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, 1997
Commission File Number 33-91250
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FRONTIER TELEPHONE OF ROCHESTER, INC.
(Exact name of Registrant as specified in its charter)
(previously Rochester Telephone Corp.)
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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, 1998 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
Frontier Telephone of Rochester, Inc. ("FTR" or the
"Company") (formerly Rochester Telephone Corp.) 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 diversified national telecommunications firm. The
Company's operations represented approximately 13.9% of
Frontier's consolidated revenues for the year ended December
31, 1997 and 17.4% of Frontier's consolidated assets as of
December 31, 1997.
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 charges for
local services, network access for interconnection of long
distance companies, directory advertising and 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, Internet 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
functions.
The Company operates 71 central office and remote
switching centers in and around Rochester, New York. As of
December 31, 1997, the Company served 539,698 access lines
in the Rochester market, of which 356,223 were residential
lines and 183,475 were business lines.
Since the beginning of 1988, the Company has invested
approximately $505 million of capital expenditures 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 network
and has pursued regulatory alternatives such as the Open
Market Plan, which is described in more detail on page 4.
Currently, the Company continues to be the primary retail
provider of basic residential local telephone service in
Rochester, New York.
Telecommunications Law
The Telecommunications Act of 1996 was enacted on
February 8, 1996. This landmark legislation significantly
modified 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 network 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. The Telecommunications Act incorporated
many aspects of the Open Market Plan initiated by the
Company in 1993 and implemented in 1995. The Company
believes its experience with the Rochester, New York Open
Market Plan provides it with a competitive advantage.
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.
On August 8, 1996, the Federal Communications
Commission ("FCC") released a First Report and Order (the
"First Report and Order") in a core rulemaking proceeding to
implement the Telecommunications Act of 1996. The First
Report and Order established guidelines to promote local
competition affecting the Company and all other competitors
in local telecommunications markets. On July 18, 1997, the
U.S. Circuit Court of Appeals for the Eighth Circuit
reversed portions of the First Report and Order that
provided for pricing based primarily on forward-looking,
rather than historical costs, and that would have provided
the FCC with substantially more authority over the
compliance by local telephone companies with provisions of
the Telecommunications Act. On January 22, 1998, the same
court issued a mandate compelling adherence to the decision.
The FCC's action is subject to reconsideration and to
further appellate review. On January 23, 1998, the U.S.
Supreme Court agreed to review this case. The case will be
heard in late 1998 or early 1999.
The Act also requires the FCC to restructure the manner
in which universal service support payments are established
and distributed. On May 7, 1997, the Commission
substantially adopted the recommendation of a Federal-State
Joint Board released on November 8, 1996 with respect to
universal service. The FCC's order increased the amount of
financial support to be dedicated to universal service
programs. The Commission has released numerous subsequent
orders that have modified its original decisions, including
one which slightly reduced the amount of support to be
collected in 1998. These actions are subject to
reconsideration and appeal.
On May 16, 1997, the Commission adopted an order that
substantially modified the structure by which local exchange
carriers are compensated for access to and use of their
networks. This order was implemented effective January 1,
1998. In general, this order encouraged the recovery in
fixed charges of some costs that had previously been
recovered by local telephone companies in usage-based
charges. Competitors have reacted in different and widely
varying ways to this order. The Company believes that its
response is competitive and that it was not disadvantaged by
the order. Both of these orders are subject to the
possibility of Commission modification in light of market
impacts and are pending judicial review proceedings.
On October 9, 1997, the FCC ordered carriers that
receive "dial around" calls from payphones (certain calls
sent without coins, such as 800 or other calls with special
access codes) to compensate payphone owners at the rate of
28.4 cents per completed call. The per-call compensation
rate became effective retroactive to October 7, 1997. The
FCC is still considering how it will address the payphone
operator compensation issue for the preceding eleven month
period.
The Company cannot predict the ultimate outcome of any
of these FCC proceedings.
The Open Market Plan
The Company began its fourth year of operations under
the Open Market Plan in January 1997. The Open Market Plan
promotes telecommunications competition in the Rochester,
New York marketplace by providing for (1) interconnection of
competing local networks including reciprocal compensation
for terminating traffic, (2) equal access to network
databases, (3) access to local telephone numbers, (4)
service provider telephone number portability, and (5)
certain wholesale discounts to resellers of local services.
The inherent risk associated with opening the Rochester
market to competition is that some customers are able to
purchase services from competitors, which may reduce the
number of retail customers and potentially cause a decrease
in the revenues and profitability for the Company.
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.
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.
Management believes there are significant market and
business opportunities associated with the Company's Open
Market Plan. However, there are also uncertainties
associated with the Plan. In the Company's opinion, the
most significant risks relate to increased competition in
the Rochester, New York market, the risk inherent in the
Rate Stabilization Plan.
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 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 this refund were established in 1996.
