<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 September 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 October 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
nine months ended September 30, 1999 and 1998 3
Statements of Income for the three and nine months
ended September 30, 1999 and 1998 4
Balance Sheets as of September 30, 1999 and
December 31, 1998 5
Statements of Cash Flows for the nine months
ended September 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)
<CAPTION>
3 Months Ended September 30, 9 Months Ended September 30,
In thousands of dollars 1999 1998 1999 1998
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Local Services:
Revenue $ 77,063 $ 76,404 $229,814 $225,345
Costs and Expenses 43,234 46,110 131,245 128,825
Depreciation and Amortization 16,434 13,219 47,768 41,794
- -----------------------------------------------------------------
Operating Income $ 17,395 $ 17,075 $ 50,801 $54,726
Total Assets $543,777 $468,050 $543,777 $468,050
=================================================================
Directory Services:
Revenue $ 9,540 $ 8,913 $ 29,147 $ 26,975
Costs and Expenses 4,435 3,843 12,628 11,506
- -----------------------------------------------------------------
Operating Income $ 5,105 $ 5,070 $ 16,519 $ 15,469
Total Assets $ 5,161 $ 4,618 $ 5,161 $ 4,618
=================================================================
Consolidated
Revenue $ 86,603 $ 85,317 $258,961 $252,320
Costs and Expenses 47,669 49,953 143,873 140,331
Depreciation and Amortization 16,434 13,219 47,768 41,794
- -----------------------------------------------------------------
Operating Income $ 22,500 $ 22,145 $ 67,320 $ 70,195
Total Assets $548,938 $472,668 $548,938 $472,668
=================================================================
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Income
(Unaudited)
3 Months Ended September 30, 9 Months Ended September 30,
In thousands of dollars 1999 1998 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $86,603 $85,317 $258,961 $252,320
- -----------------------------------------------------------------------
Costs and Expenses
Operating expenses 41,801 43,940 126,610 122,474
Depreciation and amortization 16,434 13,219 47,768 41,794
Taxes other than income taxes 5,868 6,013 17,263 17,857
- -----------------------------------------------------------------------
Total Costs and Expenses 64,103 63,172 191,641 182,125
- -----------------------------------------------------------------------
Operating Income 22,500 22,145 67,320 70,195
Interest expense 4 414 143 1,239
Other income 632 154 1,688 810
- -----------------------------------------------------------------------
Income Before Taxes 23,128 21,885 68,865 69,766
Income tax expense 7,895 7,033 23,932 23,698
- -----------------------------------------------------------------------
Net Income $15,233 $14,852 $44,933 $46,068
=======================================================================
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Balance Sheets
<CAPTION> September 30, December 31,
1999 1998
In thousands of dollars (Unaudited)
- ----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 51,379 $ 53,103
Accounts receivable, (less allowance for
uncollectibles of $6,697 and $5,493,
respectively) 39,708 37,779
Accounts receivable - affiliates 9,275 3,200
Advances to affiliates 21,261 11,933
Materials and supplies 573 336
Prepaid directory 4,341 14,200
Other prepayments 2,844 2,014
- ----------------------------------------------------------------------------
Total Current Assets 129,381 122,565
- ----------------------------------------------------------------------------
Property, plant and equipment, net 393,738 360,648
Prepaid pension 24,467 20,619
Deferred and other assets 1,352 966
- ----------------------------------------------------------------------------
Total Assets $548,938 $504,798
============================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 32,518 $ 36,457
Accounts payable - affiliates 15,643 8,534
Advance billings 4,607 4,648
Accrued taxes 4,627 5,466
Other liabilities 1,644 7,003
- ----------------------------------------------------------------------------
Total Current Liabilities 59,039 62,108
- ----------------------------------------------------------------------------
Long-term debt 40,000 40,000
Deferred income taxes 18,480 19,124
Accrued postretirement benefits obligation 32,201 29,287
Other long-term liabilities 2,724 2,718
- ----------------------------------------------------------------------------
Total Liabilities 152,444 153,237
- ----------------------------------------------------------------------------
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 164,329 119,396
- ----------------------------------------------------------------------------
Total Shareholder's Equity 396,494 351,561
- ----------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $548,938 $504,798
============================================================================
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FRONTIER TELEPHONE OF ROCHESTER, INC.
