SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 33-91250
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ROCHESTER TELEPHONE CORP.
(Exact name of Registrant as specified in its charter)
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New York 16-1469713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 South Clinton Avenue 14646-0700
Rochester, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (716) 777-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
As of February 28, 1997 all 772 outstanding shares of the
registrant's no par common stock were held by Frontier
Corporation.
OMISSION OF INFORMATION BY CERTAIN WHOLLY-OWNED SUBSIDIARIES
The registrant meets the conditions set forth in general
instruction J(1)(a) and (b) of Form 10-K and is therefore
filing this Form with the reduced disclosure format.
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PART I
ITEM 1. BUSINESS
The Company
Rochester Telephone Corp. (the "Company") is a
regulated independent telephone company that serves
customers in the Rochester, New York market. The Company is
the primary provider of basic telephone services in the
Rochester market and offers its customers a full complement
of local 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.
The Company was incorporated under the laws of the
State of New York in November 1994 and is a wholly owned
subsidiary of Frontier Corporation ("Frontier"). Frontier
has served the Rochester market since 1920 and has evolved
into a major U.S. diversified telecommunications firm. The
Company's operations represented approximately 12.5% of
Frontier's consolidated revenues for the year ended December
31, 1996 and 18.7% of Frontier's consolidated assets as of
December 31, 1996.
The principal executive offices of the Company are
located at 180 South Clinton Avenue, Rochester, New York
14646-0700. The telephone number is (716) 777-1000.
General
The Company derives revenue primarily from fees for
local services, network access for interconnection of long
distance companies, directory advertising and from billing
and collection and other services provided to long distance
companies. The Company also derives revenue from the sale,
leasing and maintenance of telephone equipment and the sale
of enhanced services such as voice mail, custom calling
features and advanced number identification products such as
caller ID. In addition, the Company offers its network
services on a tariff basis for wholesale purchase by other
telecommunication service providers, including Frontier
Communications of Rochester, Inc., a subsidiary of Frontier.
The Company's expenses are primarily related to the
development and maintenance of its local exchange network
and costs associated with customer service, billing and
other general and administrative expenses.
The Company operates 71 central office and remote
switching centers in Rochester, New York. As of December
31, 1996, the Company served 530,217 access lines in the
Rochester market, of which 352,177 were residential lines
and 178,040 were business lines.
Since the beginning of 1988, the Company has invested
over $447 million in upgrading its local exchange business
in the Rochester market. Over this period, the Company's
switching networks have been fully digitalized, making
Rochester one of the largest cities in the United States to
be served by an all-digital network.
Technological innovation and regulatory change are
accelerating the pace of competition for local exchange
services. New competitors now have the ability to provide
basic local telephone service in many major U.S. markets,
including Rochester, New York. To benefit from these
technological advances and broaden the scope and quality of
its own product and service offerings, the Company has
increased digital switching capacity throughout its networks
and has pursued regulatory alternatives such as the Open
Market Plan, which is described in more detail below.
Currently, the Company continues to be the primary retail
provider of basic residential local telephone service in
Rochester, New York.
Regulatory Matters
Telecommunications Act of 1996
On February 8, 1996, President Clinton signed into law
the Telecommunications Act of 1996 (the "Act"). The Act
substantially revised the Communications Act of 1934. The
Act has particular relevance to the Company in two areas.
First, the Act creates a duty on the part of the Company to
interconnect its networks with those of its competitors and,
in particular, to negotiate in good faith the terms and
conditions of such interconnection. The Act also establishes
pricing rules for services sold by the Company to its
competitors.
Second, although the Act generally prohibits long
distance companies from marketing their services jointly
with the local telephone services provided by a Regional
Bell Operating Company ("RBOC"), at least until that RBOC is
permitted to enter the long distance business, it contains
an exception for companies that serve less than five percent
of the nation's presubscribed access lines, such as the
Company. The Company is not an RBOC. Thus, the Act permits
the Company to market its local telephone services jointly
with long distance services whether provided by the Company
or provided by an affiliated company.
The FCC has initiated three major proceedings, among
others, to implement the Act. First, the Commission adopted
regulations implementing the unbundling, interconnection and
resale obligations of the Act. The Commission's order has
been appealed to the United States Court of Appeals for the
Eighth Circuit and that Court has stayed the pricing
provisions of the order. A decision from the Court is
expected in the next few months.
Second, the FCC has also issued proposed rules
addressing the Act's universal service provisions. A final
decision from the Commission is expected in May 1997.
Finally, the Commission has issued a notice of proposed
rulemaking in which it is proposing changes to its rules
governing the assessment and collection of interstate access
charges assessed by local exchange carriers.
The Company is evaluating its options in light of the
pendency of these three proceedings, but cannot predict the
outcome of the ongoing judicial and administrative
proceedings.
The Open Market Plan
On February 3, 1993, the Company filed its Open Market
Plan with the New York State Public Service Commission
("NYSPSC"). The Open Market Plan was approved by an Order
of the NYSPSC dated November 10, 1994. The Plan was approved
by the Company's shareowners on December 19, 1994 and
implemented effective January 1, 1995. The Open Market Plan
formally opened the Rochester, New York local exchange
market to competition. The Company was the first
communications company in the nation to propose and
implement a plan for full local competition. The Open
Market Plan enables customers to choose their local
telephone service provider and to select from a broad array
of products, services and prices. It also gives the Company
the flexibility to broaden the scope and quality of its own
competitive service offerings. The Company has increased
its level of enhanced services such as caller ID, call
forwarding and enhanced voicemail. These enhanced services
are not subject to significant price regulation.
As a result of the Open Market Plan, two new companies
were formed from the Rochester, New York local exchange
operations: The Company, a provider of retail services
as well as basic network services to resellers and
Frontier Communications of Rochester, Inc. ("FCR"),
a retail provider of telecommunications services. The
Company and FCR are subsidiaries of Frontier, which became
an unregulated parent holding company. This configuration
has been established to better meet the current and emerging
competition in the marketplace.
The Open Market Plan provides for a total of $21
million in rate reductions (the "Rate Stabilization Plan")
over a seven year period beginning January 1, 1995, subject
to termination by either the Company or the NYSPSC after
five years (the "Rate Period"). The Rate Stabilization Plan
also precludes the Company from increasing basic residential
and business telephone service rates during the rate period.
In consideration of the rate reductions, the Rate
Stabilization Plan provides that the Company's local
exchange services be subject to price-cap regulation rather
than rate of return regulation. The rates provided in the
Rate Stabilization Plan were designed at the inception of
the Open Market Plan to permit the Company to recover its
costs and to earn a reasonable rate of return, calculated
using a methodology utilized by the NYSPSC to set the rate
of return earned by providers of local exchange services in
New York State.
Under the Telecommunications Act of 1996 and a
statewide proceeding, the NYSPSC is also 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
sometime in 1997. In a related statewide proceeding, the
NYSPSC is also examining possible changes to the prices and
rate structure of intrastate access charges paid by long
distance companies for the origination and termination of
long distance calls. See related discussion in Item 3,
"Legal Proceedings".
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, the
Company 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. The Company anticipates a
decision by the NYSPSC staff by the end of April 1997, but
cannot predict the outcome of this matter. Until such time
as the matter is resolved, the Company is prohibited from
paying dividends to Frontier Corporation.
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 issues relate to increased competition in
the Rochester, New York market and the risk inherent in the
Rate Stabilization Plan.
There can be no assurance of what impact the changing
regulatory environment will have on the Company.
Regulatory Accounting
As of September 30, 1995, the Company discontinued the
application of Financial Accounting Standards No. 71 ("FAS
71"), "Accounting for the Effects of Certain Types of
Regulation." The Company discontinued the use of FAS 71
based upon changes in regulation and increasingly rapid
advancements in telecommunications technology and other
factors creating more competitive markets. The
discontinuance of regulatory accounting methods resulted in
a non-cash post-tax extraordinary charge of $60.4 million,
net of applicable income taxes of $34.9 million, primarily
caused by the reduction in the recorded value of long-lived
telephone plant assets.
Environmental and Other Matters
Except for site specific issues, environmental issues
tend to impact members of the telecommunications industry in
consistent ways. The Environmental Protection Agency (EPA)
and other agencies regulate a number of chemicals and
substances that may be present in facilities used in the
provision of telecommunications services. These include
preservatives in some wood poles, asbestos in certain
underground duct systems, and lead in some cable sheathing.
Some components of the Company's network may include one or
more of these substances. The Company believes that, in
their present uses, any such facilities of the Company pose
no significant environmental or health risk that derives
from EPA regulated substances. If EPA regulation of any
such substance is increased, or if any facilities are
disturbed or modified in such a way as to require removal,
special handling, storage and disposal may be required for
any such facilities removed from use. At this time, the
Company is not subject to any environmental litigation that
requires disclosure.
Employees and Labor Relations
As of December 31, 1996 the Company had 1,525
employees, of which 217 were management employees and 1,308
were clerical, service and craft workers. The Rochester
Telephone Workers Association ("RTWA") represents 689 of
such clerical and service workers and the Communications
Workers of America, Local 1170 ("CWA")
represents 619 craft and service workers. The union labor
contracts are negotiated in three year cycles.
Under the current three-year contract between the
Company and the RTWA, effective August 12, 1994, bargaining
unit employees received a 2.0% general increase. On
February 12, 1995, February 18, 1996 and February 16, 1997
they received a 1.0% general increase. The RTWA contract
will expire on August 12, 1997.
On January 31, 1996, the CWA Local 1170 contract
expired. The contract negotiations are currently at an
impasse and the Rochester company implemented the terms of
its final offer as of April 9, 1996. The Union filed unfair
labor practice charges with the National Labor Relations
Board ("NLRB"). In June, the Company received a favorable
determination after review within the NLRB, rejecting all
unfair labor practice claims that could have affected the
declaration of impasse. The Union appealed these decisions
within the NLRB. On December 2, 1996 the Office of the
General Counsel of the NLRB in Washington, D.C. affirmed the
dismissal of three of the four unfair labor practice
charges. The fourth charge was returned to the Regional
Office in Buffalo, New York for an administrative hearing.
This hearing is scheduled to commence in May 1997.
On December 11, 1996, the Company and the CWA National
reached a tentative agreement on a new three year contract.
However, on January 27, 1997, the membership of Local 1170
voted against the agreement. At the request of the Union,
Management returned to the bargaining table on February 4,
1997. No changes resulted from this meeting. Additional
bargaining sessions may be scheduled in the future, if
warranted. At the present time, the terms and conditions of
employment as implemented on April 9, 1996, remain in place.
Risk Factors
The Company is subject to several risk factors that
should be considered by current security owners and
prospective investors. This Report on Form 10-K and the
documents incorporated by reference include forward-looking
statements as described under the Private Securities
Litigation Reform Act of 1995. Actual results may differ
materially from those identified in forward looking
statements. Forward looking statements are identified by
such words as "expects," "anticipates," "believes,"
"intends," "plans" and variations of such words and similar
expressions.
Changes in Rates of Growth of the Economy and the
Overall Industry
To some extent, the Company's revenue growth is related
to the overall economy and to the telecommunications
industry in general. Factors that may influence the
Company's performance within the telecommunications industry
include product pricing and development, integration of
services, the effects of competition and the expansion of
the business. The performance of the economy and the
telecommunications industry could cause the Company's
actual results to vary significantly.
