-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, EyBAAlPDkDFEsO92/U85DnWgeCeosB4dmxkmLG7rFc19eXZaODrQzrh5s2bQFC1c V8JPjSDk6jNlpSy+/ep36g== 0000950109-94-002168.txt : 19941122 0000950109-94-002168.hdr.sgml : 19941122 ACCESSION NUMBER: 0000950109-94-002168 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19941118 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCHESTER TELEPHONE CORP CENTRAL INDEX KEY: 0000084567 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 160613330 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04166 FILM NUMBER: 94561218 BUSINESS ADDRESS: STREET 1: ROCHESTER TEL CENTER STREET 2: 180 S CLINTON AVE CITY: ROCHESTER STATE: NY ZIP: 14646-0995 BUSINESS PHONE: 7167771000 10-K/A 1 FORM 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K/A AMENDMENT NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NUMBER 1-4166 ---------------- ROCHESTER TELEPHONE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- NEW YORK 16-0613330 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 180 SOUTH CLINTON AVENUE ROCHESTER, NEW 14646-0700 YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (716) 777-7100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF CLASS WHICH REGISTERED -------------- ------------------------ Common Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE REGISTRANT HEREBY AMENDS THE FOLLOWING ITEMS, FINANCIAL STATEMENTS, EXHIBITS OR OTHER PORTIONS OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 (THE "FORM 10-K") AS SET FORTH BELOW: ITEM 1. BUSINESS Item 1 is hereby amended and restated in its entirety as follows: Rochester Telephone Corporation ("Rochester Tel" or the "Company") is a major U.S. diversified telecommunications firm with headquarters in Rochester, New York. The Company was incorporated in 1920 under the laws of New York State to take over and unify the properties of a predecessor company and certain properties of the New York Telephone Company which were located in the same general territory. Currently, the Company's principal lines of business are Telecommunication Services and Telephone Operations. Telecommunication Services consists of a major regional long distance company, cellular and paging operations, and equipment sales. Telephone Operations consists of 37 local telephone companies which serve, as of December 31, 1993, approximately 931,650 access lines in 14 states. Historically, Telephone Operations has provided the majority of the Company's revenues and income. However, an increasing percentage of Rochester Tel's revenues and income is being generated by the Company's long distance and wireless operations. In 1982, the Company made the strategic decision to enter the long distance business. It now provides long distance voice, video and data communication services throughout the United States with its major marketing and sales focus in New York State, New England, and the Mid-Atlantic and Midwest regions. The Company first began providing cellular communications services in the Rochester, New York metropolitan area in 1985. Today, it has ownership interests in wireless communications operations which serve over 4.3 million potential subscribers in five states. Prior to 1988, the Company's Telephone Operations were heavily concentrated in New York State. Since 1988, the Company has acquired 29 local telephone companies and has significantly diversified its geographic base. The Company's largest telephone operation is in Rochester, New York and serves approximately 506,520 access lines. The Company refers to the other 36 telephone companies outside of Rochester, New York as "Regional Telephone Operations". This latter group now includes approximately 425,130 access lines and in 1993 reached an aggregate revenue level greater than the Rochester, New York Operating Company. A key strategy for the Company is to provide integrated communications services for its customers. These integrated services include long distance, wireless, and local telephone service as well as selected products and services that the Company will remarket to customers as a single source provider. Rochester Tel is committed to growing its business through expansion of its existing businesses, the development of value added products and services, and selected acquisitions. Certain financial data relating to the Company's business segments is presented under "Business Segment Information" in Exhibit 13 to this Form 10- K. On February 3, 1993, the Company filed a proposal with the New York State Public Service Commission (NYSPSC) to open its Rochester, New York local exchange market to competition. Adoption of the Company's plan would also result in the formation of a Holding Company that would own the various Rochester Tel companies. This filing is discussed in detail under the caption "Open Market Plan", at page 7, infra. Rochester Tel and NYNEX have agreed to form a joint venture, Upstate Partners, to manage and operate certain of their cellular properties located within New York State. This joint venture will serve a territory that includes approximately 4,543,000 potential customers and includes the cities of Buffalo, Syracuse, Rochester, Binghamton, Utica, Elmira and Watertown, New York. One of Rochester Tel's subsidiaries will serve as managing partner of Upstate Partners. This is described in more detail under the caption "Wireless Communications", at page 3, infra. On November 3, 1993, the Company announced a management reorganization to address the needs of specific market segments and to operate more cost effectively. The reorganization included the consolidation of redundant systems, a reduction in the number of customer service centers, and a continuing emphasis on streamlining and reducing management layers. Overall, the Company reduced its work force by 7 percent during 1993, and will continue to pursue further reductions in work force levels. On December 20, 1993, the Company announced two transactions. In Alabama, the Company increased its ownership interest in the South Alabama Cellular Partnership from 50.6 percent to 69.6 percent. In addition, the Company has reached a definitive agreement to sell the Minot Telephone Company of North Dakota, representing approximately 26,000 access lines. Both of these transactions are subject to various regulatory approvals. On February 1, 1994, the Company entered into a nonbinding letter of intent for the purchase of a partnership ("Minnesota Cellular") which owns the business and assets of a cellular company serving a Rural Service Area ("RSA") in Minnesota with a population of approximately 225,000 potential subscribers. The transaction is anticipated to involve the issuance of the Company's Common Stock. The transaction is contingent upon several factors, including the negotiation of a definitive agreement, approval of the Company's Board of Directors, and regulatory approvals. On February 15, 1994, the Company completed a public offering of its common stock. A total of 2,605,500 new shares were issued in connection with this offering. The public offering also included the sale of 2,885,000 shares that were held by a subsidiary of Sprint Corporation. The principal executive offices of the Company are located at 180 South Clinton Avenue, Rochester, New York 14646-0700. The telephone number is (716) 777-1000. TELECOMMUNICATION SERVICES General The Telecommunication Services segment of Rochester Tel is comprised of Network Systems and Services, which provides long distance services, customer premises equipment, and wireless services. The Company's major deregulated business is long distance service. While regionally focused in the Northeast, Mid-Atlantic and Midwest states from a marketing and sales perspective, customers of the Company's long distance business enjoy nationwide and international connectivity. Telecommunication Services' revenues have increased significantly over the past few years and accounted for 34 percent of Rochester Tel's total revenues for the year ended December 31, 1993. The Company intends to expand Telecommunication Services by increasing its existing commercial and residential customer base, continuing to develop new products, and effecting selected acquisitions. Long Distance Services The Company provides long distance services primarily through a subsidiary, RCI Long Distance, Inc. ("RCI"). RCI routes long distance traffic over its 100 percent digital state-of-the-art network and resells services obtained from other suppliers to route calls to areas where it does not have its own facilities. RCI currently owns and operates seven switching sites. These are located in Rochester, New York; New York City; Washington, D.C.; Philadelphia, Pennsylvania; Cleveland, Ohio; Burlington, Vermont; and Manchester, New Hampshire. RCI is installing a switch in Chicago, Illinois to handle its increased traffic volume in the Midwest. RCI's switched services include basic long distance or measured toll service which is accessible via "l + dialing", 800 services, a variety of long distance products targeted at specific consumer and business segments, and value-added services such as travel cards, prepaid cards and information services. In addition, RCI provides flexible billing services such as multi-location billing, customized accounting codes and electronic billing features. 2 RCI currently focuses its marketing efforts in New York State, New England and the Mid-Atlantic and Midwest regions. In these regions, RCI markets its products through a direct sales force, direct marketing campaigns, sales agents, and affiliated local exchange carriers. The majority of RCI's revenues are derived from small to medium-sized business customers. RCI has introduced a number of programs designed to attract new long distance customers. For example, the "Budget Call" feature enables any telephone user to dial an access code and complete a call through RCI's long distance network. The cost of the call is invoiced by the customer's local telephone company. The rates for such calls are typically 10 percent lower than the rates charged by the major long distance carriers. Budget Call is currently available in five states. This program is anticipated to expand to as many as sixteen states by the end of 1994. As part of the Company's overall service integration strategy, RCI has significantly increased residential usage through its "Visions Long Distance" program (as described in "Telephone Operations--General" at page 6) where RCI's long distance services are marketed through Company-owned as well as non- affiliated local exchange service providers. Through the Visions Long Distance program, the Company has achieved penetrations in excess of 50 percent in several markets as a result of customer preference for unified billing and service. Because residential long distance calling volumes peak in the evenings, on weekends and on holidays, when commercial traffic tends to be lowest, expanding the residential business increases revenues with virtually no need to increase existing switching and transmission facilities. RCI completed two acquisitions in 1993. In June 1993, the Company completed the purchase of Budget Call Long Distance Inc. ("Budget Call"), a long distance reseller in Pennsylvania. RCI then began to utilize the Budget Call program, described earlier in this section, throughout its long distance markets. On September 30, 1993, the Company completed the purchase of Mid Atlantic Telecom, Inc., ("Mid Atlantic"), an interexchange carrier headquartered in Washington D.C. with operations in New England and the Mid-Atlantic region. Mid Atlantic had more than tripled its revenue in the five years prior to the acquisition to approximately $21 million for the twelve months ended December 31, 1993. Both purchases served to implement RCI's strategy to expand its customer and market base. The Company intends to continue to pursue additional acquisitions to provide greater economies of size and scale to its operation and to extend its customer and market reach. The long distance industry is dominated on a volume basis by the nation's three largest long distance providers, AT&T, MCI and Sprint, which generate an aggregate of approximately 86 percent of the nation's long distance revenue of approximately $59 billion. In each of its markets RCI competes with AT&T, MCI and Sprint, as well as with other national and regional long distance companies, for intercity communications transmission services such as 1+, dedicated access, 800 service and private line service. The primary bases for competition in the long distance business are pricing, product offering, and service. One element of service includes billing and customer information. RCI provides long distance services at prices below the three large carriers, but generally above smaller third-tier carriers. In addition to basic long distance and 800 services, and private line services, RCI products include prepaid calling card services and operator services. RCI's prepaid calling card product has many features, is a market leader and is designed to meet standard needs while at the same time offering enhanced audio-text services to users. Although RCI does not currently offer some of the enhanced voice or data services provided by the three large carriers (such as frame relay and ATM), it is able to meet the needs of its targeted general business and residential markets. The Company intends to compete aggressively in the long distance business. Wireless Communications Since 1985, the Company has provided cellular service in the Rochester Metropolitan Statistical Area ("MSA"), which has a population of approximately one million, in a partnership with ALLTEL Corporation. Rochester Tel has an 85 percent interest in this partnership which currently operates and maintains 25 cell sites in the Rochester, New York MSA. In addition, in April 1993, the Company acquired a 70 percent interest in a cellular system serving the Utica- Rome, New York MSA. The Company also has investments in wireless properties elsewhere in New York State and in Alabama, Georgia, Illinois and Iowa. The Company, 3 through its subsidiaries, is a member of the MobiLink marketing alliance, a nationwide consortium of wireless operators. The Company intends to continue to pursue additional investments in cellular or wireless operations. The Company's preference is to invest in properties which are adjacent to existing Company- owned properties or where a controlling interest can be obtained. Despite intense price competition during the construction of its network in the Rochester, New York market, the Company's cellular business has remained profitable since its first full year of service. This business has consistently increased its subscriber base while maintaining an efficient cost structure. On March 12, 1993, the Company and NYNEX signed a definitive agreement to form a joint venture, Upstate Partners, in upstate New York (the "Supersystem"). This agreement was amended in December 1993 to add additional properties to the joint venture. A Rochester Tel subsidiary will operate the 50/50 joint venture, and has already assumed certain operational responsibilities under an interim consulting contract. Under the joint venture agreement, Rochester Tel will contribute its cellular properties in Rochester, New York, its Utica-Rome Partnership interest, as well as its Rochester, New York area paging operations. NYNEX will contribute its cellular properties in Buffalo, Syracuse, its own minority interests in Utica-Rome and New York State RSA No. 1, as well as the Binghamton and Elmira MSAs. By combining marketing and service efforts and integrating networks, the Company and NYNEX will be able to provide seamless cellular service to a population of more than 4.5 million potential subscribers in upstate New York. This joint venture has been approved by the New York State Public Service Commission ("NYSPSC") and is subject to approval of the Federal Communications Commission (the "FCC") and the receipt of waivers by NYNEX from the U.S. District Court for the District of Columbia. The Company anticipates receipt of all required approvals by mid- 1994. Cellular systems compete principally on the basis of network quality, customer service, price and coverage area. Each market currently has two cellular providers, and the Company's chief competition in each market is from the other cellular licensee in that market. The Company believes that its technological expertise, emphasis on customer service and development of new products and services make it a strong competitor. Several recent FCC initiatives indicate that the Company is likely to face greater wireless competition in the future. The FCC has licensed specialized mobile radio ("SMR") system operators to construct digital mobile communications systems on existing SMR frequencies in many metropolitan areas throughout the United States. Also, in September 1993, the FCC announced its decision to allocate radio frequency spectrum for personal communications services ("PCS"), a form of wireless communication using lower power and more cell sites than current cellular service. The FCC's decision will permit the grant of seven new licenses: two 30 MHz blocks, one 20 MHz block and four 10 MHz blocks. (By comparison, the two cellular carriers in each market currently have 25 MHz of spectrum each.) The Company has committed resources to evaluating the expansion of wireless communications to include PCS offerings and, depending upon the Company's economic evaluations, may participate in the bidding for these new licenses, which is expected to occur in 1994. 4 CELLULAR PROPERTY OWNERSHIP TABLE The Company owned the following cellular properties as of December 31, 1993:
