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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-91250
ROCHESTER TELEPHONE CORP.
(Exact name of registrant as specified in its charter)
New York 16-1469713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 South Clinton Avenue, Rochester, NY 14646-0700
(Address of principal executive offices) (Zip Code)
(716) 777-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
No Par, No Stated Value Common Stock: 772 shares outstanding as
of April 30, 1996
The Registrant meets the conditions set forth in general
instruction H(1)(a) and (b) of Form 10-Q and is therefore filing
this form with the reduced disclosure format.
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ROCHESTER TELEPHONE CORP.
Form 10-Q
Index
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three months ended
March 31, 1996 and March 31, 1995 3
Balance Sheets as of March 31, 1996 and
December 31, 1995 4
Statements of Cash Flows for the three months
ended March 31, 1996 and March 31, 1995 5
Notes to Financial Statements 6
Item 2. Management's Narrative Analysis of the
Results of Operations 8
Part II. OTHER INFORMATION
Item 5. Employees and Labor Relations 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Index to Exhibits 14
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<TABLE>
ROCHESTER TELEPHONE CORP.
STATEMENTS OF INCOME
(Unaudited)
3 Months Ended March 31,
- - ------------------------------------------------------------
In thousands of dollars 1996 1995
- - ------------------------------------------------------------
<S> <C> <C>
Revenues $ 81,134 $77,652
- - ------------------------------------------------------------
Costs and Expenses
Operating Expenses 41,371 35,476
Depreciation and amortization 12,799 13,981
Taxes other than income taxes 5,098 6,534
- - ------------------------------------------------------------
Total Costs and Expenses 59,268 55,991
- - ------------------------------------------------------------
Operating Income 21,866 21,661
Interest expense 898 1,738
Other income (expense), net (631) (675)
- - ------------------------------------------------------------
Income before taxes and cumulative
effect of change in accounting
principle 20,337 19,248
Income taxes 7,136 7,378
- - ------------------------------------------------------------
Income before cumulative effect of
change in accounting principle 13,201 11,870
Cumulative effect of change in
accounting principle for the
impairment of long-lived assets and
for long-lived assets to be
disposed of 6,949 0
- - ------------------------------------------------------------
Net Income $ 6,252 $ 11,870
============================================================
See accompanying Notes to Financial Statements
</TABLE>
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<TABLE>
ROCHESTER TELEPHONE CORP.
BALANCE SHEETS
(Unaudited)
March 31, December 31,
- - ------------------------------------------------------------
In thousands of dollars 1996 1995
- - ------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,654 $ 5,643
Accounts receivable, (less 51,846 54,450
allowance for uncollectibles of
$1,702 and $1,421, respectively)
Accounts receivable - affiliates 5,565 2,273
Materials and supplies 3,128 3,084
Prepaid directory 9,417 13,038
Other prepayments 1,586 1,752
- - ------------------------------------------------------------
Total Current Assets 74,196 80,240
Property, plant and equipment, net 328,560 340,545
Prepaid pension 28,718 28,305
Deferred and other assets 2,295 1,799
- - ------------------------------------------------------------
Total Assets $433,769 $450,889
============================================================
LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities
Accounts payable $ 31,499 $ 42,054
Accounts payable - affiliates 13,013 9,770
Advance from affiliate 0 5,753
Advance billings 5,030 5,120
Taxes accrued 12,080 5,602
Other liabilities 3,393 5,520
- - ------------------------------------------------------------
Total Current Liabilities 65,015 73,819
Long-term debt 64,099 60,300
Deferred income taxes 30,869 36,196
Postretirement benefits obligation 21,675 20,253
Other long-term liabilities 8,776 9,238
- - ------------------------------------------------------------
Total Liabilities 190,434 199,806
- - ------------------------------------------------------------
SHAREOWNER'S EQUITY
Common stock, no par, no stated
value 263,537 263,537
Retained earnings (20,202) (12,454)
- - ------------------------------------------------------------
Total Shareowner's Equity 243,335 251,083
- - ------------------------------------------------------------
Total Liabilities and Share- $ 433,769 $ 450,889
owner's Equity
============================================================
See accompanying Notes to Financial Statements
</TABLE>
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<TABLE>
ROCHESTER TELEPHONE CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
3 Months Ended March 31,
- - -------------------------------------------------------------
In thousands of dollars 1996 1995
- - -------------------------------------------------------------
<S> <C> <C>
Net Income $ 6,252 $ 11,870
- - -------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Cumulative effect of change in 10,691 0
accounting principle
Depreciation and amortization 12,799 13,981
Changes in operating assets and
liabilities:
Increase in accounts receivable (688) (49,290)
(Increase) decrease in (44) 122
material and supplies
Decrease in prepaid directory 3,621 2,895e
Decrease in other prepayments 166 62
Increase in deferred and (909) (2,036)
other assets
(Decrease) increase in (7,312) 27,198
accounts payable
Decrease in advance billings (90) (875)
Increase in other liabilities 4,351 9,325
Decrease in deferred income (5,327) (340)
taxes
Increase in postretirement 1,422 2,603
benefits obligation
(Decrease) increase in (462) 2,828
