<PAGE>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 17, 1998
FRONTIER CORPORATION
(Exact name of registrant as specified in its charter)
New York 1-4166 16-0613330
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
180 South Clinton Avenue, Rochester, New York 14646
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 777-1000
Item 5 Other Events
- - ------ ------------
Frontier Corporation (the "Registrant") has restated its
Management's Discussion of Results of Operations and Analysis of
Financial Condition and its Consolidated Financial Statements at
December 31, 1997, 1996 and 1995 and for the years then ended in
order to reflect the combined financial position and results of
operations resulting from the registrant's pooling of interests
merger with GlobalCenter Inc., effective February 27, 1998.
Such financial information is attached hereto as Exhibit 99
and incorporated herein by reference.
<PAGE>
<PAGE>2
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 of the undersigned hereunto duly
authorized.
Frontier Corporation
(Registrant)
/s/ James G. Dole
Dated: June 17, 1998 By: ----------------------------
James G. Dole
Senior Vice President and
Controller
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<PAGE> 3
EXHIBIT INDEX
Exhibit Number Description
- - -------------- ------------------
23-1 Consent of Accountants Filed herewith
(Price Waterhouse)
23-2 Consent of Accountants Filed herewith
(Ernst & Young)
27 Financial Data Schedule Filed herewith
99 Financial Information Filed herewith
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectus constituting part of the Registration Statements on
Forms S-3 (File Nos. 33-64307 and 333-23229), Form S-4 (File No.
33-91250) and in the Registration Statements on Forms S-8 (File
Nos. 33-67430, 33-54511, 33-67432, 33-54519, 33-67324, 33-51331,
33-51885, 33-52025, 33-59579, 33-61855, 333-04803, 333-48755 and
333-49657) of Frontier Corporation of our report dated January 26,
1998, except as to the pooling of interests with GlobalCenter,
Inc. which is as of February 27, 1998, appearing on page 19 of the
Form 8-K of Frontier Corporation dated June 17, 1998.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Rochester, New York
June 17, 1998
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
We consent to the reference to our firm under the caption "Experts"
and to the incorporation by reference in the Registration Statement
on Form S-3 (File Nos. 33-64307 and 333-23229) and the related
Prospectus of Frontier Corporation and to the incorporation by
reference in the Prospectuses constituting part of the Registration
Statement on Form S-4, as amended (File No. 33-91250) and in the
Registration Statements on Form S-8 (File Nos. 33-67430, 33-67432,
33-67324, 33-51331, 33-51885, 33-52025, 33-54511, 33-54519, 33-59579,
33-61855, 333-48755 and 333-49657 and 333-04803) of Frontier Corporation
of our reports dated January 17, 1996 with respect to the consolidated
financial statements and financial statement schedule II of ALC
Communications Corporation and subsidiaries which reports are included
in the Current Report on Form 8-K of Frontier Corporation to be filed
with the Securities and Exchange Commission on June 17, 1998.
/s/ Ernst & Young LLP
Ernst & Young LLP
Detroit, Michigan
June 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000084567
<NAME> FRONTIER CORPORATION
<MULTIPLIER> 1,000
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,302
<SECURITIES> 0
<RECEIVABLES> 405,424
<ALLOWANCES> 25,100
<INVENTORY> 12,312
<CURRENT-ASSETS> 490,305
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20,126
<COMMON> 170,503
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<TOTAL-LIABILITY-AND-EQUITY> 2,501,517
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<PAGE>
Management's Discussion of Results of Operations and
Analysis of Financial Condition
The information presented in this Management's Discussion of
Results of Operations and Analysis of Financial Condition
should be read in conjunction with the consolidated
financial statements and accompanying notes of Frontier
Corporation (the "Company" or "Frontier") for the three
years ended December 31, 1997. The matters discussed
throughout this annual report, 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 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 Frontier's markets,
changes in law and regulatory policy, and the mix of
products and services offered in the Company's markets. Any
forward-looking statements in the 1997 annual report 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 the Business
Frontier Corporation provides integrated communications
services to business, carrier and targeted residential
customers nationwide, in Canada and the United Kingdom.
Following is a description of the Company's principal lines
of business:
Long Distance Communications Services
Through its Long Distance Communications Services segment,
the Company is the nation's fifth largest long distance
company. This segment provides domestic and international
voice, data and video communications, digital distribution
services and Internet service to primarily small to mid-size
business customers, carrier customers and targeted consumer
markets. Results for this segment also include competitive
local exchange carrier ("CLEC") services, currently
available in 15 states, providing Frontier with the ability
to offer integrated local and long distance telephone
service to approximately 40% of the United States
population.
Local Communications Services
The Company's Local Communications Services operation is
the eleventh largest local exchange service provider in the
United States. This segment consists of 34 regulated
telephone operating subsidiaries in 13 states, serving
approximately one million access lines. The Rochester, New
York local communications subsidiary, now called Frontier
Telephone of Rochester, Inc., led the telecommunications
industry by being the first to open its local market to
competition in 1995 under the Open Market Plan. 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.
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 ("FNS").
FNS 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 RSA No. 4 and No. 6. The Alabama interest was
sold in January 1997.
Telecommunications Law
The Telecommunications Act of 1996 was enacted on February
8, 1996. This landmark legislation significantly modified
the Communications Act of 1934 and established a framework
for increased competition in the local and long distance
segments of the Company's business. The Company views this
legislation as favorable to its operations because Frontier
has been able to enter new markets to provide local service
as a CLEC, as well as derive other benefits from the
elimination of barriers to competition. In addition to its
established local telephone and long distance base, Frontier
companies have been authorized to provide competitive local
services in 21 states as of December 31, 1997. The
Telecommunications Act incorporated many aspects of the Open
Market Plan initiated by the Company in Rochester, New York
in 1993 and implemented in 1995. The Company believes its
experience in providing integrated services and its
experience with the Rochester, New York Open Market Plan
provides it with a competitive advantage.
On August 8, 1996, the Federal Communications Commission
("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 First Report and Order
established guidelines to promote local competition
affecting the Company and all other competitors in local
telecommunications markets. On July 18, 1997, the U.S.
Circuit Court of Appeals for the Eighth Circuit reversed
portions of the First Report and Order that provided for
pricing based primarily on forward-looking, rather than
historical costs, which would have provided the FCC with
substantially more authority over the compliance by local
telephone companies with provisions of the
Telecommunications Act. On January 22, 1998, the same court
issued a mandate compelling adherence to the decision. The
FCC and court decisions are subject to reconsideration and
to further appellate review. On January 23, 1998, the U.S.
Supreme Court agreed to review this case. The case will be
heard in late 1998 or early 1999.
The Act also requires the FCC to restructure the manner in
which universal service support payments are established and
distributed. On May 7, 1997, the Commission substantially
adopted the recommendation of a Federal-State Joint Board
released on November 8, 1996 with respect to universal
service. The FCC's order increased the amount of support to
be dedicated to universal service programs. The Commission
has released numerous subsequent orders that have modified
its original decisions, including one which slightly reduced
the amount of support to be collected in 1998. These
actions are subject to reconsideration and appeal. On May
16, 1997, the Commission adopted an order that substantially
modified the structure by which local exchange carriers are
compensated for access to and use of their networks. This
order was implemented effective January 1, 1998. In
general, this order encouraged the recovery of some costs
that had previously been recovered in usage-based charges to
be recovered in fixed charges. Competitors have reacted in
different and widely varying ways to this order. The
Company believes that its response is competitive and that
it was not disadvantaged by the order. Both of these orders
are subject to the possibility of Commission modification in
light of market impacts and is pending judicial review
proceedings.
On October 9, 1997, the FCC ordered carriers that receive
"dial around" calls from payphones (certain calls sent
without coins, such 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 retroactive to October 7, 1997. The
FCC is still considering how it will address the payphone
operator compensation issue for a preceding eleven month
period. The Company intends to pursue challenges to the FCC
order with other selected carriers. However, the Company
has also taken action to assess a surcharge to recover the
amount of the compensation ordered and related costs. This
is consistent with the action taken by most other long
distance providers that handle similar calls through
payphones. The Company cannot predict the ultimate outcome
of any of these proceedings.
On December 31, 1997, a judge in the United States
District Court for the Northern District of Texas issued an
opinion that found certain sections of the
Telecommunications Act that imposed conditions on entry by
some of the Bell Operating Companies into certain lines of
business, including the long distance business, to be
unconstitutional. A number of additional parties have asked
the Court to stay its decision pending further judicial
review. On February 12, 1998, the court granted a stay of
the December 31, 1997 ruling until an appeal is heard. The
court's original decision, if upheld, will likely have
significant impact on the domestic long distance business.
However, the Company has evaluated issues related to the
Bell Operating Companies' provision of long distance
services, and believes that it is well-positioned to offer
services to, as well as compete against them in the
Company's target markets.
Competitive Response To Changes in Telecommunications Law
Since the enactment of the Telecommunications Act of 1996,
a number of fundamental changes in the business have
occurred. During 1996 and 1997, many companies in the
industry announced or completed corporate consolidations or
other acquisitions, partnerships or organizational
transactions. As a result, a number of these competitors
may be larger in size and may possess financial resources
substantially greater than Frontier's. This trend toward
consolidation is expected to continue. There is ongoing
regulatory activity at both the federal and state levels to
implement the Telecommunications Act, and to put in place
mechanisms to govern and to deal with new business
relationships. These activities include governmental
efforts designed to open new areas of the radio spectrum and
to permit technological development of new services and
improvements in established services. Many of these
decisions are now in the process of judicial review.
As new technological and business opportunities emerge,
the pace of innovation and business activity will likely
accelerate. New business relationships are developing and
this can be expected to continue. These relationships are
partially the result of provisions in the law that require
new forms of pricing agreements between facilities based
carriers and resellers, new interconnection agreements, and
arrangements that replace long-standing tariff filing
mechanisms. Many interconnection and resale agreements have
been entered into between incumbent local exchange carriers
and other firms. However, in the regions served by the Bell
Operating Companies, there continue to be large segments of
customers who cannot obtain basic local services from
competitors of the incumbent Bell Operating Company . The
new law promotes broader competition among incumbent
companies in traditional telecommunications lines of
business and across such lines of business. While such
competition is growing, the local telephone market has not
yet achieved the level of competition anticipated at the
time of the enactment of the Telecommunications Act.
Frontier anticipated that public policy would continue to
evolve in favor of greater competition. As a result, the
Company has been positioning itself to confront a
marketplace with numerous new competitors in each of its
targeted business segments requiring the development of
sales, marketing, new products, provisioning, customer
service, billing and information technology capabilities
that are necessary to compete aggressively and successfully.
Part of this activity has involved an analysis of the
merits of owning additional amounts of long distance
facilities. Ownership of facilities can provide a number of
benefits, including the advantages of lower unit costs, new
strategic pricing opportunities and the ability to offer new
or unique services. Completion of the nationwide SONET
network, which is anticipated within the next year, will
provide the Company with the infrastructure necessary to
meet the increasing demands for bandwidth and connectivity.
The SONET network will also provide a significant increase
in capacity, reduced costs and unparalleled reliability.
Frontier is also installing Nortel DMS-500 switching systems
in strategic locations across the country that will connect
to the SONET network. These switches will provide Frontier
the ability to offer combined local and long distance
telecommunications services to its customers through a
single, cost-effective switching platform and will enable
Frontier to accelerate offerings of its CLEC services. In
the fourth quarter of 1997, Frontier introduced a nationwide
frame relay product. This product will complement the
Company's voice services business with a portfolio of
additional data services products. In addition, the
acquisition of GlobalCenter, Inc. (renamed "Frontier
GlobalCenter Inc." or "GlobalCenter"), a provider of
Internet, data and digital services, completed in February
1998, will further enhance Frontier's data product
capability. The combined technology of the SONET network,
DMS-500 switches, frame relay and enhanced data service
comprises a substantial part of the infrastructure that will
allow Frontier to become a nationwide, facilities based
provider of local, long distance and data services.
The Company's customer base has been segmented to
provide better focus for its sales efforts. Frontier is
targeting four major customer segments: small to mid-size
business customers, where Frontier will also offer
customized products for vertical industry segments; carrier
customers, which will include long distance resellers as
well as Internet Service Providers ("ISPs"), CLECs and
international telecommunications companies; and selected
consumer segments. Marketing efforts have been centralized.
Frontier anticipates that brand awareness and product
development will be an important part of successful
marketing in the future telecommunications marketplace. The
Company has committed resources in 1998 to diversify and
improve its product lines and increase brand awareness.
The Company's resources are being increasingly directed
to strategic assets and operations, and additional
management disciplines and performance measurements are
being implemented to leverage the Company's strengths. As
the nature and boundaries of telecommunications evolve as a
result of technology and changing regulation,
the Company believes it is positioned to take advantage of
these trends.