1993 CURRENT PENDING ESTIMATED OWNERSHIP ADJUSTED PROPOSED ADJUSTED MARKET POPULATION INTEREST POPULATION INTEREST POPULATION - ------ ---------- --------- ---------- -------- ---------- NEW YORK Rochester*............... 1,012,000 85.0% 860,200 42.5% 430,100 Orange-Poughkeepsie...... 600,000 15.0% 90,000 15.0% 90,000 Binghamtom**............. 305,000 24.0% 73,200 32.5% 99,125 Utica-Rome*.............. 313,000 70.0% 219,100 50.0% 156,500 RSA #2**................. 231,000 12.5% 28,875 12.5% 28,875 RSA #3*.................. 477,000 22.5% 107,325 22.5% 107,325 Buffalo**................ 1,180,000 0.0% 0 50.0% 590,000 Syracuse**............... 665,000 0.0% 0 27.5% 182,875 Elmira**................. 96,000 0.0% 0 50.0% 48,000 RSA #1**................. 264,000 0.0% 0 20.0% 52,800 ALABAMA RSA #4................... 134,000 69.6% 93,264 69.6% 93,264 RSA #6................... 118,000 69.6% 82,128 69.6% 82,128 GEORGIA RSA #3................... 202,000 25.0% 50,500 25.0% 50,500 ILLINOIS RSA #2................... 250,000 6.7% 16,750 6.7% 16,750 RSA #3................... 199,000 6.4% 12,736 6.4% 12,736 IOWA Des Moines............... 411,000 4.0% 16,440 4.0% 16,440 TOTAL...................... 6,457,000 1,650,518 2,057,418 RTC Total.................. 4,252,000 1,650,518 2,057,418 Total Managed Including Supersystem............... 4,543,000 1,288,700 1,695,600
- -------- * Company managed systems. ** Additional Company managed systems pending completion of the Supersystem in 1994. For each market listed above, the number in the "Adjusted Population" column represents an estimate of the Company's proportionate share of the number of potential cellular customers in such market as of December 31, 1993 and is calculated by multiplying the 1993 estimated population of such market by the Company's ownership interest in the cellular system serving that market as of such date. Similarly, the number in the "Pending Adjusted Population" column represents an estimate of the Company's proportionate share of the number of potential cellular customers in each such market as of December 31, 1993 assuming that the Supersystem were completed as of such date, and is calculated by multiplying the 1993 estimated population of such market by the Company's ownership interest in the cellular system serving that market, assuming completion of the Supersystem. Customer Premises Equipment Rotelcom Network Systems ("Rotelcom"), which was established in 1978, markets and services a wide range of telecommunications and data equipment for mid- to large-size business customers, and competes directly with other interconnect vendors that market telephone systems to businesses and other enterprises. Rotelcom's product line includes: private branch exchanges ("PBXs") from Siemens/ROLM and Northern Telecom; data communications equipment from leading manufacturers including Dowty and Newbridge; and videoconferencing equipment from PictureTel. Product lines purchased by Rotelcom from its two largest suppliers, Siemens/ROLM and Northern Telecom, account for more than a majority of its purchases from suppliers. The Company believes Rotelcom's relationships with its various suppliers is good. The majority of 5 Rotelcom's customers are in New York State. Rotelcom is also a partner in Anixter-Rotelcom, a telecommunication supply joint venture with Anixter Bros., Inc., which was established in 1986 to combine Anixter Bros.' experience in computer-assisted, just-in-time telecommunications inventory delivery systems with Rotelcom's interconnect (private telephone system) business and to provide just-in-time inventory control for the Company's regional telephone companies. TELEPHONE OPERATIONS General Through its Telephone Operations, the Rochester, New York Operating Company and the 36 other local exchange companies serve, as of December 31, 1993, approximately 931,650 access lines in 14 states. The local exchange carriers provide local, toll access and resale services; sell, install and maintain customer premises equipment; and provide directory services. Since the beginning of 1988, the Company has invested over $560 million in upgrading its Telephone Operations business and over $480 million for the acquisition of independent telephone companies. Over this period, the Company installed advanced digital switching platforms throughout much of its switching network. The Company's network in Rochester, New York is over 99 percent digital, making Rochester one of the largest cities in the United States to be served by a virtually all-digital network. In aggregate, the 36 local exchange companies outside of Rochester, New York have over 91 percent digital capability. This is illustrated in the "Access Line Table" located below. The Company has also achieved substantial cost reductions through the elimination of duplicative services and procedures and the consolidation of administrative functions. As of December 31, 1993, Telephone Operations had 37 employees per ten thousand access lines. The Company has reduced the number of telephone employees per ten thousand access lines by over 20 percent since 1988. Rochester Tel believes that additional reductions in employee levels will be necessary to further improve the competitive position of its Telephone Operations. The Company intends to vigorously pursue additional gains in productivity through reengineering while simultaneously improving customer service. ACCESS LINE TABLE The Table below sets forth certain information with respect to access lines as of December 31, 1993:
PERCENT OF TOTAL COMPANY ACCESS TELEPHONE PROPERTIES AT ACCESS LINES AT PERCENT DECEMBER 31, 1993 LINES DECEMBER 31, 1993 DIGITAL - ----------------------- ------- ----------------- ------- Rochester, NY................................ 506,522 54.4% 99.9% Other NY Companies........................... 89,942 8.9% 100% ------- ----- ---- TOTAL NEW YORK............................. 589,464 63.3% 100% Alabama(1)................................... 26,809 2.9% 100% Georgia...................................... 20,693 2.9% 100% Illinois(1).................................. 18,187 2.0% 96% Indiana...................................... 4,506 0.5% 100% Iowa......................................... 50,582 5.4% 54% Michigan(1).................................. 25,635 2.8% 89% Minnesota.................................... 96,680 10.4% 89% Mississippi.................................. 5,064 0.5% 100% North Dakota................................. 26,292 2.8% 100% Pennsylvania................................. 33,197 3.6% 100% Wisconsin.................................... 34,541 3.6% 100% ------- ----- ---- TOTAL OTHER STATES......................... 342,186 36.7% 91% CONSOLIDATED ACCESS LINES.................. 931,650 100.0% 96% ======= ===== ====
- -------- (1) These companies also have properties in one or more other states (Florida, Iowa and Ohio). 6 The Company operates 71 central office and remote switching centers in Rochester, New York, and a total of 275 central office and remote switching centers in its other telephone territories. Of the 931,650 access lines in service on December 31, 1993, 669,512 were residence lines and 262,138 were business lines. Long distance network service to and from points outside of the telephone companies' operating territories is provided by interconnection with the lines of interexchange carriers. As part of the Company's continuing strategy to provide a greater selection of value-added products, the Rochester, New York Operating Company introduced advanced services such as Caller ID, distinctive ringing, directory-assisted call completion, and an enhanced voice mail platform during 1992 and 1993. The Company is introducing similar advanced services, where appropriate, at its other telephone properties. The Company is pursuing several alternatives to provide expanded broadband services to its customers. To date, the Company has installed over 10,000 miles of fiber optic cable in the Rochester, New York area to provide its customers with enhanced capacity and product capability. Throughout its telephone operations, Rochester Tel has over 24,000 miles of fiber optic cable in place. The Company is also conducting marketing trials and testing new technologies such as a video on demand service utilizing a hybrid fiber-optic/coaxial cable network. The Company expects to market this technology to selected customers in its Rochester, New York service area during the second quarter of 1994. The Company is also providing expanded broadband services to select customers outside the Rochester, New York service area. These include video-distance learning arrangements at certain Midwest region telephone properties. In connection with its integration strategy, the Company has developed a new program known as "Visions Long Distance", where its local exchange companies resell RCI's long distance services. The Company believes that many customers prefer the convenience of obtaining their long distance service through their local telephone company and receiving a single bill. The Company introduced Visions Long Distance at nine local telephone exchange companies in 1993 and intends to extend the program to additional subsidiaries in 1994. The results of Visions Long Distance operations are included as part of the Telecommunication Services segment. Technological innovation and regulatory change are accelerating the level of competition in both local exchange and long distance services. New competitors now have the ability to provide basic local telephone service in some areas, including Rochester, New York. To benefit from these technological advances and broaden the scope and quality of its own product and service offerings, the Company has increased its fiber and digital switching capacity throughout its networks and is pursuing regulatory alternatives such as the Open Market Plan, which is described in more detail below. Currently, the Company may be considered the primary provider of basic local telephone service in its Rochester, New York property and may be considered the only provider of basic local exchange service in the various other geographic areas where it has telephone properties. Open Market Plan On February 3, 1993, the Company filed its Open Market Plan with the New York State Public Service Commission ("NYSPSC"). The plan, if adopted, would open the Rochester, New York local exchange market to competition. Rochester Tel was the first communications company in the nation to propose such a plan for full open local competition. The Open Market Plan would enable customers to choose their local telephone service provider and have a broad selection of products, services and prices. It would also give Rochester Tel the flexibility to broaden the scope and quality of its own competitive service offerings. Under the proposed open Market Plan, the Company's local exchange operations would be divided into two companies--a wholesale provider of basic network services ("R-Net") and a retail provider of telecommunication services ("R- Com"). R-Net and R-Com would be subsidiaries of the Company, which would become an unregulated parent holding company. The parent holding company structure would provide financial flexibility for the Company to continue the acquisition and diversification efforts that are necessary for its long-term growth. 7 R-Net would be a regulated company and would sell basic network services such as Access to the network, transport between offices, and switching services to R-Com and all other local telecommunication companies. These local telecommunication companies, including R-Com, would then package services for resale to local customers. R-Com would be an unregulated frill service provider of a broad array of integrated telecommunication services, including local, long distance, cellular and, potentially, video and other value-added offerings. R-Com would also be able to package the network elements purchased from R-Net and other network providers with services such as flat rate service, measured rate service, Centrex and ISDN. The Company intends that R-Com would eventually offer products and services outside of the Rochester, New York market. The Open Market Plan must be approved by the NYSPSC. Negotiations among all interested parties begin in 1993, and determinative action by the NYSPSC is expected during the second half of 1994. The Company will aggressively pursue approval of the Open Market Plan but cannot predict whether or when it will be approved by the NYSPSC, and, if so, in what form. REGULATORY MATTERS Each of Rochester Tel's local telephone service companies is regulated by the public utility regulatory agency of the state in which that company provides local telephone service. The respective states are listed on the Access Line Table on page 6. The telecommunication industry has become more competitive over time. This evolution has also resulted in a more fluid state regulatory framework. In general, state regulatory agencies exercise authority over the prices charged for the provision of local telephone service and intrastate long distance service, the quality of service provided, the issuance of securities, the construction of facilities and other matters. Each of the Company's long distance and wireless companies may be regulated to a limited extent by the public utility regulatory agency of the state in which each is providing service. The Company's long distance and wireless service providers are also subject to FCC jurisdiction. (a) Royalty Proceeding. In 1984, the NYSPSC initiated a proceeding to investigate the issue of whether the Company's competitive subsidiaries should pay a royalty to the Rochester, New York local telephone service provider primarily for the alleged intangible benefits received from the use of the Rochester Telephone name and reputation. This proceeding remains unresolved and is discussed in more detail in Item 3, Legal Proceedings. (b) Stipulated Agreement. In 1986, the Company and the NYSPSC entered into an agreement which allowed the Company to pursue certain acquisitions and investments without further Commission approval. This agreement was amended three times, most recently in conjunction with the 1991 acquisition of the Vista Telephone properties in Minnesota and Iowa from Centel Corporation. Certain portions of that amendment expired in June 1993, and the Company requested an extension of the expiration to December 1993. That extension was granted by the Commission in August 1993. In anticipation of a 1994 resolution on the Open Market Plan, the Company has elected to not pursue any further amendment to this agreement at this time. NYSPSC approval is required to effect additional acquisitions by the Company. (c) Wireline Transfer. In August 1989, the Company filed a petition with the NYSPSC seeking approval of the transfer of the Rochester, New York Operating Company's interest in the Rochester, New York wireline cellular business to its wholly-owned subsidiary, Rochester Tel Mobile Communications Inc. This application was consolidated with the May 18, 1993 application to form a joint venture with NYNEX to create a "Supersystem" in upstate New York. The joint venture is described in more detail on page 4. The NYSPSC approved the application and transfer on December 10, 1993. (d) Incentive Regulation. In January 1990, the NYSPSC approved an incentive regulation agreement for the Rochester, New York Operating Company. This agreement expired at the end of 1992, and the Company proposed a new incentive regulation agreement in January 1993. An interim settlement was approved by the NYSPSC in February 1994. The settlement reduces the Company's revenue requirement in 8 1993 by $5 million and by an additional $4.5 million in 1994. Each of these reductions is subject to adjustment for depreciation changes and the outcome in the Generic Financing Proceeding, which is discussed on page 10. The amount of allowable depreciation is the subject of a contested proceeding before the NYSPSC. Fifty percent of the Rochester, New York Operating Company's earnings in 1994 above the authorized return on equity of 10.9 percent (also subject to adjustment in the Generic Financing Proceeding which is described in more detail below) will be shared with ratepayers, with