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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] 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
FRONTIER TELEPHONE OF ROCHESTER, INC.
(Exact name of registrant as specified in its charter)
(Previously Rochester Telephone Corp.)
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 October 31, 1997
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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FRONTIER TELEPHONE OF ROCHESTER, INC.
Form 10-Q
Index
Page
Number
Part I. FINANCIAL INFORMATION ------
Item 1. Financial Statements
Statements of Income for the
three months ended and for the
nine months ended September 30, 1997
and September 30, 1996 3
Balance Sheets as of September 30,
1997 and December 31, 1996 4
Statements of Cash Flows for the
nine months ended September 30,
1997 and September 30, 1996 5
Notes to Financial Statements 6
Item 2. Management's Narrative Analysis of the
Results of Operations 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14-15
Item 5. Employees and Labor Relations 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Index to Exhibits 17
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Income
(Unaudited)
3 Months Ended 9 Months Ended
September 30, September 30,
In thousands of dollars 1997 1996 1997 1996
- ---------------------------------------------------------------------
Revenues $80,813 $79,828 $244,123 $242,933
Costs and Expenses
Operating expenses 39,121 38,979 114,848 118,839
Depreciation and amortization 13,664 13,503 41,028 40,130
Taxes other than income taxes 5,868 5,354 17,669 16,253
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Total Costs and Expenses 58,653 57,836 173,545 175,222
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Operating Income 22,160 21,992 70,578 67,711
Interest expense 538 781 1,940 2,434
Other expense 235 342 879 1,433
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Income Before Taxes and
Cumulative Effect of
Change in Accounting Principle 21,387 20,869 67,759 63,844
Income taxes 7,525 7,105 23,693 22,140
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Income Before Cumulative Effect of Change
in Accounting Principle 13,862 13,764 44,066 41,704
Cumulative effect of change in
accounting principle - - - (6,949)
- ---------------------------------------------------------------------
Net Income $13,862 $13,764 $ 44,066 $ 34,755
=====================================================================
See accompanying Notes to Financial Statements.
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Balance Sheets
September 30, December 31,
1997 1996
In thousands of dollars (Unaudited)
- -------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,427 $ 3,591
Accounts receivable, (less allowance
for uncollectibles of $2,076
and $1,501, respectively) 42,478 47,777
Accounts receivable - affiliates 3,224 2,670
Advances to affiliates 10,490 -
Materials and supplies 1,340 2,006
Prepaid directory 4,152 12,463
Other prepayments 2,491 1,406
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Total Current Assets 65,602 69,913
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Property, plant and
equipment, net 329,525 330,552
Prepaid pension 16,092 14,204
Deferred and other assets 901 1,247
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Total Assets $412,120 $415,916
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LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities
Accounts payable $ 25,757 $ 31,759
Accounts payable - affiliates 13,808 19,022
Advances from affiliate - 3,827
Advance billings 4,785 4,994
Taxes accrued 461 3,047
Other current liabilities 1,409 5,908
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Total Current Liabilities 46,220 68,557
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Long-term debt 40,000 62,872
Deferred income taxes 21,679 25,266
Postretirement benefits
obligation 24,976 23,176
Other long-term liabilities 3,014 4,971
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Total Liabilities 135,889 184,842
- -------------------------------------------------------
Shareowner's Equity
Common stock, no par value
and additional paid in capital:
authorized, 1,000 shares:
issued, 772 shares in
1997 and 1996 232,165 231,074
Retained earnings 44,066 -
- -------------------------------------------------------
Total Shareowner's Equity 276,231 231,074
- -------------------------------------------------------
Total Liabilities and
Shareowner's Equity $412,120 $415,916
=======================================================
See accompanying Notes to Financial Statements.