Strategic Developments
In the fourth quarter of 1997, the Company announced a
restructuring plan designed to focus the Company on its core
business. The restructuring plan included exiting certain
non-strategic businesses; phasing out low margin, price-
sensitive long distance consumer products; and targeted
actions to reduce costs. In connection with these actions,
a post-tax charge of $54.7 million was recorded in the
fourth quarter of 1997, primarily associated with a
workforce reduction, program cancellations, the exiting of
certain product lines and miscellaneous asset and lease
impairments. As of December 31, 1997, the Company has
reduced its workforce by approximately 700 positions or 8%.
These cost cutting measures are expected to be partially
offset in the short-term by investments in sales and
customer service, an acceleration of competitive local
service expansion and increased product development costs.
Frontier is redeploying its resources to respond more
quickly to opportunities to provide superior product
offerings and customer service in its core business.
The Company's strategy has been defined and actions have
been taken to move toward the goal of becoming a market-
driven business. During the fourth quarter of 1997, the
Company began to divest certain nonstrategic assets, which,
when completed, will allow the redirection of resources into
more strategic assets and operations. The sale of a portion
of its retail prepaid calling card business to SmarTalk
Teleservices Inc. was completed in December and a definitive
agreement to sell the Minnesota facilities-based cellular
business has been signed. This latter transaction is
expected to close in the second quarter of 1998, and the
Company expects to recognize a gain on the sale at that
time.
Construction of the nationwide fiber optic network, which
commenced in the fourth quarter of 1996, is progressing on
schedule. The Company's service capacity and network
reliability is increasing significantly as the fiber optic
network is put into service. The Company's reliance on
other carriers to complete customer calls is also changing.
When essentially complete at the end of 1998, the fiber
optic network will interconnect nearly 100 cities, encompass
more than 13,000 route miles and provide coast-to-coast
SONET connectivity. The Company is installing Nortel DMS-
500 switches strategically across the fiber network. The
DMS-500 switches provide the Company with the ability to
offer combined local and long distance telecommunication
services utilizing a single, cost effective switching
platform. The combined technology of the fiber optic
network and the DMS-500 switches will enable the Company to
expand its ability to provide integrated local and long
distance services nationwide. In the fourth quarter of
1997, the Company also introduced a nationwide frame relay
product. This product will complement the Company's voice
services business with a portfolio of additional data
services products. This technology will make Frontier a
nationwide facilities based provider of integrated local,
long distance and data services.
In February 1998, the Company acquired GlobalCenter, a
provider of Internet, data and digital distribution
services, located in Sunnyvale, California. The acquisition
of GlobalCenter will accelerate Frontier's ability to
provide data products and result in synergies. The synergies
will be achieved in part through network cost savings that
will result as Frontier's fiber optic network will be able
to cost effectively accommodate the bandwidth requirements
of GlobalCenter's digital and data distribution services.
Synergies will also result from leveraging GlobalCenter's
data services product set across the Frontier sales and
distribution organization.
Consolidated Results of Operations
Consolidated revenues were $2.4 billion in 1997, a $213.7
million, or 8.3%, decrease from 1996. Revenues in 1996
increased $438.2 million or 20.4% over 1995. The decrease
in 1997 revenue is primarily attributed to the migration of
the Company's largest long distance carrier customer's one-
plus traffic from the Frontier network, a process that was
essentially completed by the end of 1996. Normalized for
certain nonrecurring adjustments, costs and expenses were
$2.1 billion in 1997, $2.2 billion in 1996 and $1.8 billion
in 1995. This resulted in an operating income decrease of
38.2% in 1997 and an increase of 9.2% in 1996. Operating
margins were 11.4%, 16.8% and 18.6% during 1997, 1996 and
1995, respectively. The negative trend in operating income
and operating margins for 1995 through 1997 is attributable
to the migration of the Company's largest long distance
carrier customer discussed above as well as a higher level
of primarily network expenses in the Long Distance segment.
Expenses in the Long Distance segment were adversely
affected by increased cost of access driven by the growth
and mix of international traffic, increased costs related to
the public payphone compensation order and operating losses
attributed to the prepaid calling card business. Selling,
General and Administrative ("SG&A") costs in the Long
Distance segment have also increased as compared to prior
years as a result of the costs associated with sales and
marketing to support new revenue initiatives and
distribution channels.
Diluted earnings per share were $.18, $1.13 and $.13 for
the years ended 1997, 1996 and 1995, respectively.
Excluding the impact of the nonrecurring adjustments
discussed below, normalized net income amounted to $137.0
million, $238.5 million and $217.9 million in 1997, 1996 and
1995, respectively. Diluted earnings per share, normalized
for nonrecurring adjustments, were $.81, $1.43 and $1.33 for
the three years, representing a decrease of 44.1% and an
increase of 7.5%, respectively.
Nonrecurring Adjustments
Consolidated operating results for the years 1995 through
1997 were impacted by a number of nonrecurring adjustments.
Net income for these years, normalized for nonrecurring
adjustments, is summarized in the chart below and succeeding
narrative.
(In thousands of dollars, except per share data)
- - -------------------------------------------------------------
1997 1996 1995
- - -------------------------------------------------------------
Income applicable to common stock $30,782 $189,005 $21,253
Adjustments, net of taxes:
Other charges 117,464 42,670 78,764
Gain on sale of assets (11,243) (3,029) (4,826)
Loss on early retirement of debt --- --- 9,060
Discontinuance of regulatory
accounting --- --- 112,148
Adoption of new accounting standards --- 8,018 1,477
Work stoppage preparation costs --- 1,861 ---
- - -------------------------------------------------------------
Total adjustments $106,221 $49,520 $196,623
- - -------------------------------------------------------------
Normalized income applicable
to common stock $137,003 $238,525 $217,876
=============================================================
Diluted earnings per share $0.18 $1.13 $0.13
Total adjustments 0.63 0.30 1.20
- - -------------------------------------------------------------
Normalized earnings per share $0.81 $1.43 $ 1.33
=============================================================
1. Other Charges
During the first quarter of 1997, the Company recorded a
$62.8 million charge, net of a tax benefit of $33.8 million,
relating to the write-off of certain leased 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.
In the fourth quarter of 1997, Frontier recorded a $54.7
million charge, net of a tax benefit of $32.1 million.
This charge was primarily associated with a restructuring
and refocusing of the business which included a workforce
reduction, program cancellations, the exiting of certain
product lines and miscellaneous asset and lease
impairments.
Operating results for 1996 include a $42.7 million charge,
net of a tax benefit of $25.0 million, resulting from the
curtailment of certain company pension plans, a one-time
charge associated with the Company's conference calling
product line and the write-off of in-process product
development costs. The pension curtailment comprises $17.3
million of the total post-tax charge and is a result of the
Company's efforts to standardize pension benefits. The one-
time charge associated with the Company's conference calling
product line ($13.1 million, post-tax) primarily reflects an
adjustment to write-off nonrecoverable product development
costs relating to proprietary software. The write-off of in-
process product development costs ($12.3 million, post-tax)
relates to the 1996 GlobalCenter merger with GCIS, an
Internet management services company.
The Company's 1995 operating results reflect an
acquisition related charge of $78.8 million, net of a tax
benefit of $35.4 million, that is associated with the
integration of the Company's 1995 acquisitions as well as
the ALC Communications Corporation ("ALC") merger related
transaction costs.
2. Gain on Sale of Assets
Gain on sale of assets in 1997 reflects the sale of the
Company's 69.5% equity interest in the South Alabama
Cellular Communications Partnership which resulted in a post-
tax gain of $11.2 million ($18.8 million pre-tax). In 1996,
Frontier sold its minority investment in a Canadian long
distance company ($5.0 million pre-tax gain, $3.0 million
post-tax) and in 1995, the Company sold Ontonagon County
Telephone Company ($4.8 million non-taxable gain). Each of
these businesses was considered to be a nonstrategic asset
at the time of the sale.
3. Early Retirement of Debt
In 1995, the Company redeemed, through a tender offer,
$76.8 million of ALC's 9.0% Senior Subordinated Notes for
$83.5 million. The early retirement resulted in an
extraordinary loss including issuance costs, of $5.8
million, net of income taxes of $3.7 million. In 1995, the
Company redeemed its outstanding 9.0% debentures scheduled
to mature in 2020. The Company recorded an extraordinary
loss of $3.2 million, net of applicable income taxes of $1.7
million.
4. Discontinuance of Regulatory Accounting
As a result of changes in regulation and increasing
competition in the telecommunications industry, the Company
discontinued the use of Statement of Financial Accounting
Standards ("FAS") No. 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 $68.4 million. The write-off was
primarily related to the reduction in the recorded values of
long-lived telephone plant assets.
5. Adoption of New Accounting Standards
Results in 1996 reflect an $8.0 million charge, net of a
tax benefit of $4.3 million, for the adoption of 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
a central office switch consolidation project in Frontier's
New York markets.
Frontier adopted FAS 116, "Accounting for Contributions
Received and Made," in September of 1995. FAS 116 requires
that companies reflect an accrual in current expenses for
the cost of multi-year charitable contributions. The
cumulative effect of adopting FAS 116 in 1995 was a charge
of $1.5 million, net of applicable income taxes of $0.8
million.
6. Work Stoppage Preparation Costs
During the first quarter of 1996, operating costs
increased $1.9 million, net of applicable income taxes of
$.9 million, at the Company's largest telephone subsidiary
due to higher labor and related expenses in connection with
a union contract negotiation that was substantively settled
during 1997.
Results of Segment Operations
Long Distance Communications Services
Revenues were $1.7 billion, $1.9 billion, and $1.5 billion
in 1997, 1996 and 1995, respectively, representing a 12.3%
decrease in 1997 and a 27.9% increase in 1996. The decrease
in the revenue growth percentage from 1996 to 1997 is
attributable primarily to the migration of the one-plus long
distance traffic of the Company's largest carrier customer
from the Frontier network. The migration was substantially
completed in the fourth quarter of 1996. Normalized for the
effect of this major carrier customer's one-plus traffic and
the 1995 purchase acquisitions, revenue grew approximately
4% in 1997 and 11% in 1996. Traffic, excluding the
Company's major customer's one-plus traffic and the
Company's 1995 purchase acquisitions, increased
approximately 5% and 4%, respectively, in 1997 and 1996.
Both the revenue and traffic normalized growth rates have
shown sequential improvement throughout 1997. Revenue grew
approximately 9% in the fourth quarter of 1997 as compared
to nearly 3% in the first quarter. Traffic increased 9% and
3%, respectively for the same periods during 1997. The 1997
variance between revenue growth and traffic growth was
primarily due to changes in the Company's carrier customer
base and the transition to a higher mix of dedicated
services versus switched services. Both carrier and
dedicated traffic typically are at lower revenue per minute
rates. In addition, the introduction of new products at
promotional prices contributed to the variance. Increased
sales and marketing efforts, growth in carrier market
traffic, as well as higher levels of sales of enhanced
services, were the primary drivers of the variance between
revenue growth and traffic growth for 1996 as compared to
1995.
In 1996, the Company renegotiated its contract with its
largest carrier customer as the customer was planning to
install its own long distance switching capacity and
diversify its traffic distribution to one or more additional
carriers. Revenue from this carrier comprised approximately
6% of Frontier's long distance revenue in 1997 as contrasted
with 21% and 14% in 1996 and 1995, respectively. The loss
of this customer's one-plus traffic contributed to lower
operating income in 1997 due to lower overall traffic levels
resulting in a higher level of fixed network costs than
required by the remaining volume of business carried by the
Company. Due to 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. In
March 1997, the Company recorded a post-tax charge of $62.8
million or $0.37 per share, primarily related to the write-
off of certain leased network costs no longer necessary to
support long distance traffic volumes. The Company's fixed
network cost structure is expected to be further reduced
through the completion of the Company's new SONET based
fiber optic network and through the further integration and
consolidation of network facilities.
Costs and expenses for the long distance operation were
$1.6 billion, $1.7 billion and $1.3 billion in 1997, 1996
and 1995, respectively, excluding nonrecurring charges. As
a percentage of revenue, total costs and expenses increased
10.0% in 1997 and 2.1% in 1996. The increase in costs as a
percentage of revenue in 1997 is driven by higher cost of
access and increased SG&A expenses as a result of costs
incurred for sales and marketing support associated with new
revenue and marketing initiatives. Costs and expenses have
also been impacted by start-up costs associated with
GlobalCenter's emerging Internet service. The increase in
costs and expenses in 1996 as compared to 1995 is primarily
due to higher cost of access.