the specific form of the sharing to be determined by the NYSPSC as a part of the Open Market Plan deliberations. Customers of the Rochester, New York Operating Company will continue to receive service at a quality level no less than that enjoyed in 1992. In the event service deteriorates from this standard, the Rochester, New York Operating Company would be subject to a penalty of one-half of one percent of its local service revenues. (e) Ice Storm. In March 1991, Rochester, New York experienced a severe ice storm which caused the Rochester, New York Operating Company to spend approximately $9.7 million to repair and replace outside plant facilities and to provide customers billing credits for service disruptions. The Rochester, New York Operating Company filed a petition with the NYSPSC requesting that it be allowed to defer and amortize the portion of those costs which were intrastate expenses. In November 1991, the NYSPSC approved the deferral and amortization of $5.2 million of the intrastate local service expenses over a forty-eight month period beginning January 1, 1992 and the amortization of $1.6 million of the intrastate long distance service expenses through June 1993. The Rochester, New York Operating Company also filed a petition with the FCC requesting that it be allowed to defer and amortize the portion of the ice storm expenses that were allocated to or assigned the interstate jurisdiction. The FCC approved an order effective January 23, 1992, which permitted the Company to begin the amortization of $2.0 million of interstate expenses over an eighteen month period. In order to recover the expenses, the FCC permitted the Rochester, New York Operating Company to establish a temporary surcharge on interstate switched access charges to be billed to interexchange carriers and a monthly increase in the interstate customer access line charges applicable to Centrex and multiline business customers. (f) Canton Telephone Company. The Pennsylvania Public Utility Commission issued an Order to Show Cause on May 29, 1992 against the Canton Telephone Company. The Order required Canton to show cause why Canton's rates were not unreasonable and therefore subject to modification. Canton reached a settlement with the parties. The settlement allows Canton to eliminate prospectively a state tax adjustment surcharge, to flow through state deferred taxes, and to amortize a $451,000 reserve deficiency over three years. Canton agreed to refrain from filing a rate case for three years and the other parties agreed that they would not seek a rate reduction from Canton during this three year period. The Pennsylvania Commission approved the settlement effective December 17, 1992. (g) FAS 106. The Company adopted Financial Accounting Standards Board Statement 106 (FAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." The estimated accumulated postretirement benefit obligation as of January 1, 1993 is $125 million. The Company elected to defer the recognition of the accrued Transition Benefit Obligation over a period of twenty years. Each state regulatory agency may treat these obligations differently in the rate-making process. On September 7, 1993, the NYSPSC issued its Statement of Policy and Order concerning postretirement benefit and pension accounting. Consistent with this NYSPSC policy the Rochester, New York Operating Company included the FAS 106 costs in its incentive regulation settlement agreement discussed on pages 8-9. Although the FCC originally rejected the Company's petition to recover the FAS 106 transition costs through the rate-making process, the FCC later allowed the Company, subject to an investigation that remains pending, to recover the portion of the FAS 106 cost associated with the Transition Benefit Obligation (the unrecorded postretirement benefit liability) amortized over a twenty year period. The Company has also appealed the FCC's original order, but cannot, at this time, predict the outcome of that proceeding. (h) Tariff Disaggregation Filing. Effective January 1, 1993, the FCC approved the Company's request to disaggregate the switched access rates contained in Rochester Tel's interstate access tariff. Prior to this 9 time, with a few exceptions, Rochester Tel and its telephone company subsidiaries concurred in a uniform set of switched access rates. Effective with this disaggregation, the Company established two sets of switched access rates: one for the Rochester, New York Operating Company; and one for most of the subsidiary operating telephone companies. (Certain of the subsidiary companies continue to concur in the National Exchange Carrier Association tariff. In addition, Rochester Tel's Illinois subsidiaries and its Thorntown Telephone Company subsidiary provide interstate switched access services under company-specific rates.) On a consolidated basis, the change is revenue neutral. (i) Open Market Plan. The Company filed a petition in February 1993 with the NYSPSC in which the Company requested approval to reorganize the corporation. This Open Market Plan is discussed in more detail on pages 7 and 8. A series of meetings have been held with the Staff of the NYSPSC and all intervening parties. Negotiations are in process to reach a stipulated settlement. Although the Company cannot predict whether a settlement is likely to occur, a Commission decision is expected in the second half of 1994. (j) Vista Telephone Company of Minnesota. Vista Telephone Company of Minnesota filed a request to increase rates in March 1993 with the Minnesota Public Service Commission. A stipulated settlement was executed by all parties and was submitted for approval to the Minnesota Public Service Commission. The Administrative Law Judge recommended an annual regulated revenue increase of $4.5 million. The Company expects Commission approval during the first quarter of 1994. (k) Generic Financing Proceeding. In May 1993, the NYSPSC instituted a Generic Financing Proceeding to review its financial policy guidelines and to determine if there should be established a generic rate of return methodology for New York State local exchange companies. The Company favors a generic methodology because it would streamline the ratemaking process, provide all stakeholders a much greater sense of predictability, and create an environment more conducive to long term planning. The Company supports the implementation of a generic rate of return methodology, but it cannot, at this time, predict the outcome of this proceeding. (l) Vista Telephone Company of Iowa. Vista Telephone Company of Iowa filed in August 1993 for a rate increase in Iowa of approximately $4.5 million but with a temporary increase of $4.1 million. On February 11, 1994, the Iowa Utilities Board issued an order approving a proposed settlement of this case. Under the terms of the proposed order, the Board granted Vista Iowa an annual revenue increase of $2.9 million. (m) Undergrounding Proceeding. The NYSPSC, in an order dated September 21, 1993, stated that the Company's New York local exchange service providers should, for the next five years, accrue funds for the purposes of "undergrounding" construction of distribution plant in "visually significant areas." Any unspent amounts are to be carried over to the next year until expensed. The amount of the accrual is determined in accordance with a NYSPSC approved formula. The Company currently estimates the total amount of the accrual to be approximately $408,000 for all of its New York local exchange companies. The Company has filed for reconsideration, but cannot predict the outcome at this time. COMPETITION Although traditionally considered a monopoly, the telecommunications industry has experienced a significant increase in competition in recent years. Rochester Tel is intent on meeting and taking advantage of the various business opportunities which competition provides in the markets where it operates. The Company is addressing competition by focusing on improved customer satisfaction, by developing and offering products and services, and by reducing its cost base and becoming more efficient. (a) Local Exchange Networks. Prior to 1968, the telephone industry alone provided and maintained the telephones and lines of the public switched telecommunication network. In that year, an FCC order declared unlawful certain AT&T tariffs which prohibited customers from attaching their own equipment to 10 the telephone network. However, the telephone equipment provided by telephone companies which remained in place on customers' premises remained regulated. By a subsequent FCC order, effective January 1, 1983, telephone companies were required to deregulate all new telephone equipment. Although Rochester Tel experiences different levels of network regulation throughout the geographic territory of its telephone properties, in general the Company is subject to numerous competitors in the provision of equipment and facilities used in connection with the local exchange network. Since the deregulation of telephone equipment, sales of telephone equipment has become commonplace throughout all geographic areas of the United States. The Rochester, New York Operating Company has responded to this competition through operation of its retail Phone Centers for the direct sale of telephone sets, inside wire and telephone outlets. The Phone Centers also perform as maintenance centers where customers who lease equipment from the company can pick up or exchange telephones and receive a credit on their bills if they bring in a telephone that needs repair. In 1982, the Rochester, New York Operating Company formed its Consumer Equipment Services division to maintain all company provided leased equipment as well as maintain customer-owned equipment on a fee for service or contract basis. Many of the Company's other local exchange companies also sell, lease and maintain telephone sets and equipment. Business consumer equipment needs are another segment of the telecommunication network equipment market. The Company's local exchange companies market equipment and facilities directly to business consumers in much the same way as they market to residential customers. In addition, Rotelcom Network Systems, which was established in 1978, markets and services a wide range of telecommunications and data equipment for mid-to large-size business customers, and competes directly with other interconnect vendors that offer for sale telephone systems to businesses and other enterprises. Rotelcom's product line includes: private branch exchanges (PBX's) from ROLM, Siemens and Northern Telecom; data communications equipment from leading manufacturers including Dowty and Newbridge; and videoconferencing equipment from PictureTel. The majority of Rotelcom's customers are in New York State. Rotelcom is also a partner in Anixter-Rotelcom, a joint venture telecommunications supply venture with Anixter Bros., Inc. Although competitive providers of local exchange basic service are not expected to be active for the forseeable future at the Company's smaller rural properties, local exchange basic service competition is occurring today in the Rochester, New York marketplace. For example, FiberNet, Inc. is an alternative local exchange service provider in Rochester. The Company is unaware of the exact revenues and market share of the local exchange market that FiberNet accounts for in the City of Rochester. On February 3, 1993, Rochester Tel filed a plan with the NYSPSC, to open the local telephone market in the Rochester, New York service area to competition. This plan will enable customers to choose their local telephone service company and have a broader selection of products, services and prices. It will also give the Company greater flexibility to broaden the scope and quality of its own competitive offerings. See the discussion on the Open Market Plan on pages 7-8 and Regulatory Matters on pages 8-10. Long distance companies largely access their end users through interconnection with local telephone companies. Those long distance companies pay access fees to the local telephone companies for this service. This is one reason the Company derives at least ten percent of its consolidated gross revenues from AT&T. The Company provides a number of other services to AT&T, such as billing and collection. Companies which provide alternative transmission media now exist and compete with local exchange companies to provide access services to long distance companies. Currently, FiberNet is the only Alternate Access Vendor active in the Rochester, New York area and no significant Alternate Access Vendors are active in any of the Company's other properties. (b) Interexchange Service. During the past two decades, rulings by the FCC and associated court decisions have restructured the market for the provision of interexchange telecommunication services and have opened up this market to competition. The Company recognized an opportunity to compete in this 11 market. In 1984, RCI Long Distance was launched and a digital switching and transmission system was built throughout the Northeast. Today RCI operates in New York, New England and the Mid-Atlantic and Midwest regions, an area which accounts for nearly 25 percent of the nation's total interexchange revenues. Through arrangements with other interexchange carriers, RCI provides connectivity to the entire United States and to over 200 countries around the world. In addition to growing its customer base in its original operating territory, RCI has expanded its network coverage and customer base through the acquisition of long distance companies in the Northeast: RCI Long Distance New England Inc., operating as Long Distance North (January 1991) and Taconic Long Distance Service Corp. (July 1991). In 1993, the Company purchased Mid Atlantic Telecom, Inc., a $20 million regional long distance company headquartered in Washington, D.C., and Budget Call Long Distance, Inc., a long distance reseller in Pennsylvania. A number of companies, including AT&T, MCI, Sprint and smaller regional long distance companies, compete with RCI and offer interexchange services such as Wide Area Telephone Service ("WATS"), private line and switched message toll. Given the competitive nature of the interexchange service industry, RCI is not aware of its exact market share in any specific market, however RCI does not believe that it holds a dominant market position in any market in which it operates. (c) Wireless. The Company is the managing partner of Rochester Telephone Mobile Communications ("RTMC"), which is a partnership with ALLTEL Corporation. The partnership constructed and now operates a cellular system in all or a part of the five New York counties which comprise the Rochester, New York MSA which has a population of approximately 1.1 million potential subscribers. The Company has an 85% interest in the Rochester MSA and ALLTEL Corporation has a 15% interest. Cellular service in the Rochester MSA began on June 5, 1985, and RTMC currently operates and maintains 25 cell sites in the Rochester, New York MSA. RTMC is one of two competing cellular systems in the Rochester, New York MSA. The other cellular system is Genesee Telephone Company ("GTC") which does business as Cellular One. A proposed sale to Southwestern Bell of a controlling interest in GTC was announced earlier this year. In the cellular industry, competitive characteristics include the geographic coverage area, transmission clarity and the price of the service offerings. The Company believes that the transmission quality of the RTMC system is generally comparable to or better than the quality of the GTC system. The Company also competes through pricing packages which provide certain benefits to customers, including significantly reduced roaming rates throughout most of Upstate New York. In addition, the Company's strong geographical service coverage of virtually all of the Rochester area makes the Company a strong competitor. This coverage, which includes handheld level service in downtown Rochester and in most of its major commuting areas, is comparable or superior to the coverage of GTC. Because the Company does not have information regarding GTC's customer base, the Company is unable to calculate any specific assessment of its market share. In addition to RTMC, the Company has partnership interests in various other MSAs and RSAs (Rural Service Areas.) Please see the "Cellular Property Ownership Table" on page 5 for a breakdown of the Company's cellular ownership interests and the estimated population in each of the indicated cellular markets. Although in the future the Company may divest itself of selected cellular properties, the Company will continue to place a heavy emphasis on cellular service growth and expansion. To this end, the Company recently entered into a nonbinding letter of intent for the purchase of a partnership which owns the business and assets of a cellular provider in Minnesota. Please also see the discussion of Upstate Partners on page 