-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UpkEPXuUPEfOF0XTPIQIOZLGCVqKTYLreTqEyhCEsb3W/2C/ObDon8B8wVrMDxkK QKPzeUZbXmfMUKNmolNayQ== 0000084567-98-000011.txt : 19980515 0000084567-98-000011.hdr.sgml : 19980515 ACCESSION NUMBER: 0000084567-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER CORP /NY/ CENTRAL INDEX KEY: 0000084567 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 160613330 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04166 FILM NUMBER: 98620594 BUSINESS ADDRESS: STREET 1: ROCHESTER TEL CENTER STREET 2: 180 S CLINTON AVE CITY: ROCHESTER STATE: NY ZIP: 14646-0995 BUSINESS PHONE: 7167771000 FORMER COMPANY: FORMER CONFORMED NAME: ROCHESTER TELEPHONE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FRONTIER CORP 10Q 1Q 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 From the transition period from to ______ Commission file number 1-4166 FRONTIER CORPORATION (Exact name of registrant as specified in its charter) New York 16-0613330 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 180 South Clinton Avenue, Rochester, NY 14646-0700 (Address of principal executive offices) (Zip Code) (716) 777-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $1.00 Par Value Common Stock 171,212,786 shares as of April 30, 1998 FRONTIER CORPORATION Form 10-Q Index Page Number Part I. FINANCIAL INFORMATION Item 1. Financial Statements Business Segment Information for the three months ended March 31, 1998 and March 31, 1997 3 Consolidated Statements of Income for the three months ended March 31, 1998 and March 31, 1997 4 Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 5 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and March 31, 1997 6 Notes to Consolidated Financial Statements 7-11 Item 2. Management's Discussion of Results of Operations and Analysis of Financial Condition 12-19 Part II. OTHER INFORMATION Item 1. Legal Proceedings 19-21 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 Index to Exhibits 25 FRONTIER CORPORATION Business Segment Information (Unaudited) 3 Months Ended March 31, In thousands of dollars 1998 1997 - -------------------------------------------------------------- Integrated Services Revenues $449,546 $405,299 Costs and Expenses 433,353 395,095 - -------------------------------------------------------------- Operating Income (Loss): Operating Income Before Other Charges $ 16,193 $ 10,204 Other Charges (6,528) (96,600) - -------------------------------------------------------------- Total Operating Income (Loss) $ 9,665 $ (86,396) Depreciation and Amortization $ 25,930 $ 22,939 Capital Expenditures $ 55,285 $ 57,471 Identifiable Assets $1,393,897 $1,173,516 - -------------------------------------------------------------- Local Communications Services Revenues $173,098 $ 163,330 Costs and Expenses 109,506 103,616 - -------------------------------------------------------------- Total Operating Income $ 63,592 $ 59,714 Depreciation and Amortization $ 28,343 $ 27,285 Capital Expenditures $ 22,969 $ 15,356 Identifiable Assets $946,520 $ 903,355 - -------------------------------------------------------------- Corporate Operations and Other Revenues $ 9,354 $ 8,947 Costs and Expenses 14,597 10,831 - -------------------------------------------------------------- Total Operating Loss $ (5,243) $(1,884) Depreciation and Amortization $ 961 $ 862 Capital Expenditures $ 7,251 $ 6,733 Identifiable Assets $256,821 $205,937 - -------------------------------------------------------------- Consolidated Revenues $631,998 $577,576 Costs and Expenses 557,456 509,542 - -------------------------------------------------------------- Operating Income (Loss): Operating Income Before Other Charges $ 74,542 $68,034 Other Charges (6,528) (96,600) - -------------------------------------------------------------- Total Operating Income (Loss) $ 68,014 $(28,566) Depreciation and Amortization $ 55,234 $51,086 Capital Expenditures $ 85,505 $79,560 Identifiable Assets $2,597,238 $2,282,808 ============================================================== See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Consolidated Statements of Income (Unaudited) In thousands of dollars, 3 Months Ended March 31, except per share data 1998 1997 - ------------------------------------------------------------ Revenues $631,998 $577,576 - ------------------------------------------------------------ Costs and Expenses Operating expenses 485,747 445,451 Depreciation and amortization 55,234 51,086 Taxes other than income taxes 16,475 13,005 Other charges 6,528 96,600 - ------------------------------------------------------------ Total Costs and Expenses 563,984 606,142 - ------------------------------------------------------------ Operating Income (Loss) 68,014 (28,566) Interest expense 13,431 10,618 Other income and expense: Gain on sale of assets - 18,765 Equity earnings from unconsolidated wireless interests 2,458 1,490 Interest income 1,198 734 Other income, net 892 87 - ------------------------------------------------------------- Income (Loss) Before Taxes 59,131 (18,108) Income taxes 25,217 (2,206) - ------------------------------------------------------------- Consolidated Net Income (Loss) 33,914 (15,902) Dividends on preferred stock 251 254 - ------------------------------------------------------------- Basic Income (Loss) Applicable to Common Stock 33,663 (16,156) Diluted earnings adjustment 90 - - ------------------------------------------------------------- Diluted Income (Loss) Applicable to Common Stock $ 33,753 $(16,156) - ------------------------------------------------------------- Basic Earnings (Loss) Per Common Share $ .20 $ (.10) Average shares outstanding 170,071 167,006 - ------------------------------------------------------------- Diluted Earnings (Loss) Per Common Share $ .20 $ (.10) Average shares outstanding 172,804 167,006 ============================================================= See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Consolidated Balance Sheets March 31, December 31, 1998 1997 In thousands of dollars, except share data (Unaudited) - --------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 59,302 $ 26,303 Accounts receivable, (less allowance for uncollectibles of $29,034 and $25,100, respectively) 411,941 380,324 Materials and supplies 13,794 12,312 Deferred income taxes 30,315 33,948 Prepayments and other 32,531 37,418 - ------------------------------------------------------------- Total Current Assets 547,883 490,305 Property, plant and equipment, net 1,126,825 1,046,884 Goodwill and customer base,net 511,073 517,754 Deferred and other assets 411,457 446,574 - ------------------------------------------------------------- Total Assets $2,597,238 $2,501,517 ============================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 371,362 $ 340,104 Dividends payable 38,306 36,798 Debt due within one year 6,468 9,943 Taxes accrued 34,489 16,023 Other liabilities 72,641 90,108 - ------------------------------------------------------------- Total Current Liabilities 523,266 492,976 Long-term debt 985,524 934,680 Deferred income taxes 19,693 10,927 Deferred employee benefits obligation 88,370 88,562 - ------------------------------------------------------------- Total Liabilities 1,616,853 1,527,145 - ------------------------------------------------------------- Shareholders' Equity Preferred stock 20,126 20,126 Common stock, par value $1.00, authorized 300,000,000 shares; 170,899,781 shares and 170,500,676 shares issued in 1998 and 1997, respectively 170,900 170,501 Capital in excess of par value 552,322 541,458 Retained earnings 248,328 253,045 Accumulated other comprehensive income 3,863 3,418 - ------------------------------------------------------------- 995,539 988,548 Less - Treasury stock, 10,949 shares in 1998 and 10,849 shares in 1997, at cost 244 231 Unearned compensation - restricted stock plan 14,910 13,945 - ------------------------------------------------------------- Total Shareholders' Equity 980,385 974,372 - ------------------------------------------------------------- Total Liabilities and Shareholders' Equity $2,597,238 $2,501,517 ============================================================= See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Consolidated Statements of Cash Flows (Unaudited) 3 Months Ended March 31, In thousands of dollars 1998 1997 - ------------------------------------------------------------------------ Operating Activities Net income (loss) $33,914 $(15,902) - ------------------------------------------------------------------------ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Other charges 6,528 96,600 Depreciation and amortization 55,234 51,086 Gain on sale of assets - (18,765) Equity earnings from unconsolidated wireless interests (2,458) (1,490) Other, net 447 304 Changes in operating assets and liabilities, exclusive of impacts of dispositions and acquisitions: Increase in accounts receivable (30,819) (10,059) Increase in materials and supplies (1,482) (1,414) Decrease (increase) in deferred income taxes 25,397 (39,870) Decrease (increase) in prepayments and other assets 5,035 (7,792) Increase in deferred and other assets (8,434) (7,669) Increase in accounts payable 10,617 34,482 Increase (decrease) in taxes accrued and other liabilities 12,399 (37,151) (Decrease) increase in deferred employee benefits obligation (191) 587 - ---------------------------------------------------------------------- Total adjustments 72,273 58,849 - ---------------------------------------------------------------------- Net cash provided by operating activities 106,187 42,947 - ---------------------------------------------------------------------- Investing