Statements of Cash Flows
(Unaudited)
9 Months Ended September 30,
In thousands of dollars 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $44,933 $46,068
- ---------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 47,768 41,794
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (8,004) 4,479
(Increase) decrease in materials and supplies (237) 221
Decrease in prepaid directory 9,859 10,036
Increase in other prepayments (830) (1,491)
Increase in prepaid pension (3,848 (2,192)
(Increase) decrease in deferred and other assets (386) 515
Increase (decrease) in accounts payable 3,170 (1,279)
Decrease in advance billings (41) (141)
(Decrease) increase in accrued taxes (839) 493
Decrease in other liabilities (5,359) (5,026)
Decrease in deferred income taxes (644) (2,345)
Increase in accrued postretirement
benefits obligation 2,914 2,631
Increase in other long-term liabilities 6 42
- ---------------------------------------------------------------------------
Total adjustments 43,529 47,737
- ---------------------------------------------------------------------------
Net cash provided by operating activities 88,462 93,805
- ---------------------------------------------------------------------------
Investing Activities
Expenditures for property, plant and equipment (80,858) (55,250)
- ---------------------------------------------------------------------------
Net cash used in investing activities (80,858) (55,250)
- ---------------------------------------------------------------------------
Financing Activities
Advances to affiliate (9,328) 13,161
- ---------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (9,328) 13,161
- ----------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents (1,724) 51,716
Cash and Cash Equivalents at Beginning of Period 53,103 2,406
- ---------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $51,379 $54,122
===========================================================================
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"), a Global Crossing Company, 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 audited financial
statements included in 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 September 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" or lower 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 the
Company's directors to 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".
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 nine
month periods ended September 30, 1999 or 1998. Due to this
restriction, surplus cash is being invested in interest-
bearing accounts.
Actual interest paid was $3.1 million for each of the
nine months ended September 30, 1999 and 1998. Interest
costs associated with the construction of capital assets are
capitalized. Total amounts capitalized for the first nine
months of 1999 and 1998 totaled $2.2 million and $1.1
million, respectively. During the first nine months of 1999
and 1998, the Company paid income taxes of $24.9 million and
$24.8 million, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION OF THE RESULTS OF
OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Three and Nine Months Ended September 30, 1999 and 1998
The Company has included "foward-looking statements"
throughout this quarterly report filed on Form 10-Q. These
forward-looking statements describe management's intentions,
beliefs, expectations or predictions for the future. The
Company uses the words "believe," "anticipate," "expect,"
"intend" and similar expressions to identify forward-looking
statements. Such forward-looking statements are subject to
a number of risks, assumptions and uncertainties that could
cause the Company's actual results to differ materially from
those projected in such forward-looking statements. These
risks, assumptions and uncertainties include the Company's
ability to complete systems within currently estimated time
frames and budgets, the Company's ability to compete
effectively in a rapidly evolving and price competitive
marketplace, changes in the nature of telecommunications
regulation, changes in the Company's business strategy, and
the impact of technological change. This list is only an
example of some of the risks, uncertainties and assumptions
that may affect the Company's forward-looking statements.
The Company undertakes no obligation to update any forward-
looking statements made by it. 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 550,561 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. On September 28, 1999 Frontier
became a wholly-owned subsidiary of Global Crossing Ltd. FTR
is the primary provider of basic telephone services in the
Rochester market and offers its customers a full complement
of local telephone network services, access to long distance
network services, directory, and other operator services.
The Company also offers all of its network services for sale
on a wholesale basis to other telecommunication service
providers in the Rochester market.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended September
30, 1999 were $86.6 million and $259.0 million,
respectively, while revenues for the same periods in 1998
were $85.3 million and $252.3 million, respectively. This
2.6% year-to-date and 1.5% quarter-to-date revenue growth is
primarily attributable to an increased demand for dedicated
lines and higher directory advertising revenue.
Costs and expenses for the three months ended September
30, 1999 amounted to $64.1 million while cost and expenses
for the same period in 1998 were $63.2 million. On a year-
to-date basis, costs and expenses were $191.6 million at
September 30, 1999 as compared to $182.1 million at
September 30, 1998. This $9.5 million year-to-date or 5.2%
increase is attributable to increased depreciation expense
and an increase in labor costs related to service
improvement initiatives.