4. ENVIRONMENTAL AND OTHER MATTERS Underground duct systems are often used to house telephone cable. Some of the existing ducts are made of a material containing asbestos. This material poses a potential removal and disposal problem if a 12 realignment of the duct system is necessary due to road construction or similar projects. The Company is in the process of identifying the portions of the duct system that contain this material so if need be, action may be taken in a timely fashion to minimize the cost of removal and disposal of such material. The asbestos presents no health risk as long as it remains buried and undisturbed. It cannot be determined how much of the affected underground duct system will undergo future reconstruction and, therefore, an estimate of the cost of asbestos removal and disposal cannot be made at this time. See Item 3. Legal Proceedings, for discussion of environmental litigation. EMPLOYEES AND LABOR RELATIONS As of December 31, 1993, the Company had 4,376 employees, of which 3,444 were employees of the various Telephone Operations businesses, and 932 were employees of the various Telecommunication Services businesses. At the Rochester, New York Operating Company, 578 clerical and service workers were represented by the Rochester Telephone Workers Association (RTWA) and 719 craft and clerical employees were represented by the Communications Workers of America (CWA), Local 1170. Under the current three-year contract between the Rochester, New York Operating Company and the RTWA, effective August 15, 1993 bargaining unit employees received a 1.5 percent general increase plus a .678 percent "Cost of Living Allowance" increase. The RTWA contract will expire on August 11, 1994. The current three-year contract between the Rochester, New York Operating Company and the CWA granted bargaining unit employees a wage increase of up to 4.75 percent, effective January 1, 1993. Effective January 1, 1994 employees received a wage increase of up to 4.5 percent. On January 1, 1995, employees will receive a wage increase of up to 4.25 percent plus a "Cost of Living Allowance" increase based on 70 percent of the movement of the Consumer Price Index above 9.25 percent during the period from November 1992 to November 1994. The CWA contract will expire on January 31, 1996. The International Brotherhood of Electrical Workers (IBEW) represents 155 employees at Highland, 16 employees at Sylvan Lake and 12 employees at AuSable Valley. Highland bargaining unit employees received a 3.85 percent increase in 1993. On May 25, 1993, Highland and the IBEW entered into a contract which expires February 13, 1997, and provides for an increase of 4% in September 1994, 4% in September 1995, and no increase thereafter until the contract is renegotiated. On September 29, 1992, Sylvia Lake and the IBEW entered into a three-year contract extension which provides for an increase of 3.0 percent in year one, 3.5 percent in year two, and 5.0 percent in year three of the contract. The current three-year contract between AuSable Valley and the IBEW granted bargaining unit employees an average wage increase of 3.6 percent effective May 1993, and also provides for an average 3.4 percent waste increase in the final year of the contract. That contract will expire May 10, 1995. The IBEW also represents 20 employees of C, C & S Telco, Inc. Their current contract, which expires in October 1994, granted bargaining unit employees a 3.0 percent increase in October 1993. The IBEW additionally represents 6 employees at Midland, 7 employees at Inland, 1 employee at Lakeside, 1 employee at Prairie, 4 employees at Mt. Pulaski and 19 employees at Minot. On November 1, 1991, Midland, Inland, Lakeside, Mt. Pulaski and Prairie entered into a three-year contract with the IBEW that provided for a 4.0 percent wage increase on November 1, 1993. Effective January 1, 1993, Minot and the IBEW entered into a one-year contract with the IBEW which provided for a 1.5 percent wage increase plus a 1.0 percent lump sum payment based on 1992 wages. A new one year contract between Minot and the IBEW, ratified December 8, 1993, provides for a lump sum payment equal to 3 percent of salary. The CWA, Local 7270, represents 179 employees at Vista Minnesota. On June 21, 1993, Vista Minnesota and the CWA entered into a three-year contract which provides for wage increases of 3.0 percent in June 1994, and a minimum of 2 percent in June 1995, with an opportunity to receive, also in June 1995, up to an additional 1.25 percent based upon the performance of the Vista Minnesota telephone operation. The CWA, 13 Local 7171, represents 95 employees at Vista Iowa. On May 1, 1993, Vista Iowa and the CWA entered into a three-year contract which provides for wage increases of 2.7 percent in May 1994, and a minimum of 2 percent in May 1995, with an opportunity to receive, also in May 1995, up to an additional 1.25 percent based upon the performance of the Vista Iowa telephone operation. In March, 1994, the Rochester, New York Operating Company announced a retirement incentive program which would add an additional five years of age and five years of service credit to covered employees. As of March 15, 1994, 112 management employees, and 69 members of the RTWA had announced their decision to take advantage of this retirement incentive. ITEM 3. LEGAL PROCEEDINGS Item 3 is hereby amended and restated in its entirety as follows: On June 11, 1992, a group of corporate plaintiffs consisting of Cooper Industries, Inc., Keystone Consolidated Industries, Inc., The Monarch Machine Tool Company, Niagara Mohawk Corporation, and Overhead Door Corporation commenced an action in the United States District Court for the Northern District of New York seeking contribution from Rotelcom Inc., a wholly-owned subsidiary of the registrant held through intervening subsidiaries ("Rotelcom"), and fourteen other corporate defendants seeking contribution for environmental "response costs" in the approximate amount of $1.5 million incurred by the plaintiffs, pursuant to a consent decree entered into by plaintiffs with the United States Environmental Protection Agency (the "EPA"). Two additional defendants were named earlier this year. In addition to Rotelcom, the current defendants are: Agway, Inc.; BMC Industries, Inc.; Borg- Warner Corporation; Elf Atochem North America, Inc.; Mack Trucks, Inc.; Motor Transportation Services, Inc.; Pall Trinity Micro Corporation; The Raymond Corporation; Redding-Hunter, Inc.; Smith Corona Corporation; Sola Basic Industries, Inc.; Wilson Sporting Goods Company; Phillip A. Rosen; Harvey M. Rosen; City of Cortland; and New York State Electric & Gas Corporation. The consent decree concerned the clean-up of an environmental Superfund site located in Cortland, New York. It is alleged that the corporate defendants disposed of hazardous substances at the site and are therefore liable under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). The Company anticipates that a final Record of Decision ("ROD") will be issued by the EPA in March 1995 and will prescribe the remediation requirements for the site. The aggregate amount of remediation costs to be incurred by the plaintiffs will be based on the requirements of the ROD. The total cost of remediation at the site is uncertain, although estimates have recently ranged from $25 million and $100 million. There has been no allocation of liability as among or between the plaintiffs or defendants. The extent to which plaintiffs can recover any of these costs from the defendants, including Rotelcom, will be determined at a trial which is scheduled to begin in July 1995. The action is currently in discovery. Rotelcom has been vigorously defending this lawsuit. However, the Company is unable to predict the outcome at this time. In its Opinion and Order in Case 87-C-8959, issued July 6, 1993, the New York State Public Service Commission (NYSPSC), by a three-to-two vote, imposed a royalty upon the Company in the amount of two percent of the total capitalization of the Company's unregulated operations. The NYSPSC justified the royalty on two grounds; first, that ratepayers are entitled to protection from the potential for coast misallocations and increased risk that accompany diversification of the Company's basic telephone business; and second, that the Company's unregulated operations benefit from their use of the Rochester name and reputation. The NYSPSC rejected the Company's statutory and constitutional defenses and concluded that it possessed the authority under the Public Service Law to impose a royalty and that its imposition is not unconstitutional. Based upon an initial interpretation of the Order, the company estimates that its potential effect is in the range of two million dollars per year. The royalty, if implemented, would be an imputation against the Rochester, New York operating Company's revenue requirement form regulated intrastate operations. The NYSPSC ordered the Rochester, New York Operating Company to file, by August 5, 1993, and accounting plan to account for the royalty amount, together with a plan for returning such amount to ratepayers. 14 Although the Rochester, New York Operating Company requested the NYSPSC to waive this requirement, the NYSPSC denied this request. In compliance with the order of the NYSPSC, on August 5, 1993, the Rochester, New York Operating Company filed its plan. On August 6, 1993, the Rochester, New York Operating Company filed with Supreme Court, Albany County, its petition pursuant to Article 78 of the New York Civil Practice Law and Rules seeking judicial review of the NYSPSC's Opinion and Order. By order dated October 7, 1993, this proceeding was transferred to the Appellate Division, Third Department. The Company filed its Brief on December 16, 1993. Respondents' briefs were filed on February 28, 1994, and reply briefs are currently due in mid-March. The Court has scheduled the case for oral argument at its April term. The Company is vigorously contesting this case and is of the opinion that it will ultimately prevail, but cannot predict the outcome with any certainty at this time. The Regulatory Matters discussion in management's discussion of Business in Part 1, Item 1, on pages 8 through 10 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Item 6 is hereby amended and restated in its entirety as follows: The information required by this item should be read in conjunction with the consolidated financial statements and related notes included in Item 14 contained herein, and is as follows (in thousands, except per share data):
1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- Net Revenues and Sales.. $ 906,450 $ 804,049 $ 713,559 $ 612,994 $ 590,345 Income from Continuing Operations (before Ex- traordinary Items)..... $ 82,720 $ 70,503 $ 75,289 $ 51,935 $ 57,386 Consolidated Net Income. $ 82,720 $ 69,431 $ 79,046 $ 51,935 $ 83,944 Earnings per Common Share: Income before Extraor- dinary Items......... $ 2.42 $ 2.08 $ 2.31 $ 1.71 $ 1.94 Extraordinary Items... $ -- $ (.03) $ .12 $ -- $ .92 Earnings per Common Share--Primary....... $ 2.42 $ 2.05 $ 2.43 $ 1.71 $ 2.86 Earnings per Common Share--Fully Diluted... $ 2.41 $ 2.04 $ 2.42 $ 1.70 $ 2.83 Cash Dividends Declared per Common Share....... $ 1.59 $ 1.55 $ 1.51 $ 1.47 $ 1.43 Total Assets............ $1,510,201 $1,513,897 $1,496,737 $1,198,858 $1,122,147 Long-Term Debt.......... $ 492,555 $ 525,597 $ 591,232 $ 363,020 $ 354,302
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION Item 7 is hereby amended and restated in its entirety as follows: OVERVIEW Rochester Tel is pleased to report that 1993 was an excellent year for the company and its shareowners. The principal contributors to the company's positive results were outstanding performances by our long distance operations and the regional telephone companies outside of Rochester, New York. Consolidated operating income in 1993 reached the highest level in the company's history at $195 million, an increase of $19.8 million, or 11.3 percent, over 1992. Operating income for the Telecommunication 15 Services segment improved 32.8 percent over 1992, largely driven by results from the company's long distance operations. Operating Income for our Telephone Operations segment improved 8.1 percent. The regional telephone companies outside of Rochester, New York, improved their operating income by 22.7 percent, while the Rochester, New York operating company's operating income declined by 7.4 percent. By comparison, consolidated operating income in 1992 was $175.1 million, an increase of $26.8 million, or 18.0 percent, over 1991. Excluding the impact of our 1991 purchase accounting acquisitions, operating income improved $13.7 million, or 10.1 percent. Operating income for Telephone Operations improved 15.4 percent over 1991. Telecommunication Services' operating income rose 38.9 percent for the same period. Net income was $82.7 million in 1993, a 19.1 percent increase over 1992. Earnings per common share were $2.42 in 1993, an increase of 18 percent over 1992. In 1992, net income was $69.4 million and earnings per common share were $2.05, reflecting decreases of 12.2 percent and 15.6 percent, respectively, when compared to 1991. Effective January 1, 1993, the company adopted Financial Accounting Standards Board Statement No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," (OPEB) using the delayed recognition of the transition obligation method. The incremental expense included in 1993 operating income was $11.9 million. However, a substantial portion, 50.7 percent, of the increase was offset by a change in accounting for pensions for rate-making purposes at the Rochester, New York operating company. The impact of these two items on 1993 earnings, net of the income tax benefit, was $3.8 million. (See Note 11 to the Consolidated Financial Statements.) See Note 12 to the Consolidated Financial Statements regarding the estimated impact of the adoption of Financial Accounting Standards Board Statement No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112). There are no other accounting standards applicable to the Company which would have a material effect on the Company upon adoption. NONRECURRING ITEMS The financial results for the years 1991 through 1993 include the impact of five nonrecurring items: 1. Tax Rate Change. The 1993 income tax provision includes the retroactive impact of the federal income tax rate increase from 34 to 35 percent. The overall impact of the tax rate change was approximately $2 million and includes approximately $400,000 attributable to years prior to 1993. (See Note 9 to the Consolidated Financial Statements.) 2. Software Writeoff. As part of the Rochester, New York operating company's Settlement Agreement with the New York State Public Service Commission (the Commission) the company agreed to write off one-half of the costs ($3.3 million) previously deferred as part of a project to redesign customer account records, order flow and customer billing systems. The after-tax impact of the charge is $2.1 million. (See Note 4 to the Consolidated Financial Statements.) 3. Sale of Assets/Investments. During the third quarter of 1993, the company sold its interest in the S&A Telephone Company of Kansas. In the fourth quarter, the company sold a substantial portion of its investment in a Canadian long distance company. The transactions resulted in pre-tax gains totaling $4.4 million, as reflected on the Consolidated Statement of Income under the caption "Gain on Sale of Assets". 4. First Mortgage Bond Refinancing. On December 14, 1992, the Executive Committee of the Board of Directors approved the refinancing of the $40 million Series H, 9 1/2% first mortgage bonds. The company recorded an after-tax charge of $1.1 million, or $.03 per share, in 1992 relating to the call premium, the write-off of the remaining initial discount and associated expenses of the transaction. The bonds were retired during January 1993 using internally generated cash and the private placement of $35 million of debt at a telephone subsidiary. 16 5. Gain on Sale of Cellular. During 1991, the company realized a gain from the transfer of cellular interests as part of the acquisition of the Vista Minnesota properties from Centel. The gain, net of taxes, was $19.5 million. Approximately $15.7 million of the gain was recorded as a net ordinary gain on the sale of assets. The balance of $3.8 million was recorded as an extraordinary gain because it related to cellular properties acquired in pooling transactions within two years of the transfer. The transfer of cellular properties did not represent any diminishment in the company's strategic plans for wireless services. The company held a minority interest in each of the properties transferred, with no reasonable expectation of gaining a majority interest or managing role. Consolidated income and earnings per share before nonrecurring items for the three years ended December 31, 1993 are summarized in the following table.