On October 22, 1997, the NYSPSC adopted an order requiring
the Company to issue returns 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 service levels demonstrate that the
Company has rectified the service deficiency. The NYSPSC is
currently examining service level data for the period 1993-
1997 and may reopen the calculation of service levels for
these years. Based on the level of customer complaints to
the NYSPSC in 1996 and 1997, the Company will be required to
refund approximately $150,000 in early 1998. Reserves
sufficient to cover this refund were established in 1997.
Discontinuance of Regulatory Accounting
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 for
its local communications companies. This non-cash,
extraordinary write-off totaled $60.4 million, net of
applicable income taxes of $34.9 million. The write-off was
primarily related to the reduction in the recorded values of
long-lived telephone plant assets.
Employees and Labor Relations
As of December 31, 1997 the Company had 1,525
employees, of which 314 were management employees and 1,211
were clerical, service and craft workers. The Frontier
Telephone of Rochester, Inc. Workers Association ("RTWA")
represents 560 of such clerical and service workers and the
Communications Workers of America, Local 1170 ("CWA Local")
represents 651 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.
On January 31, 1996, the CWA Local contract expired.
The contract negotiations reached an impasse, and the
Company implemented the terms of its final offer as of April
9, 1996. Members of the 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 and ratified by CWA Local membership
are not material. The 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, and
a decision is anticipated by the second quarter of 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.
Year 2000 Issues
The Company has developed a plan to ensure that all of
its key computer systems will be Year 2000 compliant in
advance of December 31, 1999. It also includes review and
revision, where necessary, of computer applications that
directly connect elements of the company's business with
customers, suppliers and service providers.
Implementation of the plan began in 1997 and will
continue through 1999. It involves capital expenditures for
new software and hardware, as well as spending to modify
existing software. In most cases, these systems purchases
and modifications will not only provide for Year 2000
compliance, but will also enhance the Company's operations.
Many of the changes would have been made in any event,
although perhaps on a different timetable.
The Company does not believe it will face Year 2000
systems problems that could significantly impact operations
or financial results. Costs of achieving Year 2000
compliance have not been and are not expected to be material
to the Company's financial condition or results of
operations.
Environmental and Other Matters
With the exception of 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. The Company is not subject to any environmental
litigation that requires disclosure at this time.
Risk Factors
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.
Contingent Liabilities
The Company is often 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 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.
Connecting lines include aerial and underground cable,
conduit, poles, 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, franchise, easement or other agreement.
Central office switching equipment includes digital
electronic switches and peripheral equipment.
The Company owns or leases the land and buildings in
which its central office, warehouse, 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 which it shares with
other Frontier affiliates. The lease expires in 2003 and is
renewable for two successive ten-year periods.
ITEM 3. 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 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 I, 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). Payment of dividends is also
restricted when certain service quality levels fall below
minimum levels as stipulated in the Open Market Plan as
discussed in Item 1.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction J.
ITEM 7. MANAGEMENT'S DISCUSSION OF THE RESULTS OF
OPERATIONS AND ANALYSIS OF FINANCIAL
CONDITION
The information presented in this Management's
Discussion of Results of Operations and Analysis of
Financial Condition should be read in conjunction with the
financial statements and accompanying notes of Frontier
Telephone of Rochester, Inc. ("FTR" or the "Company")
(formerly Rochester Telephone Corp.) for the three years
ended December 31, 1997.
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 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 1997 Form 10-K should be evaluated in
light of these important risk factors.
RESULTS OF OPERATIONS
Revenues were $326.8 million in 1997, a $5.0 million,
or 1.5% increase from 1996. Revenues in 1996 increased $6.5
million or 2.1% over 1995. The Company experienced revenue
growth from increased demand for dedicated circuits,
enhanced features and the expansion of its Internet service
customer base. The growth in revenue continues to be
negatively impacted by the elimination of the surcharge on
wholesale, flat rate, local measured service, an increase in
the discount to wholesale providers from 5.0% to 17.0%, as
ordered by the NYSPSC and the $1.5 million annual rate
reduction, effective January 1, 1997, associated with the
Open Market Plan. In addition, new interstate access rates
which became effective July 1, 1997 have reduced revenues.
Costs and expenses for 1997 of $233.5 million are
consistent with 1996 expenses of $233.0 million (excluding
pension curtailment) and $228.4 million in 1995. 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. Reduced selling, administrative and
depreciation costs in 1996 were offset by increased costs
associated with the union contract negotiations. These
costs, which were incurred in connection with the contract
negotiations with CWA Local, were necessary to ensure
reliable and uninterrupted customer service in the event of
a work stoppage or shutdown. Expense reductions are being
driven by operating efficiencies implemented late in 1996
and the absence of work stoppage preparation costs
associated with the Rochester CWA Local contract
negotiations.
Depreciation and amortization expense for 1997
increased $0.7 million or 1.3% from 1996. The increase is
primarily due to capital additions to telephone plant and
equipment in service during 1997. Depreciation and
amortization expense decreased $2.3 million or 4.0% from
1995 to 1996. The decrease was primarily attributed to the
reduction in depreciation expense associated with the
impairment loss and plant write- down under Statement of
Financial Accounting Standards ("FAS ") 121, "Accounting for
the Impairment of Long-Lived Assets to be Disposed of."