Activities Expenditures for property, plant and equipment (20,203) (45,596) Deposits for capital projects (64,036) (31,761) Investment in cellular partnerships (798) 784 Proceeds from asset sales - 32,889 Other investing activities - 118 - ---------------------------------------------------------------------- Net cash used in investing activities (85,037) (43,566) - ---------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 55,656 40,721 Repayments of debt (8,051) - Dividends paid (36,746) (35,871) Treasury stock, net (13) (2,468) Issuance of common stock 1,003 274 - ---------------------------------------------------------------------- Net cash provided by financing activities 11,849 2,656 - ---------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 32,999 2,037 Cash and Cash Equivalents at Beginning of Period 26,303 37,411 - ---------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $59,302 39,448 ====================================================================== See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Notes to Consolidated Financial Statements (Unaudited) Note 1: Consolidation The consolidated financial statements of Frontier Corporation (the "Company" or "Frontier") included herein, are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with the Annual Report of the Company on Form 10-K for the year ended December 31, 1997. The consolidated financial information includes the accounts of Frontier Corporation and its majority-owned subsidiaries after elimination of all significant intercompany transactions. Investments in entities in which the Company does not have a controlling interest are accounted for using the equity method. Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform with current year presentation. Note 2: Acquisitions On February 27, 1998, the Company acquired GlobalCenter, Inc. (renamed "Frontier GlobalCenter, Inc." or "GlobalCenter"), a leading provider in digital distribution, Internet and data services headquartered in Sunnyvale, California. Under the terms of the merger agreement, the Company acquired all of the outstanding shares of GlobalCenter. The total shares issued by the Company to effect the merger were 6.4 million. At the time of the merger, GlobalCenter had 1.1 million stock options and warrants outstanding as converted into Frontier equivalents. As they vest, the options and warrants are exercisable for the purchase of an equal number of Frontier shares. This transaction has been accounted for as a pooling of interests and, accordingly, historical information has been restated to include GlobalCenter. Combined and separate results of Frontier Corporation and GlobalCenter were as follows: Frontier In Millions Corporation GlobalCenter Combined - ------------------------------------------------------------ One month ended January 31, 1998 (unaudited) Revenues $ 205.5 $ 2.5 $ 208.0 Net income $ 14.7 $ (1.0) $ 13.7 ============================================================ Three months ended March 31, 1997 (unaudited) Revenues $ 573.4 $ 4.2 $ 577.6 Net income $ (13.6) $ (2.3) $ (15.9) ============================================================ In February 1997, the Company completed its purchase of R.G. Data Incorporated (renamed "Frontier Data Systems Corp." or "FNSC"), a privately held upstate New York based computer and data networking equipment and services company. A total of 110,526 shares of Frontier common stock held in treasury were reissued in exchange for all of the shares of R.G. Data Incorporated. The treasury shares were acquired through open market purchases. This transaction was accounted for as a purchase. Note 3 : Other Charges In the first quarter of 1998, the Company recorded a $6.5 million pre-tax acquisition related charge associated with the GlobalCenter transaction. These charges include investment banker, legal fees and other direct costs. In October 1997, the Company recorded a pre-tax charge of $86.8 million consisting of a restructuring charge of $43.0 million and a provision for asset and lease impairments of $43.8 million. These reserves are included in the "Other liabilities" caption in the Consolidated Balance Sheets. The remaining restructuring reserve balance of $8.6 million at March 31, 1998, which primarily relates to program and cancellation activities, is adequate to cover the exit activities. The provision for asset and lease impairments primarily relates to long term assets and certain lease obligations the Company is in the process of disposing of, or exiting. In March 1997, the Company recorded a $96.6 million pre- tax charge primarily related to the write-off of certain network facilities no longer required as a result of the migration of the Company's major carrier customer's one-plus traffic volume to other networks