1993 1992 1991 --------- --------- ---------- ALL DOLLARS, EXCEPT PER SHARE AMOUNTS, ARE IN THOUSANDS) Income, as stated.............................. $ 82,720 $ 69,431 $ 79,046 Adjustments, net of taxes 1. Tax rate change........................... 400 -- -- 2. Software write-off........................ 2,145 -- -- 3. Gain on sale of assets.................... (3,293) -- -- 4. Early retirement of debt.................. -- 1,072 -- 5. Cellular gain............................. -- -- (19,500) --------- --------- ---------- Income, after adjustment....................... $ 81,972 $ 70,503 $ 59,546 ========= ========= ========== Earnings per share, as stated.................. $ 2.42 $ 2.05 $ 2.43 Adjustments 1. Tax rate change........................... .01 -- -- 2. Software write-off........................ .06 -- -- 3. Gain on sale of assets.................... (.10) -- -- 4. Early retirement of debt.................. -- .03 -- 5. Cellular gain............................. -- -- (.61) --------- --------- ---------- Earnings, per share, after adjustments......... $ 2.39 $ 2.08 $ 1.82 ========= ========= ==========
The following sections of this report provide more specific information and should be read together with the financial statements for the three years ended December 31, 1993 found on pages 8 through 20. MAJOR EVENTS Open Market Plan In February 1993, the company filed a widely-recognized innovative proposal with the New York State Public Service Commission that would result in opening the Rochester, New York local exchange market to competition and simultaneously allow Rochester Tel to form a holding company. The company's proposal is called the "Open Market Plan". The plan would enable customers in the Rochester, New York service territory to select their local telephone service provider and have a much broader selection of products, services and prices. The company proposes to divide the current Rochester, New York operating company into two subsidiaries which would be wholly owned by an unregulated parent holding company. One of the two subsidiaries would be a regulated network facilities provider that would sell and market wholesale network services to retailers of telecommunication services. The second subsidiary would be a retail company which would provide an array of communication services on a competitive basis to residential and business customers in the Rochester, New York marketplace. 17 This structure will enable the Rochester, New York operating company to respond more promptly to changes in its marketplace and customer demands. Informational meetings have been held with the Staff of the New York State Public Service Commission and all intervening parties. Negotiations were under way as of January 1994 to reach a stipulated settlement on the proposal. The company will aggressively pursue approval of the "Open Market Plan" but cannot predict whether or when it will he approved by the Commission, and, if so, in what form. Regulatory Proceedings In 1986, the company and the New York State Public Service Commission entered into an agreement which allowed the company to pursue certain acquisitions and investments without further Commission approval. This agreement was amended in 1987, 1989 and 1991. The 1991 amendment preceded the acquisition of the Vista Telephone properties in Minnesota and Iowa from Centel Corporation. Certain portions of the amendment expired in June 1993, and at the request of the company, the Commission extended the amendment to December 1993. It is anticipated that resolution of the company's Open Market Plan filing and the associated provision allowing Rochester Tel to form a holding company would eliminate the necessity of this agreement. Until the Open Market Plan proposal is resolved, effective January 1, 1994, the company must petition the Commission for approval of future acquisitions. In 1984, the New York State Public Service Commission initiated a proceeding to investigate whether or not the company's unregulated subsidiaries should pay a royalty to the Rochester, New York operating company for alleged intangible benefits received from the use of the Rochester Telephone name and reputation. The proceeding was reopened in 1990. In its Opinion and Order in Case 87-C- 8959, issued July 6, 1993, the Commission, by a three-to-two vote, imposed a royalty in the amount of two percent of the total capitalization of Rochester Tel's unregulated operations. The Commission attempted to justify the royalty on essentially two bases: first, that ratepayers are entitled to protection from the potential for cost misallocations and the increased risks that accompany diversification; and second, that the company's unregulated operations benefit from their use of the Rochester Telephone name and reputation. The Commission rejected the company's statutory and constitutional defenses and concluded that it possessed the authority under the Public Service Law to impose a royalty. Based upon an initial interpretation of the Order, Rochester Tel estimates that the effect of the Order is in the range of $2 million per year. The royalty would reduce the Rochester, New York operating company's revenue requirement for regulated intrastate telephone operations. The Commission ordered Rochester Telephone to file an accounting plan for the royalty amount, together with a plan for returning such amount to ratepayers. The company vigorously disagrees with the Commission's determination and has sought judicial review of the Commission's Opinion and Order. The timing and outcome of the appeal process cannot be predicted. The company intends to fully prosecute its appeal in the courts. During 1993, the company took specific pricing action to allow it to compete more effectively. The company believes it must be able to flexibly price its services to be successful in a competitive marketplace. The Federal Communications Commission approved the company's request to de-average interstate access charges between the Rochester, New York operating company and the combined subsidiary local telephone companies. This action allowed the company to establish two sets of rates: one based on the specific costs incurred by the Rochester, New York operating company; and one based on the combined cost of the subsidiary local telephone companies, which primarily serve geographic areas currently less subject to competition than the Rochester, New York operating company. On a consolidated basis, the change is initially revenue neutral. Effective January 1, 1993, the company adopted FAS 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," and petitioned the FCC to recover the FAS 106 costs through the rate-making process. Although the FCC originally rejected the company's petition, the FCC later allowed the company to recover the portion of the FAS 106 cost associated with the Transition Benefit Obligation (the unrecorded 18 postretirement benefit liability) amortized over a twenty year period, pending the FCC's investigation as to whether this cost should be recoverable by price cap regulated companies. Rates reflecting this expense went into effect on July 2, 1993. The FCC's investigation remains pending. On March 12, 1993, the company signed a definitive agreement to form a joint venture with New York Cellular Geographic Service Area, Inc. a subsidiary of NYNEX Corporation, to create an upstate New York cellular supersystem that will include the Buffalo, Rochester, Syracuse, Utica-Rome and NY Rural Service Area #1 markets. The parties have sought a waiver of the interLATA prohibition contained in the AT&T consent decree, United States V. American Telephone and Telegraph Co., 552 F. Supp. 131 (D.D.C. 1982), aff'd mem., 460 U.S. 1001 (1983). Approval on the waiver request is anticipated in early 1994. On May 18, 1993, the company filed for approval to form the joint venture from the New York State Public Service Commission. This filing included a petition to transfer the Rochester, New York operating company's interest in the Rochester wireless cellular business to its wholly-owned subsidiary, Rochester Tel Mobile Communications Inc. The Commission approved the entire transaction and transfer at its open session on November 10, 1993 and issued an order dated December 10, 1993. In addition, the joint venture parties filed applications with the Federal Communications Commission to transfer various radio licenses associated with the cellular properties and anticipate that the approvals will be granted in early 1994. Pending the remaining approvals, Rochester Tel Mobile Communications, Inc. (RTMC) and NYNEX have signed an agreement allowing RTMC to manage the combined properties. Vista Telephone Company of Minnesota filed a request to increase rates in March 1993 with the Minnesota Public Service Commission. A stipulated settlement was executed by all parties and was submitted for approval to the Minnesota Public Service Commission. The Administrative Law Judge recommended an annual regulated revenue increase of $4.5 million. The company expects Commission approval during the first quarter of 1994. The Vista Telephone Company of Iowa filed in August 1993 for a permanent rate increase of approximately $4.5 million and a temporary rate increase of $4.1 million. On November 5, 1993, the Iowa State Utilities Board approved the temporary rate increase as submitted. This resulted in an approximate 21 percent across-the-board increase in local service rates. A final order is expected in the second quarter of 1994. Incentive Regulation The incentive regulation agreement which the New York State Public Service Commission approved in January 1990 for the Rochester, New York operating company expired at the end of 1992. The Rochester, New York operating company proposed a new incentive regulation agreement in January 1993 to the Commission staff, and reached a settlement, which was approved by the Commission on January 12, 1994. The settlement reduces the Rochester, New York operating company's revenue requirement by $5 million in 1993 and $9.5 million in 1994. Each of these reductions is subject to adjustment for depreciation changes. In 1994, fifty percent of the Rochester, New York operating company's earnings above the authorized return on equity will be shared with ratepayers. The authorized return is currently 10.9 percent and is subject to adjustment based on the results of the Generic Finance Proceeding. Also, if the Rochester, New York operating company's service levels in 1994 drop below 1992 levels, company will be subject to a penalty of one-half of one percent of its local service revenues. Acquisitions and Divestitures On April 15, 1993, the company acquired a 70 percent ownership of the Utica- Rome Cellular Partnership using 702,737 shares of original issue common stock. The transaction was accounted for as a purchase acquisition. In December 1993, the company increased its cellular ownership from 50.6 percent to 19 69.6 percent in the South Alabama cellular partnership. This later transaction gave the company the right to manage two cellular properties, Alabama RSA #4 and #6, which serve a territory with a population of approximately 252,000. On June 7, 1993, the Telecommunication Services Group acquired Budget Call Long Distance, Inc. for $7.5 million in cash. On September 30, 1993, Mid Atlantic Telecom, Inc. was acquired using 143,587 shares of treasury stock. Both transactions were accounted for as purchase acquisitions. Statesboro Telephone Company of Statesboro, Georgia, with more than 15,000 access lines, was acquired on August 31, 1992. The transaction was accounted for as a pooling of interests. During 1991, four telephone companies representing more than 160,000 access lines were acquired. (See Note 2 to the Consolidated Financial Statements.) In September 1993, the company sold its interest in the S&A Telephone Company (824 access lines) and its related minority cellular interest in a Topeka, Kansas cellular partnership. In December 1993, the company announced that it had reached a definitive agreement to sell the Minot Telephone Company in North Dakota. Minot serves approximately 25,000 access lines and is the company's only operation in North Dakota. The sale is subject to regulatory approvals and is expected to be finalized during the second quarter of 1994. Both transactions represented the company's only holdings in each state and it was not expected that our base in those states could be expanded. The company will continue to pursue opportunities to increase the size of its long distance, wireless, and telephone operations through internal growth, acquisitions, partnerships and joint ventures. Growth in all segments is necessary to achieve the economies of scale and scope necessary for long-term success. FINANCIAL REVIEW Consolidated Operations Historically, the company's Telephone Operations have provided the majority of the overall company's revenues and income. Telephone Operations provided 66 percent of total revenues and 84 percent of operating income for the year ended December 31, 1993. Telephone Operations revenues are derived from local service and toll access fees, directory advertising, billing services and other services such as sales of telephone equipment and voice mail. An increasing percentage of the company's revenues and income is being generated by its Telecommunication Services businesses. Telecommunication Services revenues include long distance revenues based on billable minutes of long distance usage, and wireless access and usage charges. Operating income from the deregulated businesses represented 16 percent of the company's total operating income in 1993, compared with just 8 percent five years ago. The company's Telephone Operations expenses are primarily related to the development and maintenance of its local exchange networks. Additional Telephone Operations expenses include costs associated with customer service and billing. The company's principal Telecommunication Services expenses are related to the leasing of transmission facilities and the payment of local access charges for its long distance business; and charges for interconnection of cellular and paging operations with telephone companies, costs of cellular telephones and paging units sold and other wireless network-related expenses. Revenues and expenses derived from the company's majority-owned cellular operations are currently, and will continue to be, reflected in the company's consolidated financial statements. The company's minority interests and, following its commencement, the proposed 50/50 cellular joint venture with NYNEX, are accounted for using the equity method. The company will recognize its proportional share of the net income (loss) of the cellular operations following the commencement of the proposed joint venture with NYNEX in the line item entitled "Equity in net income (loss) of unconsolidated partnerships and corporations." 20 Consolidated revenues and sales were $906 million in 1993, a $102 million, or 12.7 percent increase, over 1992. This followed a 12.7 percent, or $90.5 million, increase in 1992 over 1991. Of the $102 million increase in 1993, $15 million related to additional revenues associated with 1993 purchase accounting acquisitions. Of the $90.5 million increase in 1992, $56.7 million was related to additional revenues associated with 1991 purchase accounting acquisitions (See Note 2 to the Consolidated Financial Statements for further details about the purchase accounting acquisitions.) Excluding the impact of these acquisitions, revenues and sales rose 10.9 percent in 1993 and 5.2 percent in 1992. Consolidated costs and expenses were $711.5 million, $628.9 million and $565.2 million in 1993, 1992 and 1991, respectively, reflecting 13.1 percent and 11.3 percent increases in 1993 and 1992, respectively. Purchase accounting acquisitions accounted for $16.9 million of the increase in 1993 and $43.7 million in 1992. Consolidated costs and expenses, excluding the impact of purchase accounting acquisitions, increased 10.4 percent in 1993 and 3.9 percent in 1992. As a result of the company's continuing focus on cost controls and operating synergies, consolidated operating margins improved steadily over the past three years, from 20.8 percent in 1991, to 21.8 percent in 1992 and 21.9 percent in 1993 after excluding the impact of the software write-off at the Rochester Telephone, New York operating company. Telephone Operations Telephone Operations revenues increased $26.6 million to $593.9 million in 1993 representing an increase of 4.7 percent over 1992. For 1992 versus 1991, revenues increased 14.0 percent to $567.3 million. Excluding purchase accounting acquisitions, revenue increased by 4.2 percent in 1992. Revenue growth was partly driven by robust increases in telephone access lines of 3.9 percent in 1993 and 3.3 percent in 1992. The company's total access lines in service reached a level of 931,650 by year end 1993. Growth in long distance usage also contributed substantially to revenue growth, with minutes of use increasing by 7.7 percent in 1993 and 18.8 percent in 1992. In general, the prices charged to long distance companies for access usage declined slightly to address the telephone operating companies' need to be competitive in this market sector and are expected to decline further in 1994. Local service revenue increased due to rate increases implemented in 1993 and 1992 at a selected number of non-New York State telephone companies, offset in part by a regulatory revenue reduction at the Rochester, New York operating company. Increased market penetration of enhanced services such as custom calling features and advanced number identification products like Caller ID also contributed to revenue growth in 1993 and 1992. Costs and expenses for Telephone Operations rose $14.4 million in 1993 and $49.4 million in 1992. In 1992, $35.4 million of the increase was related to the incremental costs and expenses associated with the telephone companies acquired in 1991. Adjusting for these acquisition-related expenses, total costs and expenses increased 3.8 percent in 1992. The primary reasons for expense increases in 1993 were: the $3.3 million write-off of deferred software expenses at the Rochester, New York operating company; an increase in wages and benefits; an increase in severance and other expenses associated with streamlining operations to arrive at a reduced cost structure; and an increase in right-to-use fees associated with network software upgrades. In 1992, expenses increased due to higher depreciation expenses and the amortization of costs associated with the March 1991 ice storm in Rochester, New York. Operating margins for Telephone Operations were 27.7 percent in 1993, 26.8 percent in 1992 and 26.5 percent in 1991. Excluding