In
aggregate, the Company's national fiber optic network will
have 16,000 route miles. As of June 30, 1998, approximately
66% of the network being built by Qwest is carrying traffic.
On July 31, 1998, the Company agreed to join as an initial
party in the development and construction of a trans-Pacific
fiber network from California to Japan made up of a number
of restorable optic segments.
Operating income for the second quarter of 1998 was $19.7
million, an increase of 24.2% over the second quarter of
1997. Operating margin as a percent of revenue for the
three months ended June 30, 1998, increased from 3.9% in the
second quarter of 1997 to 4.2% in the second quarter of
1998. On a year-to-date basis, excluding nonrecurring
items, operating income increased 37.7% to $35.9 million.
Operating margin as a percent of revenue increased from 3.2%
in the first half of 1997 to 3.9% for the current year. The
increase in operating margin is attributed to higher revenue
and continuing improvement in the cost structure resulting
from the implementation of its restructuring announced in
the fourth quarter of 1997.
Frontier anticipates that its operating margins will
strengthen throughout 1998 and 1999, particularly in 1999,
as the national fiber optic network is completed, as its
higher margin data sales grow as a percent of the revenue
mix and its cost structure continues to decrease as a
percent of revenue with a focused product mix.
Local Communications Services
Local Communications Services includes the Company's local
telephone operations, consisting of 34 telephone operating
subsidiaries in 13 states. Also included in this segment
are revenues and expenses of Frontier Communications of
Rochester Inc., a competitive telecommunications company
formed January 1, 1995 that provides an array of services on
a retail basis in the Rochester, New York marketplace.
Consequently, the Local Communications Services segment
includes both wholesale and retail local service provided in
the Rochester, New York market.
Revenues for Local Communications Services were $175.1
million in the three month period ended June 30, 1998, an
increase of $8.1 million or 4.9% over the comparable period
in 1997. For the six month period ended June 30, 1998,
revenues were $348.2 million, an increase of $17.9 million
or 5.4% over the comparable period in 1997. Access lines
increased 2.7% over the prior year to 1,013,000 and access
minutes of use increased 3.3% over the same prior year
period. On a year-to-date basis, minutes of use increased
2.9% over the comparable 1997 period. Revenue growth during
the first half of 1998 is also influenced by an increased
demand for Internet services.
Costs and expenses in the second quarter of 1998 for Local
Communications Services were $110.0 million, an increase of
$3.0 million or 2.8% over the second quarter of 1997. Costs
and expenses for the first half of 1998 were $219.5 million,
representing an increase of $8.8 million or 4.2% over the
same period in 1997. The increase in costs and expenses is
primarily attributed to increased depreciation expense,
higher operating costs for repair and maintenance in 1998
and an increase in customer service costs due to access line
growth. A portion of the repair and maintenance increase
was caused by severe flooding and ice storms during the
first half of 1998.
Operating income was $65.1 million and $128.7 million for
the three and six month periods ended June 30, 1998,
respectively, representing increases of $5.2 million or
8.6%, and $9.0 million or 7.6% over the comparable three and
six month periods in the prior year. Operating margins for
the three months ended June 30, 1998 improved to 37.2% as
compared to 35.9% in 1997. On a year-to-date basis,
operating margins improved from 36.2% in 1997 to 37.0% in
1998. The favorable trend in operating margins reflects
continuing improvements in operating efficiencies.
Corporate Operations and Other
Corporate Operations is comprised of 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 Frontier Network Systems Corp. ("FNSC").
FNSC markets and installs telecommunications systems and
equipment. This segment also includes wireless operations
from Minnesota RSA No. 10 and the Company's 69.5% interest
in Alabama RSAs No. 4 and No. 6. The sale of Minnesota RSA
No. 10 was finalized April 30, 1998. The Alabama interest
was sold in January 1997.
The Company completed its purchase of R.G. Data
Incorporated (renamed "Frontier Network Systems Corp." or
"FNSC") in February 1997. R.G. Data Incorporated was a
privately held, upstate New York based computer and data
networking equipment and services company.
