<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-91250
FRONTIER TELEPHONE OF ROCHESTER, INC.
(Exact name of registrant as specified in its charter)
(Previously Rochester Telephone Corp.)
New York 16-1469713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 South Clinton Avenue, Rochester, NY 14646-0700
(Address of principal executive offices) (Zip Code)
(716) 777-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
No Par, No Stated Value Common Stock: 772 shares outstanding
as of July 31, 1999
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.
<PAGE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Form 10-Q
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Business Segment Information for the three
and six months ended June 30, 1999 and 1998 3
Statements of Income for the three and six months
ended June 30, 1999 and 1998 4
Balance Sheets as of June 30, 1999 and
December 31, 1998 5
Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 6
Notes to Financial Statements 7-8
Item 2. Management's Discussion of the Results of
Operations and Analysis of Financial Condition 9-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Employees and Labor Relations 15-16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Index to Exhibits 18
<PAGE>
<TABLE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Business Segment Information
(Unaudited)
3 Months Ended 6 Months Ended
In thousands June 30, June 30,
of dollars 1999 1998 1999 1998
- -----------------------------------------------------
<S> <C> <C> <C> <C>
Local Services:
Revenue $ 76,937 $ 75,008 $152,752 $148,942
Costs and Expenses 42,944 40,991 88,019 82,715
Depreciation
and Amortization 16,048 14,233 31,333 28,575
- ------------------------------------------------------
Operating Income $ 17,945 $ 19,784 $ 33,400 $ 37,652
Total Assets $ 521,619 $ 461,833 $521,619 $461,833
======================================================
Directory Services:
Revenue $ 9,583 $ 8,705 $ 19,606 $ 18,061
Costs and Expenses 4,129 3,753 8,192 7,663
- ------------------------------------------------------
Operating Income $ 5,454 $ 4,952 $ 11,414 $ 10,398
Total Assets $ 9,819 $ 8,868 $ 9,819 $ 8,868
======================================================
Consolidated
Revenue $ 86,520 $ 83,713 $172,358 $167,003
Costs and Expenses 47,073 44,744 96,211 90,378
Depreciation
and Amortization 16,048 14,233 31,333 28,575
- ------------------------------------------------------
Operating Income $ 23,399 $ 24,736 $ 44,814 $ 48,050
Total Assets $ 531,438 $ 470,701 $531,438 $470,701
======================================================
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Income
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands of dollars 1999 1998 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------
Revenue $86,520 $83,713 $172,358 $167,003
- -----------------------------------------------------------------------
Costs and Expenses
Operating expenses 41,474 38,810 84,815 78,534
Depreciation and amortization 16,048 14,233 31,333 28,575
Taxes other than income taxes 5,599 5,934 11,396 11,844
- -----------------------------------------------------------------------
Total Costs and Expenses 63,121 58,977 127,544 118,953
- -----------------------------------------------------------------------
Operating Income 23,399 24,736 44,814 48,050
Interest expense - 336 138 825
Other income 532 644 1,055 656
- -----------------------------------------------------------------------
Income Before Taxes 23,931 25,044 45,731 47,881
Income tax expense 8,482 8,624 16,037 16,665
=======================================================================
Net Income $15,449 $16,420 $29,694 $31,216
=======================================================================
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Balance Sheets
June 30, December 31,
1999 1998
In thousands of dollars (Unaudited)
--------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 53,570 $ 53,103
Accounts receivable, (less allowance
for uncollectibles of $6,501
and $5,493, respectively) 38,899 37,779
Accounts receivable - affiliates 4,141 3,200
Advances to affiliates 13,452 11,933
Materials and supplies 467 336
Prepaid directory 8,320 14,200
Other prepayments 682 2,014
--------------------------------------------------------
Total Current Assets 119,531 122,565
--------------------------------------------------------
Property, plant and equipment, net 388,124 360,648
Prepaid pension 22,772 20,619
Deferred and other assets 1,011 966
--------------------------------------------------------
Total Assets $531,438 $504,798
========================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 32,342 $ 36,457
Accounts payable - affiliates 10,815 8,534
Advance billings 4,609 4,648