the write-off of the deferred software expense, the operating margin in 1993 was 28.2 percent. The composite depreciation rate for Telephone Operations was 6.2 percent in 1993, compared with 6.4 percent in 1992 and 6.3 percent in 1991. The company continues to pursue alignment of depreciation rates with the economic lives of depreciable property. Telecommunication Services Telecommunication Services sales were $312.6 million in 1993, representing $75.8 million, or 32 percent, increase over 1992. In 1992, sales increased $20.8 million, or 9.6 percent, over 1991. Excluding the impact of 21 purchase accounting acquisitions, sales rose 25.7 percent, or $60.9 million in 1993. The improvements in both years resulted primarily from the growth in Network Systems and Services, where sales in the long distance business were $262.5 million in 1993 and $187.3 million in 1992. The growth in long distance revenue is due to increased usage and market penetration, price increases and new products. Sales from wireless communications increased $8.5 million, or 40.1 percent, in 1993 and $4.1 million, or 23.9 percent, in 1992 and continue to improve as a result of the company's acquisition of the Utica-Rome partnership in 1993, price increases and a growing customer base. Costs and expenses in 1993 for Telecommunication Services amounted to $281.9 million, increasing $68.2 million, or 31.9 percent, over 1992. Adjusting for the impact of the 1993 acquisitions, expenses increased by $51.3 million, or 24.0 percent. The increase in expenses is primarily due to the increased volume of long distance traffic carried by the company and the associated costs to originate and terminate the traffic on local telephone company facilities. The increase in costs and expenses in 1992 over 1991 was $14.3 million, or 7.2 percent. Normalizing for the impact of the 1991 acquisitions, costs and expenses rose 4.5 percent, driven primarily by access costs. These results, which compare favorably to the increases in sales, produced operating margins for the three-year period of 7.7 percent in 1991, 9.8 percent in 1992, and 9.8 percent in 1993. This positive trend was achieved through a continuation of operating synergies, new product offerings and a growing customer base. Interest Expense Interest expense decreased $3.5 million, or 7.0 percent, in 1993 as a result of lower debt levels than in 1992. During 1993, the company recalled $115.4 million of debt. In 1992, interest expense increased $5.5 million, or 12.2 percent, primarily due to the issuance of new debt in 1991 which was used to finance acquisitions. Gain on Sale of Assets In 1993, the company recognized gains on sales of the S&A Telephone Company and a portion of the company's minority investment in a Canadian long distance company. In 1991, the gain represents the ordinary gain on sale of cellular interests as part of the purchase of the Vista Minnesota properties from Centel. Other Income (Expense), Net In 1993, other income (expense), on a net basis increased $6.9 million, or 47.9 percent, over 1992. This increase is primarily the result of additional administrative expenses associated with the reorganization petition filed with the New York State Public Service Commission, refinancing expenses and acquisition expenses. In 1992, the net change was an increase in expense of $3.8 million, or 36.2 percent, over 1991, primarily due to lower equity earnings in cellular partnerships and increased goodwill amortization relating to purchase acquisitions. Income Taxes The effective federal tax rate in 1993 was 35.4 percent, compared to 34.2 percent in 1992 and 35.0 percent in 1991. (See Note 9 in Notes to the Consolidated Financial Statements.) LIQUIDITY AND CAPITAL RESOURCES Management's overall objective is to maximize shareowner value. One of the most important items in evaluating management's success is its use of the company's financial resources. While increasing net income 22 is an important component of the process, management believes that the primary source of value over the long term is cash generation over and above investment requirements. Key management decisions are made based on the value added to our shareowner's investment. Corporate performance, strategies, capital projects and acquisitions are evaluated and measured using cash flows and are expected to provide a return on investment that exceeds the risk-adjusted cost of capital of the company, or specific business unit, as appropriate. Management has three options for the use of excess cash generated. It can pay dividends, repurchase stock or reinvest in the business. Key financial data that can be used to monitor management's progress in maximizing the use of cash are shown below. KEY FINANCIAL DATA
1993 1992 1991 ------------ ------------ ------------ ($ IN MILLIONS, EXCEPT PER SHARE DATA) Total debt............................ $ 497 $ 591 $ 610 Total capital......................... $1,172 $1,213 $1,214 Debt ratio............................ 42.4% 48.8% 50.2% Operating margin...................... 21.5% 21.8% 20.8% Pre-tax interest coverage............. 3.9x 3.2x 3.9x Construction.......................... $ 102 $ 124 $ 109 Dividends declared per share.......... $ 1.59 $ 1.55 $ 1.51 Dividends paid per share.............. $ 1.58 $ 1.54 $ 1.50 Dividend yield........................ 3.6% 4.4% 4.8% Dividend payout ratio................. 65.3% 75.1% 61.7% Total shareowner return............... 31.1% 15.7% 15.0% Year-end stock price.................. $45.13 $35.63 $32.13
As reflected in the Consolidated Statement of Cash Flows, net cash provided by operating activities increased $12.2 million in 1993, from $216 million to $228.2 million, and $52.9 million in 1992, from $163.1 million to $216 million. The increase in both years is the result of increases in net income, after excluding the 1991 cellular gains and depreciation and amortization; and in 1992, an increase of $26.5 million in accounts payable which is directly related to the timing of purchases associated with the company's construction program. Net cash used in investing activities decreased $12.4 million in 1993, from $121.5 million to $109.1 million, and $148.8 million in 1992, from $270.3 million to $121.5 million. The decline in 1993 was caused by a reduction in construction expenditures offset, in part, by an increase in purchase accounting acquisitions. The decline in 1992 is due primarily to a $164.6 million decrease in purchase accounting acquisitions, offset, in part by an increase of $15.3 million in construction expenditures. The net cash used in financing activities increased $87.3 million in 1993, from $69.8 million to $157.1 million. Net cash provided by financing activities amounted to $129.3 million in 1991. The changes in 1993 and 1992 are associated with the repayment/retirement of long-term debt and the issuance of $239 million of long-term debt in 1991 to support the company's acquisition program. The company's periodic deficit in working capital is largely driven by its construction program. The timing of plant additions has a significant impact on the accounts payable balance until it is refinanced or liquidated using internally generated funds, as was the case at the end of 1992. The company must generate adequate amounts of cash to meet both short-term and long-term needs. The company's liquidity is a function of its construction program, debt service requirements, internal generation of funds and access to securities markets. 23 On November 30, 1993, the company filed a registration statement with the Securities and Exchange Commission to sell up to $100 million of unsecured debt securities. The company intends to use the proceeds for general corporate purposes which may include the replacement of debt retired in 1993 and the financing of possible future acquisitions. At December 31, 1993, no debt had been issued. On December 21, 1993, the company filed a registration statement for a public underwritten offering of at least five million shares of its common stock. Approximately 2.1 million shares will be sold by the company and the remainder will be sold by a wholly-owned subsidiary of Sprint Corporation, which acquired the shares when Rochester Tel purchased several telephone properties in 1991. The net proceeds from the offering will be used for general corporate purposes, including potential expansion of the company's existing lines of business or investing in new lines of business. The use of the proceeds is subject to approval by the New York State Public Service Commission, which approved the issuance of the equity on January 12, 1994. It is expected that the public offering of the equity will be completed in the first quarter of 1994. The financing needs associated with telephone company acquisitions and network modernization programs have stabilized. The company has in place a switching network that is essentially 100 percent digital. The company has nearly 27,000 miles of fiber in place with its telephone and long distance operating territories. The company will continue to deploy fiber facilities where it is economically justified. Management will continue to focus on building the profitability of the existing businesses by increasing revenues and operating efficiencies, and by partnering or entering into joint ventures when appropriate. The company will also continue to evaluate acquisition opportunities and technology deployment such as multimedia, with a focus on improving shareowner value. Total gross expenditures for property, plant and equipment in 1994 are anticipated to be $73.7 million. Telephone Operations expects to spend $58.3 million on its construction program and Telecommunication Services, $15.4 million. At December 31, 1993, aggregate debt maturities were $3.96 million in 1994, $3.66 million in 1995 and $3.75 million in 1996. (See Note 7 to the Consolidated Financial Statements.) The company's bond ratings remain constant and are strong investment grade ratings. Also, on November 15, 1993, the Board of Directors increased the quarterly dividend paid on common stock by one cent to $0.405 per share, payable February 1, 1994, to shareowners of record on January 14, 1994. This action raises the annualized common stock dividend to $1.62 per share. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 10 is hereby amended and restated in its entirety as follows: Directors Certain information is set forth below regarding the Directors of the Corporation as of March 1, 1994. All such persons have been engaged in the occupation or employment set forth opposite their respective names in their current capacities for more than five years except where indicated. Patricia C. Barron, 51, is President, Xerox Engineering Systems, Xerox Corporation, a manufacturer of office systems and equipment and has held this position since February 1994. From March 1992 until February 1994 she was President, Office Documents Products Division, Xerox Corporation. From 1979 to March 1992 she was a Vice President of Xerox Corporation. She is a Director of Quaker Chemical Corporation. She has been a Director of the Company since 1990. Ronald L. Bittner, 52, is Chairman, President and Chief Executive Officer of the Company and has held this position since April 1993. From February 1992 to April 1993 he was President and Chief Executive 24 Officer of the Company. From May 1988 to February 1992 he was Executive Vice President and President-- Telecommunications Group of the Company. He has been a Director of the Company since 1989. John R. Block, 59, is President of the National American Wholesale Grocers' Association, a trade association which serves as a forum for the exchange of ideas and information and is a source of data for the industry. He is a Director of Deere and Co., Arcadian Corporation, Crop Genetics, Inc., and Purina Mills, Inc. He has been a Director of the Company since 1990. Harlan D. Calkins, 62, is Chairman, President, Chief Executive Officer, and a Director of Rochester Midland Corporation, a manufacturer of specialty chemicals. He has been a Director of the Company since 1982. Brenda E. Edgerton, 44, is Vice President and Treasurer of Campbell Soup Company, a manufacturer of prepared convenience foods and has held this position since August 1989. From April 1988 to August 1989 she was Deputy Treasurer of Campbell Soup Company. She has been a Director of the Company since 1993. Jairo A. Estrada, 46, is Chairman of the Board and Chief Executive Officer of Garden Way Incorporated, a company which manufactures outdoor power equipment. He is a Director of Garden Way Incorporated and of The Chase Manhattan Corporation. He has been a Director of the Company since 1989. Daniel E. Gill, 57, is Chairman and Chief Executive Officer of Bausch & Lomb Incorporated, a worldwide manufacturer and marketer of health care and optical products. He is a Director of Bausch & Lomb, Reebok International, Ltd., and Welch Allyn, Inc. He has been a Director of the Company since 1981. Alan C. Hasselwander, 60, is Past Chairman of the Board of the Company. From February 1992 to April 1992 he was Chairman of the Company. From July 1984 to February 1992 he was President and Chief Executive Officer of the Company. He has been a Director of the Company since 1984. Douglas H. McCorkindale, 54, is Vice Chairman and Chief Financial and Administrative Officer of Gannett Co., Inc., a nationwide diversified communications company. He is a Director of Gannett Co., Inc., Continental Airlines, and seven mutual funds in the Prudential Mutual Fund complex of funds. He has been a Director of the Company since 1980. Richard P. Miller, Jr., 51, is Vice President for External Affairs and Senior Counsel to the President of the University of Rochester and has held this position since 1987. Prior to his present position, he was Chief Executive Officer of The Case-Hoyt Corporation. He is a Director of Genesee Corporation and a Director of Forbes Products Corporation. He has been a Director of the Company since 1984. Dr. Leo J. Thomas, 57, is Group Vice President and President, Imaging, of Eastman Kodak Company, a manufacturer of photographic and chemical products, and has held this position since September 1991. From November 1989 to September 1991 he was Group Vice President and General Manager, Health of Eastman Kodak Company. From September 1989 to November 1989 he was Senior Vice President and General Manager, Health Group of Eastman Kodak Company. From September 1988 to September 1989 he was Chairman of Sterling Drug, Inc., a subsidiary of Eastman Kodak. He is a Director of Eastman Kodak Company and of John Wiley & Sons, Inc. He has been a Director of the Company since 1984. Michael T. Tomaino, 56, is an Attorney with the law firm of Nixon, Hargrave, Devans & Doyle, and has been a Director of the Company since 1975. The following companies (which are mentioned above) do not have registered securities nor are the companies otherwise required to file reports with the Securities and Exchange Commission: Continental Airlines, Forbes Products Corporation, and Welch Allyn. 25 Executive Officers Certain information is set forth below regarding the Executive Officers of the Company as of March 1, 1994. Mr. Pestorius retired as an Executive Officer as of July 1, 1994. Each Officer serves for a period of one year or until a successor is elected.
OTHER POSITIONS HELD NAME (AGE) POSITION AND OFFICES HELD DURING THE PAST FIVE YEARS ---------- ------------------------- -------------------------- Ronald L. Bittner (52) Chairman, President and From February 1992 to April 1993 he Chief Executive Officer was President and Chief Executive since April 1993 Officer. From May 1988 to February 1992 he was Executive Vice President and President-- Telecommunications Group. Jeremiah T. Carr (51) Corporate Vice President From February 1993 to November 1993 and President--Telephone he was Corporate Vice President and Group since November 1993 President Telephone Operations. From February 1992 to February 1993 he was President Rochester Telephone Operations. From October 1991 to February 1992 he was President of Rotelcom. From January 1990 to October 1991 he was Vice President RCI and General Manager--NYS, and President Rotelcom. From 1988 to January 1990 he was Vice President of Consumer Markets--RCI. Dale M. Gregory (45) Corporate Vice President From February 1993 to November 1993 and President-- he was Corporate Vice President and Telecommunications Group President--Network Systems and since November 1993 Services. From February 1992 to February 1993 he was Corporate Vice President and President-- Telecommunication Services. From January 1991 to February 1992 he was President--RCI Network and Systems. From March 1991 to February 1992 he was also President, Dale M. Gregory Management Consultants, Inc. From June 1988 to March 1991, he was President and Chief Operating Officer, Advanced Telecommunications Inc. Louis L. Massaro (47) Corporate Vice From September 1991 to February 1993 President--Finance and he was Corporate Vice President and Treasurer since February President--Rochester Operations. 1993 From May 1988 to September 1991 he was Vice President-- Telecommunications Group. Frederick R. Pestorius (52) Corporate Vice President From February 1993 to November 1993 and President--Rochester he was Corporate Vice President and Business Markets since President--Regional Telephone November 1993 Operations. From May 1988 to February 1993 he was Corporate Vice President--Finance, Secretary and Treasurer.
26
OTHER POSITIONS HELD NAME (AGE) POSITION AND OFFICES HELD DURING THE PAST FIVE YEARS ---------- ------------------------- -------------------------- John K. Purcell (50) Corporate Vice President-- From February 1993 to November 1993 Corporate Partnering and he was Corporate Vice President-- Alliances since November 1993 Planning and President--Wireless Operations. From February 1992 to February 1993 he was Corporate Vice President--Development. From September 1991 to February 1992 he was Corporate Vice President and President--Telephone Subsidiaries. From May 1988 to September 1991 he was Vice President--Telephone Group. Janet F. Sansone (48) Corporate Vice President-- From March 1993 to November 1993 she Human Resources and Corporate was Corporate Vice President--Human Services since November 1993 Resources and Excellence. From July 1991 to March 1993 she was Manager Management and Human Resources Education, General Electric Corporation. From August 1989 to July 1991 she was Manager Recruiting and University Development, General Electric Corporation. Josephine S. Trubek (51) Corporate Secretary since From January 1990 to April 1993 she April 1993 was General Counsel and Secretary. From 1982 to January 1990 she was Corporate Counsel and Assistant Secretary.