The change in results for this segment on both a quarter-
to-date and year-to-date basis, are influenced by the sale
of the Company's wireless properties and the addition of
Frontier Network Systems Corporation in 1997.
Other Income Statement Items
Interest Expense
Interest expense was $12.6 million and $26.0 million in
the three and six month periods ending June 30, 1998,
representing increases of $.8 million and $3.6 million,
respectively over the same periods in 1997. The overall
increase in interest expense is the result of higher levels
of debt outstanding and is partially offset by an increase
in capitalized interest of $2.2 and $3.4 million,
respectively during the same periods. The increase in
capitalized interest and levels of debt outstanding is
primarily attributable to the Company's capital program
driven by the national fiber optic network build.
Gain on Sale of Assets
In April 1998, the Company completed the sale of
Minnesota RSA No. 10 and certain other properties, which
resulted in an after-tax gain of $2.5 million, or $.01 per
share. On January 31, 1997, the Company completed the sale
of its 69.5% equity interest in the South Alabama Cellular
Communications Partnership. The sale resulted in an after-
tax gain of $11.2 million, or $.07 per share. The Company
decided to redeploy resources into more strategic assets as
the assets sold were not critical to the achievement of the
Company's overall business strategy.
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 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 were $6.6 million and $4.3 million for the six
month periods ended June 30, 1998 and 1997, respectively.
The increase in equity earnings is attributable to continued
operating efficiencies as well as an increase in the number
of customers to approximately 347,000 as compared to 296,000
for the same period in 1997.
Income Taxes
The effective income tax rate (normalized for nonrecurring
items) of 39.5% for the quarter ended June 30, 1998 and on a
year-to-date basis are relatively consistent with the same
periods in 1997. The effective income tax rates reported
are impacted by the sale of Minnesota RSA No. 10 in the
second quarter of 1998 which resulted in nondeductible
goodwill, the sale of South Alabama Cellular in the first
quarter of 1997 and acquisition related charges associated
with the GlobalCenter transaction in the first quarter of
1998.
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, and not in place
of, cash flow from operating activities. The Company's
EBITDA was $264.6 million and $243.7 million, excluding
nonrecurring charges, for the six month periods ending June
30, 1998 and 1997, respectively. The increase in EBITDA
corresponds with the improved operating results of the
Company.
Cash provided from operations for the six months ending
June 30, 1998 increased $155.8 million to $220.3 million as
a result of improved operating results as compared to the
same period in the prior year. Changes in working capital
projects include an increase in accounts receivable,
accounts payable and taxes accrued and other liabilities,
partially offset by a decrease in deferred income taxes.
These increases are primarily driven by the growth of the
business.
Cash used for investing activities increased $105.9
million or 95.1%. This increase is being driven by an
increase in cash expended for capital during the first six
months of 1998 of $111.0 million or 75.2%, principally due
to the national fiber optic network build. Cash utilized
for capital expenditures was partially funded by the
proceeds received from the sale of Minnesota RSA No. 10 in
the second quarter of 1998 and the sale of the Company's
equity interest in the South Alabama Cellular Communications
partnership in the first quarter of 1997.
Cash provided from financing activities increased $14.6
million or 44.2% during the first six months of 1998 as
compared to the same period in 1997. This net inflow of
cash is the result of increased commercial paper borrowings
during the period which were driven by the Company's capital
program as well as a refinancing of GlobalCenter debt
subsequent to the acquisition of GlobalCenter in the first
quarter of 1998.
Debt
The Company's total debt amounted to $1,027.4 million at
June 30, 1998, an increase of $82.8 million from December
31, 1997. This higher debt level is driven by the Company's
capital program, including the national fiber optic network
as well as the temporary restriction on dividend payments
from the Company's subsidiary, Frontier Telephone of
Rochester, Inc. ("FTR") as discussed on page 21.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percentage of
total capitalization) was 50.8% at June 30, 1998, as
compared with 49.2% at December 31, 1997. Pre-tax interest
coverage, excluding nonrecurring charges, was 4.8 times for
the six months ended June 30, 1998, as compared with 6.0
times for the same period in 1997.