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Cash Flows
(Unaudited)
9 Months Ended September 30,
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------
Operating Activities
Net income $44,066 $34,755
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Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in
accounting principle - 10,691
Depreciation and amortization 41,028 40,130
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,745 4,660
Decrease in materials and supplies 666 481
Decrease in prepaid directory 8,311 8,938
Increase in other prepayments (1,085) (488)
Increase in prepaid pension (1,888) (930)
(Decrease) increase in deferred
and other assets 293 (144)
(Decrease) increase in accounts payable (11,216) 1,793
Decrease in advance billings (209) (521)
Decrease in accrued taxes (2,586) (3,325)
Decrease in other current liabilities (4,499) (3,439)
Increase in postretirement benefits
obligation 1,800 2,197
Decrease in deferred income taxes (2,496) (8,314)
Decrease in other long term liabilities (1,957) (6,630)
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Total adjustments 30,907 45,099
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Net cash provided by operating activities 74,973 79,854
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Investing Activities
Expenditures for property, plant and equipment (39,948) (37,328)
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Net cash used in investing activities (39,948) (37,328)
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Financing Activities
Repayments of long-term debt (22,872) -
Proceeds of long-term debt - 179
Advances to/from affiliate (14,317) (4,718)
Dividends paid - (22,301)
Return of capital to Frontier Corporation - (19,699)
- ------------------------------------------------------------------------
Net cash used in financing activities (37,189) (46,539)
- ------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (2,164) (4,013)
Cash and Cash Equivalents at Beginning of Period 3,591 5,643
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Cash and Cash Equivalents at End of Period $ 1,427 $ 1,630
========================================================================
See accompanying Notes to Financial Statements.
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Frontier Telephone of Rochester, Inc.
Notes to Financial Statements
(Unaudited)
Note 1: Accounting Policies
The financial statements of Frontier Telephone of
Rochester, Inc. ("FTR" or the "Company"), (formerly
Rochester Telephone Corp.), a wholly owned subsidiary of
Frontier Corporation ("Frontier"), are unaudited and have
been prepared in accordance with generally accepted
accounting principles for interim financial reporting and
Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) which are
necessary to present fairly the financial position, results
of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the
Annual Report of the Company on Form 10-K for the year ended
December 31, 1996.
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.
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 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 $6.9 million (net of a tax benefit of
$3.7 million) and is reported in the Statements 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. It applies to an
asset write-down for the impairment loss and disposal costs
for telephone switching equipment as a result of the Company
implementing a central office switch consolidation project.
Note 3: Long-Term Debt
Effective June 30, 1997, the Company reduced its
available line of credit under its Revolving Credit
Agreement from $100.0 million to $50.0 million.
On March 31, 1997, Standard & Poor's ("S&P") announced
their new domestic telephone company rating methodology,
which addresses the impact of deregulation on operating and
holding company ratings. As a result, the ratings of 16
companies were affected by S&P's announcement, and S&P
lowered their rating of the Company's long-term debt from
"AA" to "AA-". Under S&P's revised rating methodology, a
local telephone company is typically allowed a rating one
"notch" higher than that of the consolidated entity (i.e.,
holding company and operating subsidiaries). However, the
Company was allowed a two "notch" differential, largely as a
result of the regulatory controls in existence under the
Company's Open Market Plan.
Note 4: Common Stock and Additional Paid In Capital
The value assigned to the Company's common stock and
additional paid in capital was determined based on the
historical book value of the assets transferred from
Frontier to the Company on January 1, 1995. In the first
quarter of 1997, a $1.1 million adjustment to this valuation
was required relating to deferred taxes associated with the
assets transferred. This adjustment is reflected as an
increase to common stock and additional paid in capital and
a decrease to deferred taxes.
Note 5: Regulatory Matters
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 S&P, or the
equivalent rating by other rating agencies or is placed on
credit watch for such a downgrade, or (ii) certain service
quality measures fall below minimum levels stipulated in the
Open Market Plan. Dividend payments to Frontier also
require that the Company's directors certify that such
dividends will not impair the Company's service quality or
its ability to finance its short and long-term capital needs
on reasonable terms while maintaining an S&P debt rating
target of "A".