other long-term liabilities
- - ------------------------------------------------------------
Total adjustments 18,218 6,473
- - ------------------------------------------------------------
Net cash provided by operating activities 24,470 18,343
- - -----------------------------------------------------------
Expenditures for property, plant and (11,505) (6,459)
equipment
- - ------------------------------------------------------------
Net cash used in investing activities (11,505) (6,459)
- - ------------------------------------------------------------
Repayments of long-term debt 0 (40,000)
Proceeds from long-term debt 3,799 39,735
Advance repayment to affiliate (5,753) 0
Dividends paid (14,000) 0
- - ------------------------------------------------------------
Net cash used in financing activities (15,954) (265)
- - ------------------------------------------------------------
Net Decrease/Increase in Cash & Cash (2,989) 11,619
Equivalents
Cash and cash equivalents at beginning 5,643 0
of period
- - ------------------------------------------------------------
Cash and Cash Equivalents at End of $ 2,654 $11,619
Period
============================================================
See accompanying Notes to Financial Statements
</TABLE>
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Notes to Financial Statements
(Unaudited)
Note 1: Comparative Financial Statements
Rochester Telephone Corp. (the "Company"), a wholly
owned subsidiary of Frontier Corporation ("Frontier"),
received its net assets from Frontier on January 1, 1995.
Prior to January 1, 1995, the Company's results from
operations and net assets were included in the consolidated
financial statements of Frontier Corporation.
In the opinion of management, the financial statements
reflect all adjustments (of a normal and recurring nature) which
are necessary to present fairly the financial positions, results
of operations and cash flows for the interim periods.
Note 2: Long-Lived Assets to Be Disposed Of
Effective January 1, 1996 the Company adopted Financial
Accounting Standards No. 121 (FAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". FAS 121 requires that certain long-lived assets
and identified 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 $6.9 million (net of a tax benefit of
$3.7 million) and is reported in the Statement of Income as a
cumulative effect of a change in accounting principle. The
charge represents the cumulative adjustment required by FAS
121 to remeasure the carrying amount of certain assets held for
disposal as of January 1, 1996. This charge applies to an asset
write-down for the expected impairment loss and disposal costs
for telephone switching equipment as a result of the Company
implementing a central office switch consolidation project in
its Rochester, New York market.
Note 3: Discontinuance of Regulatory Accounting
In September 1995, the Company discontinued the
application of FAS 71, "Accounting for the Effects of Certain
Types of Regulation" on its regulated telephone operations. This
change was based on the Company having achieved full price
regulation on both the intrastate and interstate regulated
telephone operations and recognition of the fact that competition
has increased to the point where the Company believes traditional
rate-base, rate of return regulation for setting prices based on
historical and future costs is no longer feasible. As a result of
the discontinuance of FAS 71, the Company recorded a non-cash
extraordinary charge of $60.4 million, net of an income tax
benefit of $34.9 million.
Note 4: Cash Flows
For purposes of the Statement of Cash Flows, the Company
considers all highly-liquid investments with an original maturity
of three months or less to be cash equivalents.
The Company paid a cash dividend to Frontier in the amount
of $14.0 million in March 1996.
Actual interest paid was $1.8 million and $4.8 million for
the three months ended March 31, 1996 and 1995, respectively.
The Company paid no income taxes during the first quarter of 1996.
Actual income taxes paid during the quarter ended March 31, 1995
were $1.6 million.
Note 5: Subsequent Events
On April 11, 1996 the Board of Directors passed a resolution
to declare a quarterly dividend payment of $14 million payable in
cash on June 28, to the holders of record of the Company's common
stock as of April 30, 1996.
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ROCHESTER TELEPHONE CORP.
ITEM 2 - MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS
Rochester Telephone Corp. (the "Company") is a
regulated independent telephone company that serves
approximately 518,000 access lines in the greater Rochester,
New York metropolitan area. The Company was incorporated in
December 1994 as a wholly owned subsidiary of Frontier
Corporation. Frontier Corporation, previously known as
Rochester Telephone Corporation, has been providing local
telephone service in the greater Rochester market since
1920. The Company is the primary provider of basic telephone
services in the Rochester market and offers its customers a
full complement of local telephone network services, access
to long distance network services, directory and other
operator services. The Company also offers all of its
network services for sale on a wholesale basis to other
telecommunication service providers in the Rochester market.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1996 were
$81.1 million, an increase of $3.5 million or 4.5% over the
comparable period for 1995. Revenue growth was primarily
driven by a 3.9% increase in access lines, increases in
telephone feature revenues, directory advertising, intralata
access revenues and increased wholesale usage. These
increases were partially offset by price reductions for
business touchtone as agreed to under the Open Market Plan
and a reduction in intralata toll revenues (See discussion
of the Open Market Plan on page 11).