Cost of access as a percentage of revenues was 64.1% in
1997, 62.6% in 1996 and 58.5% in 1995. The higher cost of
access percentages reported for 1997 and 1996 were driven by
the growth and mix of international traffic and a higher
proportion of fixed network costs than would have been
required for the volume of minutes actually carried by the
Company's network during these periods. Cost of access in
1997 was also impacted by increased costs related to the
public payphone compensation order. In September 1996, an
FCC ruling established a "per call compensation plan" that
provides payphone service providers with compensation for
calls completed using their payphones. The FCC
substantially increased these charges in October 1997. The
Company has begun assessing a surcharge to its payphone
users in order to recover the amount of compensation and
related costs ordered by the FCC. Construction of the fiber
optic network and the continuing network integration efforts
are expected to reduce future network costs as well as
provide new revenue opportunities for Frontier. As of
December 31, 1997, over 70% of the planned network segments
are under construction. Frontier anticipates that the fiber
optic network will be substantially complete by the end of
1998.
SG&A as a percentage of revenues was 27.9% in 1997, 20.9%
in 1996 and 22.8% in 1995. The 1997 increase as a
percentage of revenues is principally due to the decrease in
revenues without corresponding proportional cost decreases.
During the last half of 1996 and continuing through 1997,
the Company has intensified its investment in the sales and
marketing areas with the intent of providing the Company
with the resources necessary to expand into new markets,
attract and retain new customers and provide superior
customer service. The investment strategy is designed to
accelerate revenue growth in 1998 and beyond. Depreciation
and amortization increased by $14.5 million and $22.6
million in 1997 and 1996, respectively due primarily to the
impact of the 1995 purchase acquisitions and the Company's
capital program.
Operating income for long distance, excluding nonrecurring
charges, decreased 84.6% in 1997 and increased 8.9% in 1996.
Operating margin was 2.1% in 1997, 12.1% in 1996 and 14.2%
in 1995. The Company anticipates improved operating margins
during 1998 as higher revenue levels are achieved, excess
fixed costs are removed from its network, the fiber optic
network is completed and as additional operating
efficiencies are introduced. The growth in revenue is
expected to be driven by expanded sales in the Company's
targeted markets, the introduction of new products and
services, and maintained with superior customer service.
During 1997, the Company introduced a new bundled services
product, "Frontier Independence," which replaced the
Company's "Clear Value" product. This new product is
expected to enhance the Company's performance as a
competitive, single-source provider of telecommunications
services through a flexible pricing program that provides
customers with additional discounts if they purchase value-
added services. The Company's calling card services
agreement with US West began contributing to operating
results in the second quarter of 1997. Results included in
the second half of the year demonstrate growth in revenue
from this agreement. The agreement provides US West the
ability to offer calling card services to its customers and
is expected to generate in excess of $50 million in
incremental revenue for the Company over the 30 month term
of the agreement.
The expansion of the Company's competitive local service
offerings continued aggressively throughout 1997. At year
end 1997, Frontier was providing local service as a CLEC,
combined with a complete range of long distance products, in
15 states across the country. As of the end of 1997,
Frontier was serving in excess of 100,000 ANIs, or access
lines, nationwide, predominantly through resale, in markets
where it is not the incumbent local exchange carrier.
Currently, the Company is authorized to offer local services
in locations serving 40% of the population in the United
States. The Company has switches in New York, Minneapolis
and Boston and plans to install up to 10 additional switches
in 1998. The switches are being placed in cities that are
located on the Company's fiber optic network, which will
provide Frontier with the opportunity to expand its
offerings of facilities based local and long distance
services into additional markets and insure maximum
efficiency and cost effectiveness. Frontier's objective is
to have the capability to offer local services in 30 to 35
states, covering 65% to 70% of the population in the United
States by the end of 1998.
The Company's February 1998 acquisition of GlobalCenter
will accelerate the Company's data product capability. The
Company will realize synergies from this transaction in the
form of network cost savings, as the new fiber optic network
will be able to accommodate the bandwidth requirements of
data products. In addition, during the fourth quarter of
1997, Frontier introduced a nationwide frame relay product.
These new product offerings, together with the other
elements of the Company's network infrastructure, provide
the framework for Frontier to become a nationwide facilities
based provider of local, long distance and data services.
Local Communications Services
In addition to consistent profitability and strong cash
flows, the local communications companies have been
successful in marketing and selling integrated services to
their customers. Local Communications' revenues were $667.1
million in 1997 and $643.0 million in 1996, representing
increases of 3.7% and 3.4%, respectively over the prior
years. Revenue growth in all years was driven by the
introduction of new products and features and a higher
demand for services. Revenue growth in 1997 was also
influenced by increased demand for Internet services. The
growth in revenue is partially offset by the elimination of
the surcharge on wholesale, flat rate local measured
service, as ordered by the New York State Public Service
Commission ("NYSPSC") in 1996, an increase in the discount
to wholesale providers from 5% to 17%, also ordered by the
NYSPSC, and a $1.5 million annual rate reduction as
stipulated by the Open Market Plan for the Company's
subsidiary, Frontier Telephone of Rochester, Inc. ("FTR").
Total access lines increased 2.3% and 3.0% and minutes of
use increased 5.3% and 6.7% in 1997 and 1996, respectively.
Costs and expenses for the local communications segment,
excluding nonrecurring charges, were $424.6 million in 1997,
relatively consistent with 1996 and 1995. Operating
margins, excluding nonrecurring items, were 36.3% in 1997,
34.0% in 1996 and 31.9% in 1995. This positive trend is
reflective of the continuing improvement in operating
efficiencies coupled with consistent revenue growth.
Contributing to the achievement of consistent year-over-year
expense levels is the impact of continuing centralization of
the administrative functions for all of the local telephone
companies. During 1996, the Rochester telephone operation
experienced increased costs and expenses related to higher
labor expenses resulting from work stoppage preparation
costs. These expenses, which were incurred in connection
with contract negotiations with the Communications Workers
of America ("CWA" or "Union"), were necessary to ensure
continued high standards of customer service levels in the
event of a work stoppage or slowdown. The contract
negotiations reached an impasse and the Rochester company
implemented the terms of its final offer as of April 9,
1996. Members of the CWA Local 1170 ratified a tentative
agreement with Frontier Telephone of Rochester, Inc.
(formerly Rochester Telephone Corp.) on April 29, 1997 which
contained provisions that differed from the Company's final
offer implemented at the time of impasse. The differences
between the Company's final offer and the agreement that was
subsequently reached and ratified by CWA membership are not
material. The new agreement provides several operational
improvements and will result in a more consistent alignment
of benefits with the rest of the Corporation. The Union
continues to appeal one issue related to the declaration of
impasse with the National Labor Relations Board. Hearings
on this issue were completed in June, and a decision is
anticipated by the end of the first quarter 1998. This
decision may be appealed by either the Union or the Company.
At this time, the Company cannot predict the outcome of this
matter. The agreement ratified on April 29, 1997 is
scheduled to expire at the end of 1998.
During late 1995, management committed to a major switch
consolidation plan at its Frontier Telephone of Rochester,
Inc. and Frontier Communications of New York subsidiaries.
The three-year plan to consolidate and reduce the number of
host switches by over 60% is projected to improve network
efficiency and reduce the cost of maintenance and software
upgrades. As of December 1997, the project is progressing
as scheduled and 10 host switches have been consolidated,
representing nearly 80% of the total switches that will be
consolidated. The Company anticipates that the project
will be substantially complete by July 1998.
The Rochester, New York local communications subsidiary
completed its third year of operations under the Open Market
Plan in December 1997. 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 Open Market Plan has undergone some modifications in
light of the Telecommunications Act and other regulatory
action of the NYSPSC. The Company believes that it has
successfully maintained its competitiveness in the Rochester
marketplace, as the Company's subsidiary still provides
approximately 98% of the services in the wholesale market
and approximately 95% of retail local services in the
market.
Corporate Operations and Other
This segment includes the operations of Frontier Network
Systems, the wireless operations from Minnesota RSA No. 10
and, through January 1997, the Company's 69.5% interest in
the South Alabama Cellular Communications Partnership
("Alabama RSAs No. 4 and No. 6"). The sale of the Company's
interest in Alabama RSAs No. 4 and No. 6 was finalized
January 31, 1997. In December 1997, the Company signed a
definitive agreement to sell Minnesota RSA No. 10 (Minnesota
Southern Cellular Telephone Company). The transaction is
expected to close by the second quarter of 1998, and the
Company expects to recognize a gain on the sale. The sale
of wireless properties results from the Company's strategic
decision to divest non-core assets. Wireless products, as a
part of Frontier's integrated services, are to be offered to
Frontier customers nationwide on a resale basis.
In February 1997, the Company completed its purchase of
R.G. Data Incorporated (renamed "Frontier Network Systems
Corp." or "FNSC"). FNSC was 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 FNSC. The treasury shares were
acquired through open market purchases. This transaction
was accounted for as a purchase. FNSC's operations are
consolidated with FNS for reporting purposes.
Results for this segment are relatively consistent for all
years presented.
Other Income Statement Items
Interest Expense
Interest expense was $48.2 million in 1997, an increase of
$4.9 million or 11.4% over 1996. The overall increase in
interest expense is the result of higher levels of debt
outstanding primarily attributable to the Company's capital
program. The amount of interest expense capitalized
increased $7.2 million and $5.0 million in 1997 and 1996,
respectively, also as a result of increased capital
spending. The Company realized reduced interest expense in
1996 as compared to 1995 primarily as a result of
refinancing approximately $140.0 million of long term debt
during the third and fourth quarters of 1995.
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 $12.0 million in 1997, $9.0 million in
1996 and $3.7 million in 1995. The increase in equity
earnings during 1997 and 1996 is attributable to increased
customers and usage, as well as improved operating
efficiencies as compared to 1996.
Income Taxes
The effective tax rate was 58.1% in 1997 versus 41.8% in
1996 and 41.1% in 1995. The increase in the effective tax
rate for 1997 is attributable to the nonrecurring charges
recorded by the Company, combined with the effect of
recording additional valuation allowance for net operating
loss deferred tax assets at GlobalCenter prior to the
pooling of interests tranaction. Use of the preacquisition
net operating losses are limited by tax laws and the
realization of these losses is uncertain at this time. The
effective tax rate normalized for these charges is
consistent for all periods.
Financial Condition
Review of Cash Flow Activity
Cash provided from operations in 1997 amounted to $255.8
million as compared to $397.2 million in 1996 and $357.5
million in 1995, normalized for $31.1 million of cash paid
for acquisition related charges. The decrease in cash flow
from operations is largely attributable to the effect of the
nonrecurring adjustments recorded during 1997 and by the
lower revenues and higher operating expenses in the long
distance segment.
Earnings before interest, taxes, depreciation and
amortization ("EBITDA") is a common measurement of a
company's ability to generate operating cash flow. EBITDA
should be used as a supplement to, not in place of, cash
from operating activities. The Company's EBITDA was $482.1
million, $626.9 million and $569.0 million, excluding
nonrecurring items, in 1997, 1996 and 1995, respectively.
Cash used for investing activities was $292.6 million,
$333.3 million and $521.0 million in 1997, 1996 and 1995,
respectively. Capital expenditures continue to be the
largest recurring use of the Company's investing funds.
Capital spending amounted to $365.1 million, $311.9 million
and $165.4 million in 1997, 1996 and 1995, respectively.
The Company's total capital investment for 1997 was $453.0
million, including the $92.9 million accrued for the
Company's new fiber optic network. The $92.9 million
obligation at December 31, 1997 is a non-cash transaction
that is treated as debt in the Company's capital structure.
The amount will be refinanced with long-term debt in 1998
when payment is made to the company constructing the network
for Frontier. The increase in the 1997 capital program was
due to long distance switch enhancements, continued product
enhancements and construction costs for the fiber optic
network build. Cash utilized in 1997 for investing
activities was partially funded by the proceeds received
from the sale of the Company's equity interest in the South
Alabama Cellular Communications Partnership, which closed in
the first quarter of 1997, and the sale of a portion of the
Company's retail prepaid calling card business which closed
in December 1997. The Company's cash purchase acquisitions
of $349.5 million were the most significant investing
activities in 1995.
Cash flows from financing activities amounted to an inflow
of $25.7 million in 1997, compared with outflows of $58.0
million and $133.3 million in 1996 and 1995, respectively.
The net inflow of cash is the result of increased borrowings
during 1997 driven by the Company's capital program. The
Company's largest recurring financing activities are the
payment of common and preferred dividends which totaled
$143.6 million, $138.7 million and $82.8 million in 1997,
1996 and 1995, respectively. The large increase in the 1996
dividend payments was caused by an increase in the number of
shares outstanding as a result of the issuance of 69.2
million common shares on August 16, 1995 for the ALC merger.
