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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-91250
FRONTIER TELEPHONE OF ROCHESTER, INC.
(Exact name of registrant as specified in its charter)
(Previously Rochester Telephone Corp.)
New York 16-1469713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 South Clinton Avenue, Rochester, NY 14646-0700
(Address of principal executive offices) (Zip Code)
(716) 777-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
No Par, No Stated Value Common Stock: 772 shares outstanding as of
July 31, 1998
The Registrant meets the conditions set forth in general instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with
the reduced disclosure format.
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Form 10-Q
Index
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three months ended
and for the six months ended June 30, 1998 and
June 30, 1997 3
Balance Sheets as of June 30, 1998 and
December 31, 1997 4
Statements of Cash Flows for the six months ended
June 30, 1998 and June 30, 1997 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion of the Results
of Operations and Analysis of
Financial Condition 9-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Employees and Labor Relations 15-16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Index to Exhibits 18
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Income
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands of dollars 1998 1997 1998 1997
- -----------------------------------------------------------------------
Revenues $83,713 $82,512 $167,003 $163,310
- -----------------------------------------------------------------------
Costs and Expenses
Operating expenses 38,810 38,983 78,534 75,727
Depreciation and amortization 14,233 13,692 28,575 27,364
Taxes other than income taxes 5,934 5,840 11,844 11,801
- -----------------------------------------------------------------------
Total Costs and Expenses 58,977 58,515 118,953 114,892
- -----------------------------------------------------------------------
Operating Income 24,736 23,997 48,050 48,418
Interest expense 336 750 825 1,402
Other (income) expense (644) 365 (656) 644
- -----------------------------------------------------------------------
Income Before Taxes 25,044 22,882 47,881 46,372
Income taxes 8,624 7,973 16,665 16,168
- -----------------------------------------------------------------------
Net Income $16,420 $14,909 $31,216 $30,204
=======================================================================
See accompanying Notes to Financial Statements.
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Balance Sheets
June 30, December 31,
1998 1997
In thousands of dollars (Unaudited)
- ---------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 40,285 $ 2,406
Accounts receivable, (less
allowance for uncollectibles
of $4,579 and $2,646, respectively) 40,760 45,673
Accounts receivable - affiliates 6,202 4,382
Advances to affiliates 11,670 11,421
Materials and supplies 446 710
Prepaid directory 7,473 13,934
Other prepayments 1,220 1,425
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Total Current Assets 108,056 79,951
- ------------------------------------------------------------
Property, plant and equipment, net 344,265 333,406
Prepaid pension 17,880 16,419
Deferred and other assets 500 709
- ------------------------------------------------------------
Total Assets $470,701 $430,485
============================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current
Liabilities
Accounts payable $30,370 $ 29,904
Accounts payable - affiliates 13,723 6,820
Advance billings 4,618 4,707
Taxes accrued 6,576 2,439
Other current liabilities 4,006 6,585
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Total Current Liabilities 59,293 50,455
- ------------------------------------------------------------
Long-term debt 40,000 40,000
Deferred income taxes 19,807 21,448
Postretirement benefits obligation 26,999 25,327
Other long-term liabilities 2,548 2,417
- ------------------------------------------------------------
Total Liabilities 148,647 139,647
- ------------------------------------------------------------
Shareholder's Equity
Common stock, no par value and
additional paid in capital:
authorized, 1,000 shares: issued,
772 shares in 1998 and 1997 232,165 232,165
Retained earnings 89,889 58,673
- ------------------------------------------------------------
Total Shareholder's Equity 322,054 290,838
- ------------------------------------------------------------
Total Liabilities and
Shareholder's Equity $470,701 $430,485
============================================================
See accompanying Notes to Financial Statements.