Capital Spending
Through June 1998, gross capital expenditures amounted to
approximately $219.1 million, as compared to $150.5 million
in the prior year. The Company currently projects its
capital expenditures to be in the range of $590.0 million to
$625.0 million in 1998. Through June 1998, cumulative
capital expenditures relating to the national network
totaled $350.0 million. The Company anticipates financing
its capital program through a combination of internally
generated cash from operations and external financing.
Year 2000 Issues
The Company's Year 2000 ("Year 2K") project is intended
to address potential processing errors in computer programs
that use two digits (rather than four) to define the
applicable year.
Frontier has developed plans to assess and remediate key
internally-developed computer systems so they will be Year
2K compliant in advance of December 31, 1999. The plan
encompasses all operating properties as well as corporate
headquarters. It also includes both IT and non-IT
compliance. The plans cover the review, and either
revision, or replacement, where necessary, of the Company's
computer applications, telecommunications networks and
building facility equipment that directly connect the
Company's business with customers, suppliers and service
providers. Implementation of the plan began in 1996 and the
Company believes that a majority of its internally-developed
IT systems are now compliant. Assessment and remediation is
expected to be substantially complete by year end 1998,
leaving 1999 for system testing, carrier interoperability
testing and resolution of identified issues should they
arise. These plans involve capital expenditures for new
software and hardware, as well as costs to modify existing
software.
Costs of addressing potential Year 2K problems are not
considered material to the Company's financial condition,
results of operations or cash flows and, to date, have been
consistent with planned expenditures. However, if the
Company or its vendors are unable to resolve such processing
issues in a timely manner, it could pose risks to the
Company's business that could be material. Accordingly, the
Company has devoted resources to resolve all significant
identified Year 2K issues in a timely manner, and plans to
make information available to customers and others related
to its Year 2K activities. In addition, the Company is
engaged in communications with third party equipment and
software vendors and suppliers of services to verify their
Year 2K readiness, and it plans to engage in internetwork
testing with other carriers in early 1999. Since the
Company's own fiber optic network is expected to be
substantially fully deployed well before December 31, 1999,
the Company anticipates that the impact of other carriers
who may experience business interruptions would be lessened,
and is not currently expected to have any material adverse
impacts on the Company. Contingency plans (if necessary)
will be developed for critical systems if conversion or
replacement projects fall behind schedule or if internetwork
testing should identify significant risk issues.
Dividends
On June 15, 1998, the Board of Directors declared the
second quarter 1998 dividend of 22.25 cents per share on the
Company's common stock, payable August 3, 1998 to
shareholders of record on July 15, 1998.
New Accounting Pronouncements
The Company will adopt the provisions of Financial
Accounting Standards Board Statement No. 131, " Disclosures
about Segments of an Enterprise and Related Information,"
effective December 31, 1998. This statement establishes
annual and interim reporting standards for an enterprise's
business segments and related disclosures about its
products, services, geographic areas and major customers.
Adoption of this statement will not impact the Company's
consolidated financial position, results of operations or
cash flows. In the initial year of application, comparative
information for earlier years will be restated. The Company
is currently evaluating the disclosures that will be
required by this statement.
On June 17, 1998, the Financial Accounting Standards board
issued FAS 133, "Accounting for Derivative Instruments and
Hedging Activities ("FAS 133") effective for fiscal years
beginning after June 15, 1999. This statement standardizes
the accounting for derivatives and hedging activities and
requires that all derivatives be recognized in the statement
of financial position as either assets or liabilities at
fair value. Changes in the fair value of derivatives that
do not meet the hedge accounting criteria are to be reported
in earnings. Adoption of this standard is not expected to
have a material effect on the Company's financial position,
results of operations or cash flows.
OTHER ITEMS
Open Market Plan
The Company began its fourth year of operations under the
Open Market Plan in January 1998. The Open Market Plan
promotes telecommunications competition in the Rochester,
New York marketplace 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, (4)
service provider telephone number portability, and (5)
certain wholesale discounts to resellers of local services.