Competition Risk
Technological innovation and regulatory changes are
accelerating the pace of competition for telecommunications
services. As a result, the Company faces intensified
competition in all aspects of providing telecommunications
services.
There are significant uncertainties surrounding the
introduction of new products and services and the capital
expenditures that will be required by the Company to remain
in a competitive position. In addition, there are
uncertainties surrounding the impact on competition as a
result of the enactment of the Telecommunications Act of
1996.
Contingent Liabilities
The Company is continuously involved in various
judicial and administrative proceedings involving matters
incidental to the business. Unless otherwise stated
specifically, the Company believes that the probable outcome
of any of these matters, or to the combination of all of the
matters, will not have a material adverse effect on the
Company's consolidated results of operations or financial
position. However, there can be no assurance that the
resolution of these matters will not be contrary to
management's expectations.
ITEM 2. PROPERTIES
The Company owns its telephone property, which
includes: connecting lines between customers' premises and
the central office switching equipment, buildings, land and
miscellaneous property and customer premises equipment under
lease agreement with the Company.
The connecting lines include aerial and underground
cable, conduit, poles and wires and microwave equipment.
These facilities are located on public streets and highways
or on privately owned land. The Company has permission to
use these lands pursuant to local governmental consent or
lease, permit, easement or other agreement.
The central office switching equipment includes digital
electronic switches and peripheral equipment.
The Company owns or leases the land and buildings in
which its central offices, warehouse space, office and
traffic headquarters are located. The Company's
headquarters are located in a leased seven-story building at
180 South Clinton Avenue, Rochester, New York. The lease
expires in 2003 and is renewable for two successive ten-year
periods.
ITEM 3. LEGAL PROCEEDINGS
On October 3, 1995, AT&T Communications of New
York filed a formal complaint with the NYSPSC requesting
changes to the Open Market Plan. AT&T asked the NYSPSC to
reduce the Company's wholesale rates to resellers by
increasing the "wholesale discount" (the margin between
wholesale and retail rates) for most services from 5% to
35%. AT&T also complained about other rates and about the
terms and conditions of the provisioning of service to
resellers. On July 18, 1996, the NYSPSC increased the
wholesale discount 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, 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 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.
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, the
Company 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. The Company anticipates a
decision by the NYSPSC staff by the end of April 1997.
Until such time as the matter is resolved, the Company is
prohibited from paying dividends to Frontier Corporation.
Management cannot predict the ultimate results of these
proceedings at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Omitted pursuant to General Instruction J.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SECURITY MATTERS
The Company is a wholly-owned subsidiary of Frontier.
There is no established public trading market for the no par
value, common stock of the Company.
The Open Market Plan, discussed under Item 1, imposes
conditions on the declaration of dividends from the Company
to Frontier such that the Company may only pay dividends on
its common stock when the payment of such dividends will not
impair the Company's service quality or its ability to
finance its short and long term capital needs at reasonable
terms, while maintaining specified debt ratings (a target
debt rating of "A" from S&P).
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction J.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF
THE RESULTS OF OPERATIONS
The information presented in this Management's
Narrative Analysis of the Results of Operations should be
read in conjunction with the financial statements and
accompanying Notes of Rochester Telephone Corp. ("the
Company") for the three years ended December 31, 1996.
The matters discussed throughout this Form 10-K, 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 the 1996 Form 10-K should be evaluated
in light of these important risk factors.
RESULTS OF OPERATIONS
Revenues in 1996 were $321.8 million, an increase of
$6.5 million or 2.1% over the prior year. Revenue growth
over the prior year was driven in part by the introduction
of new products and features and a higher demand for
services in the open market environment. Total access lines
increased 1.1% and minutes of use increased 6.5% over 1995.
The increases in revenue growth were partially offset by
rate reductions for business touch-tone as stipulated by the
Open Market Plan and a decline in intraLATA toll revenues.
(See discussion of the Open Market Plan on pages 12-14.) In
general, prices being charged to both customers and to long
distance companies for access usage have declined over the
past three years. This is due not only to regulatory
requirements, but also to increased competition in the
marketplace. Prices charged to customers and access prices
charged to long distance companies may continue to decline
as competition increases and regulatory controls are
relaxed.
Costs and expenses for 1996 include a charge of $17.3
million resulting from the curtailment of certain company
pension plans. The pension curtailment is a result of
Frontier's efforts to standardize pension benefits across
the Corporation. Normalized for these nonrecurring charges,
cost and expenses were $233.0 million, an increase of $4.6
million or 2.0%, which was relatively flat as compared to
1995. Reduced selling, administrative and depreciation costs
were offset by increased costs associated with the union
contract negotiations. These costs, which were incurred in
connection with the contract negotiations with
Communications Workers of America, Local 1170, were
necessary to ensure reliable and uninterrupted customer
service in the event of a work stoppage. The contract
negotiations are currently at an impasse and the Company
implemented the terms of its final offer as of April 9,
1996. See also Item 1, "Business" and "Employee and Labor
Relations" in this section for additional information
regarding the CWA contract negotiations.
Depreciation and amortization expense for 1996
decreased $2.3 million or 4.0% from 1995. The decrease is
primarily due to the reduction in depreciation expense
associated with the impairment loss and plant write-down
under FAS 121. The assets included in the FAS 121
adjustment consist principally of telephone switching
equipment held for disposal as a result of the Company's
implementing a central office switch consolidation project.
The three year plan to consolidate host switches and reduce
the number by over 60% is projected to improve network
efficiency and reduce the cost of maintenance and software
upgrades in future years. As of December 31, 1996, the
project is progressing as scheduled and two host switches
have been consolidated. The Company anticipates that the
project will be substantially complete by July 1998.
Other Income Statement Items
Interest expense for 1996 was $3.1 million, a decrease
of $3.1 million or 50.2% over 1995. The Company realized
reduced interest expense in 1996 primarily due to lower
average debt levels in 1996 as compared to 1995 and as a
result of the refinancing of outstanding debt previously
issued under the revolving credit agreement in the first
quarter of 1996.
The effective tax rate in 1996 was 35.1% versus 37.1%
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.
Nonrecurring Charge
The Company's operating results for 1996 include a
$17.3 million pre-tax charge resulting from the curtailment
of certain Company pension plans. The pension curtailment is
a result of Frontier's efforts to standardize pension plans
across the Corporation.
Extraordinary Item
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. This
non-cash extraordinary write-off totaled $60.4 million, net
of an income tax benefit of $34.9 million.
New Accounting Pronouncements
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 $6.9 million (net of a tax benefit of
$3.7 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 as a result of
the Company implementing a central office switch
consolidation project.
LIQUIDITY AND CAPITAL RESOURCES
Review of Cash Flow Activity
Cash generated from operations amounted to $106.4
million in 1996 as compared to $98.6 million in 1995. The
increase in operating cash flow is primarily attributable to
revenue growth and decreased working capital requirements.
Offsetting cash provided by operating activities in 1996 and
1995 are outflows for capital expenditures of $53.1 million
and $38.6 million, respectively. The increase in capital
expenditures in 1996 is primarily due to the host
consolidation project.
Financing activities resulted in net cash outflows of
$55.4 million and $54.4 million for 1996 and 1995,
respectively. During 1996, the Company paid cash dividends
of $56.0 million, repaid advances to Frontier Corporation in
the amount of $1.9 million and increased borrowings under
its commercial paper program by $2.6 million. Financing
activities in the prior year included $99.7 million for debt
repayments, offset by proceeds from the issuance of long-
term debt of $39.6 million and advances from Frontier
Corporation of $5.8 million. No cash dividends were paid to
Frontier Corporation during 1995.
Debt
At December 31, 1996, the Company's total outstanding
long-term debt amounted to $62.9 million. This debt
consisted of $22.9 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 was 21.4% as of December 31,
1996. This compares to a debt ratio of 19.4% at December
31, 1995. This change is driven by the reduction in equity
primarily as a result of dividends paid to Frontier during
1996 . Pre-tax interest coverage was 20.1 times for the
year ended December 31, 1996 as compared with 11.5 times for
the year ended December 31, 1995, excluding nonrecurring
charges.
Capital Spending
The Company plans to expend approximately $50.0 million
for additions to property, plant and equipment during 1997.
The planned capital expenditures are primarily attributed to
technological advancements and expansion of the network to
meet customer demand.
OTHER ITEMS
Open Market Plan
The Company completed its second full year of
operations under the Open Market Plan in 1996. 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 from competitors, which reduces the number of
retail customers and potentially causes a decrease in the
revenues and profitability for the Company. However,
results since the implementation of the Open Market Plan
indicate that a stimulation of demand in the use of the
network and new product revenue can offset the loss of some
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 will be
implemented for Rochester area consumers, including $11.5
million of which occurred in 1995 and an additional $2.5
million which occurred in 1996. A rate reduction of
$1.5 million will occur in 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 in 1996.
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 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".
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, the minutes of use surcharge and
changes in a number of operational and support activities.
Some of these issues are also being considered in other
states in other unrelated local competition proceedings. On
July 18, 1996, the NYSPSC increased the wholesale discount
of 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 that use the Company's operator services and
19.6% for resellers that provide their own operator
services. The Company believes that, currently, all
resellers in this market use the Company's operator
services.
Under the Telecommunications Act of 1996 and a
statewide proceeding, the NYSPSC is also considering the
prices local exchange companies in New York may charge for
"unbundled" service elements such as links (the wire from
the switch to the customer premise) and ports (the portion
of the switch that terminates the link) and switch usage
features. The Company is actively participating in the
proceeding and expects the NYSPSC to issue a decision on
some service elements in 1997. In a related statewide
proceeding, the NYSPSC is also examining possible changes to
the prices and rate structure of intrastate access charges
paid by long distance companies for the origination and
termination of long distance calls.
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, the
Company 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. The Company anticipates a
decision by the NYSPSC staff by the end of April 1997, but
cannot predict the outcome of this matter. Until such time
as the matter is resolved, the Company is prohibited from
paying any more dividends to Frontier Corporation. This does
not affect the dividend payments made to Frontier throughout
1996.
Employee and Labor Relations
The labor contract between the Communications Workers
of America ("CWA") Local 1170 and the Company expired on
January 31, 1996. The Company's total workforce is 1,525
employees at December 31, 1996. Membership in the CWA Local
accounted for approximately 41% of that total. 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 is scheduled to commence in May 1997. The Company
cannot predict the final outcome of these matters at this
time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The financial statements, together with the
report thereon of Price Waterhouse LLP, dated January 20,
1997, is presented on pages 15 through 34 of this Form 10-K
report and is incorporated by reference into this Item 8.
<PAGE>
<PAGE>
Report of Independent Accountants
To the Shareowner of
Rochester Telephone Corp.
In our opinion, the accompanying balance sheets and the
related statements of income, shareowner's equity and cash
flows present fairly, in all material respects, the
financial position of Rochester Telephone Corp. at December
31, 1996, 1995 and 1994, and the results of its operations
and its 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
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 provide a reasonable basis for the
opinion expressed above.
As discussed in Note 9 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 9 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 2 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."
As discussed in Note 9 to the financial statements,
during the first quarter of 1994 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 112 "Employers' Accounting for Postemployment Benefits."
The accompanying financial statements represent the
carve out of the Company's results from operations and net
assets from the December 31, 1994 historical consolidated
financial statements of Frontier Corporation (formerly
Rochester Telephone Corporation). A description of the
significant assumptions used to prepare the carve out
financial statements is included in Note 1 to the financial
statements.