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Cash Flows
(Unaudited)
6 Months Ended June 30,
In thousands of dollars 1998 1997
Operating Activities
Net income $31,216 $30,204
- ------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,575 27,364
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,093 1,588
Decrease in materials and supplies 264 898
Decrease in prepaid directory 6,461 5,409
Decrease in other prepayments 205 420
Increase in prepaid pension (1,461) (1,783)
Decrease (increase) in deferred
and other assets 180 (148)
Increase (decrease) in accounts payable 7,369 (13,231)
Decrease in advance billings (89) (204)
Increase (decrease) in accrued taxes 4,137 (162)
Decrease in other liabilities (2,579) (2,245)
Decrease in deferred income taxes (1,641) (1,579)
Increase in postretirement benefits
obligation 1,672 987
Increase (decrease) in other
long term liabilities 131 (222)
- -------------------------------------------------------------------------
Total adjustments 46,317 17,092
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Net cash provided by operating activities 77,533 47,296
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Investing Activities
Expenditures for property, plant and equipment (39,405) (27,811)
- -------------------------------------------------------------------------
Net cash used in investing activities (39,405) (27,811)
- -------------------------------------------------------------------------
Financing Activities
Repayments of long-term debt - (9,553)
Advances to/from affiliate (249) (11,812)
- -------------------------------------------------------------------------
Net cash used in financing activities (249) (21,365)
- -------------------------------------------------------------------------
Net Increase (decrease) in Cash and
Cash Equivalents 37,879 (1,880)
Cash and Cash Equivalents at Beginning of Period 2,406 3,591
- -------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $40,285 $ 1,711
=========================================================================
See accompanying Notes to Financial Statements.
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Frontier Telephone of Rochester, Inc.
Notes to Financial Statements
(Unaudited)
Note 1: Accounting Policies
The financial statements of Frontier Telephone of Rochester,
Inc. ("FTR" or the "Company") (formerly Rochester Telephone Corp.),
a wholly owned subsidiary of Frontier Corporation ("Frontier"), are
unaudited and have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and
Securities and Exchange Commission ("SEC") regulations. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements
reflect all adjustments (of a normal and recurring nature) which are
necessary to present fairly the financial position, results of
operations, and cash flows for the interim periods. These financial
statements should be read in conjunction with the Annual Report of
the Company on Form 10-K for the year ended December 31, 1997.
Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Note 2: Long-Term Debt
Effective June 30, 1997, the Company reduced its available line
of credit under its Revolving Credit Agreement from $100.0 million
to $50.0 million.
On March 31, 1997, Standard & Poor's ("S&P") announced their
new domestic telephone company rating methodology, which addresses
the impact of deregulation on operating and holding company ratings.
As a result, the ratings of 16 companies were affected by S&P's
announcement, and S&P lowered their rating of the Company's long-
term debt from "AA" to "AA-". Under S&P's revised rating
methodology, a local telephone company is typically allowed a rating
one "notch" higher than that of the consolidated entity (i.e.,
holding company and operating subsidiaries). However, the Company
was allowed a two "notch" differential, largely as a result of the
regulatory controls in existence under the Company's Open Market
Plan.
Note 3: Regulatory Matters
The Open Market Plan prohibits the payment of dividends by the
Company to Frontier Corporation if (i) the Company's senior debt has
been downgraded to "BBB" by S&P, or the equivalent rating by other
rating agencies or is placed on credit watch for such a downgrade,
or (ii) certain service quality measures fall below minimum levels
stipulated in the Open Market Plan. Dividend payments to Frontier
also require that the Company's directors certify that such
dividends will not impair the Company's service quality or its
ability to finance its short and long-term capital needs on
reasonable terms while maintaining an S&P debt rating target of "A".
In 1996, the Company failed to achieve the service quality
levels required by the Open Market Plan. On December 19, 1996,
pursuant to the Open Market Plan, FTR requested the New York State
Public Service Commission ("NYSPSC") staff to exclude certain
months from the calculation used to measure service quality, due to
operating conditions considered by management to be abnormal and
beyond the Company's control. In April 1997, the Company received
notice from the NYSPSC that its request for a waiver of certain
conditions in the Open Market Plan related to service quality
results was denied. The NYSPSC's ruling resulted in a temporary
restriction on the payment of dividends from the Company to Frontier
and a refund to the Company's customers of approximately $.9
million. Reserves sufficient to cover the refund were established
in 1996. On October 22, 1997, the NYSPSC adopted an order requiring
the Company to issue refunds of approximately $2.60 per customer.