In 1996, the Company failed to achieve the service
quality levels required by the Open Market Plan. On
December 19, 1996, pursuant to the Open Market Plan, FTR
requested that the New York State Public Service Commission
("NYSPSC") staff exclude certain months from the calculation
used to measure service quality, due to operating conditions
considered by management to be abnormal and beyond the
Company's control. In April 1997, the Company received
notice from the NYSPSC that its request for a waiver of
certain conditions in the Open Market Plan related to
service quality results was denied. The NYSPSC's ruling
resulted in a temporary restriction on the payment of
dividends from the Company to Frontier and a refund to the
Company's customers of approximately $.9 million. On
October 22, 1997, the NYSPSC adopted an order requiring the
Company to issue rebates of approximately $2.60 per
customer, commencing within sixty days after the NYSPSC
issues its order. Reserves sufficient to cover the refund
were established in 1996.
The temporary restriction of dividend payments remains
in place as the Company has not yet reached cumulative 1997
service quality levels that are sufficient to justify its
removal.
Note 6: 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.
As previously discussed in Note 4, in the first quarter
of 1997, an adjustment was required relating to deferred
taxes associated with assets transferred from Frontier to
the Company as of January 1, 1995. This $1.1 million
adjustment has been reflected as a noncash transaction in
the Statements of Cash Flows, increasing common stock and
additional paid-in-capital and decreasing deferred taxes.
The Company paid cash dividends to Frontier in the
amount of $42.0 million through the first nine months of
1996. As a result of the temporary restriction on dividends
discussed in Note 5, no dividends were paid during the first
nine months of 1997.
Actual interest paid was $3.7 million and $3.3 million
for the nine months ended September 30, 1997 and 1996,
respectively. Interest costs associated with the
construction of fixed assets are capitalized. Total amounts
capitalized for the first nine months of 1997 and 1996 were
$1.0 million and $.9 million, respectively. In addition,
actual income taxes paid during the nine month periods ended
September 30, 1997 and 1996 were $27.3 million and $26.2
million, respectively.
ITEM 2 - MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS
OF OPERATIONS
Three and Nine Months Ended September 30, 1997 and 1996
The matters discussed throughout this Form 10-Q, except
for historical financial results contained herein, may be
forward-looking in nature or "forward-looking statements."
Actual results may differ materially from the forecasts or
projections presented. Forward-looking statements are
identified by such words as "expects," "anticipates,"
"believes," "intends," "plans" and variations of such words
and similar expressions. The Company believes that its
primary risk factors include, but are not limited to:
changes in the overall economy and the economy in Rochester,
New York, the nature and pace of technological change, the
number and size of competitors in the Company's market,
changes in law and regulatory policy and the mix of products
and services offered in the Company's markets. Any forward-
looking statements in this September 30, 1997 Form 10-Q
should be evaluated in light of these important risk
factors. For additional disclosure regarding risk factors
refer to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
DESCRIPTION OF BUSINESS
Frontier Telephone of Rochester, Inc. ("FTR" or the
"Company") (formerly Rochester Telephone Corp.) is a
regulated independent telephone company that serves
approximately 538,000 access lines in the greater Rochester,
New York area. The Company was incorporated in December 1994
as a wholly owned subsidiary of Frontier Corporation.
Frontier 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 and nine month periods ended
September 30, 1997 were $80.8 million and $244.1 million,
respectively. These levels are consistent with the same
periods in the prior year. The Company experienced revenue
growth from increased demand for dedicated circuits,
enhanced features and the expansion of its Internet service
customer base. The growth in revenue continues to be
negatively impacted by the elimination of the surcharge on
wholesale, flat rate, local measured service, an increase in
the discount to wholesale providers from 5% to 17%, as
ordered by the New York State Public Service Commission
("NYSPSC") and the $1.5 million annual rate reduction,
effective January 1, 1997, associated with the Open Market
Plan. In addition, new interstate access rates which became
effective July 1, 1997 have reduced revenues.