PRICE WATERHOUSE LLP
January 20, 1997
Rochester, New York
<PAGE>
<PAGE>
Rochester Telephone Corp.
Statements of Income
In thousands of dollars Years Ended 1996 1995 1994
December 31,
- ----------------------------------------------------------------------------
Revenues $321,838 $315,335 $308,349
Costs and Expenses
Operating expenses 157,197 146,236 151,472
Depreciation and amortization 54,291 56,549 56,235
Taxes other than income taxes 21,492 25,589 28,647
Nonrecurring charge 17,340 - -
- ----------------------------------------------------------------------------
Total Costs and Expenses 250,320 228,374 236,354
- ----------------------------------------------------------------------------
Operating Income 71,518 86,961 71,995
Interest expense 3,105 6,237 11,550
Other expense, net 2,304 2,839 7,013
- ----------------------------------------------------------------------------
<PAGE>
Income Before Taxes,
Extraordinary Items and
Cumulative Effect of Changes in
Accounting Principles 66,109 77,885 53,432
Income taxes 23,169 28,878 18,386
- ----------------------------------------------------------------------------
Income Before Extraordinary Items
and Cumulative
Effect of Changes in Accounting Principles 42,940 49,007 35,046
Extraordinary item (60,441) -
Cumulative effect of changes in accounting
principles (6,949) (1,020) (6,729)
- ----------------------------------------------------------------------------
Net Income (Loss) $35,991 $(12,454) $28,317
============================================================================
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Rochester Telephone Corp.
Balance Sheets
In thousands of dollars December 31, 1996 1995 1994
- -----------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 3,591 $ 5,643 -
Accounts receivable, (less
allowance for uncollectibles of
$1,501, $1,421, and $1,017
respectively) 47,777 54,450 53,608
Accounts receivable - affiliates 2,670 2,273 -
Materials and supplies 2,006 3,084 3,623
Prepaid directory 12,463 13,038 10,767
Other prepayments 1,406 1,752 1,805
- -----------------------------------------------------------------------
Total Current Assets 69,913 80,240 69,803
Property, plant and equipment,net 330,552 340,545 465,747
Prepaid pension 14,204 28,305 11,739
Deferred and other assets 1,247 1,799 21,592
- -----------------------------------------------------------------------
Total Assets $415,916 $450,889 $568,881
=======================================================================
LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities
Accounts payable $ 31,759 $ 42,054 $ 29,995
Accounts payable - affiliates 19,022 9,770 -
Advances from affiliate 3,827 5,753 -
Advance billings 4,994 5,120 7,597
Taxes accrued 3,047 5,602 4,970
Other liabilities 5,908 5,520 5,636
- -----------------------------------------------------------------------
Total Current Liabilities 68,557 73,819 48,198
Long-term debt 62,872 60,300 120,000
Deferred income taxes 25,266 36,196 75,384
Deferred employee benefits obligation 23,176 20,253 15,597
Other long-term liabilities 4,971 9,238 17,604
- -----------------------------------------------------------------------
Total Liabilities 184,842 199,806 276,783
- -----------------------------------------------------------------------
<PAGE>
Shareowner's Equity
Common stock, no par,
authorized 1,000 shares; 772
shares in 1996 and 1995 and
one share in 1994 issued and
additional paid in capital 231,074 263,537 292,098
Retained earnings - (12,454) -
- -----------------------------------------------------------------------
Total Shareowner's Equity 231,074 251,083 292,098
- -----------------------------------------------------------------------
Total Liabilities and
Shareowner's Equity $415,916 $450,889 $568,881
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Rochester Telephone Corp.
Statements of Shareowner's Equity
Common
In thousands of Stock
dollars and
Additional Retained
Paid in Earnings
Capital (Deficit) Total
--------------------------------------------------------
Balance, January 1, 1994 $292,098 $ 23,484 $315,582
Net income 28,317 28,317
Common stock dividends (51,801) (51,801)
--------------------------------------------------------
Balance, December 31, 1994 292,098 - 292,098
Net loss (12,454) (12,454)
Equity adjustment on
assets transferred 1/1/95 (28,561) - (28,561)
-------------------------------------------------------
Balance, December 31, 1995 263,537 (12,454) 251,083
Net income 35,991 35,991
Common stock dividends (23,537) (23,537)
Return of capital to
Frontier Corporation (32,463) - (32,463)
-------------------------------------------------------
Balance, December 31, 1996 $231,074 $ - $231,074
=======================================================
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Rochester Telephone Corp.
Statements of Cash Flows
In thousands of dollars Years Ended 1996 1995 1994
December 31,
- ---------------------------------------------------------------------
Operating Activities
Net Income (Loss) $35,991 $(12,454) $28,317
- ---------------------------------------------------------------------
Adjustments to reconcile net
income to net cash provided by operating
activities:
Extraordinary items - 95,317 -
Cumulative effect of
changes in accounting principles 10,691 1,569 10,352
Nonrecurring charge 17,340 - -
Depreciation and amortization 54,291 56,549 56,235
Depreciation reserve adjustment - - 9,500
Changes in operating
assets and liabilities:
Decrease (increase) in accounts
receivable 6,673 (54,450) (571)
Increase in
accounts receivable - affiliates (397) (2,273) -
Decrease (increase)
in materials and supplies 1,078 170 (349)
Decrease (increase) in prepaid directory 575 (2,271) (1,197)
Decrease (increase) in other prepayments 346 (208) 297
Increase in prepaid pension (1,240) (16,566) (5,622)
Decrease in deferred and other assets 325 5,210 9,743
(Decrease) increase in accounts payable (12,294) 40,401 1,679
Increase in accounts payable - affiliates 7,557 9,770 -
Decrease in advance billings (126) (2,207) (91)
(Decrease) increase in accrued taxes (2,555) 1,344 (1,661)
Increase in other current liabilities 388 1,848 155
Increase in deferred employee benefits
obligation 2,923 5,264 6,951
Decrease in deferred income taxes (10,930) (30,418) (13,832)
(Decrease) increase
in other long term liabilities (4,267) 2,046 (3,177)
-------------------------------------------------------------------
Total Adjustments 70,378 111,095 68,412
-------------------------------------------------------------------
<PAGE>
<PAGE>
Net cash provided by operating
activities 106,369 98,641 96,729
-------------------------------------------------------------------
Investing Activities
Expenditures for property, plant
and equipment (53,067) (38,619) (34,928)
- ----------------------------------------------------------------------
Net cash used in investing
activities (53,067) (38,619) (34,928)
- ----------------------------------------------------------------------
Financing Activities
Repayments of long-term debt (99,700) (10,000)
Proceeds from issuance of long-term debt 2,572 39,568 -
Advances from affiliates (1,926) 5,753 -
Dividends paid (23,537) - (51,801)
Return of capital to Frontier
Corporation (32,463) - -
- ----------------------------------------------------------------------
Net cash used in financing activities (55,354) (54,379) (61,801)
- ----------------------------------------------------------------------
Net (Decrease) Increase in Cash & Cash
Equivalents (2,052) 5,643 -
Cash and Cash Equivalents at Beginning
of Year 5,643 - -
- ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 3,591 $ 5,643 $ -
======================================================================
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Note 1: Accounting Policies
Basis of Accounting
The accounting policies of Rochester Telephone Corp.
(the "Company"), a wholly owned subsidiary of Frontier
Corporation ("Frontier"), are in conformity with generally
accepted accounting principles. 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 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.
Comparative Financial Statements
The Company received its net assets from Frontier
Corporation on January 1, 1995. Prior to January 1, 1995,
the Company's results of operations and net assets were
included in the consolidated financial statements of
Frontier. The 1994 comparative financial statements assume
that the net cash flow generated from operating activities,
less those expenditures for property, plant and equipment and
repayment of long term debt, was paid to Frontier in the form
of a cash dividend. The Company's management believes that
the assumptions used in preparing the carve-out financial
statements provide a reasonable basis for presenting the
results of operations and net assets of the Company.
Allocation of Corporate Overhead
The results of operations of the Company include
allocations of corporate expenses from Frontier. These costs
primarily include executive, corporate planning, legal, tax,
treasury, corporate communications, and corporate accounting
functions. They are allocated to the Company based on a
weighted average of four factors: employees, revenues,
capitalization and common equity. The methodology used to
allocate these common corporate costs is considered
reasonable and has been approved for use by the New York
State Public Service Commission ("NYSPSC") prior to the
separation of the companies under the Open Market Plan
agreement (see Note 11).
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 is based on the straight-
line, average remaining life method for the various classes
of plant. The range of service lives for furniture and
fixtures is 12 to 20 years, central office equipment is 8 to
13.5 years, local and toll service lines is 12 to 25 years,
station equipment is 10 to 21 years and building and building
improvements is 5 to 35 years.
The cost of depreciable property units retired, plus
removal costs, less salvage is charged to accumulated
depreciation.
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
The Company is included in the consolidated federal
income tax return of Frontier. The Company pays Frontier for
the federal income tax liability resulting from the filing by
Frontier of a consolidated U.S. federal income tax return,
determined on a separate entity basis. Deferred income 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 will be in effect when those differences are
expected to reverse.
Common Stock and Additional Paid in Capital
The value assigned to common stock and additional paid
in capital of the Company was determined based on the
historical net book value of the assets transferred from
Frontier to the Company on January 1, 1995. The adjusted net
book value of the assets transferred as of January 1, 1995,
was $263.5 million. For 1994, the value assigned to common
stock and additional paid in capital of the Company was based
on the historical net book value of the assets represented by
the carve-out, as if they were transferred from Frontier on
January 1, 1994.
Revenue Recognition
Customers are billed as of monthly cycle dates. Revenue
is recognized as service is provided and unbilled usage is
accrued.
Cash Flows
For purposes of the Statements of Cash Flows, the
Company considers all highly-liquid investments with an
original maturity of three months or less to be cash
equivalents.
Actual interest paid was $4.3 million, $9.3 million, and
$14.0 million for the years ended December 31, 1996, 1995,
and 1994 respectively. Interest costs associated with the
construction of capital assets are capitalized. Total
amounts capitalized during 1996, 1995 and 1994 were $1.2
million, $1.0 million and $1.1 million, respectively. In
addition, actual income taxes paid were $31.3 million, $33.2
million and $28.6 million for the years ended December 31,
1996, 1995 and 1994 respectively.
Reclassifications
Certain prior year amounts have been reclassified to
conform to current year presentation.
Note 2: Discontinuation of Regulatory Accounting
Principles
The Company determined in 1995 that Financial Accounting
Standards Board Statement No. 71 ("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 $60.4 million,
net of an income tax benefit of $34.9 million, as of
September 30, 1995. The components of the extraordinary
charge follow:
In millions of dollars Pre-Tax After-Tax
- ---------------------------------------------------------
Increase to the accumulated
depreciation balance $ 105.4 $ 68.5
Elimination of other net
regulatory liabilities (10.1) (0.9)
Accelerated amortization
of tax credits - (7.2)
- ---------------------------------------------------------
$ 95.3 $ 60.4
- ---------------------------------------------------------
The adjustment of $105.4 million to net plant was
necessary because estimated useful lives and depreciation
methods historically prescribed by regulators did not keep up
with the rapid pace of technological changes in the Company
and differed significantly from those used by unregulated
enterprises.
The discontinuance of FAS 71 also required the Company
to eliminate for financial reporting the effects of any
actions of regulators that had been previously recognized as
regulatory assets and liabilities pursuant to FAS 71.