These refunds have been completed.
The temporary restriction of dividend payments to Frontier will
remain in place until the NYSPSC is satisfied that the Company's 1997
and 1998 service levels demonstrate that the Company has rectified
the service deficiency. The NYSPSC is currently examining service
level data for the period 1993-1998 and may reopen the calculation of
service levels for one or more of the prior years to determine
whether additional regulatory action is appropriate. Weather and
other events have adversely impacted service levels in recent months.
Based on the level of customer complaints to the NYSPSC in 1996 and
1997, FTR will be required to refund approximately $150,000 in 1998.
The NYSPSC has authority to determine that additional amounts will
have to be refunded with respect to 1997, up to $1.0 million,
including the $150,000 previously discussed. The Company's service
results for the remainder of 1998 will determine whether a refund
will be required with respect to 1998. The Company has established
reserves with respect to the refund issues at a level it considers
reasonable.
The NYSPSC has issued a Notice Inviting Comments in which it has
proposed to make further changes in pricing under the Open Market
Plan. These pricing changes would reduce some prices to competitors
for network elements and other offerings, but would also reduce the
amount paid by the Company for reciprocal compensation. The issues
being addressed by the NYSPSC have been under consideration since
1995. The Company cannot predict the ultimate impact of any NYSPSC
action in this proceeding, although it is not expected to be
material.
Note 4: Cash Flows
For purposes of the Statement of Cash Flows, the Company
considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.
As a result of the temporary restriction on dividends discussed
in Note 3, no dividends were paid during the six month periods
ended June 30, 1998 or 1997. Due to this restriction, surplus cash
is being invested in interest-bearing accounts.
Actual interest paid was $1.5 million and $2.1 million for the
six months ended June 30, 1998 and 1997, respectively. Interest
costs associated with the construction of capital assets are
capitalized. Total amounts capitalized for the first six months of
1998 and 1997 totaled $.7 million and $.4 million, respectively.
During the second quarter of 1998 and 1997, the Company paid income
taxes of $16 million and $19.1 million, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION OF THE RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL CONDITION
Three and Six Months Ended June 30, 1998 and 1997
The matters discussed throughout this Form 10-Q, except for
historical financial results contained herein, may be forward-
looking in nature or "forward-looking statements." Actual results
may differ materially from the forecasts or projections presented.
Forward-looking statements are identified by such words as
"expects," "anticipates," "believes," "intends," "plans," and
variations of such words and similar expressions. The Company
believes that its primary risk factors include, but are not limited
to: changes in the overall economy 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 June
30, 1998 Form 10-Q should be evaluated in light of these important
risk factors. For additional disclosure regarding risk factors
refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
DESCRIPTION OF BUSINESS
Frontier Telephone of Rochester, Inc. ("FTR" or the "Company")
(formerly Rochester Telephone Corp.) is a regulated independent
telephone company that serves approximately 545,000 access lines in
the greater Rochester, New York area. The Company was incorporated
in December 1994 as a wholly owned subsidiary of Frontier
Corporation. Frontier has served the Rochester market since 1920
and has evolved into a diversified national telecommunications firm.
The Company is the primary provider of basic telephone services in
the Rochester market and offers its customers a full complement of
local telephone network services, access to long distance network
services, directory, and other operator services. The Company also
offers all of its network services for sale on a wholesale basis to
other telecommunication service providers in the Rochester market.
RESULTS OF OPERATIONS
Revenues for the three and six months ended June 30, 1998 were
$83.7 million and $167.0 million, respectively, while revenues for
the same periods in 1997 were $82.5 million and $163.3 million,
respectively. This 2.3% year-to-date and 1.5% quarter-to-date
revenue growth is attributable to an increase in demand for
dedicated circuits, enhanced features, expansion of the Internet
customer base, and increased directory yellow page advertising.