Costs and expenses for the three months ended September
30, 1997 amounted to $58.7 million, consistent with the
three month period ended September 30, 1996. On a year-to-
date basis, excluding certain one-time costs that were
incurred in the first nine months of 1996, costs and
expenses also remained consistent totaling $173.5 million at
September 30, 1997, as compared to $172.4 million at
September 30, 1996. The one-time costs that were incurred
during the first nine months of 1996 related to higher labor
and associated expenses resulting from the expiration of the
Communication Workers of America ("CWA") Local 1170 union
labor agreement with the Company. These increased costs
were necessary to ensure reliable and uninterrupted customer
service in the event of a work stoppage or slowdown.
Expense reductions are being driven by operating
efficiencies implemented late in 1996 and the absence of
work stoppage preparation costs associated with the
Rochester CWA contract negotiations.
Depreciation and amortization expense for the third
quarter of 1997 increased $.2 million or 1.2% over the
comparable 1996 period. For the nine months ended September
30, 1997, depreciation and amortization rose $.9 million or
2.2% over the same 1996 period. Increases are due primarily
to capital additions to telephone plant and equipment in
service during 1997.
Net income for the three months ended September 30,
1997 was $13.9 million, an increase of $.1 million or .7%
over the same period in 1996. On a year-to-date basis, net
income was $44.1 million, an increase of $9.3 million or
26.8% over 1996. Results for the first nine months of 1996
reflect 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 relates to the accounting for a central office switch
consolidation project. Excluding this charge, 1997 net
income increased by $2.4 million or 5.7% over the comparable
1996 period. The increase in net income is largely due to
the reduction in operating expenses and an increase in
revenue during the first nine months of 1997.
During 1995, management committed to a plan which makes
Frontier Telephone of Rochester, Inc. the first company in
the United States to undertake a major 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. The project is
progressing as scheduled and as of September 30, 1997 nine
host switches have been consolidated, representing
approximately 70% of the total switches that will be
consolidated. The Company anticipates that the project will
be substantially complete by July 1998.
Other Income Statement Items
Interest expense for the three months ended September
30, 1997 amounted to $.5 million, a decrease of $.2 million
or 31.1% over the same period for 1996. For the nine months
ended September 30, 1997, interest expense decreased $.5
million to $1.9 million, a 20.3% decrease from 1996. The
decrease is primarily attributed to lower average
outstanding debt levels.
The effective income tax rate for the third quarter of
1997 is 35.2%, consistent with the third quarter of 1996;
and 35.0% and 34.7% for the nine month periods ended
September 30, 1997 and September 30, 1996, respectively.
FINANCIAL CONDITION
Review of Cash Flow Activity
Cash provided by operating activities for the first
nine months of 1997 decreased $4.9 million or 6.1%.
Offsetting the cash provided by operating activities in 1997
and 1996 are outflows for capital expenditures of $39.9
million and $37.3 million, respectively.
Cash flow from financing activities amounted to a net
outflow of $37.2 million for the nine months ended September
30, 1997, compared with a net outflow of $46.5 million for
the same period last year. In the first nine months of
1997, the Company repaid $22.9 million of outstanding debt
under its commercial paper program. Advances between the
Company and Frontier resulted in a net cash outflow of $14.3
million for the period ended September 30, 1997. There were
no cash dividends paid during the first nine months of 1997.
(See discussion relating to the dividend policy on page 14.)
In the first three quarters of 1996, the Company paid cash
dividends of $42.0 million and repaid advances from Frontier
in the amount of $4.7 million.
Debt
At September 30, 1997, the Company's total outstanding
long-term debt amounted to $40.0 million of medium-term
notes.
Effective June 30, 1997, the Company reduced its
available line of credit under its Revolving Credit
Agreement from $100.0 million to $50.0 million.