Other Income Statement Items
Interest Expense
Interest expense was $2.3 million in 1997, a decrease
of $0.8 million or 24.6% over 1996. Interest expense of
$3.1 million in 1996 decreased $3.1 million or 50.2% over
1995. Reductions in interest expense in 1997 and 1996 as
compared to 1995 is the result of lower average debt levels.
The decrease in interest expense in 1996 as compared to 1995
is primarily due to the refinancing of outstanding debt
previously issued under the revolving credit agreement
during the first quarter of 1996.
Income Taxes
The effective tax rate was 35.0% in 1997 versus 35.1%
and 37.1% in 1995. The decrease in the effective tax rate
from 1995 is a result of the Company's discontinuance of
regulatory accounting for deferred taxes associated with its
telephone plant.
Nonrecurring Adjustments
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
benefits 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 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 applicable income taxes of $34.9 million.
The write-off was primarily related to the reduction in the
recorded value of long-lived telephone plant assets.
FINANCIAL CONDITION
Review of Cash Flow Activity
Cash provided from operating activities amounted to
$94.7 million in 1997 as compared to $106.4 million in 1996
and $98.6 million in 1995. The decrease in operating cash
flow in 1997 is primarily attributable to a decrease in
accounts payable to affiliates in 1997 of $12.2 million.
Cash used for investing activities was $57.8 million,
$53.1 million and $38.6 million in 1997, 1996 and 1995,
respectively. The increase in capital expenditures in 1997
and 1996 compared to 1995 is primarily attributable to the
central office host consolidation project. The increase in
capital expenditures in 1997 compared to 1996 is primarily
due to outside plant facility upgrades.
Financing activities resulted in net cash outflows of
$38.1 million, $55.4 million and $54.4 million for 1997,
1996 and 1995, respectively. During 1997, the Company
repaid commercial paper borrowings of $22.9 million and
advances to affiliates of $15.2 million. In 1996, the
Company paid cash dividends of $23.5 million, returned
capital to Frontier of $32.5 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 1995 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 1997 or
1995.
Liquidity and Capital Resources
At December 31, 1997, the Company's total outstanding
long-term debt amounted to $40.0 million of medium-term
notes. The notes were issued March 27, 1995 and mature in
2002. The Company has a credit facility totaling $50.0
million which is available through commercial paper
borrowings or through draws under the Revolving Credit
Agreement. At December 31, 1997, the Company had no
outstanding commercial paper issuances.
On March 31, 1997, 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 to total capital ratio at December
31, 1997 decreased to 12.1%, as compared to 21.4% in the
prior year and 19.4% in 1995. The change in the debt ratio
in 1997 as compared to 1996 is primarily driven by the
reduction in total debt outstanding during the year as the
Company paid off commercial paper borrowings with excess
cash. Pre-tax interest coverage, which measures the
Company's ability to cover its financing costs, was 24.7
times in 1997 versus 20.1 times in 1996 and 11.5 times in
1995 (excluding nonrecurring charges for all years).
Capital Spending
Total gross expenditures for property, plant and
equipment in 1998 are anticipated to be approximately $65.0
million. These expenditures are primarily attributable to
technological advancements and expansion of the network to
meet customer demand.
OTHER ITEMS
New Accounting Pronouncement
The Financial Accounting Standards Board ("FASB")
issued FAS 130, "Reporting Comprehensive Income," effective
for fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of
comprehensive income and its components in a full-set of
general-purpose financial statements. Comprehensive income
is defined as "the change in equity of a company during a
period from transactions and other events and circumstances
from nonowner sources." It includes all changes in equity
during a period except those resulting from investments by
owners and distributions to owners. The Company will adopt
FAS 130 in the first quarter of 1998. Adoption of this
standard is not expected to have a material impact on FTR.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report
thereon of Price Waterhouse LLP, dated January 26, 1998, are
presented on pages 15 through 32 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
Frontier Telephone of Rochester, Inc.
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 Frontier Telephone of Rochester, Inc.
at December 31, 1997, 1996 and 1995, 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 8 to the financial statements,
during the third quarter of 1995 the Company discontinued
accounting for its operations in accordance with Statement
of Financial Accounting Standards No. 71, "Accounting for
the Effects of Certain Types of Regulation."
PRICE WATERHOUSE LLP
Rochester, New York
January 26, 1998
<PAGE>
<PAGE>
Frontier Telephone of Rochester, Inc.
