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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 September 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 October 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 and nine months
ended September 30, 1998 and 1997 3
Balance Sheets as of September 30, 1998 and
December 31, 1997 4
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion of the Results of
Operations and Analysis of Financial Condition 8-14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 5. Employees and Labor Relations 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Index to Exhibits 17
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Income
(Unaudited)
3 Months Ended 9 Months Ended
September 30, September 30,
In thousands of dollars 1998 1997 1998 1997
- ---------------------------------------------------------------------
Revenues $85,317 $80,813 $252,320 $244,123
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Costs and Expenses
Operating expenses 43,940 39,121 122,474 114,848
Depreciation and amortization 13,219 13,664 41,794 41,028
Taxes other than income taxes 6,013 5,868 17,857 17,669
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Total Costs and Expenses 63,172 58,653 182,125 173,545
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Operating Income 22,145 22,160 70,195 70,578
Interest expense 414 538 1,239 1,940
Other (income) expense (154) 235 (810) 879
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Income Before Taxes 21,885 21,387 69,766 67,759
Income taxes 7,033 7,525 23,698 23,693
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Net Income $14,852 $13,862 $46,068 $44,066
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
See accompanying Notes to Financial Statements.
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Balance Sheets
September 30, December 31,
1998 1997
In thousands of dollars (Unaudited)
- ----------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 54,122 $ 2,406
Accounts receivable, (less
allowance for uncollectibles
of $4,767 and $2,646, respectively) 40,825 45,673
Accounts receivable - affiliates 4,751 4,382
Advances to affiliates - 11,421
Materials and supplies 489 710
Prepaid directory 3,898 13,934
Other prepayments 2,916 1,425
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Total Current Assets 107,001 79,951
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Property, plant and equipment, net 346,575 333,406
Prepaid pension 18,611 16,419
Deferred and other assets 481 709
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Total Assets $472,668 $430,485
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- ---------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current
Liabilities
Accounts payable $ 28,161 $ 29,904
Accounts payable - affiliates 7,284 6,820
Advances from affiliates 4,566 -
Advance billings 1,740 4,707
Taxes accrued 2,932 2,439
Other current liabilities 1,559 6,585
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Total Current Liabilities 46,242 50,455
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Long-term debt 40,000 40,000
Deferred income taxes 19,103 21,448
Postretirement benefits obligation 27,958 25,327
Other long-term liabilities 2,459 2,417
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Total Liabilities 135,762 139,647
- ---------------------------------------------------------
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 104,741 58,673
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Total Shareholder's Equity 336,906 290,838
- ---------------------------------------------------------
Total Liabilities and
Shareholder's Equity $472,668 $430,485
=========================================================
See accompanying Notes to Financial Statements.
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FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Cash Flows
(Unaudited)
9 Months Ended September 30,
In thousands of dollars 1998 1997
- ------------------------------------------------------------------------
Operating Activities
Net income $46,068 $44,066
- ------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 41,794 41,028
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,479 4,745
Decrease in materials and supplies 221 666
Decrease in prepaid directory 10,036 8,311
Increase in other prepayments (1,491) (1,085)
Increase in prepaid pension (2,192) (1,888)
Decrease in deferred and other assets 515 293
Decrease in accounts payable (1,279) (11,216)
Decrease in advance billings (141) (209)
Increase (decrease) in accrued taxes 493 (2,586)
Decrease in other liabilities (5,026) (4,499)
Decrease in deferred income taxes (2,345) (2,496)
Increase in postretirement benefits
obligation 2,631 1,800
Increase (decrease) in other long
term liabilities 42 (1,957)
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Total adjustments 47,737 30,907
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Net cash provided by operating activities 93,805 74,973
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Investing Activities
Expenditures for property, plant and equipment (55,250) (39,948)
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Net cash used in investing activities (55,250) (39,948)
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Financing Activities
Repayments of long-term debt - (22,872)
Advances (to) from affiliate 13,161 (14,317)
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Net cash provided by (used in) in financing
activities 13,161 (37,189)
- ------------------------------------------------------------------------
Net Increase (decrease) in Cash and
Cash Equivalents 51,716 (2,164)
Cash and Cash Equivalents at Beginning of Period 2,406 3,591
- ------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $54,122 $ 1,427
========================================================================
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.
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.
On October 15, 1998, the NYSPSC approved a proposal by the
Company for revision of its service incentive plan that:
-requires a rebate of $8.00 per customer to resolve all
service penalties for 1997 and 1998,
-establishes a rebate/client program for missed appointments, and
-increases the amounts at risk for the period 1999-2001
should the Company fail to meet service levels.
The Company also has committed to increase its capital
expenditures to a minimum of $80.0 million in 1998 and to
add employees in service-affecting areas.
The temporary restriction of dividend payments to
Frontier will remain in place until the NYSPSC is satisfied
that the Company's service levels demonstrate that the
Company has rectified the service deficiency.