Note 3: Property, Plant and Equipment
Major classes of property, plant and equipment are
summarized below:
In thousands of dollars 1996 1995 1994
- ----------------------------------------------------------
Land, buildings and building
improvements $ 47,128 $ 46,182 $ 45,939
Local and toll service lines 438,989 418,918 408,234
Central office equipment 322,943 339,390 337,468
Station equipment 13,357 11,357 11,790
Furniture and fixtures 49,192 44,019 41,223
Plant under construction 25,068 17,716 21,228
Less: Accumulated depreciation 566,125 537,037 400,135
- ----------------------------------------------------------
$330,552 $340,545 $465,747
Depreciation expense was $54.1 million, $56.0 million,
and $55.4 million for the years ending December 31, 1996,
1995 and 1994, respectively.
Note 4: Long-Term Debt
In thousands of dollars At December 31, 1996 1995 1994
- ----------------------------------------------------------------------
Debentures
10.46% convertible, due October
27, 2008 $ - $ - $ 5,300
9%, due January 1, 2020 - - 69,785
9%, due August 15, 2021 - - 100,000
- ----------------------------------------------------------------------
- - 175,085
Medium-term notes, 8.77% - 9.30%,
due 2000 to 2004 - - 179,000
Medium-term notes, 7.51%, due 2002 40,000 (a) 40,000 -
Revolving credit agreements 22,876 (b) 20,300 120,000
- ----------------------------------------------------------------------
Sub-total 62,876 (c) 60,300 474,085
Less - Discount on long-term debt,
net of premium 4 - 2,977
- ----------------------------------------------------------------------
62,872 60,300 471,108
Long-term debt allocated to Frontier - - (351,108) (d)
- ----------------------------------------------------------------------
Total long-term debt $62,872 $60,300 $120,000
======================================================================
At December 31, 1996, aggregate debt maturities were:
(In thousands of dollars) 1997 1998 1999 2000 2001
----------------------------------------
$ - $ - $22,876 $ - $ -
(a) In accordance with the Open Market Plan agreement, the
Company issued $40 million of medium-term notes in March 1995
which mature in 2002.
(b) The Company has a credit facility totaling $100.0 million
which is available through commercial paper borrowings or
through draws under the Revolving Credit Agreement. At
December 31, 1996, the Company had outstanding $22.9
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.
In December 1994, the Company entered into a Revolving
Credit agreement with six commercial banks which expires
December 1999. The agreement established a secured $160
million line of credit which was amended in 1995 to remove
the security interest on the Company's assets and reduce
the available line of credit to $100.0 million. The
agreement carries 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.
(c) 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 $64.4 million.
(d) The allocation of debt to the Company for 1994 was based
on a ratio of debt to total capital of 30%. In accordance
with the Open Market Plan, the initial ratio of long-term
debt to total capital was not to exceed 40.37%, and the
amount of public long-term debt to be maintained by the
Company could not be less than $40 million.
Note 5: Income Taxes
The provision for income taxes consists of the
following:
In thousands of dollars
December 31, 1996 1995 1994
- -----------------------------------------------------
Federal
Current $30,357 $30,358 $26,012
Deferred (7,188) (1,480) (7,626)
-------------------------
$23,169 $28,878 $18,386
The Company is taxed under Article 9 of the New York
State Tax Law on the basis of gross receipts, not net taxable
income. Therefore, there is no current state tax provision
for income taxes.
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
December 31, 1996 1995 1994
- ------------------------------------------------------------
Federal income tax expense at
statutory rate 35.0% 35.0% 35.0%
Accelerated depreciation - 3.2% 5.0%
Investment tax credit - -0.8% -1.8%
Miscellaneous 0.1% -0.3% -3.8%
- ------------------------------------------------------------
Total federal income tax 35.1% 37.1% 34.4%
Deferred tax liabilities (assets) are comprised of the
following:
In thousands of dollars
December 31, 1996 1995 1994
- ---------------------------------------------------------
Accelerated depreciation $29,346 $35,507 $65,340
Investment tax credit - - 7,853
Pension - FAS 87 5,094 7,277 4,291
Miscellaneous 443 873 5,710
- ---------------------------------------------------------
Gross deferred tax
liabilities 34,883 43,657 83,194
- ---------------------------------------------------------
Postretirement benefits
obligation (8,598) (5,767) (5,378)
Deferred compensation (85) (486)
Miscellaneous (1,019) (1,609) (1,946)
- ---------------------------------------------------------
Gross deferred tax assets (9,617) (7,461) (7,810)
- ---------------------------------------------------------
Net deferred tax liabilities $25,266 $36,196 $75,384
=========================================================
Note 6: Service Pensions and Benefits
The Company has contributory and noncontributory plans
providing for service pensions and certain death benefits for
substantially all employees. 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.
<PAGE>
<PAGE>
The following table summarizes the funded status of the
Company's pension plan.
In thousands of dollars December 31, 1996 1995 1994
- -----------------------------------------------------------------
Actuarial present value of benefit
obligations:
Vested benefit obligation $84,386 $ 78,348 $244,842
Accumulated benefit obligation 96,551 87,053 255,216
- -----------------------------------------------------------------
Plan assets at fair value,
primarily fixed income
securities and common stock 125,184 102,477 303,793
Projected benefit obligation (96,551) (88,098)(266,331)
- -----------------------------------------------------------------
Funded status 28,633 14,379 37,462
Unrecognized net (gain) loss (13,822) 14,911 (23,195)
Unrecognized net transition asset (607) (1,211) (2,063)
Unrecognized prior service cost - 226 625
Less: Allocation of pension assets
to Frontier - - (1,090)
- -----------------------------------------------------------------
Pension asset reflected in the
Balance Sheet $14,204 $ 28,305 $ 11,739
=================================================================
<PAGE>
<PAGE>
In thousands of dollars December 31, 1996 1995 1994
- ------------------------------------------------------------
Service cost $ 3,226 $ 2,853 $ 5,328
Interest cost on projected benefit
obligation 5,976 5,950 19,322
Actual (return) loss on plan assets (15,837)(22,485) 1,406
Net amortization and deferral 5,395 10,039 (30,731)
- ------------------------------------------------------------
Net periodic pension benefit (1,240) (3,643) (4,675)
Benefit resulting from regulatory
agency actions - (1,090) (1,453)
Amount due to curtailment 17,340 (1,712) -
- ------------------------------------------------------------
Net periodic pension cost (benefit)
recognized $16,100 $(6,445) $(6,128)
============================================================
The following rates and assumptions were used to
calculate the projected benefit obligation:
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Weighted average discount rate 7.5% 7.5% 8.5%
Rate of salary increase 5.0% 5.0% 5.5%
Expected return on plan assets 9.0% 9.0% 9.0%
- ------------------------------------------------------------
<PAGE>
<PAGE>
In 1996, the Company recognized a curtailment loss of
$17.3 million reflecting the freezing of defined benefit
plans by Frontier for certain bargaining unit employees. This
curtailment loss is reflected as a "Nonrecurring charge" in
the Statement of Income. Pension expense in 1995 included a
net curtailment gain of $1.7 million reflecting the freezing
of defined benefit plans sponsored by Frontier for non-
bargaining unit employees as of December 31, 1996.
The Company also participates in 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 Frontier common stock for every employee
eligible to participate in the plan. The Company also
provides 100% matching contributions in Frontier 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 and 1994, the Company provided
matching contributions in Frontier common stock up to 75
percent of participants' contributions up to six percent of
gross compensation. The total cost recognized for defined
contribution plans was $1.2 million for 1996, $1.3 million
for 1995 and $1.8 million for 1994.
Note 7: Postretirement Benefits Other Than Pensions
The Company provides health care and life insurance
benefits to most employees. In adopting FAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions,"
the Company elected to defer the recognition of the
transition benefit obligation of $90 million over a period of
twenty years. During 1996, the Company amended its health
benefits care 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 $7.8 million.
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 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 $2.3 million.
<PAGE>
<PAGE>
The status of the plan is as follows:
In thousands of dollars 1996 1995 1994
- -------------------------------------------------------------------
Accumulated postretirement benefit
obligation (APBO)
attributable to:
Retirees $53,180 $ 51,936 $ 57,781
Fully eligible plan participants 10,651 13,892 17,768
Other active plan participants 5,426 11,105 15,236
- -----------------------------------------------------------------
Total APBO 69,257 76,933 90,785
Plan assets at fair value, primarily life
insurance policies and
money market instruments 2,486 3,619 3,813
- -----------------------------------------------------------------
APBO in excess of plan assets 66,771 73,314 86,972
Unrecognized transition obligation (63,644) (74,481) (80,684)
Unrecognized net prior service cost - (1,076) (3,935)
Unrecognized net gain 20,049 22,496 14,098
Less: Allocation of postretirement benefit
obligation to Frontier - - (854)
- -------------------------------------------------------------------
Accrued postretirement benefit obligation $23,176 $20,253 $15,597
===================================================================
<PAGE>
<PAGE>
The components of the estimated postretirement benefit
cost are as follows:
In thousands of dollars December 31, 1996 1995 1994
- ---------------------------------------------------------------
Service cost $ 214 $ 467 $ 664
Interest on APBO 5,120 5,817 6,587
Return on plan assets (244) (320) (350)
Amortization of:
Transition obligation 4,079 4,381 4,482
Prior service cost 19 196 195
Gains (1,829) (2,228) (870)
- ---------------------------------------------------------------
Net postretirement benefit cost $7,359 $8,313 $10,708
===============================================================
The following assumptions were used to value the
postretirement benefit obligation:
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Weighted average discount rate 7.5% 7.5% 8.5%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of salary increase 5.0% 5.0% 5.5%
Assumed rate of increase in cost
of covered health care benefits 6.1% 10.5% 11.2%
- -------------------------------------------------------------
Health care costs were assumed to decline consistently
to 5.0% by 2006 and 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, 1996 would increase by $4.3 million while the
sum of the service and interest cost components of the net
postretirement benefit health care cost for 1996 would
increase by $.4 million.
Note 8: Stock Option Plans and Other Common Stock
Transactions
Executives, directors and certain employees of the
Company are eligible to receive Frontier stock options under
stock option plans. 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 Frontier'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 ten year period. The
maximum number of shares which may be granted under the
directors plan is 1,000,000 shares.
Note 9: 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 $6.9 million (net of a tax benefit of $3.7
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 as a result of
the Company implementing a central office switch
consolidation project.
The Company adopted FAS 116, "Accounting For
Contributions Received and Contributions Made" effective
September 30, 1995. FAS 116 requires that the Company
reflect in current expenses an accrual for the cost of
charitable contributions. The net impact of adopting FAS 116
resulted in a post-tax charge of $1.0 million, net of taxes
of $0.6 million.
The Company adopted FAS 112, "Employers' Accounting for
Postemployment Benefits" effective January 1, 1994. FAS 112
requires that projected future costs of providing
postemployment, pre-retirement benefits, such as disability,
pre-pension leave (salary continuation) and severance pay, be
recognized as an expense as employees render service rather
than when the benefits are paid. The Company recognized the
obligation for postemployment benefits through a cumulative
effect charge to net income of $6.7 million, net of taxes of
$3.6 million.
Note 10: Commitments and Contingencies
Legal Matters - The Company is party to a number of
judicial, regulatory and administrative proceedings involving
matters incidental to its business. The Company's management
does not believe that any material liability will be imposed
as a result of these matters.