On March 31, 1997, Standard & Poor's ("S&P") announced
their new domestic telephone company rating methodology
which addresses the impact of deregulation on operating and
holding company ratings. As a result, the ratings of 16
companies were affected by S&P's announcement, and S&P
lowered their rating of the Company's long-term debt from
"AA" to "AA-". Under S&P's revised rating methodology, a
local telephone company is typically allowed a rating one
"notch" higher than that of the consolidated entity (i.e.,
holding company and operating subsidiaries). However, the
Company was allowed a two "notch" differential, largely as a
result of the regulatory controls in existence under the
Company's Open Market Plan.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of
total capitalization) was 12.6% at September 30, 1997 as
compared with 21.4% at December 31, 1996. This change is
due to the reduction of outstanding debt under the Company's
commercial paper program. Pre-tax interest coverage was
23.6 times through the first nine months of 1997. Excluding
nonrecurring charges, pre-tax interest coverage was 19.8
times through the first nine months of 1996.
Capital Spending
For the nine months ended September 30, 1997, capital
expenditures amounted to $39.7 million as compared to $37.2
million for the comparable period in 1996. The Company
plans to expend a total of $55 million to $59 million for
additions to property, plant and equipment in 1997.
New Accounting Pronouncements
The Financial Accounting Standards Board issued
Financial Accounting Standard No. 130 ("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 non-owner sources." It includes all changes in equity
during a period except those resulting from investments by
owners and distributions to owners. Early application of
this statement is permitted. If comparative financial
statements are provided for earlier periods,
reclassification to reflect the provisions of this statement
is required. The Company will adopt FAS 130 in the first
quarter of 1998.
OTHER ITEMS
Open Market Plan
The Company began its third year of operations under
the Open Market Plan in January 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 inherent risk associated with opening the Rochester
market to competition is that some customers are able to
purchase services from competitors, which may reduce the
number of retail customers and potentially cause a decrease
in the revenues and profitability for the Company. However,
results since implementation of the Open Market Plan
indicate that a stimulation of demand in the use of the
network and new product revenue may offset the losses of
some retail customers. Increased competition may also lead
to additional price decreases for services, adversely
impacting the Company's margins. An additional positive
feature of the Open Market Plan provides that the Company
can retain additional earnings achieved through operating
efficiencies. Previously these earnings would have been
shared with customers.
During the seven year period of the Open Market Plan,
rate reductions of $21.0 million (the "Rate Stabilization
Plan") will be implemented for Rochester area consumers,
including $14.0 million of which occurred through 1996 and
an additional $1.5 million which commenced in January 1997.
Rates charged for basic residential and business telephone
service may not be increased during the seven year period of
the Plan. The Company is allowed to raise prices on certain
enhanced products such as caller ID and call forwarding.
Price increases on enhanced products partially offset the
rate reductions required under the Plan during 1997.
During the second quarter of 1997 the Federal
Communications Commission ("FCC") issued decisions that are
intended to implement provisions of the Telecommunications
Act of 1996. Of significance were decisions that outlined
changes in the structure of universal service support and in
the framework that applies to certain interstate rates that
are generally characterized as access-related charges.
During the second quarter, a Federal appeals court reversed
parts of an earlier FCC order that set out conditions
governing the provision of interconnection services. These
orders are not expected to have a material impact on the
Company.
Under the Telecommunications Act of 1996 and a
statewide proceeding, the NYSPSC is considering the prices
that local exchange companies in New York may charge for
"unbundled" service elements such as links (the wire from
the switch to the customer premise), ports (the portion of
the switch that terminates the link) and switch usage
features. The Company is actively participating in this
proceeding and expects the NYSPSC to issue a decision on
service elements in late 1997 or early 1998.
Management believes there are significant market and
business opportunities associated with the Company's Open
Market Plan. However, there are also uncertainties
associated with the Plan. In the Company's opinion, the
most significant risks relate to increased competition in
the Rochester, New York market, the risk inherent in the
Rate Stabilization Plan and the potential diversification
risk.
There can be no assurance that the changing regulatory
environment will not have a negative impact on the Company.