Depreciation and amortization expense for the third
quarter of 1999 increased $3.2 million or 24.3% over the
comparable period in 1998. For the nine months ended
September 30, 1999 and 1998, depreciation and amortization
expenses were $47.8 million and $41.8 million, respectively,
an increase of $6.0 million or 14.3%. The increase is
primarily due to capital additions to telephone plant and
equipment in service.
Net income for the three month period ended September
30, 1999 was $15.2 million, an increase of $0.4 million or
2.6% over the same period in 1998. On a year-to-date basis,
net income was $44.9 million, a decrease of $1.1 million or
2.5% over the comparable period in 1998. The decrease in
net income for the nine months ended September 30, 1999 is
largely due to increased depreciation expense and an
increase in labor costs related to service improvement
initiatives.
Other Income Statement Items
Interest expense was zero and $0.4 million for the
three months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999,
interest expense decreased $1.1 million from 1998. The
decreases are primarily attributable to increased
capitalized interest driven by larger capital expenditures.
The effective income tax rate for the nine months ended
September 30, 1999 is 34.8%, which is relatively consistent
with the comparable period in 1998 of 34.0%.
FINANCIAL CONDITION
Review of Cash Flow Activity
Cash provided from operations for the first nine months
of 1999 decreased $5.3 million or 5.7% from the first nine
months of 1998. The primary drivers of the decrease in cash
provided from operations include an increase in accounts
receivable offset by an increase in accounts payable to
affiliates. Accounts receivable increased due to the timing
of receipt of payments. Accounts payable to affiliates
increased due to increased activity particularly for long
distance and internet services.
Cash used for investing activities was $80.9 million
for the nine months ended September 30, 1999, an increase of
$25.6 million or 46.3% 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 $9.3
million during the first nine months of 1999 as compared to
a cash inflow of $13.2 million the same period in 1998 due
to lower advances to affiliates from the same period prior
year. No cash dividends were paid to Frontier Corporation
during 1999 or 1998.
Debt
At September 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 9.2% at September 30, 1999. Pre-tax interest
coverage was 29.9 times through the third quarter of 1999,
as compared with 30.4 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 substantially complete.
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
precautionary resources to these areas.
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 $20.0 million, and the
Company now anticipates spending an additional $1.4 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 some. Its
primary vendors have provided assurances that are believed
reasonable by the Company. The Company has replaced some
equipment and systems, and may continue to do so in
appropriate circumstances.
Contingency Plans. The Company consistently
monitors the progress of its Year 2K program. The Company
currently anticipates that it will resolve all 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, FTR 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 that include 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. 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. These plans
will be closely monitored by FTR's Internal Audit department
and the Frontier Year 2K Executive Steering Committee.
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.
On August 25, 1999, the NYPSC issued a Notice Requesting
Comments in which it invited comments on the Company's
financial condition, earnings and service quality,
competition in the Rochester market and the terms and
conditions of the Open Market Plan. Settlement discussions
in the proceeding are under way. Among the issues under
negotiation is the Company's' petition for the NYPSC to
reconsider a July 22, 1999 decision in which the NYPSC
carried forward a number of Open Market Plan rates rather
than applying the rate methodology specified in the
Telecommunications Act of 1996.
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" or lower 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 the
Company's directors to 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".
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 September 30, 1999 the Company had 1,748
employees, of which 272 were management employees and 1,476
were clerical, service and craft workers. The Rochester
Telephone Workers Association ("RTWA") represents 641 of such
clerical and service workers and the Communications Workers
of America, Local 1170 ("CWA Local") represents 817 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 and
subsequent to the quarter ended September 30, 1999:
SEC Filing Date Item Nos. Financial Statements
-----------------------------------------------------------
10/7/99 4, 7 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: November 12, 1999 By:/s/Michael T. Carr
-----------------------------
Michael T. Carr
Vice President and Treasurer
(principal accounting 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 Certificate of Amendment to Filed herewith
Certificate of Incorporation
3.4 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,
Medium Term Notes, 1995 Series 1995
A and B
4.2 Supplemental Indenture between Incorporated by reference to
the Company and Chemical Exhibit 4.2 to Form 10-Q for
Bank, dated September 20, 1995 the quarter ended March 31,
$80M Medium Term Notes, 1999
1995 Series A and B
10.1 Restated Directors Common Stock Filed herewith
Deferred Growth Plan
10.2 Amendment No. 2 to Plan for the Filed herewith
Deferral of Directors Fees
27 Financial Data Schedule Filed herewith
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
ROCHESTER TELEPHONE CORP.