Accrued taxes 6,090 5,466
Other liabilities 4,204 7,003
--------------------------------------------------------
Total Current Liabilities 58,060 62,108
--------------------------------------------------------
Long-term debt 40,000 40,000
Deferred income taxes 17,995 19,124
Accrued postretirement
benefits obligation 31,523 29,287
Other long-term liabilities 2,605 2,718
--------------------------------------------------------
Total Liabilities 150,183 153,237
--------------------------------------------------------
Shareholder's Equity
Common stock, no par value and
additional paid in capital;
authorized 1,000 shares; 772 shares
issued in 1999 and 1998 232,165 232,165
Retained earnings 149,090 119,396
--------------------------------------------------------
Total Shareholder's Equity 381,255 351,561
--------------------------------------------------------
Total Liabilities and
Shareholder's Equity $531,438 $504,798
========================================================
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Cash Flows
(Unaudited)
6 Months Ended June 30,
In thousands of dollars 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $29,694 $31,216
- ------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31,333 28,575
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,061) 3,093
(Increase) decrease in materials
and supplies (131) 264
Decrease in prepaid directory 5,880 6,461
Decrease in other prepayments 1,332 205
Increase in prepaid pension (2,153) (1,461)
(Increase) decrease in deferred and
other assets (45) 180
(Decrease) increase in accounts payable (1,834) 7,369
Decrease in advance billings (39) (89)
Increase in accrued taxes 624 4,137
Decrease in other liabilities (2,799) (2,579)
Decrease in deferred income taxes (1,129) (1,641)
Increase in accrued postretirement
benefits obligation 2,236 1,672
(Decrease) increase in other
long-term liabilities (113) 131
- ------------------------------------------------------------------------
Total adjustments 31,101 46,317
- ------------------------------------------------------------------------
Net cash provided by operating activities 60,795 77,533
- ------------------------------------------------------------------------
Investing Activities
Expenditures for property, plant and equipment (58,809) (39,405)
- ------------------------------------------------------------------------
Net cash used in investing activities (58,809) (39,405)
- ------------------------------------------------------------------------
Financing Activities
Advances to affiliate (1,519) (249)
- ------------------------------------------------------------------------
Net cash used in financing activities (1,519) (249)
- -------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 467 37,879
Cash and Cash Equivalents at
Beginning of Period 53,103 2,406
- -------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $53,570 $40,285
=========================================================================
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
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, 1998.
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
At June 30, 1999, the Company's total outstanding long-
term debt amounted to $40.0 million of medium-term notes
which mature in 2002.
Note 3: Regulatory Matters
The Open Market Plan prohibits the payment of dividends
by the Company to Frontier if (i) the Company's senior debt
is downgraded to "BBB" by Standard & Poor's ("S&P"), or the
equivalent rating by other rating agencies, or is placed on
credit watch for such a downgrade, or (ii) a service quality
penalty is imposed under the Open Market Plan. 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. FTR
requested a waiver, but was denied. The NYSPSC's ruling
resulted in a restriction on the flow of cash dividends from
the Company to Frontier. On October 22, 1997, the NYSPSC
adopted an order requiring the Company to issue refunds of
approximately $0.9 million, or $2.60 per customer. Reserves
sufficient to cover the refund were established in 1996.
These refunds have been issued.
On October 15, 1998, the NYSPSC approved a proposal by
the Company for revision of its service incentive plan that:
-required a rebate of $8.00 per customer to resolve all
service penalties for 1997 and 1998, which rebates have been
issued,
-established a rebate/client program for missed appointments,
and
-increased the amounts at risk for the period 1999-2001
should the Company fail to meet service levels.
In 1998, the Company completed commitments to the
NYSPSC to increase capital expenditures to a minimum of
$80.0 million and add employees in service-affecting areas.
The temporary restriction of dividend payments from the
Company 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.