During 1995, the Company made $4.9 million of scheduled debt
repayments and also refinanced $274.4 million of its long
term debt instruments. The refinancings included repayment
of $76.8 million of ALC's 9.0% Senior subordinated debt, the
retirement of $69.8 million of 9.0% debentures due in 2020,
the repayment of Frontier Telephone of Rochester, Inc.'s
revolving line of credit facility of $100.0 million in
conjunction with this subsidiary's medium-term note offering
and the repayment of $27.8 million of debt from the long
distance acquisitions. These early retirements were
financed with excess cash and commercial paper borrowings.
Liquidity and Capital Resources
The Company has a number of financing vehicles in place to
ensure adequate liquidity in meeting its anticipated cash
needs. The Company has commercial paper programs totaling
$400.0 million which are fully backed by committed revolving
credit agreements. In May 1996, Frontier Corporation's
$250.0 million revolving credit agreement was amended to
increase the available line of credit to $350.0 million.
The Company, through its subsidiary, Frontier Telephone of
Rochester, Inc., also has a $50.0 million revolving line of
credit. At December 31, 1997, total borrowings and amounts
available under these lines of credit were $21.7 million and
$378.3 million, respectively. In addition, the Company has
a $500.0 million universal shelf registration statement,
filed with the Securities and Exchange Commission ("SEC") in
November 1995, which allows for the issuance of a
combination of debt, common stock, preferred stock or
warrant securities. In May 1997, the Company completed a
$300.0 million offering of 7.25% Notes which mature in 2004,
under the shelf registration. In December 1997, the Company
issued $100.0 million, 6.25% Pass-Through Asset Trust
Securities ("PATS") due in 1999. The PATS securities were
sold pursuant to Rule 144A under the Securities Act, and not
under the shelf registration. Proceeds from these offerings
were used to finance a portion of the nationwide fiber optic
network and to pay down commercial paper borrowings. In
December 1997, the Company entered into an interest rate
hedge agreement that effectively converts $200.0 million of
the 7.25% fixed-rate Notes due May 2004 into a floating rate
based on an index rate plus 2.88%. The agreement expires in
May 2004 and caps the floating rate the Company pays at
7.25% through November 1999 and 9.00% through May 2004.
At December 31, 1997, aggregate debt maturities amounted
to $6.4 million for 1998, $106.7 million for 1999 and $209.2
million for 2000. The debt to total capital ratio at
December 31, 1997 increased to 49.2%, as compared to 39.1%
in the prior year and 41.0% in 1995. Pre-tax interest
coverage, which measures the Company's ability to cover its
financing costs, was 3.7 times in 1997 versus 8.7 times in
1996 and 5.4 times in 1995 (excluding nonrecurring charges
for all years).
In May 1997, Duff and Phelps revised its rating on the
Company's long-term debt from "A" to "A-", reflecting
concern about the recent performance of the Company's long
distance operations, increased capital spending levels and
rising uncertainty in the long distance business. Standard
& Poor's affirmed its "A" rating of the Company, although it
revised its rating "outlook" from stable to negative.
Rating outlooks serve as an assessment of long-term trends
or risks, normally for periods covering one to three years,
that have less certain credit implications, and are not
necessarily a precursor to future rating changes. Moody's
and Fitch affirmed their ratings of "A3" and "A",
respectively. The Company does not anticipate that the
revised rating or rating "outlook" will have a material
impact on the future cost of borrowing.
Total gross expenditures for property, plant and equipment
in 1998 are anticipated to be up to $600 million, which
includes over $200 million for the Company's fiber optic
network. Absent the expenditures associated with the fiber
optic network, the 1998 capital program represents an
increase of approximately $95 million over 1997, largely due
to network growth, switching platform consolidations,
increased data facilities and the switching costs associated
with the Company's CLEC integrated product offering. The
Company anticipates financing its capital program through a
combination of internally generated cash from operations and
external borrowings.
The Company has and will continue to make certain
investments in its software systems and applications to
ensure the Company is Year 2000 compliant. The financial
impact has not been and is not anticipated to be material to
the financial position, results of operations, liquidity or
capital resources in any given year.
In December 1997, the Company's Board of Directors
increased the quarterly dividend paid on common stock to
$0.2225 per share, payable February 2, 1998, to shareowners
of record on January 15, 1998. This 2.3% increase raises
the annualized common stock dividend to $0.89 per share.
This represents the 38th consecutive annual increase in
Frontier's common stock dividend.
New Accounting Pronouncements
The Company adopted FAS 128, "Earnings Per Share,"
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 ("EPS") standards. FAS 128 requires dual
presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the
numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS
calculation. Basic EPS excludes the effect of common stock
equivalents and is computed by dividing income available to
common shareowners by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the
potential dilution that could result if securities or other
contracts to issue common stock were exercised or converted
into common stock. The impact on EPS resulting from the
adoption of FAS 128 was not material.
The Financial Accounting Standards Board ("FASB") issued
FAS 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of
comprehensive income and its components in a full-set of
general-purpose financial statements. Comprehensive income
is defined as "the change in equity of a company during a
period from transactions and other events and circumstances
from nonowner sources." It includes all changes in equity
during a period except those resulting from investments by
owners and distributions to owners. The Company adopted FAS
130 in the first quarter of 1998. Adoption of this standard
does not have a material impact on Frontier.
The FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for financial
statements for periods beginning after December 15, 1997. This
statement requires that public companies report certain
information about operating segments in complete sets of
financial statements of the company and in condensed financial
statements of interim periods issued to shareholders. It also
requires that public companies report certain information about
their products and services, the geographic areas in which they
operate, and their major customers. In the initial year of
application, comparative information for earlier years is to be
restated. The Company will adopt FAS 131 during 1998. The
Company has not yet fully evaluated the disclosures that will
be required by this statement.
Report of Independent Accountants
<PAGE>
<PAGE>
To the Board of Directors and Shareowners of
Frontier Corporation
In our opinion, based upon our audits and the report of
other auditors, the accompanying consolidated balance sheets
and the related consolidated statements of income,
shareowners' equity and cash flows present fairly, in all
material respects, the financial position of Frontier
Corporation and its subsidiaries at December 31, 1997, 1996
and 1995, and the results of their operations and their cash
flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements
are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the
financial statements of ALC Communications Corporation, a
wholly owned subsidiary, which statements reflect total
assets of $432,146,000 at December 31, 1995 and total
revenues of $852,057,000 for the year ended December 31,
1995. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts
included for ALC Communications Corporation for the year
ended December 31, 1995, is based solely on the report of
the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
As discussed in Note 13 to the financial statements,
during the first quarter of 1996 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of."
As discussed in Note 13 to the financial statements,
during the third quarter of 1995 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 116, "Accounting for Contributions Received and
Contributions Made."
As discussed in Note 12 to the financial statements,
during the third quarter of 1995 the Company discontinued
accounting for the operations of its local communications
subsidiaries in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation."
Price Waterhouse LLP
January 26, 1998, except as to the pooling of interests with
GlobalCenter, Inc. which is as of February 27, 1998
<PAGE>
<PAGE>
Business Segment Information
In thousands of dollars Years Ended
December 31, 1997 1996 1995
- - ---------------------------------------------------------------------------
Long Distance Communications
Services
Revenues $1,666,500 $1,901,209 $1,486,950
Costs and Expenses 1,631,065 1,671,279 1,275,882
- - ---------------------------------------------------------------------------
Operating Income (Loss):
Operating Income Before Other
Charges $ 35,435 $ 229,930 $ 211,068
Other Charges (175,856) (39,756) (91,448)
- - ---------------------------------------------------------------------------
Total Operating Income (Loss) $ (140,421) $ 190,174 $ 119,620
Depreciation and Amortization $ 98,844 $ 84,336 $ 61,774
Capital Expenditures $ 316,901 $ 189,604 $ 69,961
Identifiable Assets $1,327,651 $1,059,951 $ 937,141
===========================================================================
Local Communications Services
Revenues $ 667,078 $ 643,013 $ 621,725
Costs and Expenses 424,607 427,375 423,444
- - ---------------------------------------------------------------------------
Operating Income:
Operating Income Before
Other Charges $ 242,471 $ 215,638 $ 198,281
Other Charges (4,174) (23,100) (10,249)
- - ---------------------------------------------------------------------------
Total Operating Income $ 238,297 $ 192,538 $ 188,032
Depreciation and Amortization $ 110,104 $ 102,350 $ 104,419
Capital Expenditures $ 108,782 $ 101,342 $ 73,766
Identifiable Assets $ 931,438 $ 941,629 $ 964,154
===========================================================================
Corporate Operations and Other
Revenues $ 41,231 $ 44,297 $ 41,653
Costs and Expenses 49,595 53,886 51,927
- - ---------------------------------------------------------------------------
Operating Loss:
Operating Loss Before Other Charges $ (8,364) $ (9,589) $ (10,274)
Other Charges (3,354) (4,900) (12,542)
- - ---------------------------------------------------------------------------
Total Operating Loss $ (11,718) $ (14,489) $ (22,816)
Depreciation and Amortization $ 3,584 $ 4,274 $ 3,697
Capital Expenditures $ 27,305 $ 22,554 $ 20,544
Identifiable Assets $ 242,428 $ 235,718 $ 210,120
===========================================================================
Consolidated
Revenues $2,374,809 $2,588,519 $2,150,328
Costs and Expenses 2,105,267 2,152,540 1,751,253
- - ---------------------------------------------------------------------------
Operating Income:
Operating Income Before Other
Charges $ 269,542 $ 435,979 $ 399,075
Other Charges (183,384) (67,756) (114,239)
-------------------------------------------------------------------------
Total Operating Income $ 86,158 $ 368,223 $ 284,836
Depreciation and Amortization $ 212,532 $ 190,960 $ 169,890
Capital Expenditures $ 452,988 $ 313,500 $ 164,271
Identifiable Assets $2,501,517 $2,237,298 $2,111,415
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
<TABLE>
Consolidated Statements of Income
In thousands of dollars,
except per share data Years Ended December 31, 1997 1996 1995
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $2,374,809 $2,588,519 $2,150,328
- - -------------------------------------------------------------------------------------
Costs and Expenses
Operating expenses 1,834,239 1,911,553 1,532,900
Depreciation and amortization 212,532 190,960 169,890
Taxes other than income taxes 58,496 50,027 48,463
Other charges 183,384 67,756 114,239
- - -------------------------------------------------------------------------------------
Total Costs and Expenses 2,288,651 2,220,296 1,865,492
- - -------------------------------------------------------------------------------------
Operating Income 86,158 368,223 284,836
Interest expense 48,239 43,312 53,572
Other income and expense:
Gain on sale of assets 18,765 4,976 4,826
Equity earnings from unconsolidated wireless
interests 12,019 9,011 3,676
Interest income 3,659 2,363 9,673
Other income (expense) 3,627 (500) (3,184)
- - -------------------------------------------------------------------------------------
Income Before Taxes, Extraordinary Items and
Cumulative Effect of Changes in Accounting
Principles 75,989 340,761 246,255
Income taxes 44,188 142,556 101,126
- - -------------------------------------------------------------------------------------
Income Before Extraordinary Items and Cumulative
Effect of Changes in Accounting Principles 31,801 198,205 145,129
Extraordinary items - - (121,208)
Cumulative effect of changes in accounting principles - (8,018) (1,477)
- - -------------------------------------------------------------------------------------
Consolidated Net Income 31,801 190,187 22,444
Dividends on preferred stock 1,019 1,182 1,191
- - -------------------------------------------------------------------------------------
Income Applicable to Common Stock $ 30,782 $189,005 $ 21,253
=====================================================================================
Basic Earnings Per Common Share
Income before extraordinary items and cumulative
effect of changes in accounting principles $ .18 $ 1.19 $ .94
Extraordinary items - - (.79)
Cumulative effect of changes in accounting principles - (.05) (.01)
- - --------------------------------------------------------------------------------------
Basic Earnings Per Common Share $ .18 $ 1.14 $ 0.14
======================================================================================
Diluted Earnings Per Common Share
Income before extraordinary items and cumulative
effect of changes in accounting principles $ .18 $ 1.18 $ .88
Extraordinary items - - (.74)
Cumulative effect of changes in accounting principles - (.05) (.01)
- - --------------------------------------------------------------------------------------
Diluted Earnings Per Common Share $ .18 $ 1.13 $ 0.13
======================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
Consolidated Balance Sheets
In thousands of dollars,