Leases - The Company leases buildings, land, office
space, switching and other equipment under various operating
lease contracts. Total rental expense amounted to
$2.8 million in 1996, $3.2 million in 1995, and $3.4 million
in 1994.
Minimum annual rental commitments under non-cancelable
operating leases in effect on December 31, 1996 were as
follows (in thousands):
Non-Cancelable Leases
Years Buildings Equipment
- -------------------------------------------
1997 $ 671 $ 947
1998 612 939
1999 541 934
2000 285 934
2001 162 -
2002 and thereafter 287 -
- -------------------------------------------
Total $2,558 $3,754
===========================================
Other Matters - In connection with the Company's capital
program, certain commitments have been made for the purchase
of materials and equipment. The Company plans to expend
approximately $50.0 million for additions to property, plant
and equipment during 1997. The planned capital expenditures
are primarily attributed to technological advancements and
expansion of the network to meet customer demand.
Note 11: Regulatory Matters
Open Market Plan
The Company completed its second full year of operations
under the Open Market Plan in 1996. 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 from competitors,
which reduces the number of retail customers and potentially
causes a decrease in the revenues and profitability for the
Company. However, results since the implementation of the
Open Market Plan indicate that a stimulation of demand in the
use of the network and new product revenue can offset the
loss of some 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 will be
implemented for Rochester area consumers, including $11.5
million of which occurred through 1995 and an additional $2.5
million which occurred in 1996. Rate reductions
of $1.5 million will occur in 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 in 1996.
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, 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 of 13.5% on a
temporary basis, effective July 24, 1996. On November 27,
1996 the NYSPSC set permanent wholesale discounts
retroactive to July 24, 1996, of 17.0% for resellers that use
the Company's operator services and 19.6% for resellers that
provide their own operator services. The Company believes
that, currently, all resellers in this market use the
Company's operator services.
Under the Telecommunications Act of 1996 and a statewide
proceeding, the NYSPSC is also considering the prices 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 the proceeding and expects the
NYSPSC to issue a decision on some service elements in 1997.
In a related statewide proceeding, the NYSPSC is also
examining possible changes to the prices and rate structure
of intrastate access charges paid by long distance companies
for the origination and termination of long distance calls.
Costs incurred for the development and implementation
of the Open Market Plan were reflected in the category "other
expense" for 1994. Total incremental costs recognized were
$5.1 million.
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 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".
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, the Company
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. The Company anticipates a decision by
the NYSPSC staff by the end of April 1997, but cannot predict
the outcome of this matter. Until such time as the matter is
resolved, the Company is prohibited from paying anymore
dividends to Frontier Corporation.
Incentive Regulation
Prior to the Open Market Plan, an incentive regulation
agreement between the Company and the NYSPSC had been in
effect. As part of that agreement, the Company agreed to
share with ratepayers 50% of earnings above a threshold rate
of return. As a result, the Company's revenue requirement
was reduced by $9.5 million in 1994, plus interest. This
revenue reduction was credited to the Company's depreciation
reserve to alleviate a reserve deficiency rather than
refunding cash to ratepayers.
Note 12: Related Party Transactions
The advances from affiliate balance at December 31, 1996
of $3.8 million represents funds advanced to the Company by
Frontier. In addition, accounts payable to affiliates at
December 31, 1996 includes $15.4 million due to Frontier and
accounts receivable from affiliates includes $0.6 million due
from Frontier. Interest paid to Frontier on these funds was
$0.3 thousand in 1996. There were no outstanding receivables
or payables to Frontier at December 31, 1994 as all
intercompany transactions were assumed to have been settled
prior to the end of the accounting period.
The Company paid $12.2 million in 1996, $11.9 million in
1995 and $10.7 million in 1994 to Frontier for allocated
corporate charges primarily for executive, legal and
financial assistance. The Company also paid $16.5 million,
$17.2 million and $20.4 million to an affiliate, Frontier
Information Technologies for data processing services and
support during 1996, 1995 and 1994, respectively. Other
services purchased from affiliates include supplies,
materials management, telemarketing, long distance, cellular
and paging services. These services amounted to $16.6
million, $12.8 million, and $7.4 million during 1996, 1995
and 1994, respectively.
In addition, the Company provides to its affiliates,
Frontier Communications International and Frontier
Communications of Rochester, billing and collection services,
operator services, and business office support services. The
Company also provides administrative support services for
other regulated telephone company affiliates. The total of
all these services amounted to $9.1 million, $7.8 million and
$4.2 million during 1996, 1995 and 1994, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Omitted pursuant to General Instruction J.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction J.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction J.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Omitted pursuant to General Instruction J.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) (1) Index to Financial Statements (As required by Part II,
Item 8)
Report of Independent Accountants
Balance Sheets as of December 31, 1996, 1995 and 1994
Statements of Shareowner's Equity for the years ended
December 31, 1996, 1995 and 1994
Statements of Income for the years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Financial Statements
(2) Financial Statement Schedule for the years 1996, 1995
and 1994:
Report of Independent Accountants on Financial
Statement Schedule
Valuation and Qualifying Accounts and Reserves -
Schedule II
All other schedules are omitted because they are not
applicable or the required information is shown
in the financial statements or notes thereto.
(3) See Exhibit Index for list of exhibits filed with this
report.
The Registrant hereby agrees to furnish the Commission a copy
of each of the Indentures or other instruments defining the rights
of security holders of the long-term debt securities of the
Registrant and any of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed.
(b) Reports on Form 8-K - The Company did not file any Form 8-K
reports during the quarter ended December 31, 1996. The Company
filed no reports subsequent to the quarter ended December 31, 1996
through March 27, 1997.
(c) Refer to Item 14(a)(3) above for Exhibits required by Item 601
of Regulation S-K.
(d) Schedules other than set forth in response to Item
14(a)(2) above for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
<PAGE>
<PAGE>
ROCHESTER TELEPHONE CORP.
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ----------------------------------------------------------------------
3.1 Certificate of Incorporated by reference
Incorporation dated to Exhibit 3-1 to Form 10-K for
December 8, 1994 the year ended December 31,
1995.
3.2 Certificate of Amendment Incorporated by reference to
to Certificate of Exhibit 3-2 to Form 10-K for
Incorporation dated the year ended December 31,
December 20, 1994 1995.
3.3 By-Laws Incorporated by reference to
Exhibit 3-3 to Form 10-K for
the year ended December 31,
1995.
4.1 Copy of Credit Agreement Incorporated by reference to
between the Company and Exhibit 4-1 to Form 10-K for
Chase Manhattan Bank, N.A. the year ended December 31,
dated December 19, 1994 1995.
and adopted January 1, 1995
4.2 Copy of Indenture between Incorporated by reference to
the Company and Chemical Exhibit 4-2 to Form 10-K for
Bank, as Trustee, dated the year ended December 31,
March 14, 1995 1995.
10.1 Copy of the Restated Incorporated by reference
Supplemental Management to Exhibit 10-12 to Frontier
Pension Plan Corporation's Form 10-K for the
year ended December 31, 1996.
<PAGE>
<PAGE>
ROCHESTER TELEPHONE CORP.
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ----------------------------------------------------------------------
10.2 Copy of the Restated Incorporated by reference
Supplemental Retirement to Exhibit 10-13 to
Savings Plan Frontier Corporation's
Form 10-K for the year
ended December 31, 1996
10.3 Copy of the Plan for the Incorporated by reference
Deferral of Directors Fees to Exhibit 10-34 to
Frontier Corporation's
Form 10-K for the year
ended December 31, 1994
10.4 Copy of the Directors' Incorporated by reference
Common Stock Deferred to Exhibit 10-36 to
Growth Plan Frontier Corporation's
Form 10-K for the year
ended December 31, 1994
10.5 Copy of the restated Incorporated by reference
Management Pension Plan to Exhibit 10-20 to
Frontier Corporation's
Form 10-K for the year
ended December 31, 1995
10.6 Copy of Executive Bonus Plan Incorporated by reference
to Exhibit 10-5 to
Frontier Corporation's
Form 10-K for the year
ended December 31, 1996
10.7 Copy of the restated Incorporated by reference
Directors Stock Incentive to Exhibit 10-26 to
Plan dated April 26, 1996 Frontier Corporation's
Form 10-Q for the quarter
ended March 31, 1996
10.8 Copy of the Management Stock Incorporated by reference
Incentive Plan dated to Exhibit 10-23 to
April 26, 1995 Frontier Corporation's
Form 10-K for the year
ended December 31, 1995
<PAGE>
<PAGE>
ROCHESTER TELEPHONE CORP.
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ----------------------------------------------------------------
10.9 Form of management contract Filed herewith
as amended with Mr. Carr
23 Consent of Independent Filed herewith
Accountants - Price Waterhouse
24 Powers of Attorney for a Filed herewith
majority of Directors naming
Denise K. Gutstein attorney-in-fact
27 Financial Data Schedule Filed herewith
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By:/s/Denise K. Gutstein
-----------------------------
Denise K. Gutstein, President
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Annual Report on Form 10-K has been signed
below by the following persons in their respective capacities
on its behalf of the registrant and on the dates indicated.
Signature Title
/s/ Denise K. Gutstein President and Director
- ----------------------
Denise K. Gutstein
March 27, 1997
/s/ Michael L. Evans Vice President and Treasurer
- -------------------- (principal financial and accounting
Michael L. Evans officer)
March 27, 1997
* Director
- --------------------
Harlan D. Calkins
March 17, 1997
/s/Jeremiah T. Carr Director
- --------------------
Jeremiah T. Carr
March 27, 1997
* Director
- --------------------
Katherine T. Clark
March 17, 1997
* Director
- --------------------
Maurice F. Holmes
March 17, 1997
<PAGE>
<PAGE>
SIGNATURES
* Director
- --------------------
Thomas H. Jackson
March 17, 1997
* Director
- --------------------
Robert Johnson
March 17, 1997
* Director
- --------------------
Richard P. Miller, Jr.
March 17, 1997
* Director
- --------------------
Christine B. Whitman
March 17, 1997
*By:/s/Denise K. Gutstein Manually signed powers of
-------------------- attorney are
Denise K. Gutstein attached hereto and filed
Attorney-in-Fact herewith pursuant to
Regulation S-K Item 601-
(b)24 as Exhibit 24.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareowner of
Rochester Telephone Corp.
Our audits of the financial statements referred to in our
report dated January 20, 1997 also included an audit of the
Financial Statement Schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, based on our audits, this Financial
Statement Schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Rochester, New York
January 20, 1997
<PAGE>
<PAGE>
ROCHESTER TELEPHONE CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1996
(Table 1 of 3)
In thousands of dollars
Additions
Balance Charged to Charged
at costs and to other Balance at
beginning expenses accounts(1) Deductions(2) end of
Description of year year
- -----------------------------------------------------------------------------
Reserve for
uncollectible
accounts $1,421 $2,532 - $2,452 $1,501
(1) Primarily recoveries of uncollectible accounts.
(2) Amounts written off against reserve.
<PAGE>
<PAGE>
ROCHESTER TELEPHONE CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1995
(Table 2 of 3)
In thousands of dollars
Additions
Balance Charged to Charged
at costs and to other Balance at
Description beginning expenses accounts(1) Deductions(2) end of
of year year
- -----------------------------------------------------------------------------
Reserve for
uncollectible
accounts $1,017 $2,563 $6,344 $8,503 $1,421
(1) Primarily recoveries of uncollectible accounts.