On June 2, 1999, Moody's and S&P downgraded the
Company's senior debt ratings from A1/AA- to Baa2/BBB,
respectively. These ratings actions were a direct result of
the announced merger between Frontier and Global Crossing
Ltd. and did not reflect any change in the financial
condition or creditworthiness of FTR. However, these actions
triggered an additional dividend restriction for the Company
until either the NYPSC approves the payment of dividends or
the Company's senior debt rating rises above BBB (for S&P, or
the equivalent for other rating agencies).
Note 4: Cash Flows
For purposes of the Statement of Cash Flows, the
Company considers all highly-liquid investments with an
original maturity of three months or less to be cash
equivalents.
As a result of the temporary restriction on dividends
discussed in Note 3, no dividends were paid during the six
month periods ended June 30, 1999 or 1998. Due to this
restriction, surplus cash is being invested in interest-
bearing accounts.
Actual interest paid was $1.5 million for each of the
six months ended June 30, 1999 and 1998, respectively.
Interest costs associated with the construction of capital
assets are capitalized. Total amounts capitalized for the
first six months of 1999 and 1998 totaled $1.4 million and
$0.7 million, respectively. During the second quarter of
1999 and 1998, the Company paid income taxes of $17.2
million and $16.0 million, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION OF THE RESULTS OF
OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Three and Six Months Ended June 30, 1999 and 1998
The matters discussed throughout this Form 10-Q, except
for historical financial results contained herein, may be
forward-looking in nature or "forward-looking statements."
Actual results may differ materially from the forecasts or
projections presented. Forward-looking statements are
identified by such words as "expects," "anticipates,"
"believes," "intends," "plans," and variations of such words
and similar expressions. The Company believes that its
primary risk factors include, but are not limited to:
changes in the overall economy and the economy in Rochester,
New York, the nature and pace of technological change, the
number and size of competitors in the Company's market,
changes in law and regulatory policy, and the mix of
products and services offered in the Company's markets. Any
forward-looking statements in the June 30, 1999 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, 1998.
DESCRIPTION OF BUSINESS
Frontier Telephone of Rochester, Inc. ("FTR" or the
"Company") is a regulated independent telephone company that
serves approximately 552,000 access lines in the greater
Rochester, New York area. The Company was incorporated in
December 1994 as a wholly owned subsidiary of Frontier
Corporation. Frontier has served the Rochester market since
1920 and has evolved into a diversified national
telecommunications firm. The Company is the primary
provider of basic telephone services in the Rochester market
and offers its customers a full complement of local
telephone network services, access to long distance network
services, directory, and other operator services. The
Company also offers all of its network services for sale on
a wholesale basis to other telecommunication service
providers in the Rochester market.
RESULTS OF OPERATIONS
Revenues for the three and six months ended June 30,
1999 were $86.5 million and $172.4 million, respectively,
while revenues for the same periods in 1998 were $83.7
million and $167.0 million, respectively. This 3.2% year-to-
date and 3.4% quarter-to-date revenue growth is primarily
attributable to a growth in local access lines, increased
demand for dedicated lines and higher directory advertising
revenue.
Costs and expenses for the three months ended June 30,
1999 amounted to $63.1 million while cost and expenses for
the same period in 1998 were $59.0 million. On a year-to-
date basis, costs and expenses were $127.5 million at June
30, 1999 as compared to $119.0 million at June 30, 1998.
This $8.6 million or 7.2% increase is attributable to
increased depreciation expense and an increase in labor
costs related to service improvement initiatives.
Depreciation and amortization expense for the second
quarter of 1999 increased $1.8 million or 12.8% over the
comparable period in 1998. For the six months ended June
30, 1999 and 1998, depreciation and amortization expenses
were $31.3 million and $28.6 million, respectively, an
increase of $2.8 million or 9.7%. The increase is primarily
due to capital additions to telephone plant and equipment in
service.