except share data December 31, 1997 1996 1995
- - -----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 26,302 $ 37,411 $ 31,485
Accounts receivable (less allowance for
uncollectibles of $25,100, $31,519 and
$28,722, respectively) 380,324 365,486 404,669
Materials and supplies 12,312 13,421 13,018
Deferred income taxes 33,948 30,617 43,719
Prepayments and other 37,419 30,826 31,309
- - -----------------------------------------------------------------------------
Total Current Assets 490,305 477,761 524,200
Property, plant and equipment, net 1,046,884 975,982 883,046
Goodwill and customer base, net 517,754 538,296 550,081
Deferred and other assets 446,574 245,259 154,088
- - -----------------------------------------------------------------------------
Total Assets $2,501,517 $2,237,298 $2,111,415
=============================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 343,606 $ 326,938 $ 382,347
Dividends payable 36,798 35,966 33,247
Debt due within one year 6,443 7,929 15,752
Taxes accrued 16,023 34,968 27,166
Other liabilities 90,108 18,596 47,561
- - -----------------------------------------------------------------------------
Total Current Liabilities 492,978 424,397 506,073
Long-term debt 934,681 677,570 618,867
Deferred income taxes 10,927 2,542 15,644
Deferred employee benefits obligation 88,562 65,479 58,385
- - -----------------------------------------------------------------------------
Total Liabilities 1,527,148 1,169,988 1,198,969
- - -----------------------------------------------------------------------------
<PAGE>
Shareowners' Equity
Preferred stock 20,126 22,611 22,769
Common stock, par value $1.00, authorized
300,000,000 shares; 170,503,300 shares,
168,649,955 shares and 160,753,525 shares
issued in 1997, 1996, and 1995 170,503 168,649 160,754
Capital in excess of par value 547,484 521,683 418,006
Retained earnings 253,435 365,903 317,575
- - -----------------------------------------------------------------------------
991,548 1,078,846 919,104
Less-
Treasury stock, 10,849 shares in 1997 and
6,375 shares in 1996
and 1995, at cost 231 147 147
Unearned compensation 16,948 11,389 6,511
- - -----------------------------------------------------------------------------
Total Shareowners' Equity 974,369 1,067,310 912,446
- - -----------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $2,501,517 $2,237,298 $2,111,415
=============================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
Consolidated Statements of Cash Flows
In thousands of dollars Years Ended December 31, 1997 1996 1995
- - ---------------------------------------------------------------------------
Operating Activities
Net income $ 31,801 $190,187 $ 22,444
Adjustments to reconcile net income to net cash
provided by operating activities:
Other charges 183,384 67,756 114,239
Cumulative effect of changes in accounting
principles - 12,396 2,272
Extraordinary items - - 194,932
Depreciation and amortization 212,532 190,960 169,890
Gain on sale of assets (18,765) (4,976) (4,826)
Equity earnings from unconsolidated
wireless interests (12,019) (9,011) (3,676)
Other, net 4,474 92 1,326
Changes in operating assets and liabilities, exclusive
of impacts of dispositions and acquisitions:
(Increase) decrease in accounts receivable (26,057) 36,137 (99,557)
Increase in material and supplies (1,315) (1,378) (1,532)
(Increase) decrease in prepayments and other
current assets (7,047) (2,295) 6,259
Increase in deferred and other assets (21,243) (20,876) (32,494)
Increase (decrease) in accounts payable 3,482 (77,532) 30,692
(Decrease) increase in taxes accrued and other
current liabilities (120,416) 1,582 9,250
Increase in deferred employee
benefits obligation 21,920 6,608 9,947
Increase (decrease) in deferred income taxes 5,054 7,545 (92,724)
-----------------------------------------------------------------------
Total adjustments 223,984 207,008 303,998
------------------------------------------------------------------------
Net cash provided by operating activities 255,785 397,195 326,442
------------------------------------------------------------------------
<PAGE>
<PAGE>
Investing Activities
Expenditures for property, plant
and equipment (286,947) (249,231) (165,436)
Deposits for capital projects (78,109) (62,694) -
Proceeds from asset sales 67,889 13,841 -
Investment in cellular partnerships 4,524 (29,422) (12,090)
Purchase of companies, net of cash acquired - (5,791) (349,536)
Other investing activities - - 6,060
- - ---------------------------------------------------------------------------
Net cash used in investing activities (292,643) (333,297) (521,002)
- - ---------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 401,450 58,335 208,794
Repayments of debt (236,386) (15,120) (279,353)
Dividends paid (143,638) (138,697) (82,801)
Treasury stock, net (2,468) - (10,041)
Issuance of common stock 9,289 33,407 31,957
Other financing activities (2,498) 4,103 (1,836)
- - ----------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 25,749 (57,972) (133,280)
- - ----------------------------------------------------------------------------
Net (Decrease) Increase in Cash and
Cash Equivalents (11,109) 5,926 (327,840)
Cash and Cash Equivalents at Beginning of Year 37,411 31,485 359,325
- - ----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 26,302 $ 37,411 $ 31,485
=============================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
<TABLE>
Consolidated Statements of Shareowners' Equity
Capital In
Preferred Common Excess of Retained Treasury Unearned
In thousands of dollars Stock Stock Par Earnings Stock Compensation Total
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $22,777 $150,738 $377,982 $397,857 $ - $ - $ 949,354
Net income 22,444 22,444
Redemptions (8) (8)
Retirements (117) (3,142) (3,259)
Restricted stock plan
activity, net 200 7,000 (6,511) 689
Exercise of stock options 2,434 15,780 18,214
Exercise of warrants 6,252 8,095 14,347
Tax benefit from exercise of
stock options 15,252 15,252
Common and preferred dividends (100,501) (100,501)
Equity offering of pooled subsidiary 1,247 (732) 515
Other (2,229) (2,225) (147) (4,601)
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $22,769 $160,754 $418,006 $317,575 $ (147) $ (6,511) $ 912,446
Net income 190,187 190,187
Acquisitions 1,645 19,984 21,629
Redemptions (158) 53 (105)
Exercise of stock options 5,482 27,355 32,837
Exercise of warrants 87 131 218
Restricted stock plan activity, net 100 4,089 (4,878) (689)
Tax benefit from exercise of stock options 48,531 48,531
Common and preferred dividends (141,416) (141,416)
Equity offering of pooled subsidiary 574 3,675 4,249
Other 7 (141) (443) (577)
- - ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $22,611 $168,649 $521,683 $365,903 $ (147) $(11,389) $1,067,310
Net income 31,801 31,801
Acquisitions 616 8,146 2,384 11,146
Redemptions (2,485) (13) (2,498)
Exercise of stock options 162 752 914
Exercise of warrants 44 65 109
Restricted stock plan activity, net 190 3,933 (2,556) 1,567
Incentive stock plan, net 4,964 (3,003) 1,961
Tax benefit from exercise of stock options 982 982
Common and preferred dividends (144,470) (144,470)
Purchases for acquisition (2,468) (2,468)
Equity offering of pooled subsidiary 813 8,215 9,028
Other 29 (1,243) 201 (1,013)
- - ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $20,126 $170,503 $547,484 $253,435 $ (231) $(16,948) $ 974,369
=====================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation-The consolidated financial
information includes the accounts of Frontier Corporation and
its majority-owned subsidiaries (the "Company" or "Frontier")
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.
Materials and Supplies-Materials and supplies are stated at
the lower of cost or market, based on weighted average unit
cost.
Property, Plant and Equipment-The investment in property,
plant and equipment is recorded at cost. Improvements that
significantly add to productive capacity or extend useful
life are capitalized, while maintenance and repairs are
expensed as incurred. The Company's provision for
depreciation of property, plant and equipment is based on the
straight-line method using estimated service lives of the
various classes of plant. The range of service lives for
buildings is 10 to 40 years. The range of service lives for
local and fiber service lines is 12 to 25 years, central
office equipment and switching facilities is 3 to 20 years,
station equipment is 10 to 21 years and for office equipment
and other is 2 to 20 years.
The cost of depreciable telephone property units (assets of
the Local Communications segment) retired, plus removal
costs, less salvage is charged to accumulated depreciation.
When non-telephone property, plant and equipment is retired
or sold, the resulting gain or loss is recognized currently
as an element of other income.
Goodwill and Customer Base-The excess of the cost of
companies purchased over the net assets acquired is amortized
using a straight-line basis over 7 to 40 years. The purchase
price of customer bases acquired is amortized using a
straight-line basis over principally 5 to 7 years.
Accumulated amortization is $131.6 million, $106.5 million
and $64.0 million at the end of 1997, 1996 and 1995,
respectively.
Investment in Cellular Partnerships-Financial results for
the Company's cellular joint venture with Bell Atlantic
Corporation have been reported using the equity method of
accounting. Accordingly, Frontier's 50% share of the joint
venture's earnings is reflected in the "Other income and
expense" section of the Consolidated Statements of Income.
The partnership investment balances of $69.3 million in 1997,
$58.6 million in 1996 and $33.8 million in 1995 are included
in "Deferred and other assets" in the Consolidated Balance
Sheets.
Impairment of Long-Lived Assets-In the event that facts and
circumstances indicate that the carrying amount of a long-
lived asset may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash
flow is required.
Accounts Payable-Accounts payable includes trade accounts
payable and an estimated accrual for long distance cost of
access.
Fair Value of Financial Instruments-Cash and cash
equivalents are valued at their carrying amounts, which are
reasonable estimates of fair value. The fair value of
long-term debt is estimated using rates currently available
to the Company for debt with similar terms and maturities.
The fair value of all other financial instruments
approximates cost as stated.
Federal Income Taxes-Deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are
anticipated to be in effect when those differences are
expected to reverse. Income tax benefits of tax deductions
related to common stock transactions with the Company's stock
option plans are recorded directly to capital in excess of
par value.
The Company provides a valuation allowance for its deferred
tax assets when it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Revenue Recognition-Customers are billed as of monthly
cycle dates. Revenue is recognized as service is provided
net of an estimate for uncollectible accounts.
Earnings Per Share-Earnings applicable to each share of
common stock and common stock equivalents are based on the
weighted average number of shares outstanding during each
year. Common stock equivalents are primarily stock options
assumed to be exercised for the purposes of the computation.
Effective December 31, 1997, earnings per share is calculated
following the provisions of Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share" ("FAS 128").
Historical earnings per share have been restated to conform
with the provisions of FAS 128.
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.
Cash flows from financing activities include $1.0 million,
$33.4 million and $32.0 million of cash proceeds from stock
options and warrants exercised during 1997, 1996 and 1995,
respectively. The resultant tax benefit realized from the
exercise of stock options of $1.0 million, $48.5 million and
$15.3 million for 1997, 1996 and 1995, respectively, is
reflected as an adjustment to capital in excess of par value
and taxes accrued.
Actual interest paid was $59.6 million in 1997, $49.7
million in 1996 and $57.9 million in 1995. Actual income
taxes paid were $61.3 million in 1997, $70.1 million in 1996
and $108.6 million in 1995. Interest costs associated with
the construction of capital assets, including the nationwide
fiber optic network project, are capitalized. Total amounts
capitalized during 1997, 1996 and 1995 were $13.4 million,
$6.2 million and $1.2 million, respectively.
2. MERGERS, ACQUISITIONS, AND DIVESTITURES
Mergers and 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 shares issued by the Company to
effect the merger were 6.4 million. At the time of the
merger, GlobalCenter had 1.1 million stock options and
warrants outstanding as converted into Frontier equivalents.
As they vest, the options and warrants are exercisable for
the purchase of an equal number of Frontier shares. 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
==========================================================================
Year ended December 31, 1997
(Unadited)
Revenues $2,352.9 $ 21.9 $2,374.8
Net income (loss) $ 54.6 $ (22.8) $ 31.8
- - --------------------------------------------------------------------------
Year ended December 31, 1996
(Unadited)
Revenues $2,575.6 $ 12.9 $2,588.5
Net income (loss) $ 209.9 $(19.7) $ 190.2
- - --------------------------------------------------------------------------
Year ended December 31, 1995
(Unaudited)
Revenues $2,143.7 $ 6.6 $2,150.3
Net income $ 22.1 $ .3 $ 22.4
- - --------------------------------------------------------------------------
In November 1997, the Company, through GlobalCenter,
acquired Voyager Networks, Inc. ("Voyager"),
a New York City-based provider of content management and
distribution services. The Company issued .6
million shares of Frontier equivalent common stock
in exchange for all of Voyager's issued and
outstanding shares of common stock. Additionally,
.1 million outstanding options for common stock of
Voyager, as converted into Frontier equivalents,
were assumed by the Company in connection with the
acquisition. This transaction was accounted for as a
purchase.
In May 1997, the Company, through
GlobalCenter, merged with ISI, Inc. ("ISI"), a
Sunnyvale, California-based provider of web hosting and
digital distribution services. The Company issued 1.7
million shares of Frontier equivalent common stock
in exchange for all of ISI's issued and outstanding
voting stock. Additionally, .1 million outstanding
options for common stock of ISI, as converted into Frontier
equivalents, were assumed by the Company in connection
with the merger. The ISI merger was accounted for
as a pooling of interests and, accordingly,
the Company's consolidated financial statements have been
restated for all periods prior to the merger to include the
accounts and operations of ISI.