As of March 31, 1992, Advanced Telecommunications, Inc. was the fourth largest interexchange service provider in the United States and its common stock was traded on the National Market System. General Electric is one of the largest and most diversified industrial companies in the world. Its businesses include interests in a vast array of industrial products, as well as technology, service and communication entities. ITEM 11. EXECUTIVE COMPENSATION Item 11 is hereby amended and restated in its entirety as follows: The information required by this item is presented on page 3 of the definitive Proxy Statement for the Annual Meeting of Shareowners held on April 27, 1994 under the caption "Compensation of Directors" and on pages 8 through 17 under the captions "Report of Committee on Management", "Performance Graph", "Compensation of Company Management", and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and is incorporated in this report by reference. The Company's Proxy Statement is found at Exhibit 99 to this Form 10-K. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Item 14 is hereby amended by deleting the Computation of Fully Diluted Earnings Per Share attached as Exhibit 11 to the Form 10-K and substituting therefor the Computation of Fully Diluted Earnings Per Share attached as Exhibit 11 hereto. In addition, the Company's By-Laws are filed as Exhibit 3 to this Form 10-K/A. 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. Rochester Telephone Corporation Date: November 18, 1994 /s/ Louis L. Massaro By: _________________________________ Louis L. Massaro Corporate Vice President Finance and Treasurer 28 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT ------- ------- 3 Company's By-Laws 11 Computation of Fully Diluted Earnings Per Share
EX-3 2 COMPANY'S BY-LAWS ROCHESTER TELEPHONE CORPORATION By-Laws As Revised Effective March 21, 1983 (And as amended 7/16/84, 11/19/84, 2/17/86, 2/16/87, 4/22/87, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/29/92, 4/21/93, 4/27/94, 9/19/94) ARTICLE I SHAREHOLDERS Section 1 - Annual Meeting. An annual meeting of shareholders for the election of Directors and the transaction of other business shall be held at such time on any day in the month of April in each year or on such other date as shall be fixed by the Board of Directors. Section 2 - Special Meetings. Special Meetings of the shareholders may be called by the Board of Directors. Such meeting shall be held at such time as may be fixed in the notice of meeting. Section 3 - Place of Meeting. Meetings of shareholders shall be held at such place, within or without the State of New York, as may be fixed in the notice of meeting. Section 4 - Notice of Meeting. Notice of each meeting of shareholders shall be in writing and shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be given, personally, or by mail, not less than ten or more than fifty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at the shareholder's address as it appears on the record of shareholders, or, if the shareholder shall have filed with the Secretary of the Corporation a written request that notices be mailed to some other address, then directed to the shareholder at such other address. 3/21/83 Section 5 - Inspectors of Election. The Board of Directors, in advance of any shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote at such meeting shall, appoint two inspectors. Each inspector, before entering upon the discharge of the inspector's duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of the inspector's ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote at such meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. Section 6 - List of Shareholders at Meeting. A list of shareholders as of the record date, certified by the Secretary or any Assistant Secretary or by the Transfer Agent, if any, shall be produced at the meeting of shareholders upon the request of any shareholder at such meeting or prior thereto. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding at such meeting, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote at such meeting may vote at such meeting. 3/21/83 2 Section 7 - Qualification of Voters. Every shareholder of record of common stock of the Corporation shall be entitled at every meeting of shareholders to one vote for every share of common stock held by the shareholder in the shareholder's name on the record of shareholders, subject, however, to the voting rights granted to the holders of Cumulative Preferred Stock of the Corporation upon default in dividends thereon. Section 8 - Quorum of Shareholders. The holders of a majority of the shares entitled to vote at such meeting shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such specified item of business. The shareholders present, in person or by proxy, and entitled to vote may, by a majority of votes cast, adjourn the meeting despite the absence of a quorum. Section 9 - Vote of Shareholders. Directors shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of Directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. Section 10 - Proxies. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for that shareholder by proxy. Every proxy must be signed by the shareholder or the shareholder's attorney-in-fact. No proxy shall be valid after the 3/21/83 3 expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it except in those cases where an irrevocable proxy permitted by statute has been given. Section 11 - Fixing Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of such meeting, nor more than fifty days prior to any other action. Section 12 - Order of Business.* The order of business at each meeting of shareholders shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. At any special meeting of shareholders, only such business may be transacted which is related to the purpose or purposes set forth in the notice of such meeting. At any annual meeting of shareholders, only such business (other than the nomination or election of directors) shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting or (ii) by any shareholder who is a holder of record at the time of the giving of the notice provided for in this Section 12, who is or will be entitled to vote at the meeting and who complies with the procedures set forth in this Section 12. 3/21/83 *Revised 9/19/94 4 For business (other than the nomination or election of directors) properly to be brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary. To be timely, a shareholder's notice must be addressed to the Secretary and delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder to be timely must be so delivered or received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. To be in proper written form, a shareholder's notice to the Secretary shall set forth in writing as to each matter the shareholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; (iv) a representation that the shareholder is or will be entitled to vote at such annual meeting and intends to appear in person (or send a qualified representative) or by proxy to present such proposal at the meeting; and (v) any material interest of the shareholder in such business. The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such shareholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such shareholder does not appear in person (or send a qualified representative) or by proxy to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 12. The chairman of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the annual meeting in accordance with the provisions of this 3/21/83 5 Section 12 and, if he should so determine, he shall so declare to the annual meeting and any such business not properly brought before the annual meeting shall not be transacted and any proposal contemplated by such business shall be void. ARTICLE II BOARD OF DIRECTORS Section 1 - Power of Board and Qualification of Directors. The business of the Corporation shall be managed under the direction of its Board of Directors, each of whom shall be at least twenty-one years of age. Section 2 - Number of Directors.* At the annual meeting of shareholders, the shareholders shall elect twelve directors. Section 3 - Election, Term and Qualifications of Directors. At each annual meeting of shareholders, Directors shall be elected to hold office until the next annual meeting and until their successors have been elected and qualified. No person shall be eligible for election or reelection to the Board of Directors after reaching seventy years of age, or in the case of a retired Chairman of the Board of Directors or a retired President of the Corporation, after reaching sixty-seven years of age. The term of any Director who is also an Officer of the Corporation or any subsidiary of the Corporation, other than the Chairman of the Board or the President of the Corporation, shall end on the date of termination from active employment and such officer shall thereafter be ineligible for reelection to the Board of Directors. 3/21/83 *Revised 7/16/84, 2/17/86, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/27/94 6 Section 4 - Quorum of the Board: Action by the Board. One-third of the entire Board of Directors shall constitute a quorum for the transaction of business, and the vote of a majority of the Directors present at the time of such vote, if a quorum is then present, shall be the act of the Board. Section 5 - Action Without a Meeting. Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting if all members of the Board or of the committee consent in writing to the adoption of the resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. Section 6 - Participation in Board Meetings by Conference Telephone Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 7 - Meetings of the Board. An annual meeting of the Board of Directors shall be held in each year directly after adjournment of the annual shareholders' meeting. Regular meetings of the Board shall be held at such times as may from time to time be fixed by resolution of the Board. Special meetings of the Board may be held at any time upon the call of the Chairman of the Board of Directors, if such there be, the President or any two Directors. Meetings of the Board of Directors shall be held at such place, within or without the State of New York, as from time to time may be fixed by resolution of the Board for annual and regular meetings and in the notice of meeting for special meetings. If no place is so fixed, meetings of the Board shall be held at the office of the Corporation in Rochester, New York. No notice need be given of annual or regular meetings of the Board of Directors. Notice of each special meeting of the Board shall be given by oral, telegraphic or written notice, duly given or sent or mailed to each Director not less than one (1) day before such meeting. 3/21/83 7 Section 8 - Resignation. Any Director may resign at any time by giving written notice to the Chairman of the Board of Directors, if such there be, to the President or to the Secretary. Such resignation shall take effect at the time specified in such written notice, or if no time be specified, then on delivery. Unless otherwise specified in the written notice, the acceptance of such resignation by the Board of Directors shall not be needed to make it effective. Section 9 - Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors may be filled by vote of the Board. If the number of the directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by vote of a majority of the directors then in office. A director elected to fill a vacancy shall be elected to hold office for the unexpired term of such director's predecessor. Section 10 - Executive and Other Committees of Directors.* The Board of Directors, by resolution, adopted by a majority of the entire Board, shall designate from among its members an Executive Committee consisting of three or more Directors, a majority of whom are outside directors. The Executive Committee shall have all the authority of the Board, except that it shall not have authority as to the following matters: (1) The submission to shareholders of any action that needs shareholders' approval; (2) The filling of vacancies in the Board or in any committee; (3) The amendment or repeal of the By-Laws, or the adoption of new By-Laws; (4) The amendment or repeal of any resolution of the Board which, by its terms, shall not be so amendable or repealable; (5) The fixing of compensation of the directors for serving on the Board or on any Committee; 3/21/83 *Revised 11/19/84, 4/22/87, 4/29/92, 4/21/93 8 (6) The fixing or amendment of the compensation, benefits and perquisites of the chief executive officer. The Board of Directors, by resolution by a majority of the entire Board, may designate from among its members an Audit Committee consisting of three or more outside directors. The Audit Committee shall, among other things, review the scope of audit activities, review with management significant issues concerning litigation, contingencies or other material matters which may result in either potential liability of the Company or significant exposure to the Company, review significant matters of corporate ethics, review security methods and procedures, review the financial reports and notes, and make reports and recommendations with respect to audit activities, findings, and reports of the independent public accountants and the internal audit staff of the Company. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Directors consisting of three or more outside directors. The Committee on Directors shall, among other things, review performance of incumbent directors, act as a nominating committee, and consider and report to the entire Board of Directors on all matters relating to the selection, qualification, compensation and duties of the members of the Board of Directors and any committees of the Board of Directors. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Management consisting of three or more outside directors. The Committee on Management shall, among other things, fix or amend the compensation, benefits and perquisites of all executive officers of the Company and recommend such for the chief executive officer, select and administer executive compensation plans and employee benefit plans which have Company stock as an investment option, review succession planning for the Company and review with management significant human resources issues. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members other committees each consisting of three or more directors. Unless a greater proportion is required by the resolution designating a committee of the Board of Directors, a quorum for the transaction of business of a committee shall consist of (a) a 3/21/83 9 majority of the entire authorized number of members of the Executive Committee or (b) one-third of the entire authorized number of members of any other committee of the Board of Directors, but in no event fewer than two persons. The vote of a majority of the members of a committee present at the time of the vote concerning the transaction of business of that committee or of any specified item of business of that committee if a quorum is present at such time, shall be the act of such committee. Any committee may fix the time and place of holding its regular meetings and, if so fixed, no notice of such regular meeting shall be necessary. Special meetings of any committee may be called at any time by the Chairman of the Board of Directors, if such there be, by the chief executive officer, by the President, by the Chairperson of that committee, or by any two members of that committee. Notice of each special meeting of any committee shall be given by oral, telegraphic or written notice, including notice via facsimile machine, duly given or sent or mailed to each member of that committee not less than one day before such meeting. Section 11 - Compensation of Directors. The Board of Directors shall have authority to fix the compensation of directors for services in any capacity. Section 12 - Indemnification.* (a) Generally. To the full extent authorized or permitted by law, the Corporation shall indemnify any person ("indemnified Person") made, or threatened to be made, a party to any action or proceeding, whether civil, at law, in equity, criminal, administrative, investigative or otherwise, including any action by or in the right of the Corporation, by reason of the fact that he, his testator or intestate, ("Responsible Person"), whether before or after adoption of this Section 12, (1) is or was a director or officer of the Corporation, or (2), if a director or officer of the Corporation, is serving or served, in any capacity, at the request of the Corporation, any other corporation, or any partnership, joint venture, trust, employee benefit plan or other enterprise, or (3), if not a director or officer of the Corporation, is serving or served, at the request of the 3/21/83 *Revised 2/16/87 10 Corporation, as a director or officer of any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, against all judgments, fines, penalties, amounts paid in settlement (provided the Corporation shall have given its prior consent to such settlement, which consent shall not be unreasonably withheld by it) and reasonable expenses, including attorneys' fees, incurred by such Indemnified Person with respect to any such threatened or actual action or proceeding, and any appeal therein, provided only that (x) acts of the Responsible Person which were material to the cause of action so adjudicated or otherwise disposed of were not (i) committed in bad faith or (ii) were not the result of active and deliberate dishonesty, and (y) the Responsible Person did not personally gain in fact a financial profit or other advantage to which he was not legally entitled. (b) Advancement of Expenses. All expenses reasonably incurred by an Indemnified Person in connection with a threatened or actual action or proceeding with respect to which such person is or may be entitled to indemnification under this Section 12 shall be advanced or promptly reimbursed by the Corporation to him in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by him or on his behalf to repay the amount of such advances, if any, as to which he is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent such advances exceed the indemnification to which he is entitled. Such person shall cooperate in good faith with any request by the Corporation that common counsel be used by the parties to an action or proceeding who are similarly situated unless to do so would be inappropriate due to an actual or potential conflict of interest. (c) Procedure for Indemnification. (1) Not later than thirty (30) days following final disposition of an action or proceeding with respect to which the Corporation has received written request by an Indemnified Person for indemnification pursuant to this Section 12, if such indemnification has not been ordered by a court, the Board of Directors shall meet and find whether the Responsible Person met the standard of conduct set forth in paragraph (a) of this Section 12, and, if it finds that he did, or to the extent it so finds, shall authorize such indemnification. 