Dividend Policy
The Open Market Plan prohibits the payment of dividends
by the Company to Frontier Corporation if (i) the Company's
senior debt has been downgraded to "BBB" by S&P, or the
equivalent rating by other rating agencies or is placed on
credit watch for such a downgrade, or (ii) certain service
quality measures deteriorate below minimum levels stipulated
in the Open Market Plan. Dividend payments to Frontier also
require the Company's directors to certify that such
dividends will not impair the Company's service quality or
its ability to finance its short and long-term capital needs
on reasonable terms while maintaining an S&P debt rating
target of "A".
In 1996, the Company failed to achieve the service
quality levels required by the Open Market Plan. On
December 19, 1996, pursuant to the Open Market Plan, FTR
requested the NYSPSC staff to exclude certain months from
the calculation used to measure service quality, due to
operating conditions considered by management to be abnormal
and beyond the Company's control. In April 1997, the
Company received notice from the NYSPSC that its request for
a waiver of certain conditions in the Open Market Plan
related to service quality results was denied. The NYSPSC's
ruling resulted in a temporary restriction on the payment of
dividends to Frontier and a refund to the Company's
customers of approximately $.9 million. On October 22,
1997, the NYSPSC adopted an order requiring the Company to
issue rebates of $2.60 per customer, commencing within sixty
days after the NYSPSC issues its order. Reserves sufficient
to cover the refund were established in 1996.
The temporary restriction of dividend payments remains
in place, as the Company has not yet reached cumulative 1997
service quality levels that are sufficient to justify its
removal.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
AT&T Communications of New York filed a complaint with
the NYSPSC for reconsideration of the Open Market Plan on
October 3, 1995. The complaint sought a change in the
wholesale discount, a change in the minutes of use surcharge
and also changes in a number of operational and support
activities. Some of these issues are also being considered
in other states in other unrelated local competition
proceedings. On July 18, 1996, the NYSPSC increased the
wholesale discount from 5% to 13.5% on a temporary basis,
effective July 24, 1996. On November 27, 1996, the NYSPSC
established permanent wholesale discounts, retroactive to
July 24, 1996, of 17.0% for resellers using the Company's
operator services and 19.6% for resellers providing their
own operator services. In a statewide proceeding also
examining New York Telephone Company's and the Company's
wholesale prices, the NYSPSC is determining the prices
applicable to the purchase of unbundled network elements
such as subscriber loops ("links"), switch ports and
transport and switching services. In a related statewide
proceeding, the NYSPSC is also examining possible changes in
the prices and rate structure of intrastate access charges
paid by long distance companies for the origination and
termination of long distance calls.
Item 5. Employees and Labor Relations
The Company's total workforce was 1,466 employees at
September 30, 1997. Membership in the CWA Local 1170
accounted for approximately 40% of that total. The labor
contract between the CWA Local 1170 and the Company expired
on January 31, 1996.
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
challenged the Company's declaration of impasse and
implementation through the filing of several unfair labor
practice charges with the National Labor Relations Board
("NLRB"). All but one of these charges was dismissed by the
NLRB on December 2, 1996. The remaining charge was returned
to the NLRB's Regional Office in Buffalo, New York for an
administrative hearing that concluded in June 1997. The
Company is currently waiting the decision of an
Administrative Law Judge and does not anticipate a final
decision until late 1997. This decision may be appealed
further by either the Company or the CWA. The Company
cannot predict the final outcome of these matters at this
time. On May 6, 1997, the members of CWA Local 1170,
ratified a tentative agreement that was reached with the
Company 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 ratified are not
material in the view of management. This new agreement will
provide several operational improvements and will result in
a more consistent alignment of benefits with the rest of the
Frontier organization.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Index
(b) Reports on Form 8-K filed during the quarter:
None
The Company filed one (1) report on Form 8-K subsequent
to the quarter ended September 30, 1997:
SEC Filing Date Item No. Financial Statements
------------------------------------------------------------
October 9, 1997 5 No
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned
thereunto duly authorized.
FRONTIER TELEPHONE OF ROCHESTER, INC.