Statements of Income
In thousands of dollars Years Ended
December 31, 1997 1996 1995
- --------------------------------------------------------------------
Revenues $326,794 $321,838 $315,335
Costs and Expenses
Operating expenses 155,718 157,197 146,236
Depreciation and amortization 54,984 54,291 56,549
Taxes other than income taxes 22,828 21,492 25,589
Pension curtailment - 17,340 -
- --------------------------------------------------------------------
Total Costs and Expenses 233,530 250,320 228,374
- --------------------------------------------------------------------
Operating Income 93,264 71,518 86,961
Interest expense 2,341 3,105 6,237
Other expense, net 640 2,304 2,839
- --------------------------------------------------------------------
Income Before Taxes, Extraordinary Item and
Cumulative Effect of Changes in
Accounting Principles 90,283 66,109 77,885
Income taxes 31,610 23,169 28,878
- --------------------------------------------------------------------
Income Before Extraordinary Item and
Cumulative Effect of Changes in
Accounting Principles 58,673 42,940 49,007
Extraordinary item - - (60,441)
Cumulative effect of changes in
accounting principles - (6,949) (1,020)
- --------------------------------------------------------------------
Net Income (Loss) $ 58,673 $ 35,991 $(12,454)
====================================================================
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Frontier Telephone of Rochester, Inc.
Balance Sheets
In thousands of dollars December 31, 1997 1996 1995
- --------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,406 $ 3,591 $ 5,643
Accounts receivable (less allowance
for uncollectibles of $2,646,
$1,501, and $1,421 respectively) 45,673 47,777 54,450
Accounts receivable - affiliates 4,382 2,670 2,273
Advances to affiliates 11,421 - -
Materials and supplies 710 2,006 3,084
Prepaid directory 13,934 12,463 13,038
Other prepayments 1,425 1,406 1,752
- --------------------------------------------------------------------
Total Current Assets 79,951 69,913 80,240
Property, plant and equipment, net 333,406 330,552 340,545
Prepaid pension 16,419 14,204 28,305
Deferred and other assets 709 1,247 1,799
- --------------------------------------------------------------------
Total Assets $430,485 $415,916 $450,889
- --------------------------------------------------------------------
- --------------------------------------------------------------------
LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities
Accounts payable $ 29,904 $ 31,759 $ 42,054
Accounts payable - affiliates 6,820 19,022 9,770
Advances from affiliate - 3,827 5,753
Advance billings 4,707 4,994 5,120
Accrued taxes 2,439 3,047 5,602
Other liabilities 6,585 5,908 5,520
- --------------------------------------------------------------------
Total Current Liabilities 50,455 68,557 73,819
Long-term debt 40,000 62,872 60,300
Deferred income taxes 21,448 25,266 36,196
Accrued postretirement benefit
obligation 25,327 23,176 20,253
Other long-term liabilities 2,417 4,971 9,238
- --------------------------------------------------------------------
Total Liabilities 139,647 184,842 199,806
- --------------------------------------------------------------------
Shareowner's Equity
Common stock, no par, authorized 1,000 shares;
772 shares in 1997 and 1996 and
one share in 1995 issued and
additional paid in capital 232,165 231,074 263,537
Retained earnings 58,673 - (12,454)
- --------------------------------------------------------------------
Total Shareowner's Equity 290,838 231,074 251,083
- --------------------------------------------------------------------
Total Liabilities and
Shareowner's Equity $430,485 $415,916 $450,889
====================================================================
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Frontier Telephone of Rochester, Inc.
Statements of Shareowner's Equity
Common Stock Retained
In thousands of and Additional Earnings
dollars Paid in Capital (Deficit) Total
---------------------------------------------------------
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
Net income - 58,673 58,673
Equity adjustment on assets
transferred 1/95 1,091 - 1,09
----------------------------------------------------------
Balance, December 31, 1997 $232,165 $58,673 $290,838
=========================================================
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Frontier Telephone of Rochester, Inc.
Statements of Cash Flows
In thousands of dollars Years Ended December 31,
- ---------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------
Operating Activities
Net Income (Loss) $ 58,673 $ 35,991 $(12,454)
- ---------------------------------------------------------------
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Cumulative effect of changes in
accounting principles - 10,691 1,569
Pension curtailment - 17,340 -
Extraordinary item - - 95,317
Depreciation and amortization 54,984 54,291 56,549
Changes in operating assets and liabilities:
Decrease (increase) in
accounts receivable 2,104 6,673 (54,450)
Increase in accounts
receivable - affiliates (1,712) (397) (2,273)
Decrease in materials and
supplies 1,296 1,078 170
(Increase) decrease in
prepaid directory (1,471) 575 (2,271)
(Increase) decrease in
other prepayments (19) 346 (208)
Increase in prepaid pension (2,215) (1,240) (16,566)
Decrease in deferred and
other assets 470 325 5,210
(Decrease) increase in
accounts payable (1,855) (12,294) 40,401
(Decrease) increase in
accounts payable - affiliates (12,202) 7,557 9,770
Decrease in advance billings (287) (126) (2,207)
(Decrease) increase in
accrued taxes (608) (2,555) 1,344
Increase in other liabilities 677 388 1,848
Decrease in deferred income taxes (2,727) (10,930) (30,418)
Increase in accrued
postretirement benefit obligation 2,151 2,923 5,264
(Decrease) increase in other
long-term liabilities (2,554) (4,267) 2,046
- ---------------------------------------------------------------
Total adjustments 36,032 70,378 111,095
- ---------------------------------------------------------------
Net cash provided by
operating activities 94,705 106,369 98,641
===============================================================
Investing Activities
Expenditures for property, plant
and equipment, net (57,770) (53,067) (38,619)
- ---------------------------------------------------------------
Net cash used in
investing activities (57,770) (53,067) (38,619)
- ---------------------------------------------------------------
Financing Activities
Repayments of debt (22,872) - (99,700)
Proceeds from issuance of
long-term debt - 2,572 39,568
Advances (to) from affiliates (15,248) (1,926) 5,753
Dividends paid - (23,537) -
Return of capital to Frontier Corporation - (32,463) -
- ---------------------------------------------------------------
Net cash used in
financing activities (38,120) (55,354) (54,379)
- ---------------------------------------------------------------
Net (Decrease) Increase in Cash
& Cash Equivalents (1,185) (2,052) 5,643
Cash and Cash Equivalents at
Beginning of Year 3,591 5,643 -
- ---------------------------------------------------------------
Cash and Cash Equivalents at
End of Year $ 2,406 $ 3,591 $ 5,643
===============================================================
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
Note 1: Accounting Policies
Basis of Accounting
The accounting policies of Frontier Telephone of
Rochester, Inc. ("FTR" or the "Company") (formerly Rochester
Telephone Corp.), 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.