Costs and expenses for the three months ended June 30, 1998
amounted to $59.0 million, consistent with the three month period
ended June 30, 1997. On a year-to-date basis, costs and expenses
were $119.0 million at June 30, 1998 as compared to $114.9 million
at June 30, 1997. This $4.1 million or 3.5% increase is attributed
to increased depreciation expense, higher operating costs for repair
and maintenance in 1998, and an increase in customer service costs
due to access line growth. A portion of the repair and maintenance
increase was caused by severe weather that occurred during 1998.
Depreciation and amortization expense for the second quarter of
1998 increased $.5 million or 4.0% over the comparable period in
1997. For the six months ended June 30, 1998 and 1997, depreciation
and amortization expenses were $28.6 million and $27.4 million,
respectively, an increase of $1.2 million or 4.4%. The increase is
primarily due to capital additions to telephone plant and equipment
in service.
Net income for the three month period ended June 30, 1998 was
$16.4 million, an increase of $1.5 million or 10.1% over the same
period in 1997. On a year-to-date basis, net income was $31.2
million, an increase of $1.0 million or 3.4% over the comparable
period in 1997. The increase in net income for the three and six
months ended June 30, 1998 is largely due to the decrease in
interest expense and an increase in interest income during the first
six months of 1998 as compared to the same period in the prior year.
Other Income Statement Items
Interest expense was $.3 million and $.7 million for the three
months ended June 30, 1998 and 1997, respectively, representing a
decrease of $.4 million or 55.2%. For the six months ended June 30,
1998, interest expense decreased $.6 million to $.8 million, a 41.2%
decrease from 1997. The decrease is primarily attributable to lower
average debt levels as well as lower interest rates for the same
periods.
The effective income tax rate for the second quarter of 1998 is
34.4%, which is relatively consistent with the comparable period in
1997 of 34.8%; and 34.8% and 34.9% for each of the six months ended
June 30, 1998 and June 30, 1997, respectively.
FINANCIAL CONDITION
Review of Cash Flow Activity
Cash provided from operations for the first six months of 1998
increased $30.2 million or 63.9% from the first six months of 1997.
The primary drivers of the increase in cash provided from operations
include a decrease in accounts receivable and prepaid directory and
an increase in both accounts payable and taxes accrued. The
decrease in accounts receivable is due to the timing of receipt of
payments. The decrease in prepaid directory is due to the
amortization of prepayments. The increase in accounts payable and
taxes accrued is a function of timing of payments.
Cash used for investing activities was $39.4 million for the
six months ended June 30, 1998, an increase of $11.6 million or
41.7% over the same period in 1997. This increase is driven by an
increase in capital expenditures and is primarily due to
technological advancements and expansion of the network to meet
customer demand.
Financing activities resulted in a cash outflow of $.2 million
for the six months ended June 30, 1998 compared with an outflow of
$21.4 million for the same period last year. During 1998, advances
to affiliates totaled $.2 million. In the first half of 1997, the
Company repaid $9.6 million of outstanding debt under its commercial
paper program and made advances to affiliates in the amount of $11.8
million to Frontier. No cash dividends were paid to Frontier
Corporation during 1998 or 1997.
Debt
At June 30, 1998, the Company's total outstanding long-term
debt amounted to $40.0 million of medium-term notes.
Effective June 30, 1997, the Company reduced its available line
of credit under its Revolving Credit Agreement from $100.0 million
to $50.0 million.
On March 31, 1997, Standard & Poor's ("S&P") announced their
new domestic telephone company rating methodology, which addresses
the impact of deregulation on operating and holding company ratings.
As a result, the ratings of 16 companies were affected by S&P's
announcement, and S&P lowered their rating of the Company's long-
term debt from "AA" to "AA-". Under S&P's revised rating
methodology, a local telephone company is typically allowed a rating
one "notch" higher than that of the consolidated entity (i.e.,
holding company and operating subsidiaries). However, the Company
was allowed a two "notch" differential, largely as a result of the
regulatory controls in existence under the Company's Open Market
Plan.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of total
capitalization) decreased from 12.1% at December 31, 1997 to 11.0%
at June 30, 1998. Pre-tax interest coverage was 31.3 times through
the first six months of 1998, as compared with 22.6 times for the
first six months of 1997.
Capital Spending
Total gross expenditures for property, plant, and equipment in
1998 are anticipated to be in the $75.0 to $80.0 million range.