The inherent risk associated with opening the Rochester
market to competition is that some customers are able to
purchase services from competitors, which may reduce the
number of retail customers and potentially cause a decrease
in the revenues and profitability for the Company.
Increased competition may also lead to additional price
decreases for services, adversely impacting the Company's
margins. However, results since implementation of the Open
Market Plan indicate that a stimulation of demand in the use
of the network and new product revenue may offset the losses
of some retail customers. An additional positive feature of
the Open Market Plan provides that the Company can retain
additional earnings achieved through operating efficiencies.
Previously, these earnings would have been shared with
customers. After three years of operating in a competitive
marketplace, the Rochester local exchange carrier retains a
market share of approximately 98% of wholesale and
approximately 95% of retail local service access lines in
the Rochester, New York operating territory.
During the seven year period of the Open Market Plan, rate
reductions of $21.0 million (the "Rate Stabilization Plan")
will be implemented for Rochester area consumers, including
$15.0 million of which occurred through 1997, and an
additional $1.5 million which commenced in January 1998.
Rates charged for basic residential and business telephone
service may not be increased during the seven year period of
the Plan. FTR is allowed to raise prices on certain enhanced
products such as caller ID and call forwarding.
The NYSPSC has issued a Notice Inviting Comments in which
it has proposed to make further changes in pricing under the
Open Market Plan. These pricing changes would reduce some
prices to competitors for network elements and other
offerings, but would also reduce the amount paid by FTR for
reciprocal compensation. The issues being addressed by the
NYSPSC have been under consideration since 1995. The Company
cannot predict the ultimate impact of any NYSPSC action in
this proceeding, although it is not expected to be material.
Management believes there are significant market and
business opportunities associated with the Company's Open
Market Plan. However, there are also uncertainties
associated with the Open Market Plan. In the Company's
opinion, the most significant risks relate to increased
competition in the Rochester, New York market and the risk
inherent in the Rate Stabilization Plan.
There can be no assurance that the changing regulatory
environment will not have a negative impact on the Company.
Dividend Policy
The Open Market Plan prohibits the payment of dividends by
the Company's subsidiary, FTR, to Frontier if (i) FTR's
senior debt is downgraded to "BBB" by Standard & Poor's
("S&P"), or the equivalent rating by other rating agencies,
or is placed on credit watch for such a downgrade, or (ii) a
service quality penalty is imposed under the Open Market
Plan. Dividend payments to Frontier also require the
Company's directors to certify that such dividends will not
impair FTR's service quality or its ability to finance its
short and long-term capital needs on reasonable terms while
maintaining an S&P debt rating target of "A".
In 1996, FTR failed to achieve the service quality levels
required by the Open Market Plan. On December 19, 1996,
pursuant to the Open Market Plan, FTR requested the New York
State Public Service Commission ("NYSPSC") staff to exclude
certain months from the calculation used to measure service
quality, due to operating conditions considered by
management to be abnormal and beyond FTR's control. In
April 1997, FTR received notice from the NYSPSC that its
request for a waiver of certain conditions in the Open
Market Plan related to service quality results was denied.
The NYSPSC's ruling has resulted in a temporary restriction
on the flow of cash dividends from FTR to Frontier and a
refund to FTR's customers of $.9 million. Reserves
sufficient to cover the refund were established in 1996. On
October 22, 1997, the NYSPSC adopted an order requiring FTR
to issue refunds of approximately $2.60 per customer. These
refunds have been completed.
The temporary restriction of dividend payments to Frontier
will remain in place until the NYSPSC is satisfied that FTR's
1997 and 1998 service levels demonstrate that FTR has
rectified the service deficiency. The NYSPSC is currently
examining service level data for the period 1993-1998 and may
reopen the calculation of service levels for one or more of
the prior years to determine whether additional regulatory
action is appropriate. Weather and other events have
adversely impacted service levels in recent months. Based on
the level of customer complaints to the NYSPSC in 1996 and
1997, FTR will be required to refund approximately $150,000
in 1998. The NYSPSC has authority to determine that
additional amounts will have to be refunded with respect to
1997, up to an additional $1.0 million, including the
$150,000 previously discussed. FTR's service results for the
remainder of 1998 will determine whether a refund will be
required with respect to 1998. The Company has established reserves
with respect to these refund issues at a level it considers
reasonable.