Allocation of Corporate Overhead
The results of operations of the Company include
allocations of corporate expenses from Frontier. These costs
primarily include executive and board of directors' expenses,
corporate finance and treasury, investor relations, corporate
planning, legal services and business development. 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 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 of property, plant and
equipment is based on the straight-line,
average remaining life method using estimated service lives
for the various classes of plant.
The cost of depreciable property units retired, plus
removal costs, less salvage is charged to accumulated
depreciation. When non-telephone property, plant and
equipment is retired or sold, the resulting gain or loss is
recognized currently as an element of other income.
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 from Frontier to the
Company on January 1, 1995 was $263.5 million.
In the first quarter of 1997, a $1.1 million adjustment
to this valuation was required relating to deferred taxes
associated with the assets transferred. This adjustment is
reflected as an increase to common stock and additional paid
in capital and a decrease to deferred taxes.
Revenue Recognition
Customers are billed as of monthly cycle dates. Revenue
is recognized as service is provided net of an estimate for
uncollectible accounts. 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 $3.8 million in 1997, $4.3
million in 1996 and $9.3 million in 1995. Actual income
taxes paid were $34.7 million in 1997, $31.3 million in 1996
and $33.2 million in 1995. Interest costs associated with
the construction of capital assets are capitalized. Total
amounts capitalized during 1997, 1996 and 1995 were $1.4
million, $1.2 million and $1.0 million, respectively.
Note 2: Property, Plant and Equipment
Major classes of property, plant and equipment are
summarized below:
Estimated
Service
In thousands of dollars Life
At December 31, 1997 1996 1995 (Years)
- ---------------------------------------------------------------
Land, buildings and building
improvements $47,316 $47,128 $46,182 5-35
Local and toll service lines 448,505 438,989 418,918 12-25
Central office equipment 340,435 322,943 339,390 8-13.5
Station equipment 11,673 13,357 11,357 10-21
Office equipment and other 35,302 49,192 44,019 12-20
Plant under construction 47,248 25,068 17,716
Less: Accumulated
Depreciation 597,073 566,125 537,037
- ---------------------------------------------------------------
$333,406 $330,552 $340,545
===============================================================
Depreciation expense was $54.9 million, $54.1 million,
and $56.0 million for the years ending December 31, 1997,
1996 and 1995, respectively.
Note 3: Long-Term Debt
In thousands of dollars
At December 31, 1997 1996 1995
- ------------------------------------------------------------------
Medium-term notes, 7.51%, due 2002 $40,000 (a $40,000 $40,000
Revolving credit agreements - (b) 22,876 20,300
- -----------------------------------------------------------------
Sub-total 40,000 (c) 62,876 60,300
Less - Discount on long-term debt,
net of premium - 4 -
- -----------------------------------------------------------------
Total Long-Term Debt $40,000 $62,872 $60,300
=================================================================
(a) In accordance with the Open Market Plan agreement, the
Company issued $40.0 million medium-term notes in March 1995
which mature in 2002.
(b) The Company has a credit facility totaling $50.0 million
which is available through commercial paper borrowings or
through draws under the Revolving Credit Agreement. At
December 31, 1997, the Company had no outstanding
commercial paper issuances.
The Company entered into a Revolving Credit Agreement with
six commercial banks in December 1994. The Agreement was
amended in 1997 to reduce the available line of credit from
$100.0 million to $50.0 million. The agreement is
unsecured, expires December 1999 and carries commitment
fees of .07 percent per year on the entire commitment, with
interest on amounts drawn down based on either the prime
rate, London Interbank Offered 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
$41.6 million, as compared to the carrying value of $40.0 million.