These expenditures are primarily attributable to technological
advancements and expansion of the network to meet customer demand.
Year 2000
The Company's Year 2000 ("Year 2K") project is intended to
address potential processing errors in computer programs that use
two digits (rather than four) to define the applicable year.
The Company has developed plans to assess and remediate key
internally-developed computer systems so they will be Year 2K
compliant in advance of December 31, 1999. It also includes both IT
and non-IT compliance. The plans cover the review, and either
revision, or replacement, where necessary, of the Company's computer
applications, telecommunications networks and building facility
equipment that directly connect the Company's business with
customers, suppliers and service providers. Implementation of the
plan began in 1996 and the Company believes that a majority of its
internally-developed IT systems are now compliant. Assessment and
remediation is expected to be substantially complete by year end
1998, leaving 1999 for system testing, carrier interoperability
testing and resolution of identified issues should they arise.
These plans involve capital expenditures for new software and
hardware, as well as costs to modify existing software.
Costs of addressing potential Year 2K problems are not
considered material to the Company's financial condition, results of
operations or cash flows and, to date, have been consistent with
planned expenditures. However, if the Company or its vendors are
unable to resolve such processing issues in a timely manner, it
could pose risks to the Company's business that could be material.
Accordingly, the Company has devoted resources to resolve all
significant identified Year 2K issues in a timely manner, and plans
to make information available to customers and others related to its
Year 2K activities. In addition, the Company is engaged in
communications with third party equipment and software vendors and
suppliers of services to verify their Year 2K readiness, and it
plans to engage in internetwork testing with other carriers in early
1999. Contingency plans (if necessary) will be developed for
critical systems if conversion or replacement projects fall behind
schedule, or if internetwork testing should identify significant
risk issues.
OTHER ITEMS
Open Market Plan
The Company began its fourth year of operations under the Open
Market Plan in January 1998. The Open Market Plan promotes
telecommunications competition in the Rochester, New York
marketplace by providing for (1) interconnection of competing local
networks including reciprocal compensation for terminating traffic,
(2) equal access to network databases, (3) access to local telephone
numbers, (4) service provider telephone number portability, and (5)
certain wholesale discounts to resellers of local services. The
inherent risk associated with opening the Rochester market to
competition is that some customers are able to purchase services
from competitors, which may reduce the number of retail customers
and potentially cause a decrease in the revenues and profitability
for the Company. Increased competition may also lead to additional
price decreases for services, adversely impacting the Company's
margins. However, results since implementation of the Open Market
Plan indicate that a stimulation of demand in the use of the network
and new product revenue may offset the losses of some retail
customers. An additional positive feature of the Open Market Plan
provides that the Company can retain additional earnings achieved
through operating efficiencies. Previously these earnings would
have been shared with customers. After three years of operating in
a competitive marketplace, the Company retains a market share of
approximately 98% of wholesale and 95% of retail local service
access lines.
During the seven year period of the Open Market Plan, rate
reductions of $21.0 million (the "Rate Stabilization Plan") will be
implemented for Rochester area consumers, including $15.0 million of
which occurred through 1997, and an additional $1.5 million which
commenced in January 1998. Rates charged for basic residential and
business telephone service may not be increased during the seven year
period of the Plan. The Company is allowed to raise prices on
certain enhanced products such as caller ID and call forwarding.
During the second quarter of 1997 the FCC issued decisions that
are intended to implement provisions of the Telecommunications Act.
Of significance were decisions that outlined changes in the
structure of universal service support and in the framework that
applies to certain interstate rates that are generally characterized
as access-related charges. During the second and third quarters of
1997, a Federal appeals court issued a series of decisions reversing
parts of an earlier FCC order that set out conditions governing the
provision of interconnection services. These orders are not
expected to have a material impact on the Company. These orders
have been appealed further and decisions are pending.