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 FNSC. The treasury shares were acquired
through open market purchases. This transaction was
accounted for as a purchase.
In December 1996, the Company, through GlobalCenter,
merged with GCIS, Inc. ("GCIS"), a
Sunnyvale, California-based provider of business Internet
management services. The Company issued 1.6 million shares
of Frontier equivalent common stock in exchange for all of
the issued and outstanding voting stock of GCIS.
Additionally, .1 million outstanding options for the
common stock of GCIS, as converted into Frontier
equivalents, were assumed by the Company in connection
with the merger. This transaction was accounted
for as a purchase.
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,
which 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, 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 August 1995, the Company merged with ALC Communications
Corporation ("ALC"). 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.
The transaction was 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.
In March 1995, the Company acquired American Sharecom Inc.
("ASI") in a transaction that was accounted for as a pooling
of interests. The Company acquired all of the outstanding
shares of ASI for approximately 8.7 million shares of
Frontier common stock. The consolidated financial statements
have been restated for all periods prior to the acquisition
to include the accounts and operations of ASI.
In 1995, the Company paid $318.4 million in cash for
several acquisitions that were accounted for as purchases.
These purchase acquisitions were Minnesota Southern Cellular
Telephone Company, ConferTech International, Inc., WCT
Communications, Inc., Enhanced Telemanagement, Schneider
Communications, Inc. ("SCI") and SCI's 80.8 percent interest
in LinkUSA Corporation and Link-VTC, Inc. In February 1996,
the Company acquired the remaining 19.2 percent interest in
LinkUSA Corporation for $2.3 million in cash and in June 1996
made a payment of $4.3 million to Link-VTC, Inc. in
settlement of the original earnout agreement.
Divestitures
------------
On December 9, 1997, the Company completed the sale of a
portion of its retail prepaid calling card business to
SmarTalk Teleservices Inc. for $36.6 million. The net
proceeds from this sale will be offset by costs necessary to
phase out the remainder of the Company's prepaid business.
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.
In March 1995, the Company sold Ontonagon County Telephone
Company in Michigan and its subsidiary, Midway Telephone
Company. The sale resulted from the Company's plans to
expand in areas other than Michigan's Upper Peninsula. The
sale resulted in a non-taxable gain of $4.8 million.
3. OTHER CHARGES
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. The
restructuring charge is primarily associated with a workforce
reduction, program cancellations and the exiting of certain
product lines. The provision for the workforce reduction of
approximately $16.5 million includes severance and related
termination benefits for approximately 700 positions. As of
December 31, 1997, substantially all of these positions have
been eliminated. Severance and related termination benefits
of $12.6 million were paid during the year. The remaining
reserve of $3.9 million at year end represents termination
benefits to be paid to these individuals during 1998. The
remaining restructuring reserve balance of $16.2 million at
December 31, 1997, which primarily relates to program and
contract 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 leased
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 is in the process
of decommissioning these redundant facilities and the project
is expected to be completed by the second quarter of 1998.
In December 1996, the Company, through GlobalCenter,
recorded a pre-tax charge of $18.9 million related to the
write-off of in-process product development costs associated
with the 1996 merger with GCIS, an Internet management
services company.
In November 1996, the Company recorded a $48.8 million pre-
tax charge. This charge included $28.0 million for the
curtailment of certain company pension plans and a $20.8
million charge primarily to write-off unrecoverable product
development costs for its conference calling product line.
The Company's 1995 operating results reflect pre-tax
acquisition related charges of $114.2 million associated with
the integration of a number of long distance companies
acquired during the year, including the August 1995 merger
with ALC. The integration of the acquired companies with the
existing Frontier businesses resulted in instances of
redundant facilities, equipment and staffing. The
acquisition related charges included investment banker, legal
fees and other direct costs resulting from the merger with
ALC and the ASI transaction. Through a combination of
attrition and workforce reductions, the Company reduced its
number of employees in the long distance and administrative
areas by 433 employees. Substantially all of the employees
were terminated by the end of 1996 resulting in severance
benefit payments of $14.8 million.
4. PROPERTY,
PLANT
AND
EQUIPMENT Major classes of property, plant,and equipment
are summarized below:
In thousands of dollars
At December 31, 1997 1996 1995
---------------------------------------------------------
Land and buildings $ 117,750 $ 116,876 $ 107,844
Local and fiber
service lines 817,645 795,855 761,044
Central office equipment 614,021 580,217 587,814
Station equipment 40,608 38,770 32,183
Switching facilities 412,067 390,779 331,407
Office equipment
and other 266,223 233,737 201,740
Plant under construction 171,756 126,140 77,091
Less: Accumulated
Depreciation 1,393,186 1,306,392 1,216,077
----------------------------------------------------------
$1,046,884 $ 975,982 $ 883,046
==========================================================
Depreciation expense was $167.7 million, $147.6 million
and $139.4 million for the years ending
December 31, 1997, 1996 and 1995, respectively.
<TABLE>
5. LONG-TERM DEBT
In thousands of dollars
At December 31, 1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Frontier Communications of Minnesota, Inc.
Senior Notes, 7.61%, due 2003 $35,000 $35,000 $35,000
Rural Utilities Service Debt,
2%-9% due 1995 to 2026 53,239 64,654 69,878
----------------------------------------------------------------------
88,239 (a) 99,654 104,878
----------------------------------------------------------------------
Debentures
10.46% convertible, due 2008 5,300 (b) 5,300 5,300
9%, due 2020 - - - (c)
9%, due 2021 100,000 100,000 100,000
----------------------------------------------------------------------
105,300 105,300 105,300
----------------------------------------------------------------------
9% Senior Subordinated Notes, due 2003 3,061 3,180 3,233 (d)
Medium-term notes, 7.51% - 9.3%,
due 2000 to 2004 219,000 219,000 219,000
8.25% Notes, due 2011 2,225 2,600
7.25% Notes, due 2004 300,000 (e)
6.25% Putable Notes ("PATS"), due 1999 100,000 (f)
Revolving Credit Agreements 21,705(g) 248,570 187,601
Capitalized lease obligations 8,795 9,051 17,376
Other debt 92,888(h) 996 881
------------------------------------------------------------------------
Sub-total 941,213(i) 688,351 638,269
Less: Discount on long-term debt,
net of premium 89 2,852 3,650
Current portion of long-term debt 6,443 7,929 15,752
-------------------------------------------------------------------------
Total Long-Term Debt $934,681 $677,570 $618,867
=========================================================================
</TABLE>
(a) Certain assets of the Local Communications Services
segment are pledged as security.
(b) The debenture is convertible into common stock at any time
after October 26, 1998 at $10.5375 per share. A total of
502,966 shares of common stock are reserved for such
conversion.
(c) The Company redeemed the debentures in November 1995 in
a transaction that resulted in an extraordinary loss of $3.2
million, net of applicable taxes of $1.7 million.
(d) The Company completed a tender offer for the $80.0
million of outstanding notes in September 1995 and redeemed
approximately $76.8 million. This redemption resulted in an
extraordinary loss of $5.8 million, net of applicable taxes
of $3.7 million.
(e) In December 1997, the Company entered into an interest
rate hedge agreement that effectively converts $200.0 million
of the Company's 7.25% fixed-rate notes due May 2004 into a
floating rate based on a "basket" London Interbank Offered
Rate ("LIBOR") index rate plus 2.88%. The agreement expires
in May 2004 and caps the floating rate the Company pays at
7.25% through November 1999 and 9.00% through May 2004.
Interest expense and the related cash flows under the
agreement are accounted for on an accrual basis. The Company
periodically enters into such agreements to balance its
floating rate and fixed rate obligations to insulate against
interest rate risk and maximize savings.
(f) The Company issued $100.0 million face value of Pass
Through Asset Trust Securities ("PATS") in December, 1997.
These notes have an initial maturity of two years, at which
time the notes will be either put back to the Company for
redemption or effectively remarketed by the trust as 10 year
debt, depending on the interest rate environment at that
time.
(g) The Company has credit facilities totaling $400.0
million which are available through commercial paper
borrowings or through draws under Revolving Credit
Agreements. At December 31, 1997, the Company had
outstanding $21.7 million in commercial paper issuances.
Commercial paper is classified as long-term debt as the
Company intends to refinance the debt through continued
short-term borrowing or available credit facilities
with unused commitments extending beyond one year.
Frontier Corporation's Revolving Credit Agreement was
entered into in August 1995 with a group of ten commercial
banks. The Agreement was amended in May 1996 to increase the
available line of credit from $250.0 million to $350.0
million. The Agreement is unsecured, expires in August 2000,
and has commitment fees of .08 percent per year on the entire
commitment, with interest on amounts drawn down based upon
LIBOR plus .17 percent.
The Company, through its subsidiary, Frontier Telephone of
Rochester, Inc. (formerly Rochester Telephone Corp.), entered
into a Revolving Credit Agreement with six commercial banks
in December 1994. The Agreement was amended in 1997 to
reduce the available line of credit to $50.0 million. The
agreement is unsecured, expires December 1999, and has
commitment fees of .07 percent per year on the entire
commitment, with interest on amounts drawn down based on
either the prime rate, LIBOR plus .13 percent, or a
competitive bid rate.
The Company also had a $500.0 million universal shelf which
was filed with the Securities and Exchange Commission in
November 1995. This filing allows for the issuance of a
combination of debt, common stock, preferred stock or warrant
securities. The $300.0 million, 7.25% Notes issued in 1997
were from the shelf registration.
(h) This amount includes the Company's obligation to pay
$92.9 million related to its fiber optic network build, which
is classified as long-term as the Company intends to finance
this obligation through available credit facilities and
unused commitments extending beyond one year.
(i)In accordance with FAS 107, "Disclosures about Fair Value
of Financial Instruments," the Company estimates that the
fair value of the debt, based on rates currently available to
the Company for debt with similar terms and remaining
maturities, is $991.5 million, as compared to the carrying
value of $944.7 million.
At December 31, 1997, aggregate debt maturities were:
In thousands of dollars 1998 1999 2000 2001 2002
---------------------------------------------------------------
$6,443 $106,687 $209,187 $75,048 $43,474
6. INCOME TAXES
The provision for income taxes consists of the following:
In thousands of dollars
Years Ended December 31, 1997 1996 1995
---------------------------------------------------------
Federal:
Current $24,189 $114,402 $104,012
Deferred 11,101 5,996 (17,814)
--------------------------------------------------------
35,290 120,398 86,198
--------------------------------------------------------
State:
Current 11,234 19,757 16,498
Deferred (2,336) 2,401 (1,570)
--------------------------------------------------------
8,898 22,158 14,928
----------------------------------------------------------
Total income taxes $44,188 $142,556 $101,126
==========================================================
The reconciliation of the federal statutory income tax rate
with the effective income tax rate reflected in the financial
statements is as follows:
In thousands of dollars
Years Ended December 31, 1997 1996 1995
------------------------------------------------------
Federal income tax expense
at statutory rate 35.0% 35.0% 35.0%
State income tax (net of
federal benefit) 7.6 4.2 4.0
Net operating loss carryforwards 4.7 (1.0) (1.4)
Acquisition related and
other charges - - 2.4
Research and development costs - 1.9 -
Goodwill amortization 7.0 1.3 1.5
Other 3.8 .4 (.4)
-------------------------------------------------------
Total income tax 58.1% 41.8% 41.1%
=======================================================
Deferred tax (assets) liabilities are comprised of the
following at December 31:
<TABLE>
In thousands of dollars 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Accelerated depreciation $111,657 $ 87,612 $ 81,687
Other 23,918 22,915 18,297
---------------------------------------------------------------------
Gross deferred tax liabilities 135,575 110,527 99,984
---------------------------------------------------------------------
Basis adjustment - purchased
telephone companies (23,120) (25,477) (29,232)
Employee benefits obligation (13,509) (11,136) (4,562)
Net operating loss carryforwards (56,494) (46,066) (45,844)
Acquisition related and other charges (46,944) (27,630) (29,213)
Bad debt expense (4,463) (11,232) (11,888)
Other (36,972) (38,127) (31,207)
---------------------------------------------------------------------
Gross deferred tax assets (181,502) (159,668) (151,946)
Valuation allowance 22,906 21,066 23,887
---------------------------------------------------------------------
Total deferred tax assets (158,596) (138,602) (128,059)
---------------------------------------------------------------------
Net deferred tax assets $ (23,021) $ (28,075) $ (28,075)
=====================================================================
</TABLE>
Certain of the Company's acquired subsidiaries have tax net
operating losses and alternative tax net operating loss
carryforwards ("NOLs") which can be utilized annually to
offset separate company future taxable income. Under the
provisions of Internal Revenue Code Section 382, the
utilization of carryforwards is presently limited. The
Company's NOLs begin to expire in 2004. As a result of the
annual limitation and the difficulty in predicting their
utilization beyond a period of three years, the Company has
established valuation allowances for the NOL carryforwards.