3/21/83 11 (2) Such standard shall be found to have been met unless (a) a judgment or other final adjudication adverse to the Indemnified Person establishes that subparagraphs (x) or (y) of paragraph (a) of this Section 12 were violated, or (b) if the action or proceeding was disposed of other than by judgment or other final adjudication, the Board finds in good faith that, if it had been disposed of by judgment or other final adjudication, such judgment or other final adjudication would have been adverse to the Indemnified Person and would have established a violation of subparagraphs (x) or (y) of paragraph (a) of this Section 12. (3) If indemnification is denied, in whole or part, because of an adverse finding by the Board in the absence of a judgment or other final adjudication, or because the Board believes the expenses for which indemnification is requested to be unreasonable, such action by the Board shall in no way affect the right of the Indemnified Person to make application therefor in any court having jurisdiction thereof, and in such action or proceeding the issue shall be whether the Responsible Person met the standard of conduct set forth in paragraph (a) of this Section 12, or whether the expenses were reasonable, as the case may be (not whether the finding of the Board with respect thereto was correct) and the determination of such issue shall not be affected by the Board's finding. If the judgment or other final adjudication in such action or proceeding establishes that the Responsible Person met the standard set forth in paragraph (a) of this Section 12, or that the disallowed expenses were reasonable, or to the extent that it does, the Board shall then find such standard to have been met or the expenses to be reasonable, and shall grant such indemnification, and shall also grant to the Indemnified Person indemnification of the expenses incurred by him in connection with the action or proceeding resulting in the judgment or other final adjudication that such standard of conduct was met, or if pursuant to such court determination such person is entitled to less than the full amount of indemnification denied by the Corporation, the portion of such expenses proportionate to the amount of such indemnification so awarded. (4) A finding by the Board pursuant to this paragraph (c) that the standard of conduct set forth in paragraph (a) of this Section 12 has been met shall mean a finding of the Board or shareholders as provided by law. (d) Contractual Article. This Section 12 shall be deemed to constitute a contract between the Corporation and each person who is a Responsible Person 3/21/83 12 at any time while this Section 12 is in effect. No repeal or amendment of this Section 12, insofar as it reduces the extent of the indemnification of any person who could be a Responsible Person shall without his written consent be effective as to such person with respect to any event, act or omission occurring or allegedly occurring prior to (1) the date of such repeal or amendment if on that date he is not serving in any capacity for which he could be a Responsible Person, or (2) the thirtieth (30th) day following delivery to him of written notice of such repeal or amendment as to any capacity in which he is serving on the date of such repeal or amendment, other than as a director or officer of the Corporation, for which he could be a Responsible Person, or (3) the later of the thirtieth (30th) day following delivery to him of such notice or the end of the term of office (for whatever reason) he is serving as director or officer of the Corporation when such repeal or amendment is adopted, with respect to being a Responsible Person in that capacity. No amendment of the Business Corporation Law shall, insofar as it reduces the permissible extent of the right of indemnification of a Responsible Person under this Section 12, be effective as to such person with respect to any event, act or omission occurring or allegedly occurring prior to the effective date of such amendment irrespective of the date of any claim or legal action in respect thereto. This Section 12 shall be binding on any successor to the Corporation, including any corporation or other entity which acquires all or substantially all of the Corporation's assets. (e) Non-exclusivity. The indemnification provided by this Section 12 shall not be deemed exclusive of any other rights to which any person covered hereby may be entitled other than pursuant to this Section 12. The Corporation is authorized to enter into agreements with any such person or persons providing them rights to indemnification or advancement of expenses in addition to the provisions therefor in this Section 12 to the full extent permitted by law. Section 13 - Notification of Nominations.* Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of Directors may be made by the Board of Directors or by any shareholder who is a 3/21/83 *Revised 9/19/94 13 shareholder of record at the time of the giving of the notice of nomination provided for in this Section 13 and who is entitled to vote for the election of Directors. Any shareholder of record who is or will be entitled to vote for the election of Directors at a meeting may nominate persons for election as Directors only if timely written notice of such shareholder's intent to make such nomination is given to the Secretary. To be timely, a shareholder's notice must be addressed to the Secretary and delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual meeting of shareholders, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder to be timely must be so delivered or received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made and (ii) with respect to an election to be held at a special meeting of shareholders for the election of Directors, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Each such notice shall set forth: (a) the name and address, as they appear on the Corporation's books, of the shareholder who intends to make the nomination, and the name and address of the person or persons to be nominated; (b) the class and number of shares of the Corporation which are beneficially owned by the shareholder: (c) a representation that the shareholder is or will be entitled to vote at the meeting and intends to appear in person (or send a qualified representative) or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the shareholder and such nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (e) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (f) the consent of each nominee to serve as a Director of the 3/21/83 14 Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made after compliance with the foregoing procedure. Only such persons who are nominated in accordance with the procedures set forth in this Section 13 shall be eligible to serve as Directors of the Corporation and any purported nomination or purported election not made in accordance with the procedures set forth in this Section 13 shall be void. ARTICLE III OFFICERS Section 1 - Officers. The Board of Directors, as soon as may be practicable after the annual election of directors, may elect a Chairman of the Board of Directors and shall elect a President, one or more Vice Presidents (one or more of whom may be designated Executive Vice President), a Secretary and a Treasurer, and such other officers as it may determine. Any two or more offices may be held by the same person, except the office of President and Secretary. Section 2 - Term of Office and Removal. Each officer shall hold office for the term for which each officer is elected or appointed, and until a successor has been elected or appointed and qualified. Section 3 - Powers and Duties. The officers of the Corporation shall each have such powers and authority and perform such duties in the management of the Corporation as set forth in these By-Laws and as from time to time prescribed by the Board of Directors. To the extent not set forth in these By-Laws or so prescribed by the Board of Directors, they shall each have such powers and authority and perform such duties in the management of the Corporation, subject to the control of the Board, as generally pertain to their respective offices. 3/21/83 15 In addition to the powers and authority above, each officer has the powers and duties set out below. (a) Chairman of the Board of Directors The Chairman of the Board of Directors, if such there be, shall preside at all meetings of the Board. The Chairman of the Board of Directors may be the chief executive officer of the Corporation, and if so designated, may preside at all meetings of shareholders. (b) President The President shall be the chief operating officer and shall have responsibility for the general management of the business of the Corporation, subject only to the supervision of the Board of Directors, the Executive Committee and the Chairman of the Board of Directors, as chief executive officer, if such there be. If there is no Chairman of the Board of Directors or if the Chairman of the Board of Directors is not the chief executive officer, then the President shall be the chief executive officer of the Corporation. The President may preside at all meetings of shareholders, when present, and at meetings of the Board of Directors in the absence of the Chairman of the Board, if such there be. (c) Executive Vice President The Executive Vice President or the Executive Vice Presidents, if such there be, shall assist the President in the management of the Corporation and, as may be designated by the Board of Directors, in the event of the death, resignation, removal, disability or absence of the President, an Executive Vice President shall possess the powers and perform the duties of the President for the period of such disability or absence or until the Board of Directors elects a President. (d) Vice President Each Vice President shall assist the President in the management of the Corporation and, in the absence or incapacity of the President and Executive Vice Presidents, 3/21/83 16 and in order as fixed by the Board, possess the powers and perform the duties of the President for the period of such absence or incapacity, and shall possess such other powers and perform such other duties as the Board of Directors may prescribe. (e) Secretary The Secretary shall issue notices of all meetings of shareholders and directors where notices of such meetings are required by law or these By- Laws, and shall keep the minutes of such meetings. The Secretary shall sign such instruments and attest such documents as require signature or attestation and affix the corporate seal thereto where appropriate and shall possess such other powers and perform such other duties as usually pertain to the office or as the Board of Directors may prescribe. (f) Treasurer The Treasurer shall have general charge of, and be responsible for, the fiscal affairs of the Corporation and shall sign all instruments and documents as require such signature, and shall possess such other powers and perform such other duties as usually pertain to the office or as the Board of Directors may prescribe. (g) Assistant Officers Any Assistant Officer elected by the Board of Directors shall assist the designated officer and shall possess that officer's powers and perform that officer's duties as designated by that officer, and shall possess such other powers and perform such other duties as the Board of Directors may prescribe. Section 4 - Records. The Corporation shall keep (a) correct and complete books and records of account; (b) minutes of the proceedings of the shareholders, Board of Directors and any committees of the Board; and (c) a current list of the directors and officers and their residence addresses. 3/21/83 17 The Corporation shall also keep at its office in the State of New York or at the office of its transfer agent or registrar in the State of New York, if any, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. Section 5 - Checks and Similar Instruments. All checks and drafts on the Corporation's bank accounts and all bills of exchange and promissory notes and all acceptances, obligations and other instruments, for the payment of money, shall be signed by facsimile or otherwise on behalf of the Corporation by such officer or officers or agent or agents as shall be thereunto authorized from time to time by the Board of Directors. Section 6 - Voting Shares Held by the Corporation. Either the President or the Secretary may vote shares of stock held by the Corporation in other corporations and may execute proxies for and on behalf of the Corporation for such purpose. ARTICLE IV SHARE CERTIFICATES AND LOSS THEREOF - TRANSFER OF SHARES Section 1 - Form of Share Certificate. The shares of the Corporation shall be represented by certificates, in such forms as the Board of Directors may from time to time prescribe, signed by the Chairman of the Board if such there be, or the President or a Vice President, and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or its employee. In case any officer who 3/21/83 18 has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer at the date of issue. Section 2 - Lost, Stolen or Destroyed Share Certificates. No certificate or certificates for shares of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except upon production of such evidence of the loss, theft or destruction, and upon such indemnification and payment of costs of the Corporation and its agents to such extent and in such manner as the Board of Directors may from time to time prescribe. The Board of Directors, in its discretion, and as a condition precedent to the issuance of any new certificate, may require the owner of any certificate alleged to have been lost, stolen or destroyed to furnish the Corporation with a bond, in such sum and with such surety or sureties as it may direct, as indemnity against any claim that may be made against the Corporation in respect of such lost, stolen or destroyed certificate. Section 3 - Transfer of Shares. Shares of the Corporation shall be transferable on the books of the Corporation by the registered holder thereof in person or by the registered holder's duly authorized attorney, by delivery for cancellation of a certificate or certificates for the same number of shares, with proper endorsement consisting of either a written assignment of the certificate or a power of attorney to sell, assign or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby, either written thereon or attached thereto, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. Such endorsement may be either in blank or to a specified person, and shall have affixed thereto all stock transfer stamps required by law. *Except as otherwise provided by law, not more than twenty percent of the aggregate number of shares of stock of the Corporation outstanding in any class or series shall at any time be owned of record or beneficially or voted by or for the account of aliens (as defined below). Shares of stock shall not be transferable on the books of the Corporation to any alien if, as a 3/21/83 *Revised 9/19/94 19 result of such transfer, the aggregate number of shares of stock in any class or series owned by or for the account of aliens shall be twenty percent or more of the number of shares of stock then outstanding in such class or series. The Board of Directors may make such rules and regulations as it shall deem necessary or appropriate so that accurate records may be kept of the shares of stock of the Corporation owned of record or beneficially or voted by or for the account of aliens or to otherwise enforce the provisions of this Section 3. As used in this Section 3, the word "alien" shall mean the following and their representatives: any individual not a citizen of the United States of America; a partnership, unless a majority of the partners are non-aliens and a majority interest in the partnership profits is held by nonaliens; a foreign government; a corporation, joint-stock company or association organized under the laws of a foreign country; any other corporation of which any officer or more than one-fourth of the directors are aliens, or of which more than one- fourth of any class or series of stock is owned of record or voted by or for the account of aliens; and any other corporation, joint-stock company or association controlled directly or indirectly by one or more of the above. ARTICLE V OTHER MATTERS Section 1 - Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation and such other appropriate legend as the Board of Directors may from time to time determine. In lieu of the corporate seal, when so authorized by the Board, a facsimile thereof may be affixed or impressed or reproduced in any other manner. Section 2 - Amendments. By-Laws of the Corporation may be amended, repealed or adopted by vote of the holders of the shares at the time entitled to vote in the election of any directors. By-Laws may also be 3/21/83 20 amended, repealed, or adopted by the Board of Directors, but any By-Law adopted by the Board may be amended or repealed by the shareholders entitled to vote thereon as hereinabove provided. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By- Law so adopted, amended or repealed, together with a concise statement of the changes made. 3/21/83 21 EX-11 3 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE EXHIBIT 11 ROCHESTER TELEPHONE CORPORATION CONSOLIDATED COMPUTATION OF NET INCOME PER AVERAGE SHARE OF COMMON STOCK ON A FULLY DILUTED BASIS
YEAR ENDED DECEMBER 31, --------------------------------------- 1993 1992 1991 1990 1989 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income applicable to common stock...... $81,533 $68,243 $77,857 $50,743 $82,749 Add:Interest on convertible deben- tures............................... 553 561 562 594 611 ------- ------- ------- ------- ------- $82,086 $68,804 $78,419 $51,337 $83,360 Less: Increase in related federal income taxes................... 194 191 191 202 208 ------- ------- ------- ------- ------- Adjusted income applicable to common stock................................. $81,892 $68,613 $78,228 $51,135 $83,152 ======= ======= ======= ======= ======= Average common shares outstanding (excluding common stock equivalents).. 33,705 33,319 32,103 29,674 28,966 Adjustments for: Convertible debentures............... 251 264 265 338 460 Stock Options........................ 30 -- -- -- -- ------- ------- ------- ------- ------- Adjusted common shares assuming conversion of outstanding convertible debentures and stock options at the beginning of each period(1)........... 33,986 33,583 32,368 30,012 29,426 ======= ======= ======= ======= ======= Net income per average share of common stock on a fully diluted basis........ $ 2.41 $ 2.04 $ 2.42 $ 1.70 $ 2.83
- -------- (1) As set forth in Notes 5, 6 and 7 of the Notes to Consolidated Financial Statements. -----END PRIVACY-ENHANCED MESSAGE-----