Net income for the three month period ended June 30,
1999 was $15.5 million, a decrease of $1.0 million or 5.9%
over the same period in 1998. On a year-to-date basis, net
income was $29.7 million, an decrease of $1.5 million or
4.9% over the comparable period in 1998. The decrease in
net income for the three and six months ended June 30, 1999
is largely due to the increase of plant in service and
headcount to meet customer demand and service quality
improvements.
Other Income Statement Items
Interest expense was zero and $0.3 million for the
three months ended June 30, 1999 and 1998, respectively.
For the six months ended June 30, 1999, interest expense
decreased $0.7 million from 1998. The decreases are
primarily attributable to increased capitalized interest
driven by larger capital expenditures.
The effective income tax rate for the second quarter of
1999 is 35.4%, which is relatively consistent with the
comparable period in 1998 of 34.4%; and 35.1% and 34.8% for
the six months ended June 30, 1999 and June 30, 1998,
respectively.
FINANCIAL CONDITION
Review of Cash Flow Activity
Cash provided from operations for the first six months
of 1999 decreased $16.7 million or 21.6% from the first six
months of 1998. The primary drivers of the decrease in cash
provided from operations include a decrease in accounts
payable and an increase in prepaid pension expense and
accounts receivable. The decrease in accounts payable is
attributable to $3.0 million accrued at year end and paid in
February 1999. Prepaid pension expense increased due to
earnings on benefit assets and accounts receivable increased
due to the timing of receipt of payments.
Cash used for investing activities was $58.8 million
for the six months ended June 30, 1999, an increase of $19.4
million or 49.2% over the same period in 1998. This
increase is driven by an increase in capital expenditures
primarily due to technological advancements and expansion of
the network to meet customer demand.
Financing activities resulted in a cash outflow of $1.5
million during the first six months of 1999 as compared to
$0.3 million the same period in 1998. Financing activities
increased due to additional payments of advances to
affiliates. No cash dividends were paid to Frontier
Corporation during 1999 or 1998.
Debt
At June 30, 1999, the Company's total outstanding long-
term debt amounted to $40.0 million of medium-term notes
which mature in 2002.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of
total capitalization) decreased from 10.2% at December 31,
1998 to 9.5% at June 30, 1999. Pre-tax interest coverage
was 29.7 times through the second quarter of 1999, as
compared with 30.7 times for the same period in 1998.
Capital Spending
Total gross expenditures for property, plant, and
equipment in 1999 are anticipated to be in the $97 million
to $103 million range. These expenditures are primarily
attributable to technological advancements, expansion of the
network to meet customer demand and service quality
improvements. The Company anticipates financing its capital
program through internally generated cash from operations.
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's assessment of Year 2K issues
is essentially complete. 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 and has implemented those plans to a
significant degree. The plans include both information
technology ("IT") and non-IT compliance. The plans cover
the review, and either modification or replacement where
necessary, of portions of the Company's computer
applications, telecommunications networks,
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 substantially
all of its IT systems are now compliant. Final remediation
is expected to be substantially complete during the third
quarter.
The Company has given special attention to the Year 2K
issues involved in its network, switches and billing
systems, and will continue to dedicate significant resources
to these areas as a priority. The Company has also
increased its resources in areas in which assessment and
remediation has not yet reached a point where management is
satisfied with progress. To date, Year 2K readiness is
progressing at a pace that is acceptable to management and
management maintains continuous contact with the Year 2K
team to receive progress reports and to address issues.
Costs. The Company has recently performed a detailed
update of Year 2K costs. Costs to date that are directly
attributable to Year 2K issues are $17.1 million, and the
Company now anticipates spending an additional $3.9 million
during the remainder of 1999. This includes costs directly
related to Year 2K assessment and remediation and the
replacement of non-compliant systems and end user equipment,
including acceleration of replacement of non-compliant
systems and end user equipment due to Year 2K issues. 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.
The Year 2K projects have not caused the Company to forego
or defer, to any material degree, other critical IT
projects.