--------------------------------------
(Registrant)
Dated: November 12, 1997 /s/Michael L. Evans
By: --------------------------
Michael L. Evans
Vice President and Treasurer
(and principal financial officer)
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Reference
- ----------------------------------------------------------------
3.1 Certificate of Incorporation Incorporated by
reference to Exhibit 3.1
to Form 10-K for the
year ended December 31, 1995.
3.2 Certificate of Amendment to Incorporated by reference
Certificate of Incorporation to Exhibit 3.2 to Form 10-K
for the year ended
December 31, 1995.
3.3 Bylaws Incorporated by reference
to Exhibit 3.3 to Form 10-K
for the year ended
December 31, 1995.
3.4 Certificate of Amendment to Filed herewith
Certificate of Incorporation
4.1 Copy of Credit Agreement Incorporated by reference
between the Company and to Exhibit 4-1 to Form
Chase Manhattan Bank, N.A. 10-K for the year ended
dated December 19,1994 and December 31, 1995
adopted January 1, 1995
4.2 Copy of the Indenture between Incorporated by reference
the Company and Chemical to Exhibit 4-2 to Form
Bank, as Trustee, dated March 10-K for the year ended
14, 1995 December 31, 1995
10.10 Amendment No.1 to the Filed herewith
Management Stock Incentive
Plan
10.11 Amendment No.1 to the Filed herewith
Supplemental Management
Pension Plan
27 Financial Data Schedule Filed herewith
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF ROCHESTER TELEPHONE CORP.
Under Section 805 of the Business Corporation Law
We, the undersigned, DENISE K. GUTSTEIN and GREGG C. SAYRE,
being respectively President and Secretary of ROCHESTER TELEPHONE
CORP. (the "Corporation"), do hereby CERTIFY that:
FIRST: The name of the corporation is ROCHESTER TELEPHONE
CORP.
SECOND: The Certificate of Incorporation of the Corporation
was filed in the Department of State of the State of New York on
December 9, 1994, under the original name of R-NET CORP.
THIRD: The Certificate of Incorporation is hereby amended to
change the name of the Corporation.
FOURTH: To accomplish the foregoing amendment, Article 1 of
the Certificate of Incorporation is hereby amended to read:
1. The name of the corporation is:
FRONTIER TELEPHONE OF ROCHESTER, INC.
FIFTH: The Amendment to the Certificate of Incorporation was
authorized by the Board of Directors of the Corporation followed
by a vote of the holders of a majority of all outstanding shares
entitled to vote thereon at a meeting of shareholders pursuant to
Section 502 of the Business Corporation Law of the State of New
York.
IN WITNESS WHEREOF, the undersigned have executed and
subscribed this Certificate of Amendment of the Certificate of
Incorporation of the Corporation this 18th day of September, 1997.
/s/ Denise K. Gutstein
-----------------------
Denise K. Gutstein
President
/s/ Gregg C. Sayre
------------------------
Gregg C. Sayre
Secretary
<PAGE>
<PAGE>2
STATE OF NEW YORK)
COUNTY OF MONROE ) SS:
Denise K. Gutstein and Gregg C. Sayre, being duly sworn, depose
and say that they are the persons who signed the foregoing
certificate of amendment; that they signed said certificate in
the capacity set beneath their signatures thereon; that they
have read the said certificate and know the contents thereof; and
that the statements contained therein are true to their own
knowledge.
/s/ Denise K. Gutstein /s/ Gregg C. Sayre
- ---------------------- -------------------------
Denise K. Gutstein Gregg C. Sayre
President Secretary
Subscribed and sworn to before
me on September 18, 1997.
/s/ Alexis A. Spinelli
- ------------------------
Notary Public
<PAGE> 1
EXHIBIT 10.10
FRONTIER CORPORATION
MANAGEMENT STOCK INCENTIVE PLAN
Amendment No. 1
Pursuant to Section 14, the Plan is hereby amended as
follows:
1. Effective April 19, 1996, Section 5(d) is amended by
deleting the last paragraph thereof and by adding to the end of
the first paragraph the following sentence:
The Committee may impose such other terms and conditions
on the exercise of options as it deems appropriate to
serve the purposes for which this Plan has been established.