Costs and expenses for the three months ended March
31, 1996 amounted to $41.4 million, an increase of $5.9
million or 16.6% over the three month period ended March
31, 1995. This increase is primarily the result of certain
one-time costs incurred related to higher labor and
associated expenses resulting from the expiration of the
Communication Worker's of America (CWA) Local 1170 union
labor agreement with the Company. These increased costs
were necessary to ensure continued high standards of
customer service in the event of a work stoppage. In
addition, the Company experienced higher overtime costs to
handle increased maintenance work on its network to meet
customer service metrics and increases in the cost of sales
associated data terminal equipment, ISDN and centrex
services.
Depreciation and amortization expense for the first
three months of 1996 decreased $1.2 million or 8.45% from
the comparable period last year due primarily to the
reduction in deprecation expense associated with the
impairment loss and plant writedown under FAS 121.
Net income for the first three months of 1996 was $6.3
million as compared to net income of $11.9 million for the
same period in 1995. The results for the three months of
1996 reflected a one-time after tax charge of $6.9 million
for the adoption of Financial Accounting Standards Board
Statement No.121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", which related to the accounting for a central
office switch consolidation project in the Rochester, New
York market. Excluding this charge, 1995 net income
increased by $1.3 million or 11.2% over the comparable 1995
period.
During 1995, management committed to a plan which makes
Rochester Telephone Corp. the first company in the United
States to begin a central office switch consolidation
project in a major market. The three-year plan to
consolidate host switches by over 60% is projected to
improve network efficiency and reduce the cost of
maintenance and software upgrades.
Other Income Statement Items
Interest expense for the period ended March 31, 1996
amounted to $0.9 million, a decrease of $0.8 million or 48%
from the first three months of 1995. This decrease is
attributed to lower average outstanding debt levels and
reduced interest rates applicable to the Company's
outstanding long-term debt.
Income taxes for the first three months of 1996
decreased slightly to $7.1 million, or a 35.1% effective tax
rate for the period. This compares to income taxes of $7.4
million or an effective tax rate of 38.3% for the comparable
period in 1995. The decrease in the effective tax rate is a
result of the Company's discontinuance of regulatory
accounting for deferred taxes associated with its telephone
plant (See Note 3 in the Notes to the Financial Statements).
FINANCIAL CONDITION
Review of Cash Flow Activity
At March 31, 1996 the Company had $2.7 million in cash
and cash equivalents. Cash generated from operations
amounted to $24.5 million for the three months ended March
31, 1996 as compared to $18.3 million for the comparable
period in 1995. The primary driver of the operating cash
flow increase was the reduction in working capital
requirements. Offsetting the cash provided by operating
activities in 1996 and 1995 are outflows for capital
expenditures of $11.5 million and $6.5 million,
respectively.
Cash flow from financing activities amounted to a net
outflow of $16.0 million for the three months ended March
31, 1996 compared with a net outflow of $0.3 million for the
same period last year. In the first quarter of 1996, the
Company paid cash dividends of $14.0 and repaid advances to
Frontier in the amount of $5.8 million. In addition, the
Company borrowed $3.8 million under its commercial paper
program. No cash dividends were paid during the first three
months of 1995.
Debt
At March 31, 1996, the Company's total outstanding long-
term debt amounted to $64.1 million. This debt consisted of
$24.1 million issued under the Company's Commercial Paper
program and $40.0 million of medium-term notes issued on
March 27, 1995.
In the first quarter of 1996, the Company refinanced
the outstanding debt previously issued under the revolving
credit agreement with commercial paper issued by Chase
Manhattan. The Company's commercial paper program is backed
by the revolving credit agreement.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of
total capitalization) was 20.8% at March 31, 1996 as
compared with 30.0 percent at March 31, 1995. This change is
primarily due to the reduction throughout 1995 of
outstanding debt under the Revolving Credit Agreement. Pre-
tax interest coverage was 23.6 times through the first three
months of 1996, as compared with 12.1 times for the first
three months of 1995.
Capital Spending
For the three months ended March 31, 1996 capital
expenditures amounted to $11.5 million as compared to $6.5
million for comparable period in 1995. The Company plans to
spend a total of approximately $45.0 million on its 1996
annual capital program. The full year capital program
represents an increase of $6.4 million over 1995. This
increase is largely driven by capital requirements
associated with the host consolidation project.