(2) Amounts written off against reserve.
<PAGE>
<PAGE>
ROCHESTER TELEPHONE CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1994
(Table 3 of 3)
In thousands of dollars
Additions
Balance Charged to Charged
at costs and to other Balance at
Description beginning expenses accounts(1) Deductions(2) end of
of year year
- -----------------------------------------------------------------------------
Reserve for
uncollectible
accounts $431 $ 3,229 $6,720 $9,363 $1,017
(1) Primarily recoveries of uncollectible accounts.
(2) Amounts written off against reserve.
<PAGE>
EXHIBIT 10.9
FORM OF MANAGEMENT CONTRACTS AS AMENDED WITH MR. CARR
August 16, 1995
___________________
Frontier Corporation
180 South Clinton Avenue
Rochester, New York 14646-0700
Dear Mr. ______________:
The Board of Directors (the "Board") of Frontier Corporation, on
behalf of Frontier and its subsidiaries and affiliates (together,
the "Company") has determined that it is in the best interests of
the Company and its shareowners to be able to avail itself of
your continued dedication and service to the Company in the
immediate future and in case of Change of Control, as defined
later in this letter agreement ("Agreement"). It is therefore
the intent of this Agreement to encourage your complete
dedication to the Company by providing you with compensation and
benefits arrangements while you fulfill your duties now and
during the pendency of a Change of Control, should such an event
occur, which provide you with a measure of security commensurate
with your importance to the Company.
Therefore, upon your signature on a counterpart of this
Agreement, the following terms and conditions shall become
effective as of August 16, 1995 and shall supersede any prior
agreements between the Company and you related to the subject
matter hereof. However, this Agreement does not supersede any
stock option agreements, restricted stock grant agreements or
agreements related to the bridging of your prior service with
other employers for pension service credit purposes which may
exist as of August 16, 1995 between the Company and you, all of
which shall remain in full force and effect.
1. Employment.
1.1 Term. The Company shall employ you in a senior
executive management capacity as the Company, with your consent,
may from time to time designate. This Agreement shall become
effective as of August 16, 1995 and shall continue until December
31, 1998, unless earlier terminated or extended in accordance
with its terms. Beginning on January 1, 1998 and on each
anniversary of that date thereafter, the term of this Agreement
(the "Term") shall automatically be extended for one additional
year unless either the Company or you has given written notice to
the other no later than September 30 of the preceding year that
the giver of the notice does not elect to extend the Term. Even
if the Company has given you such a notice, if a Change of
Control has occurred during the Term and you have met your
obligations in the next paragraph of this Section 1.1, the Term
will be automatically extended and this Agreement will remain in
full force and effect until the last day of the 36th month
following the month in which the Change of Control occurs. You
acknowledge that, except as set forth in this Agreement, your
employment is "at will".
If, during the Term, a person (as that term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) commences any action that, if
consummated, would result in a Change of Control of the Company,
or if any person publicly announces an intention or proposal to
commence any such action, you agree that you will not leave the
Company's employ (other than as a result of death, Disability or
Retirement) and will render the services contemplated in this
Agreement for the reasonable duration of the Company's defense
against such action and until such action has been abandoned or
terminated or a Change in Control has occurred.
Any termination of your employment during the Term for
reasons other than your death shall be evidenced by a written
Notice of Termination, which shall specify the provision of this
Agreement relied upon for such termination and describe with
reasonable detail the facts and circumstances claimed by the
sender of such Notice of Termination to provide the basis for
termination. Any such Notice of Termination shall also specify
the effective date of termination (the "Termination Date"). If
you die during the Term the Termination Date shall be the date of
your death.
1.2 Duties. You shall perform all duties incidental to
your position with the Company, or as may be assigned to you by
the Chief Executive Officer of the Company or the Board. You
agree to use your best efforts in the business of the Company and
to devote your full time attention and energy to the business of
the Company. You agree not to work, either on a part-time or
independent contracting or consulting basis, with or without
compensation, for any other business or enterprise during the
Term without the Company's prior consent. Such consent shall not
be unreasonably withheld in the case of service on the boards of
directors of other corporations and community organizations.
1.3 Base Compensation. The Company shall pay you as base
compensation an annual salary of $___,___, in installments in
accordance with the Company's policies from time to time in
effect, until January 1, 1996. Thereafter, your annual salary
may be adjusted by the Company consistent with the Company's
results and your performance during the prior year. However,
unless the annual salaries of all senior executives of the
Company are reduced across-the-board, your annual salary in any
year shall not be less than your annual salary during the prior
year.
1.4 Incentive Compensation. The Company shall establish
and review with you from time to time the performance goals
("Performance Goals") for the Company and you individually, and a
methodology for calculating the amount of incentive compensation
to be paid upon achievement of such Performance Goals. Incentive
compensation shall be payable to you at such time or times as are
established under the Company's policies (including the Company's
Executive Compensation Program) in effect from time to time.
1.5 Benefits; Perquisites. You shall be entitled to
receive the retirement and welfare benefits and perquisites
provided by the Company under its Executive Compensation program
in effect from time to time for executives at the
Executive Vice President level.
1.6 Expenses. You shall be reimbursed for any reasonable
expenses you incur in connection with your employment during the
Term, upon presentation to the Company of an itemized account and
receipts of such expenses as required by the Company's policies
from time to time in effect.
2. Developments and Intellectual Property. You
acknowledge that all developments, including but not limited to
trade secrets (including strategies, business plans and customer
lists), discoveries, improvements, ideas and writings which
either directly or indirectly relate to or may be useful in the
business of the Company (the "Developments") which you, either
alone or in conjunction with any other person or persons, shall
conceive, make, develop, acquire or acquire knowledge of during
the Term are the sole and exclusive property of the Company. You
will cooperate with the Company's reasonable requests to obtain
or maintain rights or protections under United States or foreign
law with respect to all Developments. The Company will reimburse
you for all reasonable expenses incurred by you in order to
comply with this provision of this Agreement, regardless of when
such expenses may be incurred.
3. Confidential Information. You acknowledge that by
reason of your employment by the Company, especially as a senior
executive thereof, you will in the future have (and you have had
prior to August 16, 1995), access to information of the Company
that the Company deems to be confidential and/or proprietary,
including but not limited to, information about the Company's
strategies, plans, products and services, methods of operation,
employees, sales, profits, expenses, customer lists and the
relationships between the Company and its customers, suppliers
and others who have business dealings with the Company. You
covenant and agree that during the Term and thereafter, you will
not disclose any such information to any person without the prior
written authorization of the Chief Executive Officer of the
Company or the Board.
4. Non-Competition.
4.1 Covenant. In consideration of the benefits provided
to you under this Agreement, which you acknowledge are
independent consideration, you covenant and agree that during the
Restricted Period (as defined below), you will not, directly or
indirectly, without the Company's prior consent: (i) own, manage,
operate, finance, join, control or participate in the ownership
or control of, or be associated as an officer, director,
executive, partner or principal, agent, representative,
consultant or otherwise with, or use or permit your name to be
used in connection with, any enterprise that directly or
indirectly competes (as defined below) with the business of the
Company in a Restricted Area (as defined below); or (ii) offer or
provide employment to, or solicit, interfere with or attempt to
entice away from the Company any individual who either is
employed by the Company at the time of such offer, employment,
solicitation, interference or enticement or has been so employed
by the Company within 12 months prior to such offer, employment,
solicitation, interference or enticement. This Section shall not
be construed to prohibit the ownership by you of not more than 1%
of any class of securities of any corporation which competes with
the Company and which has a class of securities registered
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
4.2 Definitions.
4.2.1 "Competes" means the production, marketing or
selling of any product or service of any person or entity other
than the Company which resembles or competes with a product or
service produced, marketed or sold by the Company (or to your
knowledge was under development by the Company) during the period
of your employment by the Company (whether under this Agreement
or otherwise).
4.2.2 "Restricted Area" means:
(a) The Standard Metropolitan Statistical Area (or
the equivalent) in which any office, place of employment,
business address or POP maintained by the Company is located; or
(b) Any state of the United States, any province of
Canada or any foreign country from which the Company or any of
its material subsidiaries or affiliates derives 5% or more of its
annual net income.
4.2.3 "Restricted Period" means:
(a) The period of your employment by the Company
(whether under this Agreement or otherwise), if your employment
is terminated because of your death or Disability;
(b) The period of your employment by the Company
(whether under this Agreement or otherwise) and 24 months
thereafter, if your employment is terminated because of your
Retirement, or by the Company for Cause or without Cause (and not
by the Company following Change of Control);
(c) The period of your employment by the Company
(whether under this Agreement or otherwise) and, if this
Agreement is still in effect at the Termination Date, the number
of months remaining in the Term at the Termination Date or 12
months, whichever is longer (but in no event more than 24
months), if you terminate your employment voluntarily (and not
for Good Reason); or
(d) The period of your employment by the Company
under this Agreement, if your employment is terminated by you for
Good Reason or by the Company following Change of Control.
4.3 Savings Clause. If any of the provisions of
this Section 4 are ever determined by a court to exceed the time,
geographic scope or other limitations permitted by applicable law
in any jurisdiction, then such excessive provisions shall be
deemed reduced, in such jurisdiction only, to the maximum time,
geographic scope or other limitation permitted in such
jurisdiction.
5. Equitable Relief. You acknowledge that the
restrictions contained in Sections 2, 3 and 4 of this Agreement
are, in view of the nature of the business of the Company,
reasonable and necessary to protect the legitimate interests of
the Company, and that any violation of the provisions of those
Sections will result in irreparable injury to the Company. You
also acknowledge that the Company shall be entitled to
preliminary and permanent injunctive relief, without the
necessity of proving actual damages, and to an equitable
accounting of all earnings, profits and other benefits arising
from such violation. These rights shall be cumulative and in
addition to any other rights or remedies to which the Company may
be entitled. You agree to submit to the jurisdiction of any New
York State court located in Monroe County or the United States
District Court for the Western District of New York or of the
state court or the federal court located in or presiding over the
county in which the Company has its corporate headquarters at the
applicable time in any action, suit or proceeding brought by the
Company to enforce its rights under Sections 2, 3 and/or 4 of
this Agreement.
6. Company's Obligations upon Termination. The sole
obligations of the Company upon the termination of your
employment prior to the failure of either you or the Company to
extend the Term in accordance with Section 1.1 of this Agreement
are as set forth in this Section 6. Any and all amounts to be
paid to you in connection with your termination shall be paid in
a lump sum promptly after the Termination Date, but not more than
30 days thereafter.
6.1 Termination upon Disability or Death. If your
employment with the Company ends by reason of your death or
Disability (as defined later in this Agreement), the Company
shall pay you all amounts earned or accrued through the
Termination Date but not paid as of the Termination Date,
including:
6.1.1 Base compensation;
6.1.2 Reimbursement for reasonable and necessary
expenses incurred by you on behalf of the Company during the
Term;
6.1.3 Pay for earned but unused vacation and floating
holidays;
6.1.4 All compensation you previously deferred (if
any) to the extent not yet paid; and
6.1.5 An amount equal to your "Pro Rata Bonus". Your
Pro Rata Bonus shall be determined by multiplying the "Bonus
Amount" (as defined below) by a fraction, the numerator of which
is the number of days in the fiscal year through the Termination
Date and the denominator of which is 365. The term "Bonus
Amount" means: (i) a bonus calculated using the performance
metrics of the Company's results and your individual performance
for the fiscal year ended prior to the year in which the
Termination Date occurs, applied to the payouts set forth under
the incentive compensation program in effect for the year in
which the Termination Date occurs; or (ii) if the Termination
Date occurs after the end of a fiscal year but before any bonus
related thereto was paid, the bonus you would have received for
that fiscal year.