Under the Telecommunications Act and a statewide proceeding, the
NYSPSC is considering the prices that local exchange companies in New
York may charge for "unbundled" service elements such as links (the
wire from the switch to the customer premise), ports (the portion of
the switch that terminates the link) and switch usage features. The
Company is actively participating in this proceeding and expects the
NYSPSC to issue a decision on service elements in 1998. The NYSPSC
has issued a Notice Inviting Comments in which it has proposed to
make further changes in pricing under the Open Market Plan. These
pricing changes would reduce some prices to competitors for network
elements and other offerings, but would also reduce the amount paid
by the Company for reciprocal compensation. The issues being
addressed by the NYSPSC have been under consideration since 1995.
The Company cannot predict the ultimate impact of any NYSPSC action
in this proceeding, although it is not expected to be material.
Management believes there are significant market and business
opportunities associated with the Company's Open Market Plan.
However, there are also uncertainties associated with the Plan. In
the Company's opinion, the most significant risks relate to
increased competition in the Rochester, New York market and the risk
inherent in the Rate Stabilization Plan.
There can be no assurance that the changing regulatory
environment will not have a negative impact on the Company.
Dividend Policy
The Open Market Plan prohibits the payment of dividends by the
Company 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) certain service quality measures
fall below minimum levels stipulated in the Open Market Plan.
Dividend payments to Frontier also require that the Company's
directors certify that such dividends will not impair the Company's
service quality or its ability to finance its short and long-term
capital needs on reasonable terms while maintaining an S&P debt
rating target of "A".
In 1996, the Company failed to achieve the service quality
levels required by the Open Market Plan. On December 19, 1996,
pursuant to the Open Market Plan, FTR requested the New York State
Public Service Commission ("NYSPSC") staff to exclude certain months
from the calculation used to measure service quality, due to
operating conditions considered by management to be abnormal and
beyond the Company's control. In April 1997, the Company received
notice from the NYSPSC that its request for a waiver of certain
conditions in the Open Market Plan related to service quality
results was denied. The NYSPSC's ruling resulted in a temporary
restriction on the payment of dividends from the Company to Frontier
and a refund to the Company's customers of approximately $.9
million. Reserves sufficient to cover the refund were established
in 1996. On October 22, 1997, the NYSPSC adopted an order requiring
the Company to issue refunds of approximately $2.60 per customer.
These refunds have been completed.
The temporary restriction of dividend payments to Frontier will
remain in place until the NYSPSC is satisfied that the Company's 1997
and 1998 service levels demonstrate that the Company has rectified
the service deficiency. The NYSPSC is currently examining service
level data for the period 1993-1998 and may reopen the calculation of
service levels for one or more of the prior years to determine
whether additional regulatory action is appropriate. Weather and
other events have adversely impacted service levels in recent months.
Based on the level of customer complaints to the NYSPSC in 1996 and
1997, FTR will be required to refund approximately $150,000 in 1998.
The NYSPSC has authority to determine that additional amounts will
have to be refunded with respect to 1997, up to $1.0 million,
including the $150,000 previously discussed. The Company's service
results for the remainder of 1998 will determine whether a refund
will be required with respect to 1998. The Company has established
reserves with respect to the refund issues at a level it considers
reasonable.
Part II - Other Information
Item 1. Legal Proceedings
AT&T Communications of New York filed a complaint with the
NYSPSC for reconsideration of the Open Market Plan on October 3,
1995. The complaint sought a change in the wholesale discount, a
change in the minutes of use surcharge and also changes in a number
of operational and support activities. Some of these issues are
also being considered in other states in other unrelated local
competition proceedings. On July 18, 1996, the NYSPSC increased the
wholesale discount from 5.0% to 13.5% on a temporary basis,
effective July 24, 1996. On November 27, 1996, the NYSPSC
established permanent wholesale discounts, retroactive to July 24,
1996, of 17.0% for resellers using the Company's operator services
and 19.6% for resellers providing their own operator services. In a
statewide proceeding also examining New York Telephone Company's and
the Company's wholesale prices, the NYSPSC is determining the prices
applicable to the purchase of unbundled network elements such as
subscriber loops ("links"), switch ports and transport and switching
services. In a related statewide proceeding, the NYSPSC is also
examining possible changes in the prices and rate structure of
intrastate access charges paid by long distance companies for the
origination and termination of long distance calls.