Under Section 805 of the Business Corporation Law
We, the undersigned, DENISE K. GUTSTEIN and GREGG C.
SAYRE, being respectively President and Secretary of
ROCHESTER TELEPHONE CORP. (the "Corporation"), do hereby
CERTIFY that:
FIRST: The name under which the Corporation was
formed is "R-NET CORP."
SECOND: The Certificate of Incorporation of the
Corporation was filed in the Department of State of the
State of New York on December 9, 1994, under the original
name of R-NET CORP.
THIRD: The Certificate of Incorporation is hereby
amended to change the name of the Corporation.
FOURTH: To accomplish the foregoing amendment,
Article 1 of the Certificate of Incorporation is hereby
amended to read:
1. The name of the corporation is:
FRONTIER TELEPHONE OF ROCHESTER, INC.
FIFTH: The Amendment to the Certificate of
Incorporation was authorized by the Board of Directors of
the Corporation followed by a vote of the holders of a
majority of all outstanding shares entitled to vote thereon
at a meeting of shareholders pursuant to Section 502 of the
Business Corporation Law of the State of New York.
IN WITNESS WHEREOF, the undersigned have executed and
subscribed this Certificate of Amendment of the Certificate
of Incorporation of the Corporation this 18th day of
September, 1997.
/s/ Denise K. Gutstein
----------------------
Denise K. Gutstein
President
/s/ Gregg C. Sayre
-----------------------
Gregg C. Sayre
Secretary
STATE OF NEW YORK )
COUNTY OF MONROE ) SS:
Denise K. Gutstein and Gregg C. Sayre, being duly sworn,
depose and say the they are the persons who signed the
foregoing certificate of amendment; that they signed said
certificate in the capacity set beneath their signatures
thereon; that they have read the said certificate and know
the contents thereof; and that the statements contained
therein are true to their own knowledge.
/s/ Denise K. Gutstein /s/ Gregg C. Sayre
- ------------------------- --------------------
Denise K. Gutstein Gregg C. Sayre
President Secretary
Subscribed and sworn to before me on
September 18, 1997.
/s/ Alexis A. Spinelli
- -------------------------
Notary Public
EXHIBIT 10.1
FRONTIER CORPORATION
DIRECTORS COMMON STOCK DEFERRED GROWTH PLAN
The Frontier Corporation Directors Common Stock
Deferred Growth Plan (the "Plan") is hereby amended and restated,
effective October 1, 1999, to reflect the acquisition of Frontier
Corporation (the "Company") by Global Crossing Ltd. and the
decision to continue the Plan and all existing deferrals pursuant
to the terms of the Plan and the deferral agreements
notwithstanding such acquisition and to authorize the investment
of deferred amounts to be made in Global Crossing Common Stock.
1. Purposes
The purposes of the Plan are to assist directors of the
Company, of Global Crossing and of their affiliates (Global and
all affiliates hereafter referred to as "Affiliated Companies")
with their individual tax and retirement income planning, to
permit the Company and participating Affiliated Companies to
remain competitive in attracting and retaining their directors
and to authorize deferred fees to be invested in Affiliated
Company securities.
2. Plan Administrator
The Committee on Directors of the Company's Board of
Directors shall be the Plan's administrator (the "Administrator").
The Administrator shall have the authority to adopt rules and
regulations for carrying out the Plan and to interpret, construe and
implement the provisions of this Plan, including eligibility for
benefits.
3. Eligibility
Any director of the Company who is not an employee of the
Company or any Affiliated Company may elect to participate in this
Plan.
This Plan may, with the approval of the Administrator, be
adopted by Global Crossing or by another Affiliated Company with
respect to one or more of its directors. In the event of such
adoption, an eligible director may defer fees earned for services on
Global Crossing's or another Affiliated Company's Board in
accordance with the provisions of this Plan. The Company shall,
however, continue to act as plan sponsor and its Committee on
Directors as plan administrator of this Plan and continue to perform
all functions assigned herein specifically to the Company and the
Administrator, respectively.
4. Amount of Deferral
A participant may elect to defer receipt of all or a
specified portion of the fees otherwise payable to the participant
for serving on the Board of Directors or any committee thereof of
the Company or of any participating Affiliated Company.