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 nine
months ended September 30, 1998 or 1997. Due to this
restriction, surplus cash is being invested in interest-
bearing accounts.
Actual interest paid was $3.1 million and $3.7 million
for the nine months ended September 30, 1998 and 1997,
respectively. Interest costs associated with the
construction of capital assets are capitalized. Total
amounts capitalized for the first nine months of 1998 and
1997 totaled $1.1 million and $1.0 million, respectively.
During the first nine months of 1998 and 1997, the Company
paid income taxes of $24.8 million and $27.3 million,
respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION OF THE RESULTS OF
OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Three and Nine Months Ended September 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 September 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 547,000 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 nine months ended September
30, 1998 were $85.3 million and $252.3 million,
respectively, while revenues for the same periods in 1997
were $80.8 million and $244.1 million, respectively. This
5.6% quarter-to-date and 3.4% year-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 September
30, 1998 amounted to $63.2 million, an increase of $4.5
million or 7.7% over the same period in the prior year. On
a year-to-date basis, costs and expenses were $182.1 million
at September 30, 1998 as compared to $173.5 million at
September 30, 1997. This $8.6 million or 4.9% year-to-date
increase is attributable to service quality improvements,
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
increase in repair and maintenance costs was caused by
severe weather conditions that occurred during the first
half of the year, as well as a severe windstorm during the
third quarter.
Depreciation and amortization expense of $13.2 million
for the quarter ended September 30, 1998 is relatively
consistent with the comparable period in 1997. For the nine
months ended September 30, 1998, depreciation and
amortization expense increased $.8 million or 1.9% to $41.8
million over September 30, 1997. The increase is primarily
due to capital additions to telephone plant and equipment in
service.
Net income for the three month period ended September
30, 1998 was $14.9 million, an increase of $1.0 million or
7.1% over the same period in 1997. On a year-to-date basis,
net income was $46.1 million, an increase of $2.0 million or
4.5% over the comparable period in 1997. The increase in
net income for the three and nine months ended September 30,
1998 is largely due to the decrease in interest expense and
an increase in interest income during the first nine months
of 1998 as compared to the same period in the prior year.
Other Income Statement Items
Interest expense was $.4 million and $.5 million for
the nine months ended September 30, 1998 and 1997,
respectively, representing a decrease of $.1 million or
23.0%. For the nine months ended September 30, 1998,
interest expense decreased $.7 million to $1.2 million, a
36.1% decrease from the comparable 1997 period. 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 three and nine
months ended September 30, 1998 is 32.1% and 34.0%,
respectively, as compared to 35.2% and 35.0% for the same
periods in the prior year. These decreases are primarily
driven by tax exempt interest income earned on the
investment of surplus cash as a result of the temporary
dividend restriction as discussed on page 14.
FINANCIAL CONDITION
Review of Cash Flow Activity
Cash provided from operations for the first nine months
of 1998 increased $18.8 million or 25.1% to $93.8 million as
a result of improved operating results as compared to the
same period in the prior year. Changes in working capital
primarily consist of a decrease in accounts receivable and
prepaid directory. 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.
Cash used for investing activities was $55.2 million
for the nine months ended September 30, 1998, an increase of
$15.3 million or 38.3% over the same prior year period.
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.
Cash provided from financing activities increased $50.4
million during the first nine months of 1998 as compared to
the same period in 1997. During 1998, advances from
affiliates totaled $13.2 million. In the first nine months
of 1997, the Company repaid $22.9 million of outstanding
debt under its commercial paper program and made advances to
affiliates in the amount of $14.3 million to Frontier. No
cash dividends were paid to Frontier Corporation during 1998
or 1997.
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. At
September 30, 1998, the Company's total outstanding long-
term debt amounted to $40.0 million of medium-term notes.
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 10.6% at September 30, 1998. Pre-tax interest
coverage was 30.4 times through the first nine months of
1998, as compared with 23.6 times for the first nine months
of 1997.
Capital Spending
Total gross expenditures for property, plant, and
equipment in 1998 are anticipated to be in the $80.0 to
$85.0 million range. These expenditures are primarily
attributable to technological advancements, expansion of the
network to meet customer demand and service quality
improvements.
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 is providing Year 2K
disclosure because its assessment of Year 2K issues, though
extensive, is not yet complete, and because the issues, if
unresolved by the Company and by the many unaffiliated
carriers and other firms with whom the Company interconnects
its networks or does business, could have impacts that are
material. The Company addresses Year 2K issues in four
areas:
State of Readiness. 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 includes both information technology
("IT") and non-IT compliance. The plans cover the review,
and either modification, or replacement, where necessary, of
the Company's computer applications, portions of its
network, telecommunications equipment 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 midyear 1999, leaving the
remainder of 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. Initially, work with IT systems was
given priority over work with non-IT systems, but the
Company, in part through the staff of its parent, Frontier,
is comprehensively reviewing its non-IT Year 2K readiness as
well, including communications with third parties who supply
or maintain non-IT systems or significant non-IT subsystems.