Item 5. Employees and Labor Relations
As of June 30, 1998, the Company had 1,637 employees, of which
326 were management employees and 1,311 were clerical, service and
craft workers. The Frontier Telephone of Rochester, Inc. Workers
Association ("RTWA") represents 633 employees and the Communications
Workers of America, Local 1170 ("CWA Local") represents 678 craft
and service workers. The union labor contracts are normally
negotiated in three year cycles.
Under the current three year contract between the Company and
the RTWA, effective August 10, 1997, bargaining unit employees will
receive a 2.0% general increase on August 16, 1998 and August 15,
1999. On February 12, 1995, February 18, 1996 and February 16,
1997, they received a 1.0% general increase.
The labor contract between the CWA Local and the Company
expired on January 31, 1996. The contract negotiations reached an
impasse, and the Company implemented the terms of its final offer as
of April 9, 1996. Members of CWA Local ratified a tentative
agreement with the Company on April 29, 1997 which contained
provisions that differed from the Company's final offer implemented
at the time of impasse. The differences between the Company's final
offer and the agreement that was subsequently reached are not
material. This new agreement provides several operational
improvements and will result in a more consistent alignment of
benefits with the rest of Frontier. The CWA Local continues to
appeal one issue with the National Labor Relations Board related to
the declaration of impasse. Hearings on this issue were completed
in June 1997, and a decision is anticipated during the third quarter
1998. This decision may be appealed by either the CWA Local or the
Company. The Company cannot predict the final outcome of these
matters at this time. The agreement ratified on April 29, 1997 is
scheduled to expire in January, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Index to Exhibits
(b) Reports on Form 8-K filed during the quarter: None
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FRONTIER TELEPHONE OF ROCHESTER, INC.
-------------------------------------
(Registrant)
Dated: August 13, 1998 By: /s/Michael L. Evans
----------------------------
Michael L. Evans
Vice President and Treasurer
(principal financial officer)
<PAGE>
<PAGE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
INDEX TO EXHIBITS
Exhibit No. Description Reference
- --------------------------------------------------------------------
3.1 Certificate of Incorporation Incorporated by reference to
Exhibit 3.1 to Form 10-K for
the year ended December 31, 1995.
3.2 Certificate of Amendment to Incorporated by reference to
Certificate of Incorporation Exhibit 3.2 to Form 10-K for
the year ended December 31, 1995.
3.3 Bylaws Incorporated by reference to
Exhibit 3.3 to Form 10-K for
the year ended December 31,
1995.
4.1 $160M Revolving Credit Incorporated by reference to
Agreement between the Exhibit 4.1 to Form 10-K for
Company and Chase the year ended December 31,
Manhattan Bank, N.A. 1995.
dated December 19, 1994 and
adopted January 1, 1995
4.2 Indenture between the Company Incorporated by reference to
and Chemical Bank, as Trustee Exhibit 4.2 to Form 10-K for
dated March 14, 1995, $80M the year ended December 31,
Medium Term Notes, 1995 1995
Series A and B
27 Financial Data Schedule Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRONTIER TELEPHONE OF ROCHESTER'S FINANCIAL STATEMENTS FOR THE SIX
MONTH PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000936105
<NAME> FRONTIER TELEPHONE OF ROCHESTER
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 40,285
<SECURITIES> 0
<RECEIVABLES> 45,339
<ALLOWANCES> 4,579
<INVENTORY> 446
<CURRENT-ASSETS> 108,056
<PP&E> 957,119
<DEPRECIATION> 612,854
<TOTAL-ASSETS> 470,701
<CURRENT-LIABILITIES> 59,293
<BONDS> 40,000
0
0
<COMMON> 232,165
<OTHER-SE> 89,889
<TOTAL-LIABILITY-AND-EQUITY> 470,701
<SALES> 0
<TOTAL-REVENUES> 167,003
<CGS> 0
<TOTAL-COSTS> 118,953
<OTHER-EXPENSES> (656)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 825
<INCOME-PRETAX> 47,881
<INCOME-TAX> 16,665
<INCOME-CONTINUING> 31,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,216
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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