Part II - Other Information
Item 1. Legal Proceedings
On June 11, 1992, a group of corporate plaintiffs
consisting of Cooper Industries, Inc.; Keystone Consolidated
Industries, Inc.; The Monarch Machine Tool Company; Niagara
Mohawk Corporation and Overhead Door Corporation commenced
an action in the United States District Court for the
Northern District of New York seeking contribution from
fifteen corporate defendants, including Rotelcom Inc., a
wholly-owned subsidiary of the registrant held through
intervening subsidiaries (now named Frontier Network Systems
Corp. or FNSC). The plaintiffs seek environmental "response
costs incurred by the plaintiffs pursuant to a consent
decree entered into by plaintiffs with the United States
Environmental Protection Agency (the "EPA"). Two additional
defendants were named in 1994. In addition to FNS, the
current defendants are: Agway, Inc.; BMC Industries, Inc.;
Borg-Warner Corporation; Elf Atochem North America, Inc.;
Mack Trucks, Inc.; Motor Transportation Services, Inc.; Pall
Trinity Micro Corporation; The Raymond Corporation;
Redding-Hunter, Inc.; Smith Corona Corporation; Sola Basic
Industries, Inc.; Wilson Sporting Goods Company; Phillip A.
Rosen; Harvey M. Rosen; City of Cortland and New York State
Electric & Gas Corporation.
The consent decree concerned the clean-up of an
environmental Superfund site located in Cortland, New York.
It is alleged that the corporate defendants disposed of
hazardous substances at the site and are therefore liable
under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"). On November 21, 1997, the EPA
issued a Proposed Remedial Action Plan" ("PRAP"). In the
PRAP, the EPA outlined four alternative plans for
remediating the site. The Company is presently evaluating
the PRAP and will be consulting with the other defendants
about a joint response to plaintiffs. There has been no
allocation of liability as among or between the plaintiffs
or defendants. The extent to which plaintiffs can recover
any of these costs from the defendants, including FNSC, will
be determined at trial or through negotiation among the
parties.
Since February 1994, a significant number of former
American Sharecom, Inc. ("ASI") shareholders have filed and
amended several and various complaints in Hennepin County
(Minnesota) District Court. Included among the defendants
are ASI, its former principal shareowners, Steven Simon and
James Weinert, and Frontier. These 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 toward one another and refrain
from misappropriation. Another action by a few former ASI
shareholders who dissented from the cashout merger that
finally took ASI private is pending in federal court in
Minnesota. The federal lawsuit asserts RICO claims in
addition to state common law and statutory violations. The
claims against Frontier maintain only that Frontier controls
the disposition of the restricted Frontier stock which was
issued to Simon and Weinert in connection with the
acquisition of ASI and that such stock should be held in
trust for the benefit of the plaintiffs. At this time Simon
and Weinert have negotiated settlements with the majority of
former ASI shareholders who had asserted claims.
Although it is too early to determine the outcome of the
remaining suits that have not settled, Frontier, ASI and the
other defendants each are contesting the claims. In
connection with the acquisition of ASI by Frontier, Simon
and Weinert agreed to indemnify and defend the Company for
these claims.
On April 10, 1997, Jeff Thompson filed a purported class
action on behalf of himself and all other similarly-situated
persons in Circuit Court for Marengo County Alabama. Named
as defendants are Frontier Corporation, Frontier Subsidiary
Telco, Inc. and Frontier Communications of the South, Inc.
("defendants"). The complaint also reserves the right to
add additional defendants and identifies all of Frontier's
telephone subsidiaries. Concomitant with filing the
complaint, plaintiff also filed an ex parte motion for
conditional class certification which the Court granted. It
conditionally certified a class consisting of "All persons
or entities in the United States who have been charged by
defendants or their subsidiaries or affiliates a fee for
`inside wire maintenance' without having given their
affirmative acceptance to a repair service contract;
specifically excluded from this class, however, are all
employees, agents, officers, directors and affiliates of any
of the Defendants and all persons or entities who have
pending and/or previously filed individual (non-class)
lawsuits against any of the defendants for the same claims
set forth in the Complaint." On January 30, 1998, the
Supreme Court of Alabama issued a writ of mandamus to the
trial court ordering it to vacate its conditional class
certification.