Because certain of the NOL carryforwards were acquired in
purchase acquisitions and the related valuation allowance was
recorded using purchase accounting, $7.0 million of this
valuation allowance, if subsequently recognized, would be
allocated to reduce goodwill.
7. SERVICE PENSIONS AND BENEFITS
The Company has contributory and noncontributory plans
providing for service pensions and certain death benefits for
substantially all employees. In 1996 and 1995, defined
benefit plans sponsored by the Company were frozen. On an
annual basis, contributions are remitted to the trustees to
ensure proper funding of the plans.
The majority of the Company's pension plans have plan
assets that exceed accumulated benefit obligations. There
are certain plans, however, with accumulated benefit
obligations which exceed plan assets. The following tables
summarize the funded status of the Company's pension plans
and the related amounts that are primarily included in
"Deferred and other assets" in the Consolidated Balance
Sheets.
<TABLE>
Plans for Plans for
which assets which
exceed accumulated
December 31, 1997 accumulated benefits
In thousands of dollars benefits exceed assets Total
-----------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit obligation $442,647 $ 23,605 $466,252
Accumulated benefit
obligation $463,059 $ 24,138 $487,197
==============================================================
Plan assets at fair value,
primarily fixed income
securities and
common stock $550,866 $ - $550,866
Projected benefit
obligation (463,059) (24,643) (487,702)
---------------------------------------------------------------
Funded status $ 87,807 $ (24,643) $ 63,164
Unrecognized net
(gain) loss (62,443) 4,827 (57,616)
Unrecognized net
transition asset (1,801) - (1,801)
Unrecognized prior
service cost 10,290 266 10,556
Adjustment required to
recognize minimum
liability - (4,588) (4,588)
---------------------------------------------------------------
Pension asset (liability)
reflected in Consolidated
Balance Sheet $ 33,853 $ (24,138) $ 9,715
===============================================================
Plans for Plans for
which assets which
exceed accumulated
December 31, 1996 accumulated benefits
In thousands of dollars benefits exceed assets Total
-----------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefit
obligation $403,077 $ 12,693 $415,770
Accumulated benefit
obligation $423,055 $ 13,758 $436,813
-----------------------------------------------------------------
Plan assets at fair value,
primarily fixed income
securities and
common stock $493,894 $ - $493,894
Projected benefit
obligation (423,055) (14,899) (437,954)
------------------------------------------------------------------
Funded status $ 70,839 $(14,899) $ 55,940
Unrecognized net
(gain) loss (55,604) 3,250 (52,354)
Unrecognized net
transition asset (2,837) - (2,837)
Unrecognized prior
service cost 11,097 - 11,097
Adjustment required to
recognize minimum
liability - (2,109) (2,109)
-------------------------------------------------------------------
Pension asset (liability)
reflected in Consolidated
Balance Sheet $ 23,495 $(13,758) $ 9,737
===================================================================
Plans for Plans for
which assets which
exceed accumulated
December 31, 1995 accumulated benefits
In thousands of dollars benefits exceed assets Total
-----------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefit obligation $367,765 $ 19,984 $387,749
Accumulated benefit
obligation $381,528 $ 22,335 $403,863
===========================================================
Plan assets at fair value,
primarily fixed income
securities and
common stock $437,151 $ 8,234 $445,385
Projected benefit
obligation (384,199) (25,364) (409,563)
-----------------------------------------------------------
Funded status $ 52,952 $(17,130) $ 35,822
Unrecognized net
(gain) loss (19,194) 4,337 (14,857)
Unrecognized net
transition (asset)
obligation (3,909) 36 (3,873)
Unrecognized prior
service cost 12,533 3,783 16,316
Adjustment required to
recognize minimum liability - (5,246) (5,246)
-----------------------------------------------------------
Pension asset (liability)
reflected in Consolidated
Balance Sheet $42,382 $(14,220) $28,162
===========================================================
</TABLE>
The net periodic pension cost consists of the following:
In thousands of dollars
-----------------------
Years Ended December 31, 1997 1996 1995
----------------------------------------------------------
Service cost $ 1,551 $ 6,487 $ 5,616
Interest cost on projected
benefit obligation 32,983 30,100 28,868
Actual return on
plan assets (83,775) (63,807) (89,195)
Net amortization
and deferral 40,715 25,723 51,437
Amount expensed due to
curtailment 6,943 28,000 2,907
----------------------------------------------------------
Net periodic pension
(benefit) cost $ (1,583) $26,503 $ (367)
==========================================================
The following rates and assumptions were used to calculate
the projected benefit obligation:
Years Ended December 31, 1997 1996 1995
-----------------------------------------------------------
Weighted average discount rate 7.0% 7.5% 7.5%
Rate of salary increase 5.0% 5.0% 5.0%
Expected return on plan assets 9.5% 9.0% 9.0%
===========================================================
The Company's funding policy is to make contributions for
pension benefits based on actuarial computations which
reflect the long-term nature of the pension plan. However,
under FAS 87, "Employers' Accounting for Pensions," the
development of the projected benefit obligation essentially
is computed for financial reporting purposes and may differ
from the actuarial determination for funding due to varying
assumptions and methods of computation. The Company changed
its assumptions used in 1997 for the weighted average
discount rate and the expected return on plan assets. These
changes in assumptions did not have a material effect on 1997
pension expense.
In 1997, the Company recognized a curtailment loss of $6.9
million related to the restructuring of the workforce. In
1996, the Company recognized a curtailment loss of $28.0
million reflecting the enhancement and freezing of defined
benefit plans sponsored by Frontier Corporation, primarily
for certain bargaining unit employees. Pension expense in
1995 included a net curtailment loss of $2.9 million
reflecting the enhancement and freezing of defined benefit
plans sponsored by Frontier Corporation for non-bargaining
unit employees as of December 31, 1996.
The Company also sponsors a number of defined contribution
plans. The most significant plan covers non-bargaining
employees, who can elect to make contributions through
payroll deduction. Effective January 1, 1996, the Company
provides a contribution of .5 percent of gross compensation
in common stock for every employee eligible to participate in
the plan. The common stock used for matching contributions
is purchased on the open market by the plan's trustee. The
Company also provides 100% matching contributions in its
common stock up to three percent of gross compensation, and
may, at the discretion of the Management Benefit Committee,
provide additional matching contributions based upon
Frontier's financial results. In 1995, the Company provided
matching contributions in its common stock up to 75 percent
of participants' contributions up to six percent of gross
compensation. The total cost recognized for all defined
contribution plans was $8.8 million for 1997, $8.4 million
for 1996 and $6.8 million for 1995.
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance
benefits to most employees. Plan assets consist principally
of life insurance policies and money market instruments. In
adopting FAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", the Company elected to defer
the recognition of the accrued obligation of $125.0 million
over a period of twenty years. During 1996, the Company
amended its health care benefits plan to cap the cost
absorbed by the Company for health care and life insurance
for its bargaining unit employees who retire after December
31, 1996. The effect of this amendment was to reduce the
December 31, 1996 accumulated postretirement obligation by
$11.2 million. Additionally, during 1996, special
termination benefits were offered to certain employees with
25 years of service or more who were already entitled to
reduced or full retirement benefits and who voluntarily
terminated their employment with the Company prior to
December 31, 1996. During the fourth quarter of 1995, the
Company amended its health benefits plan to cap the cost
absorbed by the Company for health care and life insurance
for its non-bargaining unit employees who retire after
December 31, 1996. The effect of this amendment was to
reduce the December 31, 1995 accumulated postretirement
obligation by $8.1 million.
The status of the plans is as follows:
In thousands of dollars
-----------------------
December 31, 1997 1996 1995
------------------------------------------------------------
Accumulated postretirement benefit
obligation (APBO) attributable to:
Retirees $ 97,591 $ 78,398 $ 73,032
Fully eligible plan
participants 11,117 15,206 17,235
Other active plan
participants 9,879 10,669 20,127
--------------------------------------------------------
Total APBO $118,587 $104,273 $110,394
Plan assets at fair value 5,039 5,322 5,716
APBO in excess of
plan assets $113,548 $ 98,951 $104,678
Unrecognized transition
obligation (78,586) (84,764) (99,836)
Unrecognized net prior
service cost (1,262) (90) (1,790)
Unrecognized net gain 8,958 24,235 30,110
------------------------------------------------------------
Accrued postretirement
benefit obligation $42,658 $38,332 $33,162
============================================================
The components of the estimated postretirement benefit cost
are as follows:
In thousands of dollars
------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
------------------------------------------------------------
Service cost $ 755 $ 642 $ 947
Interest on accumulated
postretirement benefit
obligation 7,734 7,735 8,614
Amortization of transition
obligation 5,276 5,512 6,045
Return on plan assets (476) (457) (462)
Amortization of prior
service cost 217 69 392
Amortization of gains
and losses (1,891) (2,024) (2,758)
Special termination benefit - 360 -
------------------------------------------------------------
Net postretirement benefit
cost $11,615 $11,837 $12,778
============================================================
The following assumptions were used to value the
postretirement benefit obligation:
Years Ended December 31, 1997 1996 1995
------------------------------------------------------------
Weighted average discount rate 7.0% 7.5% 7.5%
Expected return on plan assets 9.5% 9.0% 9.0%
Rate of salary increase 5.0% 5.0% 5.0%
Assumed rate of increase in cost
of covered health care benefits 6.6% 7.1% 10.5%
============================================================
Increases in health care costs were assumed to decline
consistently to a rate of 5.0% by 2006 and remain at that
level thereafter. If the health care cost trend rates were
increased by one percentage point, the accumulated
postretirement benefit health care obligation as of December
31, 1997 would increase by $8.6 million while the sum of the
service and interest cost components of the net
postretirement benefit health care cost for 1997 would
increase by $.6 million.
The Company changed its assumptions used in 1997 for the
weighted average discount rate and the expected return on
plan assets. These changes in assumptions did not have a
material effect on the 1997 postretirement expense.
9. EARNINGS PER SHARE
The Company adopted the provisions of
FAS 128, "Earnings Per Share" effective
December 31, 1997. This statement simplifies the standards
for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings
Per Share", and makes them comparable to international
earnings per share ("EPS") standards. Basic EPS excludes the
effect of common stock equivalents and is computed by
dividing income available to common shareowners by the
weighted average of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could result
if securities or other contracts to issue common stock were
exercised or converted into common stock. Historical
earnings per share have been restated to conform with the
provisions of FAS 128.
<TABLE>
In thousands of dollars, except per share data
Years Ended December 31, 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income Applicable to Common Stock $ 30,782 $189,005 $ 21,253
Average Common Shares Outstanding 168,975 165,234 153,764
Basic Earnings Per Common Share $0.18 $1.14 $0.14
================================
Diluted Earnings Per Share
Income Applicable to Common Stock $ 30,782 $189,005 $ 21,253
Interest Expense on Convertible
Debentures (1) - 360 -
--------------------------------
$ 30,782 $189,365 $ 21,253
================================
Average Common Shares Outstanding 168,975 165,234 153,764
Options and Warrants 992 1,771 9,612
Convertible Debentures (1) - 503 -
--------------------------------
169,967 167,508 163,376
================================
Diluted Earnings Per Common Share $0.18 $1.13 $0.13
================================
(1) Convertible debentures are anti-dilutive in 1997 and
1995.
</TABLE>
10. STOCK OPTION PLANS AND OTHER COMMON STOCK TRANSACTIONS
The Company has stock option plans for its directors,
executives and certain employees. The exercise price for all
plans is the fair market value of the stock on the date of
the grant. The options expire ten years from the date of the
grant. The options vest over a period from one to three
years. The maximum number of shares which may be granted
under the executive plan is limited to one percent of the
number of issued shares, including treasury shares, of the
Company's common stock during any calendar year. The maximum
number of shares which may be granted under the employee plan
is a total of 8,000,000 shares over a 10 year period. The
maximum number of shares which may be granted under the
directors plan is 1,000,000 shares. In connection with the
GlobalCenter merger, the Company assumed all the outstanding
options of GlobalCenter. The plans provide for discretionary
grants of stock options which are subject to the passage of
time and continued employment restrictions.