5. Time for Electing Deferral
Any election to defer directors fees must be made prior to
the beginning of the calendar year that such fees are to be earned
by the participant, provided that in the first year of eligibility a
deferral election for that year must be made within 30 days of
commencing employment on the Board. An election to commence a
deferral may be made at any time in accordance with the procedures
set forth in section 6 and any election so made shall remain in
effect until the participant elects in writing to change his or her
election for future fees, but any such change with respect to an
investment in Affiliated Company securities will not be effective
until six months after so elected.
6. Manner of Electing Deferral
A participant shall elect a deferral by giving written
notice to the Administrator in a form substantially the same as the
Election Form attached hereto. The notice shall include (1) the
amount to be deferred; (2) the time as of which the deferral is to
commence; and (3) whether the deferred amounts plus the earnings
thereon will be paid within 30 days of termination from the Board or
30 days following the end of year in which termination occurs.
7. Participant Accounts
If a trust arrangement has been established, each
participant shall have an account (the "Participant Account") to
reflect his or her investment election as specified on the Election
Form. Amounts deferred into a Participant Account shall be invested
by the trustee in such Affiliated Company securities as shall be
specified by the Administrator. The trustee shall purchase such
securities on the open market at their fair market value at the time
of purchase. Earnings paid on securities allocated to a Participant
Account shall be used to purchase additional Affiliated Company
securities. Funds allocated to a Participant Account that cannot be
invested in Affiliated Company securities may be invested in any
fund or funds designated by the Administrator.
If no trust arrangement has been established, all
deferrals will be credited with simple interest on any unpaid
account balance at the rate fixed from time to time for the payment
of funds deposited with the Company by its customers.
The value of each Participant Account shall be adjusted no
less frequently than annually to reflect deferrals into the account,
payments from the account as hereinafter provided, earnings on
investments and changes in the market value of investments.
All amounts credited to Participant Accounts shall be
fully vested at all times. Except for the possible claims of the
general creditors of the Affiliated Companies, they shall not be
subject to forfeiture on account of any action by a participant or
by the Affiliated Companies, including termination of service on the
Board.
8. Transfer of Participant Accounts
A Participant may transfer to this Plan a participant
account held under the Company's Plan for the Deferral of Directors
Fees. In the event of any such transfer, the amounts will be
invested in accordance with the terms of this Plan and shall be paid
out in the medium provided for payments from this Plan. The
Participant's deferral election under the Plan for the Deferral of
Directors Fees shall otherwise remain irrevocable and shall govern
the time and method of payment of the transferred amounts.
No amounts held in this Plan, including amounts
transferred to it pursuant to the foregoing paragraph may be
transferred from this Plan to the Plan for the Deferral of Directors
Fees.
9. Payment of Deferred Amounts
No withdrawal may be made from a Participant Account
except as provided in this section 9. Payments from an Account
shall be made in a lump sum within 30 days following termination or
within 30 days following the close of the year in which termination
occurs in accordance with a participant's Election Form. For
purposes of this Plan, a Participant shall not be considered to have
terminated service if he or she leaves the Board of Directors of the
Company or any Affiliated Company but as of such departure or within
30 days thereafter becomes a Board member of any other such company
within the affiliated group. Termination instead shall occur only
when the Participant has terminated membership for at least 30 days
from all Affiliated Company Boards of Directors of the Company and
the Affiliated Companies.
Prior to a Change in Control (as defined in Section 11),
payments from a Participant Account that has been invested in
Company securities shall be made only in whole shares of such
securities with any fractional share made in cash. On and after a
Change in Control, such payments shall be made in cash or in shares,
as determined by the participant, in accordance with a participant's
election and the provisions of Section 11 hereof. Each participant
or beneficiary shall execute any documents reasonably deemed
necessary by the Administrator to comply with any applicable
securities laws.
Notwithstanding the provisions of this section 9 or a
participant's Election Form regarding the time for payment of
benefits, the Administrator may, in its sole discretion, accelerate
payments in the light of an unforeseeable emergency. For this
purpose, an unforeseeable emergency is an unanticipated emergency
that is caused by an event beyond the control of the participant and
that would result in severe financial hardship to the participant if
early withdrawal were not permitted. Any early withdrawal pursuant
to this section 9 is limited to the amount needed to meet the
emergency.
10. Participants' Rights Unsecured
The maintenance of individual Participant Accounts is for
bookkeeping purposes only. The Company and the Affiliated Companies
may, but are not obligated to, acquire or set aside any particular
assets for the discharge of their obligations, nor is any
participant to have any property rights in any particular assets
held by any Affiliated Company, whether or not held for the purpose
of funding the obligations of the Affiliated Companies under this
Plan.