Note 4: Income Taxes
The provision for income taxes consists of the following
for the years ended December 31:
In thousands of dollars 1997 1996 1995
- -------------------------------------------------------------
Federal
Current $34,331 $30,357 $30,358
Deferred (2,721) (7,188) (1,480)
- -------------------------------------------------------------
$31,610 $23,169 $28,878
=============================================================
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 for the years ended
December 31:
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------
Federal income tax expense at
statutory rate 35.0% 35.0% 35.0%
Accelerated depreciation - - 3.2%
Investment tax credit - - (0.8%)
Miscellaneous - 0.1% (0.3%)
- ------------------------------------------------------------
Total federal income tax 35.0% 35.1% 37.1%
============================================================
Deferred tax (assets) liabilities are comprised of the
following at December 31:
In thousands of dollars 1997 1996 1995
- ----------------------------------------------------------
Accelerated depreciation $26,306 $29,346 $35,507
Prepaid pension 5,734 5,094 7,277
Miscellaneous 253 443 873
- ----------------------------------------------------------
Gross deferred tax liabilities 32,293 34,883 43,657
- ----------------------------------------------------------
Accrued postretirement
benefit obligation (9,574) (8,598) (5,767)
Deferred compensation (297) - (85)
Miscellaneous (974) (1,019) (1,609)
- ----------------------------------------------------------
Gross deferred tax assets (10,845) (9,617) (7,461)
- ----------------------------------------------------------
Net deferred tax liabilities $ 21,448 $25,266 $36,196
==========================================================
Note 5: Service Pensions and Benefits
The Company has contributory and noncontributory plans
providing for service pensions and certain death benefits for
substantially all employees. In 1997, 1996 and 1995, defined
benefit plans sponsored by the Company covering all groups of
employees were frozen. On an annual basis, contributions are
remitted to the trustees to ensure proper funding of the
plans.
The following table summarizes the funded status of the
Company's pension plan at December 31:
In thousands of dollars 1997 1996 1995
- -----------------------------------------------------------
Actuarial present value of
benefit obligations:
Vested benefit obligation $58,266 $84,386 $78,348
Accumulated benefit obligation $66,804 $96,551 $87,053
- -----------------------------------------------------------
Plan assets at fair value,
primarily fixed income
securities and common stock $91,463 $125,184 $102,477
Projected benefit obligation (66,804) (96,551) (88,098)
- -----------------------------------------------------------
Funded status $24,659 $ 28,633 $ 14,379
Unrecognized net (gain) loss (8,237) (13,822) 14,911
Unrecognized net transition asset (3) (607) (1,211)
Unrecognized prior service cost - - 226
- -----------------------------------------------------------
Prepaid pension reflected in the
Balance Sheet $16,419 $14,204 $ 28,305
===========================================================
The net periodic pension cost consists of the following
for the years ended December 31:
In thousands of dollars 1997 1996 1995
- -----------------------------------------------------------
Service cost $ 842 $ 3,226 $ 2,853
Interest cost on projected
benefit obligation 4,299 5,976 5,950
Actual return on plan assets (13,589) (15,837) (22,485)
Net amortization and deferral 5,496 5,395 10,039
- -----------------------------------------------------------
Net periodic pension benefit (2,952) (1,240) (3,643)
Benefit resulting from regulatory
agency actions - - (1,090)
Amount due to curtailment - 17,340 (1,712)
- -----------------------------------------------------------
Net periodic pension (benefit)
cost recognized $(2,952) $16,100 $(6,445)
===========================================================
The following rates and assumptions were used to
calculate the projected benefit obligation:
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------
Weighted average discount rate 7.0% 7.5% 7.5%
Rate of salary increase 5.0% 5.0% 5.0%
Expected return on plan assets 9.5% 9.0% 9.0%
============================================================
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. The Company changed
its assumptions used in 1997 for the weighted average
discount rate and the expected return on plan assets. These
assumptions did not have a material effect on the 1997
pension expense.
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 sponsors 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. The common stock used for matching
contributions is purchased on the open market by the plan's
trustee. In 1995 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 $1.7
million for 1997, $1.2 million for 1996 and $1.3 million for
1995.
Note 6: Postretirement Benefits Other Than Pensions
The Company provides health care and life insurance
benefits to most employees. Plan assets consist principally
of life insurance policies and money market instruments. 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 1997 and 1996,
the Company amended its health care benefits 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 care 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.