Risks. The Company is engaged primarily in
telecommunications lines of business, and therefore connects
directly and indirectly with thousands of other carriers,
inside and outside the United States. These connections are
made through switching offices of the Company and the other
carriers. The switching offices were manufactured by and
often maintained by third parties. While many other
carriers have announced plans to engage independently in
Year 2K assessment and remediation for their networks, there
is a risk that some carriers (particularly smaller carriers
and carriers outside the United States) will not address or
resolve Year 2K issues, and that telecommunications may
therefore be affected. If this were to occur, it is likely
that the Company would be affected only to the same degree
as the other carriers in the telecommunications industry. A
Year 2K failure in the network of smaller carriers would not
be likely to have a significant impact on telecommunications
generally, or on the Company. However, addressing these
risks to the telecommunications industry in general is
outside the Company's control. The Company has initiated an
inquiry with its primary vendors and continues to engage in
discussions related to Year 2K compliance with many of them.
The Company has replaced some equipment and systems, and may
continue to do so in appropriate circumstances.
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,
including billing 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, and has undertaken plans to make information
available to customers and others related to its Year 2K
activities. Since Frontier's own Optronics NetworkSM,
including the recently announced southeast expansion, is
expected to be substantially deployed before December 31,
1999, the Company anticipates that the impact of other
carriers who may experience business interruptions would be
lessened, and such interruptions are not currently expected
to have material adverse impacts on the Company.
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 or suppliers and that are outside of
its control.
Consistent with the activity of its parent company,
Frontier, the Company has begun to develop contingency plans
in a number of areas. Contingency planning does not mean
that a facility or system will fail. It may be merited
because of many different factors, including the inherent
importance of a system or facility, the response or lack of
response from a third party vendor, or the results of the
Company's review and evaluation. The Company has determined
to develop contingency plans related to the following local
telephone areas: SS7 vendor arrangements, power
availability, certain OSS and CARS operating systems,
inbound call centers and internal telephone systems. Other
plans may be developed for areas in which the Company is
involved in the provision of integrated services. These
plans will continue to be developed and tested throughout
1999 as necessary, and closely monitored by the Company's
Internal Audit department and the Year 2K Executive Steering
Committee.
In all of these areas it is the potential impact of a
failure more than the probability of a failure that has led
the Company to identify it as an area for contingency
planning. The costs of contingency planning are not expected
to be material to the Company.
OTHER ITEMS
Open Market Plan
The Company began its fifth year of operations under
the Open Market Plan in January 1999. 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.
Results since implementation of the Open Market Plan are
considered to have been constructive for the Company as a
whole.
During the seven year period of the Open Market Plan,
the Company will not be regulated by rate-of-return
regulation, but instead, will be regulated under pure price
cap regulation. Over this period, planned rate reductions of
$21.0 million (the "Rate Stabilization Plan") will be
implemented for Rochester area consumers, including $16.5
million of which occurred through 1998, and an additional
$1.5 million which commenced in January 1999. 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 were appealed further and on January
25, 1999 the U.S. Supreme Court reinstated several portions
of the FCC's order. The FCC has recently initiated a
rulemaking to adopt new rules in light of the Supreme Court
decision.
Under the Telecommunications Act and a statewide
proceeding, the New York State Public Service Commission
("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 in a related
proceeding examining reciprocal compensation payments. On
July 22, 1999, the NYSPSC issued an order establishing prices
for many of the Company's network elements. 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 these proceedings.
Management believes there continues to be significant
market and business opportunities, as well as uncertainties,
associated with the Company's Open Market Plan. There can
be no assurance that the changing regulatory environment
will positively impact the Company.
Dividend Policy
The Open Market Plan prohibits the payment of dividends
by the Company to Frontier if (i) the Company's senior debt
is downgraded to "BBB" by Standard & Poor's ("S&P"), or the
equivalent rating by other rating agencies, or is placed on
credit watch for such a downgrade, or (ii) a service quality
penalty is imposed under the Open Market Plan. 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. FTR
requested a waiver, but was denied. The NYSPSC's ruling
resulted in a restriction on the flow of cash dividends from
the Company to Frontier. On October 22, 1997, the NYSPSC
adopted an order requiring the Company to issue refunds of
approximately $0.9 million, or $2.60 per customer. Reserves
sufficient to cover the refund were established in 1996.