The right of any participant or his or her estate to
receive future payments under the provisions of this Plan shall be
an unsecured claim against the general assets of the Company or the
Affiliated Companies.
11. Change in Control
In the event of a Change in Control, as defined in the
trust agreement, amounts credited to Participant Accounts shall be
paid out in cash or in shares, as determined by the participant, in
accordance with the terms of the trust agreement and any participant
elections. If no trust agreement is in effect, "Change in Control"
shall have the meaning given this term in the Company's Supplemental
Management Pension Plan and benefits shall be paid in accordance
with each participant's elections.
12. Statement of Account
Statements will be sent to participants no less frequently
than annually as to the value of their Participant Accounts.
13. Assignability
No right to receive payments hereunder shall be
transferable or assignable by a participant, except by will or by
the laws of descent and distribution.
14. Amendment
This Plan may at any time or from time to time be amended,
modified or terminated by the Board of Directors of the Company. No
amendment, modification or termination shall accelerate payment of
amounts previously deferred, provide for additional benefits, or,
without the consent of a participant, adversely affect such
participant's accruals in his or her Participant Account.
15. Governing Law
This Plan and any participant elections hereunder shall be
interpreted and enforced in accordance with the laws of the State of
New York.
16. Effective Date
The effective date of this restated Plan is October 1,
1999.
IN WITNESS WHEREOF, the Company has caused its duly
authorized member to execute this Plan document on its behalf this
23rd day of September, 1999.
FRONTIER CORPORATION
/s/ Josephine S. Trubek
By ------------------------
Josephine S. Trubek
Corporate Secretary
Exhibit 10.2
FRONTIER CORPORATION
PLAN FOR THE DEFERRAL OF DIRECTORS FEES
Amendment No. 2
Pursuant to Section 14, the Plan is amended, effective
August 1, 1999, as follows:
1. Section 9 is amended by adding to the end of the first
paragraph thereof the following:
For purposes of this Plan, a Participant shall not be
considered to have terminated service if he or she leaves
the Board of Directors of the Company, its parent, its
subsidiaries or any other affiliated company but as of such
departure or within 30 days thereafter becomes a Board
member of any other such company within the affiliated
group. Termination instead shall occur only when the
Participant has terminated membership for at least 30 days
from all Boards of Directors of companies within the
affiliated group.
2. Effective August 1, 1999, the following new Section 17
is added to the end of the Plan:
17. Adoption by Parent
This Plan may be adopted by the Company's parent with
respect to one or more of the parent's directors. In the
event of such adoption, an eligible director of the parent
may defer fees earned for services on the parent's Board in
accordance with the provisions of this Plan. The Company
shall, however, continue to act as plan sponsor and plan
administrator of this Plan and continue to perform all
functions assigned herein specifically to the Company. The
phrase "the Company and its subsidiaries" in this Plan
shall, effective August 1, 1999, be changed to "the Company,
its parent and its subsidiaries."
IN WITNESS WHEREOF, the Company's Board of Directors has
caused its duly authorized representative to execute this
Amendment on its behalf this 16th day of August, 1999.
FRONTIER CORPORATION
By /s/ Josephine S. Trubek
----------------------------
Josephine S. Trubek
Corporate Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRONTIER TELEPHONE OF ROCHESTER FINANCIAL STATEMENTS FOR THE NIN MONTH
PERIOD ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 51,379
<SECURITIES> 0
<RECEIVABLES> 46,405
<ALLOWANCES> 6,697
<INVENTORY> 573
<CURRENT-ASSETS> 129,381
<PP&E> 1,067,128
<DEPRECIATION> 673,390
<TOTAL-ASSETS> 548,938
<CURRENT-LIABILITIES> 59,039
<BONDS> 40,000
0
0
<COMMON> 232,165
<OTHER-SE> 164,329
<TOTAL-LIABILITY-AND-EQUITY> 548,938
<SALES> 0
<TOTAL-REVENUES> 258,961
<CGS> 0
<TOTAL-COSTS> 191,641
<OTHER-EXPENSES> 1,688
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 68,865
<INCOME-TAX> 23,932
<INCOME-CONTINUING> 44,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,933
<EPS-BASIC> 0
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</TABLE>