In the complaint, plaintiff alleges that the Company
improperly marketed and sold deregulated inside wire
maintenance services to defendant's telephone subscribers
pursuant to a "negative option" or "default sale" approach
from January 1, 1987 to the present. Plaintiff alleges that
the defendants have never had enforceable contracts with
their customers for inside wire maintenance services, and
have defrauded their customers. Plaintiff requests a refund
of all moneys paid for inside wire maintenance services.
This case is similar to a number of cases filed against
other carriers with local telephone properties.
The Company believes that the inside wire programs in place
in its telephone properties have been implemented in
accordance with the law and any applicable regulatory
requirements. The liability, if any, is not expected to be
material. The Company is vigorously defending against this
suit, but cannot predict the outcome at this time.
The Open Market Plan discussion in the Management's
Discussion and Analysis of Financial Condition and Results
of Operations, 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 29,
1998 for the purpose of electing a board of directors and
approving the ratification of auditors.
All of management's nominees for directors as listed in
the proxy statement were elected with the following vote:
Numbers of Shares/Votes
Name For Authority Withheld
- -------------------------------------------------------------------
Patricia C. Barron 148,482,206 956,145
Joseph P. Clayton 148,537,892 900,459
Raul E. Cesan 148,516,283 922,068
Brenda E. Edgerton 148,514,544 923,807
Jairo A. Estrada 148,526,097 912,254
Michael E. Faherty 148,538,292 900,059
Alan C. Hasselwander 147,614,843 1,823,508
Robert Holland, Jr. 148,473,370 964,981
Douglas H. McCorkindale 148,486,736 951,615
Dr. Leo J. Thomas 148,526,707 911,644
The ratification of Price Waterhouse LLP as Public
Accountant for the fiscal year 1998 was approved with the
following vote:
For 148,676,756
Against 248,999
Abstain 482,594
Broker non-votes 1
Item 5. Other Information
On October 9, 1997, the FCC ordered carriers that receive
"dial around" calls from payphones (certain calls sent
without coins as 800 or other calls, with special access
codes) to compensate payphone owners at the rate of 28.4
cents per completed call.
The per-call compensation rate became effective on October
7, 1997. The FCC has yet to determine how to address the
payphone compensation obligation for the period from
November 7, 1996 through October 6, 1997. The Company
intends to pursue challenges to the FCC order with other
carriers. On July 15, 1998, an administrative complaint was
filed by Bell Atlantic seeking $3.2 million in compensation
for use of its payphones since October 7, 1997. The filing
of the complaint has had no effect upon the position of the
Company with respect to payphone compensation. The Company
cannot predict the outcome of future proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) See Index to Exhibits for exhibits required by
Item 601 of Regulation S-K.
The Company hereby agrees to furnish the Securities and
Exchange Commission a copy of each of the indentures or
other instruments defining the rights of security holders of
the long-term debt securities of the Company and any of its
subsidiaries for which consolidated or unconsolidated
financial statements are required to be filed.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K
during the quarter ended June 30, 1998.
SEC Filing Date Item No. Financial Statements
-------------------------------------------------------------
June 17, 1998 5 Restated Consolidated Financial
Statements at December 31, 1997,
1996 and 1995 to reflect the
combined financial position and
results of operations resulting from
pooling of interests merger with
GlobalCenter Inc.
No reports on Form 8-K were filed subsequent to the
quarter ended June 30, 1998.