Costs. To date, the Company has committed approximately
$1.4 million to Year 2K issues, and anticipates that it will
spend an additional $1.0 million in the remainder of 1998
and during 1999. A substantial portion of the total amount
has been used for third party assistance in assessment and
remediation. The source of these funds is cash generated
from operations. To date, the costs of addressing potential
Year 2K problems are not considered material to the
Company's financial condition, results of operations or cash
flows and have been consistent with planned expenditures.
Risks. The Company is engaged primarily in providing
telecommunications services, and therefore, connects
directly and indirectly with many other carriers. While many
other carriers and providers of switches have announced
plans to engage independently in Year 2K assessment and
remediation for their networks, there is a risk that some
will not address or resolve Year 2K issues, and that
telecommunications will therefore be affected. A Year 2K
failure in the network of carriers not directly connected
with the network of the Company would not be likely to have
a significant impact on the Company. However, addressing
these risks is outside the Company's control. In addition,
the Company is unable at this time to assess the degree to
which the manufacturers of switches and similar equipment
have completed their assessment and remediation of such
equipment and its associated software with respect to any
other carriers. Another risk to the Company arises with
respect to the timely completion of Year 2K remediation for
the processing that occurs in the Company's IT and non-IT
systems. If the Company or its vendors are unable to
resolve such processing issues in a timely manner, it could
pose independent risks to the Company's business that could
be material. Accordingly, the Company has devoted
resources it believes to be adequate to resolve all
significant identified Year 2K issues in a timely manner.
Consistent with the practice of other carriers, the Company
generally has declined to provide Year 2K compliance
warranties or other Year 2K-related contractual promises to
customers or other persons.
Contingency Plans. The Company consistently monitors
the progress of its Year 2K program. The Company currently
anticipates that it will resolve its Year 2K issues before
the end of 1999, with the exception of any issues that
involve other carriers and are outside of its control.
During 1999, the Company will also monitor efforts
undertaken through regulatory agencies (including the
NYSPSC) and industry groups to assure that Year 2K
preparations are completed in a timely manner. 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, or if broader industry concerns emerge that
management concludes require such action.
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 96% 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, including a decision from
the U.S. Supreme Court on a matter that was argued in
October, 1998.
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 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.
On October 15, 1998, the NYSPSC approved a proposal by the
Company for revision of its service incentive plan that:
-requires a rebate of $8.00 per customer to resolve all
service penalties for 1997 and 1998,
-establishes a rebate/client program for missed appointments, and
-increases the amounts at risk for the period 1999-2001
should the Company fail to meet service levels.
The Company also has committed to increase its capital
expenditures to a minimum of $80.0 million in 1998 and to
add employees in service-affecting areas.
The temporary restriction of dividend payments to
Frontier will remain in place until the NYSPSC is satisfied
that the Company's service levels demonstrate that the
Company has rectified the service deficiency.
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 September 30, 1998, the Company had 1,678
employees, of which 346 were management employees and 1,332
were clerical, service and craft workers. The Frontier
Telephone of Rochester, Inc. Workers Association ("RTWA")
represents 641 employees and the Communications Workers of
America, Local 1170 ("CWA Local") represents 691 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 12, 1997, bargaining
unit employees will receive a 2.0% general increase on
August 15, 1999. Bargaining unit employees received a 2.0%
general increase on August 16, 1998. 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. On
October 30, 1998, the Administrative Law Judge issued his
decision which dismissed the CWA's complaint, finding that
the parties were at impasse on April 8, 1996, and the
Company properly implemented its final offer. This decision
may be appealed by either the CWA or the government. The
agreement ratified on April 29, 1997 is scheduled to expire
on January 30, 1999. Negotiations have commenced for a
successor agreement.
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>
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned
thereunto duly authorized.
FRONTIER TELEPHONE OF ROCHESTER, INC.
------------------------------------
(Registrant)
Dated: November 12, 1998 By: /s/Michael T. Carr
------------------
Michael T. Carr
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 Series 1995
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 FO ROCHESTER, INC.'S FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000936105
<NAME> FRONTIER TELEPHONE OF ROCHESTER, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 54,122
<SECURITIES> 0
<RECEIVABLES> 45,592
<ALLOWANCES> 4,767
<INVENTORY> 489
<CURRENT-ASSETS> 107,001
<PP&E> 971,407
<DEPRECIATION> 624,832
<TOTAL-ASSETS> 472,668
<CURRENT-LIABILITIES> 46,242
<BONDS> 40,000
0
0
<COMMON> 232,165
<OTHER-SE> 104,741
<TOTAL-LIABILITY-AND-EQUITY> 472,668
<SALES> 0
<TOTAL-REVENUES> 252,320
<CGS> 0
<TOTAL-COSTS> 182,125
<OTHER-EXPENSES> (810)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,239
<INCOME-PRETAX> 69,766
<INCOME-TAX> 23,698
<INCOME-CONTINUING> 46,068
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 46,068
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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