These refunds have been issued.
On October 15, 1998, the NYSPSC approved a proposal by
the Company for revision of its service incentive plan that:
-required a rebate of $8.00 per customer to resolve all
service penalties for 1997 and 1998, which rebates have been
issued,
-established a rebate/client program for missed appointments,
and
-increased the amounts at risk for the period 1999-2001
should the Company fail to meet service levels.
In 1998, the Company completed commitments to the
NYSPSC to increase capital expenditures to a minimum of
$80.0 million and add employees in service-affecting areas.
The temporary restriction of dividend payments from the
Company 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.
On June 2, 1999, Moody's and S&P downgraded the Company's
senior debt ratings from A1/AA- to Baa2/BBB, respectively.
These ratings actions were a direct result of the announced
merger between Frontier and Global Crossing Ltd. and did not
reflect any change in the financial condition or
creditworthiness of FTR. However, these actions triggered an
additional dividend restriction for the Company until either
the NYPSC approves the payment of dividends or the Company's
senior debt rating rises above BBB (for S&P, or the
equivalent for other rating agencies).
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, switch ports and transport and
switching services. On July 22, 1999, the NYSPSC issued an
order establishing prices for many of the Company's network
elements. In related statewide proceedings, 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 and reciprocal compensation between carriers
for local traffic. The Company cannot predict the final
outcome of these matters at the present time.
Item 5. Employees and Labor Relations
As of June 30, 1999 the Company had 1,758 employees, of
which 255 were management employees and 1,503 were clerical,
service and craft workers. The Frontier Telephone of
Rochester, Inc. Workers Association ("RTWA") represents 646
of such clerical and service workers and the Communications
Workers of America, Local 1170 ("CWA Local") represents 840
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 15, 1999. On August 16, 1998 they received a 2.0%
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. The CWA filed an unfair labor practice charge over
this action. Members of the CWA Local eventually 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 were not material. This agreement provided
several operational improvements and resulted in a more
consistent alignment of benefits with the rest of Frontier.
The CWA Local continued to appeal one issue with the
National Labor Relations Board ("NLRB") related to the
declaration of impasse. In October 1998, the administrative
law judge found in favor of the Company. Presently, the
Union and the government are appealing to the NLRB. The
Company cannot predict the final outcome of this matter at
the present time. Despite the appeal, the CWA Local and the
Company reached a new three year agreement in December 1998
which is not scheduled to expire until January 2002.
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
ended June 30, 1999:
None
<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: August 12, 1999 By: /s/Michael T. Carr
-------------------------------
Michael T. Carr
Vice President and Treasurer
(principal financial officer)
<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, 1998.
4.1 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, 1995.
Medium Term Notes, 1995
Series A and B
4.2 Supplemental Indenture between Incorporated by reference to
the Company and Chemical Exhibit 4.2 to Form 10-Q
Bank, dated September 20, 1995 for quarter ended March 31, 1999
$80M Medium Term Notes,
1995 Series A and B
27 Financial Data Schedule Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRONTIER TELEPHONE OF ROCHESTER FINANCIAL STATEMENTS FOR THE SIX MONTH
PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000936105
<NAME> FRONTIER TELEPHONE OF ROCHESTER
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 45,400
<ALLOWANCES> 6,501
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<CURRENT-ASSETS> 119,531
<PP&E> 1,046,987
<DEPRECIATION> 658,863
<TOTAL-ASSETS> 531,438
<CURRENT-LIABILITIES> 58,060
<BONDS> 40,000
0
0
<COMMON> 232,165
<OTHER-SE> 149,090
<TOTAL-LIABILITY-AND-EQUITY> 531,438
<SALES> 0
<TOTAL-REVENUES> 172,358
<CGS> 0
<TOTAL-COSTS> 127,544
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138
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