The status of the plan is as follows at December 31:
In thousands of dollars 1997 1996 1995
- ----------------------------------------------------------------
Accumulated postretirement benefit
obligation (APBO)
attributable to:
Retirees $68,536 $53,180 $51,936
Fully eligible plan participants 7,263 10,651 13,892
Other active plan participants 3,255 5,426 11,105
- ----------------------------------------------------------------
Total APBO 79,054 69,257 76,933
Plan assets at fair value, primarily life
insurance policies and
money market instruments 2,049 2,486 3,619
- ----------------------------------------------------------------
APBO in excess of plan assets 77,005 66,771 73,314
Unrecognized transition obligation (59,245)(63,644) (74,481)
Unrecognized net prior service cost (692) - (1,076)
Unrecognized net gain 8,259 20,049 22,496
- ----------------------------------------------------------------
Accrued postretirement benefit obligation
reflected in the Balance Sheet $25,327 $23,176 $20,253
================================================================
The components of the estimated postretirement benefit
cost are as follows for the years ended December 31:
In thousands of dollars 1997 1996 1995
- ----------------------------------------------------------
Service cost $ 333 $ 214 $ 467
Interest on APBO 5,075 5,120 5,817
Return on plan assets (206) (244) (320)
Amortization of:
Transition obligation 3,966 4,079 4,381
Prior service cost 145 19 196
Gains (1,763) (1,829) (2,228)
- ----------------------------------------------------------
Net postretirement benefit
cost $7,550 $7,359 $8,313
==========================================================
The following assumptions were used to value the
postretirement benefit obligation:
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------
Weighted average discount rate 7.0% 7.5% 7.5%
Expected return on plan assets 9.5% 9.0% 9.0%
Rate of salary increase 5.0% 5.0% 5.0%
Assumed rate of increase in cost
of covered health care benefits 5.6% 6.1% 10.5%
===============================================================
Increases in health care costs were assumed to decline
consistently to 5.0% by 2006 and remain at that level
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, 1997 would increase by $6.0 million while the sum of the
service and interest cost components of the net
postretirement benefit health care cost for 1997 would
increase by $.4 million.
The Company changed its assumptions used in 1997 for the
weighted average discount rate and the expected return on
plan assets. These changes in assumptions did not have a
material effect on the 1997 postretirement expense.
Note 7: Stock Option Plans and Other Common Stock
Transactions
The Company participates in Frontier's stock option
plans for its directors, executives, and certain employees.
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 8: Discontinuation of Regulatory Accounting Principles
The Company determined in 1995 that 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 telephone 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 recognized as
regulatory assets and liabilities pursuant to FAS 71.
Note 9: Other 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
management's commitment, in late 1995, to 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 multi-
year 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.
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 any 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
$2.7 million in 1997, $2.8 million in 1996, and $3.2 million
in 1995.
Minimum annual rental commitments under non-cancelable
operating leases in effect on December 31, 1997 were as
follows:
In thousands of dollars
- ----------------------------------
Non-Cancelable Leases
Years Buildings Equipment
- -----------------------------------
1998 $ 653 $ 920
1999 469 920
2000 214 766
2001 162 -
2002 113 -
2003 and thereafter 173 -
- -----------------------------------
Total $1,784 $2,606
===================================
Note 11: Regulatory Matters
Open Market Plan
The Company began its fourth year of operations under
the Open Market Plan in January 1997. The Open Market Plan
promotes telecommunications competition in the Rochester, New
York marketplace by providing for (1) interconnection of
competing local networks including reciprocal compensation
for terminating traffic, (2) equal access to network
databases, (3) access to local telephone numbers, (4) service
provider telephone number portability, and (5) certain
wholesale discounts to resellers of local services. The
inherent risk associated with opening the Rochester market to
competition is that some customers are able to purchase
services from competitors, which may reduce the number of
retail customers and potentially cause a decrease in the
revenues and profitability for the Company. 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.
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.
Management believes there are significant market and
business opportunities associated with the Company's Open
Market Plan. However, there are also uncertainties
associated with the Plan. In the Company's opinion, the most
significant risks relate to increased competition in the
Rochester, New York market, the risk inherent in the Rate
Stabilization Plan.
There can be no assurance that the changing regulatory
environment will not have a negative impact on the Company.
Dividend Policy
The Open Market Plan prohibits the payment of dividends
by the Company to Frontier Corporation if (i) the Company's
senior debt has been downgraded to "BBB" by S&P, or the
equivalent rating by other rating agencies or is placed on
credit watch for such a downgrade, or (ii) certain service
quality measures fall below minimum levels stipulated in the
Open Market Plan. Dividend payments to Frontier also require
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
this refund were established in 1996. On October 22, 1997,
the NYSPSC adopted an order requiring the Company to issue
returns 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 service levels demonstrate that the
Company has rectified the service deficiency. The NYSPSC is
currently examining 1993-1997 service level data and may
reopen the calculation of service levels for these years.
Based on the level of customer complaints to the NYSPSC in
1996 and 1997, the Company will be required to refund
approximately $150,000 in early 1998. Reserves sufficient to
cover this refund were established in 1997.
Note 12: Related Party Transactions
The advances to (from) affiliate balances of $11.4
million, ($3.8) million and ($5.8) million at December 31,
1997, 1996 and 1995, respectively represent funds advanced to
(from) Frontier by the Company. Accounts payable to
affiliates at December 31, 1997, 1996 and 1995 includes $1.5
million, $15.4 million and $4.1 million, respectively due to
Frontier. Accounts receivable from affiliates includes $1.6
million at December 31, 1997, $0.6 million at December 31,
1996 and $0.1 million at December 31, 1995, due from
Frontier.