The amounts described in Sections 6.1.1 through 6.1.4,
inclusive, are called elsewhere in this Agreement, collectively,
the "Accrued Compensation".
Except as otherwise provided in this Section 6.1, your
entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefit
plans and other applicable programs and practices then in effect.
6.2 Termination Without Cause. If the Company terminates
your employment without Cause (as defined later in this
Agreement), the Company shall pay you:
6.2.1 All Accrued Compensation;
6.2.2 A Pro Rata Bonus (as defined in Section 6.1.5
above); and
6.2.3 Severance ("Severance") equal to: (a) twice the
sum of (i) the annual base compensation you would have received
for the entire fiscal year in which the Termination Date occurs
plus (ii) the Bonus Amount plus (iii) $______ (being the agreed
cash equivalent of the annual value of the perquisites provided
to you under the Company's Executive Compensation Program) plus
(iv) the Company contributions which would have been made on your
behalf to the 401(k) retirement savings plan maintained by the
Company (b) reduced by the present value (determined as provided
in Section 280G(d)(4) of the Internal Revenue Code of 1986 as
amended (the "Code")) of any other amount of severance relating
to salary or bonus continuation to be received by you upon
termination of your employment under any severance plan, policy
or arrangement of the Company.
In addition, the Company shall continue to provide to
you and your family at the Company's expense, for 24 months
following the Termination Date, the life insurance, disability,
medical, dental, vision and hospitalization benefits provided to
you and your family immediately prior to the Termination Date.
Lastly, the Company shall credit you with an additional
24 months of service and age for the purposes of determining the
level of your retirement benefits under any qualified or
nonqualified defined benefit pension, supplemental or excess
retirement plan maintained by the Company in which you are a
covered employee (the "Retirement Plans").
Except as otherwise provided in this Section 6.2, your
entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefit
plans and other applicable programs and practices then in effect.
6.3 Termination for Cause or Voluntary Termination. If
your employment is terminated for Cause (as defined later in this
Agreement), or if you voluntarily terminate your employment other
than for Good Reason, the Company shall pay you all Accrued
Compensation. Except as otherwise provided in this Section 6.3,
your entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefit
plans and other applicable programs and practices then in effect.
6.4 Termination for Good Reason or by Company Following
Change of Control. If you terminate your employment for Good
Reason or the Company terminates your employment following a
Change of Control, the Company shall pay you:
6.4.1 All Accrued Compensation;
6.4.2 A Pro Rata Bonus;
6.4.3 Severance equal to: (a) three times the sum of
(i) the annual base compensation you would have received for the
entire fiscal year in which the Termination Date occurs plus (ii)
the Bonus Amount plus (iii) $_______ (being the agreed cash
equivalent of the annual value of the perquisites provided to you
under the Company's Executive Compensation Program) plus (iv) the
Company contributions which would have been made on your behalf
to the 401(k) retirement savings plan maintained by the Company
(b) reduced by the present value (determined as provided in
Section 280G(d)(4) of the Code or any other amount of severance
relating to salary or bonus continuation to be received by you
upon termination of your employment under any severance plan,
policy or arrangement of the Company;
6.4.4 An amount equal to your "Supplemental
Retirement Amount". Your Supplemental Retirement Amount shall be
equal to the difference between (a) the benefit payable under the
Retirement Plans which you would have received had your
employment continued for 36 months following the Termination Date
and (b) your actual benefit paid or payable, if any, under the
Retirement Plans. Your Supplemental Retirement Amount will be
determined in accordance with the procedures set forth in an
Addendum to this Agreement, which is made a part hereof (the
"Addendum"); and
6.4.5 An amount equal to your "SERP Payment". Your
SERP Payment shall satisfy the Company's obligations to you under
the supplemental or excess retirement plan or plans maintained by
the Company for its executive employees (the "SERP") and shall be
the actuarial equivalent (using the Actuarial Assumptions, as
defined in the Addendum) of your benefit accrued under the SERP
through the Termination Date. If all or a part of the SERP
Payment is funded through a trust of which you are a beneficiary,
the SERP Payment shall be paid from such trust to the extent of
such funding.
In addition, the Company shall continue to provide to you and
your family at the Company's expense, for 36 months following the
Termination Date, the life insurance, disability, medical,
dental, vision and hospitalization benefits provided to you and
your family immediately prior to the Termination Date.
The Company shall reimburse you for all reasonable legal fees and
expenses which you may incur following a Change of Control as a
result of the Company's attempts to contest the validity or
enforceability of this Agreement or your attempts to obtain or
enforce any right or benefit provided to you under this
Agreement, unless a court determines your actions to be
frivolous.
Except as otherwise provided in this Section 6.4, your
entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefit
plans and other applicable programs and practices then in effect.
7. Gross-Up Payment. Notwithstanding anything else in
this Agreement, if it is found that any or all of the payments
made to you, including but not limited to payments made by the
Company, or under any plan or arrangement maintained by the
Company, to you or for your benefit (other than any additional
payments required under this Section 7) (the "Payments") would be
subject to the excise tax imposed by Section 4999 of the Code or
you incur any interest or penalties with respect to such excise
tax (such excise tax, together with any such interest and
penalties, collectively the "Excise Tax"), then you are entitled
to receive an additional payment (a "Gross-Up Payment") in an
amount such that, after you pay all taxes (including any interest
or penalties imposed with respect to such taxes), including,
without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, you will retain an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. The procedures for the calculation and contesting of
any claim that such Excise Tax is due are set forth in the
Addendum.
8. No Obligation to Mitigate Damages. You are not
required to mitigate damages or the amount of any payment
provided for under this Agreement by seeking other employment or
otherwise, and the amounts to be paid to you under Section 6 of
this Agreement shall not be reduced by any compensation you may
earn from other sources. However, if, during any period that you
would otherwise be entitled to receive any payments or benefits
under this Agreement, you breach your obligations under Section
2, 3 or 4 of this Agreement, the Company may immediately
terminate any and all payments and the provision of benefits (to
the extent permitted by law and the terms of the benefit plans
maintained by the Company from time to time) hereunder.
9. Successor to Company. The Company will require any
successor or assignee to all or substantially all of the business
and/or assets of the Company, whether by merger, sale of assets
or otherwise, by agreement in form and substance reasonably
satisfactory to you, to assume and agree to perform the Company's
obligations under this Agreement in the same manner and to the
same extent that the Company would be required to perform them if
such succession or assignment had not taken place. Such
agreement of assumption must be express, absolute and
unconditional. If the Company fails to obtain such an agreement
within three business days prior to the effective date of such
succession or assignment, you shall be entitled to terminate your
employment under this Agreement for Good Reason.
10. Survival. Notwithstanding the expiration or
termination of this Agreement, except as otherwise specifically
provided herein, your obligations under Sections 2, 3 and 4 of
this Agreement and the obligations of the Company under this
Agreement shall survive and remain in full force and effect.
This Agreement shall inure to the benefit of, and be enforceable
by, your personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you die while any amounts are still payable to you,
all such amounts, unless otherwise provided in this Agreement,
shall be paid in accordance with the terms of this Agreement to
your devisee(s), legatee(s) or other designee(s) or, if there is
no such designee(s), to your estate.
11. Definitions. Whenever used in this Agreement, the
following terms shall have the meanings below:
11.1 "Cause" means:
11.1.1 You have willfully and continually failed to
substantially perform your duties (other than due to an
incapacity resulting from physical or mental illness or due to
any actual or anticipated failure after you have given a Notice
of Termination for Good Reason) after a written demand for
substantial performance is delivered to you by the Chief
Executive Officer or the Board which specifically identifies the
manner in which it is believed that you have not substantially
performed your duties; or
11.1.2 You have willfully engaged in conduct which is
demonstrably and materially injurious to the Company (monetarily
or otherwise); or
11.1.3 You have willfully engaged in conduct which is
illegal or in violation of the Company's Code of Ethics; or
11.1.4 You have been convicted of a felony; or
11.1.5 You have violated the provisions of Section 2
and/or Section 3 and/or Section 4 of this Agreement
and, in any of the events described in Sections 11.1.1 through
11.1.5 above, the Board adopts a resolution finding that in the
good faith opinion of the Board you were culpable for the conduct
set forth in any of Sections 11.1.1 through 11.1.5 and specifying
the particulars thereof in detail. For the purposes of this
Agreement, no act or failure to act on your part shall be
considered willful unless done, or omitted to be done, by you not
in good faith and without reasonable belief that your action or
omission was in the best interests of the Company. Any such
resolution of the Board must receive the affirmative vote of not
less than three-quarters of the entire membership of the Board at
a meeting of the Board called and held for the purpose of
considering the issue, and you must receive reasonable notice of
the meeting and have an opportunity, with your counsel, to
present your case to the Board.
11.2 "Change of Control" means:
11.2.1 The consummation of a consolidation or merger
of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which the shares of the
Company's common, voting equity are to be converted into cash,
securities or other property. For the purposes of this
Agreement, a consolidation or merger with a corporation which was
a wholly-owned direct or indirect subsidiary of the Company
immediately before the consolidation or merger is not a Change of
Control; or
11.2.2 The sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all
or substantially all of the Company's assets; or
11.2.3 The approval by the Company's shareowners of
any plan or proposal for the liquidation or dissolution of the
Company; or
11.2.4 Any person, as that term is used in Section
13(d) and 14(d) of the Exchange Act (other than the Company, any
trustee or other fiduciary holding securities of the Company
under an employee benefit plan of the Company, a direct or
indirect wholly-owned subsidiary of the Company or any other
company owned, directly or indirectly, by the shareowners of the
Company in substantially the same proportions as their ownership
of the Company's common, voting equity), is or becomes the
beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act), directly or indirectly, of 30% or more of the
Company's then outstanding common, voting equity; or
11.2.5 During any period of two consecutive years,
individuals who at the beginning of such period constitute the
Board, including for this purpose any new director (other than a
director designated by a person who has entered into an agreement
with the Company to effect a transaction described in this
Section 11.2.5) whose election or nomination for election by the
Company's shareowners was approved by a vote of at least two-
thirds of the directors then still in office who were directors
at the beginning of the period or whose election or nomination
for election was previously so approved (the "Incumbent Board"),
cease for any reason to constitute a majority of the Board.
11.3 "Disability" means:
11.3.1 Your absence from your duties with the Company
on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness; or
11.3.2 A physical or mental condition which prevents
you from satisfactorily performing your duties with the Company
and such incapacity or condition is determined to be total and
permanent by a physician selected by the Company or its insurers
and reasonably acceptable to you and/or your legal
representative.