<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, 1998 /s/ Rolla P. Huff
By: --------------------------
Rolla P. Huff
Executive Vice President and
Chief Financial Officer
(principal financial officer)
<PAGE>
<PAGE>
FRONTIER CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Description Reference
- ----------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation Incorporated by reference to
dated January 24, 1995 Exhibit 3.1 to Form 10-K
for the year ended
December 31, 1995
3.2 Amendment to Restated Certificate Incorporated by reference to
of Incorporation dated April 9, 1995 Exhibit 3.2 to Form 10-K
for the year ended
December 31, 1995
3.3 By-laws Incorporated by reference to
Exhibit 3.3 to Form 10-Q
for the quarter ended
March 31, 1998
4.1 Indenture between the Company and Incorporated by reference to
Manufacturers Hanover Trust Company, Exhibit 4.12 to Form 10-K
Trustee, dated September 1, 1986 for the year ended
December 31, 1986
4.2 First Supplemental Indenture to said Incorporated by reference to
Indenture with Manufacturers Hanover Exhibit 4(b) to Registration
Trust Company, Trustee, dated Statement 33-32035
December 1, 1989
4.3 10.46% Non-Negotiable Convertible Incorporated by reference to
Debenture due October 27, 2008 from Exhibit 4.14 to Form 10-K
the Company to The Walters Trust for the year ended
December 31, 1988
4.4 9% Debenture due August 15, 2021 Incorporated by reference to
Exhibit 4.16 to Form 10-K
for the year ended
December 31, 1991
4.5 $250M Revolving Credit Agreement Incorporated by reference to
between the Company and Chase Exhibit 4.5 to Form 10-K
Manhattan Bank, N.A. dated August 9, for the year ended
1995. December 31, 1995
4.6 Indenture between the Company and Incorporated by reference to
Chase Manhattan Bank, N.A., Trustee, Exhibit 4.1 to Form 8-K
dated 5/21/97, $300M 7.25% Notes due dated May 23, 1997.
May 15, 2004.
4.7 Supplemental Indenture between the Incorporated by reference to
Company and Chase Manhattan Bank, Exhibit 4.7 to Form 10-K
N.A. as Trustee, dated December 8, 1997, for the year ended
$100M 6.25% Notes due December 15, December 31, 1997.
2009.
11 Statement re: Computation of Diluted Filed herewith
Earnings Per Common Share (Unaudited)
27 Financial Data Schedule Filed herewith
<PAGE>
<TABLE>
Exhibit 11
Frontier Corporation
Computation of Diluted Earnings Per Common Share
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands of dollars, except per share data 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Income Applicable to Common Stock $ 45,656 $ 39,077 $ 79,319 $ 22,921
Interest expense on convertible debentures, net
of tax 90 90 180 180
- -----------------------------------------------------------------------------------------
Diluted Income Applicable to Common Stock $ 45,746 $ 39,167 $ 79,499 $ 23,101
=========================================================================================
Weighted Average Shares Outstanding (Basic) 170,390 168,461 170,230 168,422
Stock options and warrants 3,200 457 2,716 263
Convertible debentures 503 503 503 503
- -----------------------------------------------------------------------------------------
Weighted Average Shares Outstanding (Diluted) 174,093 169,421 173,449 169,188
=========================================================================================
Diluted Earnings Per Common Share $ .26 $ .23 $ .46 $ .14
=========================================================================================
</TABLE>
<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, 1998 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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 76,935
<SECURITIES> 0
<RECEIVABLES> 461,818
<ALLOWANCES> 28,554
<INVENTORY> 13,622
<CURRENT-ASSETS> 586,474
<PP&E> 2,666,241
<DEPRECIATION> 1,459,272
<TOTAL-ASSETS> 2,718,009
<CURRENT-LIABILITIES> 570,973
<BONDS> 1,020,956
0
20,126
<COMMON> 171,367
<OTHER-SE> 802,374
<TOTAL-LIABILITY-AND-EQUITY> 2,718,009
<SALES> 0
<TOTAL-REVENUES> 1,280,314
<CGS> 40,464
<TOTAL-COSTS> 1,131,465
<OTHER-EXPENSES> (1,894)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,989
<INCOME-PRETAX> 148,330
<INCOME-TAX> 66,753
<INCOME-CONTINUING> 81,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,755
<NET-INCOME> 79,822
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