Information with respect to options under the above plans
follows:
Weighted Average
Shares Exercise Price
-----------------------------------------------------------
Outstanding at January 1, 1995 8,975,523 $7.37
Granted in 1995 2,095,603 $24.59
Cancelled in 1995 (196,117) $23.48
Exercised in 1995 (2,433,623) $7.48
-----------------------------------------------------------
Outstanding at December 31, 1995 8,441,386 $11.24
Granted in 1996 3,165,878 $30.02
Cancelled in 1996 (800,329) $28.26
Exercised in 1996 (5,481,681) $5.99
-----------------------------------------------------------
Outstanding at December 31, 1996 5,325,254 $25.25
Granted in 1997 4,679,587 $17.83
Cancelled in 1997 (1,529,340) $23.77
Exercised in 1997 (162,421) $5.58
-----------------------------------------------------------
Outstanding at December 31, 1997 8,313,080 $21.49
===========================================================
At December 31, 1997, 7,567,247 shares were available for
future grant.
The Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in
accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation
plans other than for restricted stock awards and for
GlobalCenter stock options issued with an exercise price
below fair market value. During 1997, the Company recorded
deferred compensation of $5.0 million related to the majority
of these options which represents the difference between the
exercise price of the options and the fair market value at
the time of issuance. As of December 31, 1997, the Company
recognized related compensation expense of $2.0 million.
The remaining balance will be amortized over the four year
term of these options.
During 1996 the Company adopted the disclosure requirements
of FAS 123, "Accounting for Stock-Based Compensation". In
accordance with FAS 123, the Company has elected not to
recognize compensation cost related to stock options with
exercise prices equal to the market price at the date of
issuance. If the Company had elected to recognize
compensation cost based on the fair value of the options at
grant date as prescribed by FAS 123, the following results
would have occurred using the Black-Scholes option valuation
model:
In thousands of dollars, except per share data
-------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
-------------------------------------------------------------
Post-Tax Compensation Cost $12,049 $ 5,358 $ 1,097
Pro Forma Net Income $19,752 $184,829 $21,347
Pro Forma Basic EPS $ 0.11 $ 1.11 $ 0.13
Pro Forma Diluted EPS $ 0.11 $ 1.10 $ 0.12
Fair Value of Options
Granted $ 5.85 $ 8.50 $ 7.17
Volatility 33.2% 28.4% 28.4%
Dividend Yield 3.5% 3.0% 3.0%
Risk-Free
Interest Rates 5.7% to 6.7% 5.5% to 7.0% 5.5% to 7.0%
============================================================
Due to the difference in vesting requirements in each of
the plans, the expected lives of the options range from 5 to
7 years. Forfeitures are recognized as they occur.
Options Outstanding
-------------------
Weighted
Average Weighted
Range Of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
------------------------------------------------------
$1 - $5 929,502 8.08 $ 2.21
$12 - $20 1,393,851 8.11 $17.17
$21 - $50 5,989,727 8.41 $25.81
======================================================
Options Exercisable
-------------------
Weighted
Range Of Average
Exercise Number Exercise
Prices Exercisable Price
-----------------------------------------------------
$1 - $5 438,449 $ 2.60
$12 - $20 553,051 $16.18
$21 - $50 1,589,425 $26.13
=====================================================
Restricted Stock Plan
The Company has 490,000 shares of common stock outstanding
as of December 31, 1997 under its Management Stock Incentive
Plan. The stock issued under this plan ("Restricted Stock")
is subject to the achievement of certain performance goals,
the passage of time and continued employment restrictions.
Participants in the plan may earn, without cost to them,
Frontier common stock over three years. Shareowners' equity
reflects unearned compensation for the unvested stock
awarded. During 1997, the Company recognized related
compensation expense of $1.6 million. The Company did not
recognize compensation expense for restricted stock granted
prior to 1997 as the market price of the common stock was
significantly below the vesting prices.
<TABLE>
11. PREFERRED STOCK
In thousands of dollars, except share data
------------------------------------------
December 31, 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C>
Frontier Corporation-850,000 shares authorized;
par value $100
5.00% Series-redeemable at $101 per share
Shares outstanding 100,000 100,000 100,000
Amount outstanding $ 10,000 $ 10,000 $ 10,000
5.65% Series-redeemable at $101 per share
Shares outstanding 50,000 50,000 50,000
Amount outstanding $ 5,000 $ 5,000 $ 5,000
4.60% Series-redeemable at $101 per share
Shares outstanding 48,500 48,500 50,000
Amount outstanding $ 4,850 $ 4,850 $ 5,000
Frontier Communications of New York, Inc.
40,000 shares authorized; par value $100
5.875% Series A-redeemable at par
Shares outstanding - 18,694 18,694
Amount outstanding $ - $ 1,869 $ 1,869
7.80% Series B-redeemable at
$100.80-$105.00 per share
Shares outstanding - 6,160 6,240
Amount outstanding $ - $ 616 $ 624
Frontier Communications of AuSable Valley, Inc.
4,000 shares authorized; par value $100
5.50% Series-redeemable at par
Shares outstanding 2,754 2,754 2,754
Amount outstanding $ 276 $ 276 $ 276
------------------------------------------------------------------------------
Total shares outstanding 201,254 226,108 227,688
Total amount outstanding $ 20,126 $ 22,611 $ 22,769
==============================================================================
</TABLE>
Effective January 1, 1997, the Company redeemed all of the
outstanding preferred stock of its wholly-owned subsidiary,
Frontier Communications of New York, Inc. at approximately
par value.
At the special meeting in December 1994, Frontier
shareowners authorized 4,000,000 shares of a new class of
preferred stock, having a par value of $100.00 per share and
designated as Class A Preferred Stock. This class of stock
will rank junior to the cumulative preferred stock as to
dividends and distributions, and upon the liquidation,
dissolution or winding up of the Company. As of December 31,
1997, no shares of this class have been issued.
On April 9, 1995, the Board of Directors adopted a
Shareowners Rights Plan (the "Plan"). This Plan provides for
a dividend distribution on each outstanding common share of a
right to purchase one one-hundredth of a share of Series A
Junior Participating Class A Preferred Stock. The rights are
designed to protect shareowners in the event of an
unsolicited offer or initiative to acquire Frontier which the
Board does not believe is fair to shareowners. The rights
become exercisable under certain circumstances to purchase
Frontier common stock at one-half market value.
12. DISCONTINUANCE OF REGULATORY ACCOUNTING
The Company determined in 1995 that FAS 71,
Accounting for the Effects of Certain Types of
Regulation," was no longer applicable based upon changes in
regulation, increasingly rapid advancements in
telecommunications technology and other factors creating
competitive markets.
As a result of the discontinuance of FAS 71, the Company
recorded a non-cash extraordinary charge of $112.1 million,
net of an income tax benefit of $68.4 million as of September
30, 1995. The components of the extraordinary charge follow:
Millions of Dollars
-------------------
Pre-Tax After-Tax
------- ---------
Increase to the accumulated depreciation balance $(185.6) $(115.4)
Elimination of other net regulatory liabilities 5.1 3.3
-------------------
$(180.5) $(112.1)
===================
The adjustment of $185.6 million to net telephone plant was
necessary because estimated useful lives and depreciation
methods historically prescribed by regulators did not keep
pace with the technological changes in the Company and
differed significantly from those used by unregulated
entities. The discontinuance of FAS 71 also required the
Company to eliminate for financial reporting the effects of
any actions of regulators that had been recognized as
regulatory assets and liabilities pursuant to FAS 71.
13. OTHER ACCOUNTING PRONOUNCEMENTS ADOPTED
Effective January 1, 1996, the Company adopted 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 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 Frontier Telephone of
Rochester and Frontier Communications of New York
subsidiaries.
The Company adopted FAS 116, "Accounting for Contributions
Received and Contributions Made" for all of its consolidated
subsidiaries effective September 30, 1995. FAS 116 requires
that the Company reflect in current expenses an accrual for
the cost of multi-year charitable contributions. The net
impact of adopting FAS 116 resulted in a post-tax charge of
$1.5 million, net of taxes of $0.8 million.
14. MAJOR CUSTOMER
The Company's revenues include the impact of a major
carrier customer whose revenues comprised approximately 4%,
15% and 10% of consolidated revenues in 1997, 1996 and 1995,
respectively.
15. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Operating Environment-The Company has evolved from being a
provider of local and long distance services in certain areas
of the country to being a nationwide provider of integrated
communications services. As a result, the Company has
formidable competitors of greater size and expects that, over
time and due to the lifting of regulatory restrictions, there
will be more entrants into the long distance business and its
local markets.
Legal Matters-The Company and a number of its subsidiaries
in the normal course of business are party to a number of
judicial, regulatory and administrative proceedings. The
Company's management does not believe that any material
liability will be imposed as a result of any of these matters.
Leases and License Agreements-The Company leases buildings,
land, office space, fiber optic network, computer hardware and
other equipment, and has license agreements for rights-of-way
for the construction and operation of a fiber optic
communications system.
Total rental expense amounted to $156.5 million in 1997,
$164.7 million in 1996 and $77.9 million in 1995.
Minimum annual rental commitments under non-cancelable
operating leases and license agreements in effect on December
31, 1997 were as follows:
In thousands of dollars
License
Years Buildings Equipment Agreements
---------------------------------------------------------
1998 $ 19,014 $3,450 $ 78,725
1999 16,207 2,754 54,592
2000 15,054 2,443 20,333
2001 13,587 1,435 12,656
2002 12,576 63 2,156
2003 and thereafter 28,473 - 1,431
---------------------------------------------------------
Total $104,911 $10,145 $169,893
=========================================================
Sale of Minnesota Southern Cellular Telephone Company-On
December 18, 1997, the Company announced a definitive
agreement had been signed with Hickory Tech Corporation to
sell Minnesota Southern Cellular Telephone. The transaction,
which is subject to regulatory approvals is expected to close
by the second quarter of 1998. The Company anticipates that
a gain will be recognized as a result of this transaction.
Other Matters-In connection with the Company's capital
program, certain commitments have been made for the purchase
of material and equipment. In October 1996, construction
began on the SONET based fiber optic network build. Total
capital expenditures for 1998 are currently projected to be
up to $600 million. At December 31, 1997, $238.2
million of deposits for the SONET build are included in the
"Deferred and other assets" caption in the Consolidated
Balance Sheets.
16. BUSINESS SEGMENT INFORMATION
As of January 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 certain 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.
Revenues and sales, operating income, depreciation,
construction and identifiable assets by business segment are
set forth in the Business Segment Information.
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17. QUARTERLY DATA
(Unaudited)
1997 Quarter
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In thousands of dollars, Full
except per share data 1st 2nd 3rd 4th Year
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $577,576 $590,116 $606,521 $600,596 $2,374,809
Operating Income (Loss) (28,566) (1) 74,019 64,871 (24,166) (2) 86,158
Consolidated Net
Income (Loss) (15,902) (1) 39,334 32,451 (24,082) (2) 31,801
Earnings (loss) per share:
Basic $(.10) $.23 $.19 $(.14) $.18
Diluted $(.10) (3) $.23 $.19 $(.14) (3) $.18
Market Price:
High $23.25 $20.50 $24.19 $25.00
Low $17.75 $15.38 $19.00 $20.00
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1996 Quarter
--------------------------------------------------------------
In thousands of dollars, Full
except per share data 1st 2nd 3rd 4th Year
-------------------------------------------------------------------------------------
Revenues $657,760 $673,145 $672,741 $584,873 $2,588,519
Operating Income 112,150 122,622 129,211 4,240 (5) 368,223
Consolidated Net Income 57,309 (4) 69,143 73,825 (10,090)(5) 190,187
Earnings per share
before extraordinary items
and cumulative effect:
Basic $.40 $.42 $.44 $(.06) $1.19 (6)
Diluted $.39 $.41 $.44 $(.06) (3) $1.18
Earnings per share:
Basic $.35 $.42 $.44 $(.06) $1.14 (6)
Diluted $.34 $.41 $.44 $(.06) (3) $1.13
Market Price:
High $33.25 $33.38 $31.25 $31.88
Low $28.25 $27.75 $25.88 $19.88
(1)Includes a pre-tax charge of $96.6 million primarily
related to the write-off of certain leased network costs no
longer necessary to support long distance traffic volumes.
(2)Includes a pre-tax charge of $86.8 million primarily
related to the divestiture of certain product lines and
businesses.
(3)Due to the net loss incurred, the earnings per share
calculation excludes common stock equivalents.
(4)Includes a post-tax cumulative effect charge related to
change in accounting principle of $8.0 million.
(5)Includes a pre-tax charge of $67.7 million as a result of
the following: $28.0 million representing a one-time charge
for the curtailment of certain company pension plans; $20.8
million is the result of a nonrecurring charge relating to
the Company's conference calling product line and $18.9
million related to the write-off of in-process product
development costs associated with the 1996 GlobalCenter
merger with GCIS.
(6)As a result of rounding, the total of the four quarters'
earnings does not equal the earnings per share for the
year.
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