11.4 "Good Reason" means:
11.4.1 Without your express written consent, after a
Change of Control, the assignment to you of duties with the
Company or with a person, as that term is used in Section 13(d)
and 14(d) of the Exchange Act, in control of the Company
materially diminished from the duties assigned to you immediately
prior to a Change of Control; or
11.4.2 Without your express written consent, after a
Change of Control, any reduction by the Company or any person, as
that term is used in Section 13(d) and 14(d) of the Exchange Act,
in control of the Company in your annual base compensation or
annual bonus at Standard (or equivalent) rating from the amounts
of such compensation and/or bonus in effect immediately before
and during the fiscal year in which the Change of Control
occurred (except that this Section 11.4.2 shall not apply to
across-the-board salary or bonus reductions similarly affecting
all executives of the Company and all executives of any person in
control of the Company); or
11.4.3 Without your express written consent, after a
Change of Control, the failure by the Company or any person, as
that term is used in Section 13(d) and 14(d) of the Exchange Act,
in control of the Company to increase your annual base
compensation or annual bonus at Standard (or equivalent) rating
at the times and in comparable amounts as they are increased for
similarly situated senior executive officers of the Company and
of any person, as that term is used in Section 13(d) and 14(d) of
the Exchange Act, in control of the Company; or
11.4.4 Without your express written consent, after a
Change of Control, the failure by the Company or by any person,
as that term is used in Section 13(d) and 14(d) of the Exchange
Act, in control of the Company to continue in effect any benefit
or incentive plan or arrangement (except any benefit plan or
arrangement which expires by its own terms then in effect upon
the occurrence of a Change of Control) in which you are
participating at the time of the Change of Control, unless a
replacement plan or arrangement with at least substantially
similar terms is provided to you; or
11.4.5 Without your express written consent, after a
Change of Control, the taking of any action by the Company or by
any person, as that term is used in Section 13(d) and 14(d) of
the Exchange Act, in control of the Company which would adversely
affect your participation in or materially reduce your benefits
under any benefit plan or arrangement or deprive you of any other
material benefit (including any miscellaneous benefit which is
not represented and protected by a written plan document or
trust) enjoyed by you at the time of a Change of Control; or
11.4.6 You terminate your employment (other than
because of your death, Disability or Retirement) by giving the
Company a Notice of Termination with a Termination Date not later
than the first anniversary of the Change of Control; or
11.4.7 Any failure by the Company to comply with any
of its material obligations under this Agreement, after you have
given notice of such failure to the Company and the Company has
not cured such failure promptly after its receipt of such notice.
11.5 "Retirement" means a voluntary or involuntary
termination of your employment after age 65 or any voluntary
termination at age 65 or earlier that entitles you to receive a
normal or early retirement service pension under the Retirement
Plans (or any successor or substitute plan or plans the Company
puts into effect prior to a Change in Control).
12. Notice. All notices and other communications required
or permitted under this Agreement shall be in writing and shall
be deemed given when mailed by certified mail, return receipt
requested, or by nationally recognized overnight courier, receipt
requested, when addressed to you at your official business
address when employed by the Company or at your home address as
reflected in the Company's records from time to time and when
addressed to the Company at its corporate headquarters, to the
attention of the Board, with a required copy to the Company's
Corporate Counsel.
13. Amendment and Assignment. This Agreement cannot be
changed, modified or terminated except in a writing. You may not
assign your duties with the Company to any other person.
14. Severability. If any provision of this Agreement or
the application of this Agreement to anyone or under any
circumstances is determined by a court to be invalid or
unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect any other provisions or
applications of this Agreement which can be effective without the
invalid or unenforceable provision or application, and such
invalidity or unenforceability shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. Remedies Cumulative; No Waiver. No remedy conferred
on you or on the Company by this Agreement is intended to be
exclusive of any other remedy, and each and every remedy shall be
cumulative and shall be in addition to any other remedy given
under this Agreement or now or later existing at law or in
equity. No delay or omission by you or by the Company in
exercising any right, remedy or power under this Agreement or
existing at law or inequity shall be construed as a waiver of
such right, remedy or power, and any such right, remedy or power
may be exercised by you or the Company from time to time and as
often as is expedient or necessary.
16. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New
York, without regard to any applicable conflicts of laws.
17. Counterparts. This Agreement may be signed by you and
on behalf of the Company in one or more counterparts, each of
which shall be one original but all of which together will
constitute one and the same instrument.
If this Agreement correctly sets forth our agreement on its
subject matter, please sign and return to me the enclosed copy of
this Agreement. Please keep the other copy for your records.
Sincerely,
FRONTIER CORPORATION
By:
-----------------------
Agreed to on
----------------------
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ADDENDUM TO LETTER AGREEMENT DATED AUGUST 16, 1995
The following provisions shall apply to the determination of
the Supplemental Retirement Amount in accordance with Section
6.4.4 of the Agreement.
1. The Supplemental Retirement Amount shall be determined
using the actuarial equivalent of the benefit payable under the
Retirement Plans which you would have received had your
employment continued for 36 months following the Termination Date
and, using the Actuarial Assumptions (as defined below) of your
actual benefit paid or payable, if any, under the Retirement
Plans. The actuarial equivalent shall be determined by using the
actuarial assumptions applied by the Company during the 90 day
period immediately prior to a Change of Control in connection
with the Retirement Plans (the "Actuarial Assumptions").
2. The calculation of your Supplemental Retirement Amount
shall also be based on the assumptions that your annual base and
incentive compensation would have remained the same over those 36
months, all accrued benefits under the Retirement Plans are fully
vested and the benefit accrual formulas are those provided for in
the Retirement Plans during the 90 day period immediately prior
to a Change of Control.
3. If all or a part of your Supplemental Retirement Amount
is derived under a supplemental or excess retirement plan
maintained by the Company for its executive employees (a "SERP"),
then the amount of your Supplemental Retirement Amount which is
derived from the SERP shall be paid from any trust of which you
are a beneficiary to the extent of funding actuarially available
in that trust to pay your Supplemental Retirement Amount.
The following provisions shall apply to the calculation and
procedures relating to the Gross-Up Payment in accordance with
Section 7 of the Agreement.
1. The Company's independent auditors in the fiscal year
in which the Change of Control occurs (the "Accounting Firm")
shall determine whether and when a Gross-Up Payment is required,
the amount of such Gross-Up Payment and the assumptions to be
used in making such determination. The Accounting Firm shall
provide detailed supporting calculations, together with a written
opinion with respect to the accuracy of such calculations, to you
and the Company within 15 business days of the receipt of a
written request from either you or the Company. If the
Accounting Firm is serving (or has served within the three years
preceding the Change in Control) as accountant or auditor for the
person in control of the Company following the Change of Control
or any affiliate thereof, you may appoint another nationally
recognized accounting firm to make the determinations required in
connection with the Gross-Up Payment and the substitute
accounting firm shall then be referred to as the Accounting
Firm). The Company shall pay you any Gross-Up Payment,
determined in accordance with this Addendum, within five days of
the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that you will not be liable for any
Excise Tax, it shall furnish you with a written opinion that your
failure to report the Excise Tax on the applicable federal income
tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall
be binding upon you and the Company.
2. If there is uncertainty about how Section 4999 is to be
applied when the Accounting Firm makes its initial determination,
and as a result the Gross-Up Payment made to you by the Company
is determined (after following the procedures set forth in this
Addendum) to be less than it should have been made (an
"Underpayment"), and you are thereafter required to pay any
Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment and any such Underpayment shall be promptly paid by
the Company to you or for your benefit.
3. You shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require
the Company to pay you the Gross-Up Payment. Your notice shall
be given as soon as practicable but no later than ten business
days after you have been informed in writing of such claim and
shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. You shall not
pay such claim prior to the expiration of the 30 day period
following the date on which you gave such notice to the Company
(or any shorter period, if the taxes claimed are due sooner). If
the Company notifies you in writing prior to the expiration of
such period that it desires to contest such claim, you shall:
(a) give the Company any information reasonably requested by it
relating to such claim, (b) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney reasonably selected by the Company, (c) cooperate with
the Company in good faith in order effectively to contest such
claim, and (d) permit the Company to participate in any
proceedings relating to such claim.
4. The Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue
or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in connection
with the claim and may, at its sole option, either direct you to
pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and you agree to prosecute the contest to
a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts as the
Company shall determine.
5. Any extension by the Company of the statute of
limitations relating to payment of taxes for the taxable year for
which such contested amount is claimed to be due shall be limited
solely to such contested amount. The Company's control of the
contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable under this Agreement and you
shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other
taxing authority.
6. If the Company directs you to pay such claim and sue
for a refund, the Company shall advance the amount of such
payment to you, on an interest-free basis, and shall indemnify
and hold you harmless, on an after-tax basis, from any Excise Tax
or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to
any imputed income with respect to such advance.
7. If you receive a refund of any amount advanced to you
by the Company, you will promptly pay to the Company the amount
of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If the Company advanced
to you any amounts and a determination is made that you will not
be entitled to any refund with respect to such claim and the
Company does not notify you in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and you
will not be required to be repay it. The amount of such advance
shall offset the amount of the Gross-Up Payment required to be
paid.
8. The Company shall pay all fees and expenses of the
Accounting Firm. The Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and
hold you harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment
of costs and expenses.
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectus constituting part of the Registration Statement on
Form S-4 (File No. 33-91250) of Rochester Telephone Corp. of our
report dated January 20, 1997 appearing on page 15 of Form 10-
K. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page
42 of this Form 10-K.
BY:/s/Price Waterhouse LLP
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PRICE WATERHOUSE LLP
Rochester, New York
March 27, 1997
EXHIBIT 24
POWER OF ATTORNEY
I, the undersigned, hereby constitute and appoint DENISE
K. GUTSTEIN as my true and lawful agent and attorney-in-fact to
act with full power and authority and in my name, place and
stead as I, myself, could act for the sole purpose of executing
the Form 10-K of Rochester Telephone Corp. for the year ended
December 31, 1996, pursuant to Instruction D(2)(a) of the Form
10-K and in accordance with Regulation S-K Item 601(b)(24) of
the Securities Act of 1933 and the Securities Exchange Act of
1934, and with full and unqualified authority to delegate such
power to any person or persons as my attorney-in-fact shall
select.
IN WITNESS WHEREOF, THIS INSTRUMENT HAS BEEN SIGNED AND
DELIVERED BY THE UNDERSIGNED AS OF MARCH 17, 1997.
/s/ Harlan D. Calkins
------------------
Harlan D. Calkins
/s/ Katherine M. Clark
------------------
Katherine M. Clark
/s/ Maurice F. Holmes
------------------
Maurice F. Holmes
/s/ Thomas H. Jackson
------------------
Thomas H. Jackson
/s/ Robert Johnson
------------------
Robert Johnson
/s/ Richard P. Miller, Jr.
------------------
Richard P. Miller, Jr.
/s/ Christine B. Whitman
------------------
Christine B. Whitman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ROCHESTER TELEPHONE CORP.'S FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,591
<SECURITIES> 0
<RECEIVABLES> 49,278
<ALLOWANCES> 1,501
<INVENTORY> 2,006
<CURRENT-ASSETS> 69,913
<PP&E> 896,677
<DEPRECIATION> 566,125
<TOTAL-ASSETS> 415,916
<CURRENT-LIABILITIES> 68,783
<BONDS> 62,872
0
0
<COMMON> 263,537
<OTHER-SE> (32,463)
<TOTAL-LIABILITY-AND-EQUITY> 415,916
<SALES> 0
<TOTAL-REVENUES> 321,838
<CGS> 0
<TOTAL-COSTS> 250,320
<OTHER-EXPENSES> 2,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,105
<INCOME-PRETAX> 66,109
<INCOME-TAX> 23,169
<INCOME-CONTINUING> 42,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (6,949)
<NET-INCOME> 35,991
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