OTHER ITEMS
Open Market Plan
The Company began its second year of operations under
the Open Market Plan. The Open Market Plan promotes
telecommunications competition in the Rochester, New York
market by providing for (1) interconnection of competing
local networks including reciprocal compensation for
terminating traffic, (2) equal access to network databases,
(3) access to local telephone numbers and (4) service
provider number portability. The inherent risk associated
with opening the Rochester market to competition is that
some customers are able to purchase services form
competitors, which reduces the number of retail customers
and potentially causes a decrease in the revenues and
profitability for the Company. However, results in 1995 and
in the first quarter of 1996, indicate that a stimulation of
demand in the use of the network and new product revenue can
offset loss of retail customers. Increased competition may
also lead to additional price decreases for services,
adversely impacting the Company's margins. During
the seven year period of the Open Market Plan Agreement,
rate reductions of $21 million, $11.5 million of which
occurred through 1995 and an additional $2.5 million which
will occur during the first quarter of 1996, will be
implemented for Rochester area consumers and rates
charged for residential and business telephone service may
not be increased. The Open Market Plan does not require the
Company to rebate any additional earnings achieved through
operating efficiencies that previously would have been
shared with customers.
In addition to the required rate reductions the Open
Market Plan prohibits the payment of dividends by the
Company to Frontier Corporation if (i) the Company's senior
debt has been downgraded to "BBB" by Standard & Poor's
("S&P"), or the equivalent rating by other rating agencies
or is placed on credit watch for such a downgrade, or (ii) a
service quality penalty is imposed under the Open Market
Plan. Dividends paid to the parent, Frontier Corporation,
also are prohibited unless the Company's directors certify
that such dividends will impair neither the Company's
service quality nor its ability to finance its short and
long term capital needs on reasonable terms while
maintaining an S&P debt rating target of "A".
AT&T Communications of New York filed a complaint with
the New York State Public Service Commission (NYSPSC) for
reconsideration of the Open Market Plan on October 3, 1995.
A petition by AT&T to the same effect was dismissed earlier
in 1995 as premature. The current complaint seeks numerous
changes in light of AT&T's experience, including changes in
the wholesale discount, a minutes of use surcharge and a
number of operational and support activities. Some of these
issues are also being considered in other states in other
unrelated local competition proceedings. On February 2,
1996, the NYSPSC issued an Order reconvening Parties to the
Open Market Plan. Pursuant to this Order, a number of
issues will be litigated before the NYSPSC in the Open
Market proceeding and a related proceeding, including the
wholesale discount, the minutes of use surcharge and other
operational issues. The Company cannot predict the outcome
of this matter.
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PART II - OTHER INFORMATION
Item 5. Employees and Labor Relations
The labor contract between the Communications Workers
of America (CWA) Local 1170 and the Company expired on
January 31, 1996. Of the Company's total workforce of
approximately 1600 employees at March 31, 1996, membership
in the CWA Local accounted for approximately 42% of that
total. The union membership continues to work without a
collective bargaining agreement. After six months of
collective bargaining without reaching an agreement, the
Company declared that the negotiations were at impasse and
implemented the terms of its final offer effective April 9,
1996. The CWA Local 1170 is challenging the Company's
declaration of impasse and implementation through the filing
of several unfair labor practice charges with the National
Labor Relations Board (NLRB). No hearing dates have been
set as of May 13, 1996 and the Company cannot predict the
final outcome of these matters at this time.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter:
SEC Filing Date Item No. Financial Statements
March 26, 1996 5 None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ROCHESTER TELEPHONE CORP.
(Registrant)
Dated: May 13, 1996 /s/ Martin Mucci
By: ________________________
Martin Mucci
Vice President and Treasurer
(and principal financial
officer)
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INDEX TO EXHIBITS
Exhibit No. Description Reference
27 Financial Data Schedule Filed
herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ROCHESTER TELEPHONE CORP.'S FINANCIAL STATEMENTS FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000936105
<NAME> ROCHESTER TELEPHONE CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,654
<SECURITIES> 0
<RECEIVABLES> 59,113
<ALLOWANCES> (1,702)
<INVENTORY> 3,128
<CURRENT-ASSETS> 74,196
<PP&E> 863,074
<DEPRECIATION> (534,514)
<TOTAL-ASSETS> 433,769
<CURRENT-LIABILITIES> 65,015
<BONDS> 64,099
0
0
<COMMON> 263,537
<OTHER-SE> (20,202)
<TOTAL-LIABILITY-AND-EQUITY> 433,769
<SALES> 81,134
<TOTAL-REVENUES> 81,134
<CGS> 0
<TOTAL-COSTS> 59,268
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