The Company paid $11.1 million in 1997, $12.2 million in
1996 and $11.9 million in 1995 to Frontier for allocated
corporate charges primarily for executive, legal and
financial assistance. The Company also paid $18.5 million,
$16.5 million and $17.2 million to an affiliate, Frontier
Information Technologies for data processing services and
support during 1997, 1996 and 1995, respectively. Other
services purchased from affiliates include supplies,
materials management, telemarketing, long distance, cellular
and paging services. These services amounted to $15.6
million, $16.6 million and $12.8 million during 1997, 1996
and 1995, 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 $9.6 million, $9.1 million and
$7.8 million during 1997, 1996 and 1995, 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, 1997, 1996 and 1995
Statements of Shareowner's Equity for the years ended
December 31, 1997, 1996 and 1995
Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Financial Statements
(2) Financial Statement Schedule for the years 1997, 1996
and 1995:
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 filed the following
report during the quarter ended December 31, 1997.
SEC Filing Date Item No. Financial Statements
------------------------------------------------------------
October 9, 1997 5 None
The Company filed no reports subsequent to the quarter ended
December 31, 1997 through March 26, 1998.
(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>
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.
FRONTIER TELEPHONE OF ROCHESTER, INC.
(Registrant)
By:/s/Denise K. Gutstein
-----------------------------
Denise K. Gutstein, President
Date: March 26, 1998
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 26, 1998
/s/ Michael L. Evans Vice President and Treasurer
- -------------------- (principal financial and accounting
Michael L. Evans officer)
March 26, 1998
* Director
- --------------------
Harlan D. Calkins
March 26, 1998
/s/Jeremiah Carr Director
- --------------------
Jeremiah T. Carr
March 26, 1998
- -------------------- Director
Katherine T. Clark
March 26, 1998
- --------*----------- Director
Maurice F. Holmes
March 26, 1998
- -------*------------ Director
Thomas H. Jackson
March 26, 1998
- -------*------------ Director
Robert Johnson
March 26, 1998
- -------*------------ Director
Richard P. Miller, Jr.
March 26, 1998
- -------*------------ Director
Christine B. Whitman
March 26, 1998
*By: /s/ Denise K. Gutstein
------------------ Manually signed powers of
Denise K. Gutstein attorney for each Director
Attorney-in-Fact are attached hereto and filed
herewith pursuant to
Regulation S-K Item 601-
(b)24 as Exhibit 24.
<PAGE>
<PAGE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
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.
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
<PAGE>
<PAGE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ------ --------------------- --------------
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
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
10.6 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
10.7 Form of management contract Incorporated by reference to Exhibit
as amended with Mr. Carr 10.9 to Form 10-K for the year
ended December 31, 1996
10.8 Amendment No. 1 to the Incorporated by reference to Exhibit
Management Stock Incentive Plan 10.22 to Frontier Corporation's
10-Q for the quarter ended
September 30, 1997
10.9 Copy of Executive Bonus Plan Incorporated by reference to Exhibit
10.20 to Frontier Corporation's
Form 10-K for the year ended
December 31, 1997
10.10 Amendment No. 1 to the Incorporated by reference to Exhibit
Supplemental Management 10.21 to Frontier Corporation's
Pension Plan Form 10-K for the year ended
December 31, 1997
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>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareowner of
Frontier Telephone of Rochester, Inc.
Our audits of the financial statements referred to in our
report dated January 26, 1998 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 financial statements.
PRICE WATERHOUSE LLP
Rochester, New York
January 26, 1998
<PAGE>
<PAGE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1997
(Table 1 of 3)
In thousands of
dollars
Additions
---------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of year expenses accounts(1) Deductions(2) year
- ---------------------------------------------------------------------------
Reserve for
uncollectible
accounts $1,501 $5,770 - $4,625 $2,646
============================================================================
(1) Primarily recoveries of uncollectible accounts.
(2) Amounts written off against reserve.
<PAGE>
<PAGE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1996
(Table 2 of 3)
In thousands of
dollars
Additions
---------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of year expenses accounts(1) Deductions(2) 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>
FRONTIER TELEPHONE OF ROCHESTER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1995
(Table 3 of 3)
In thousands of
dollars
Additions
---------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of year expenses accounts(1) Deductions(2) 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.
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 Frontier Telephone of Rochester,
Inc. of our reported dated January 26, 1998 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 39 of this Form 10-K.
PRICE WATERHOUSE LLP
Rochester, New York
March 26, 1998
14902.1
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 Frontier Telephone of Rochester, Inc. for the year ended
December 31, 1997, 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 23, 1998.
/s/ Harlan D. Calkins
- ----------------------------- ----------------------------
Harlan D. Calkins Katherine M. Clark
/s/Maurice F. Holmes /s/ Thomas H. Jackson
- ----------------------------- ----------------------------
Maurice F. Holmes Thomas H. Jackson
/s/ Robert Johnson /s/ Richard P. Miller, Jr.
- ----------------------------- ----------------------------
Robert Johnson 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
FRONTIER TELEPHONE OF ROCHESTER, INC.'S FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000936105
<NAME> FRONTIER TELEPHONE OF ROCHESTER, INC.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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<ALLOWANCES> 2,646
<INVENTORY> 710
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<COMMON> 232,165
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