2. Effective November 20, 1995, Section 7(e) is amended by
adding to the end thereof the following:
Until such time as the restricted shares vest, all dividends
payable on such shares shall be reinvested in the Company's
Common Stock, treated as restricted stock until the
underlying restricted shares vest, and, upon such vesting,
released to the participant. If the underlying shares do
not vest, all shares purchased with the reinvested dividends
shall be forfeited.
IN WITNESS WHEREOF, the Company has caused its duly
authorized officer to execute this amendment on its behalf this
16th day of October, 1997.
Dated 10/16/97 FRONTIER CORPORATION
-----------------
By /s/ Josephine S. Trubek
----------------------
Josephine S. Trubek
Corporate Secretary
<PAGE> 1
EXHIBIT 10.11
FRONTIER CORPORATION
SUPPLEMENTAL MANAGEMENT PENSION PLAN
Amendment No. 1 to 1996 Restatement
Pursuant to Article Six, the Plan is amended as follows:
1. Section 4.1(k) is amended, effective January 1, 1996,
to clarify that the five years of service requirement specified
in Section 4.1(j) does not apply to the 3 + 3 enhancement by
deleting the current introductory clause of Section 4.1(k) and
substituting in its place the following:
for each Participant on the active payroll (or on the
inactive payroll but receiving benefits under the Company's
long term disability benefit plan) on August 16, 1995, the
eligibility requirements for determining the Participant's
entitlement to receive early or normal retirement benefits
shall be reduced as follows:
2. Sections 4.4 and 4.5 are amended by substituting
"Section 4.7" for "Section 4.2" in each place the latter section
is referenced in parentheses.
3. Article Four is amended, effective as of August 20,
1997, by adding the following new Section 4.7 to the end thereof:
4.7 Notwithstanding the normal benefit payment provisions
of Sections 4.4 and 4.5, any Plan benefit payable to a
Participant eligible to accrue a benefit under Section 4.2
on and after December 31, 1995 shall be subject to the
following additional provisions:
o in addition to other forms of payment available to
Participants generally, benefits to married
Participants may, with the Committee's approval, be
paid in the form of a joint and 100 percent spousal
survivor annuity. Under this form of benefit the
surviving spouse shall receive, upon the death of the
<PAGE>
<PAGE> 2
Participant, a benefit equal to 100 percent of the
benefit paid to the Participant while both were living.
The amount of this benefit shall be the straight life
annuity calculated under Section 4.2 (without taking
into account the offset of the benefit payable from the
Funded Plan) reduced pursuant to the actuarial
assumptions used in the Funded Plan, provided that the
straight life annuity shall not be reduced by more than
20 percent, and then offset by the benefit payable from
the Funded Plan.
o in the event a married Participant dies prior to the
commencement of benefits, the surviving spouse's
benefit shall, with the Committee's approval, be 100
percent (in lieu of the 50% under Section 4.5) of the
benefit the Participant would have received had the
Participant elected the joint and 100 percent spousal
survivor annuity and retired on the first day of the
month on or before the date of death.
o if a married Participant fails to elect a form of
benefit, or if the elected form of benefit is not
appropriate as of the date of death, the benefit shall
be paid in the form of a joint and 100 percent spousal
survivor annuity.
IN WITNESS WHEREOF, the Company has caused this amendment to
be executed by its duly authorized officer this 20th day of
August, 1997.
FRONTIER CORPORATION
By /s/ Josephine S. Trubek
-------------------------
Josephine S. Trubek
Corporate Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRONTIER TELEPHONE OF ROCHESTER, INC.'S FINANCIAL STATEMENTS FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000936105
<NAME> FRONTIER TELEPHONE OF ROCHESTER, INC.
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
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