and the Company's overall network integration efforts. The Company completed the decommissioning of these redundant facilities during the first quarter of 1998. Note 4: Gain on Sale of Assets On January 31, 1997, the Company completed the sale of its 69.5% equity interest in the South Alabama Cellular Communications Partnership. The sale resulted in a pre-tax gain of $18.8 million. The Company decided to redeploy these resources into more strategic assets as the assets sold were not critical to the achievement of the Company's overall business strategy. Note 5: Earnings Per Share The Company adopted the provisions of Financial Accounting Standards Board ("FAS") Statement No. 128, "Earnings Per Share" ("EPS") effective December 31, 1997. This statement simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share", and makes them comparable to international earnings per share standards. Basic EPS are based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS are based on the weighted average number of shares of common stock and common stock equivalents (options, warrants and convertible debentures) outstanding during the period, computed in accordance with the treasury stock method. Historical earnings per share have been restated to conform with the provisions of FAS 128. The following is a reconciliation of the denominator used in the computation of diluted earnings per share: Three Months Ended March 31, 1998 1997 - ---------------------------------------------------------- Average Common Shares Outstanding 170,071 167,006 Options and Warrants (1) 2,230 - Convertible Debentures (1) 503 - - ---------------------------------------------------------- Adjusted Common Shares 172,804 167,006 ========================================================== (1) Convertible debentures and common stock equivalents are not applicable to the calculation for 1997 due to the Company's net loss position. The adjustment to net income for the computation of diluted earnings per share represents the after-tax effect of interest expense on convertible debentures. Note 6: Comprehensive Income The Company adopted the provisions of FAS 130, "Reporting Comprehensive Income" as of January 1, 1998. This statement establishes standards for reporting and display of comprehensive income and its components. This statement requires reporting, by major components and as a single total, the change in net assets during the period from nonshareholder sources. Adoption of this standard did not impact the Company's consolidated financial position, results of operations or cash flow. The Company has determined that at December 31, 1998 it will display comprehensive income in the Consolidated Statements of Shareholders' Equity. The reconciliation of net income (loss) to comprehensive net income (loss) is as follows: In thousands of dollars Three Months Ended March 31, 1998 1997 - --------------------------------------------------------- Net income (loss) $33,914 $(15,902) Foreign currency translation adjustment 445 (309) - --------------------------------------------------------- Total comprehensive income (loss)$34,359 $(16,211) ========================================================= At March 31, 1998 and December 31, 1997, accumulated other comprehensive income, as reflected in the Consolidated Balance Sheets is comprised of the following: March 31, December 31, 1998 1997 - ---------------------------------------------------------- Foreign currency translation adjustment $ 881 $ 436 Minimum pension liability 2,982 2,982 -------------------------------------------------------- Accumulated other comprehensive income $3,863 $3,418 ======================================================== Note 7: New Accounting Pronouncements The Company will adopt the provisions of FAS 131, " Disclosures about Segments of an Enterprise and Related Information," effective December 31, 1998. This statement establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of this statement will not impact the Company's consolidated financial position, results of operations or cash flows. In the initial year of application, comparative information for earlier years will be restated. The Company is currently evaluating the disclosures that will be required by this statement. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5") which requires that start-up costs be expensed as incurred. The Company will adopt the provisions of SOP 98-5 in the second quarter of 1998. Adoption of this statement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. Note 8: Cash Flows For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Actual interest paid was $12.9 million for both three month periods ending March 31, 1998 and March 31, 1997. Income taxes paid totaled $11.5 and $2.2 million for the periods ended March 31, 1998 and March 31, 1997, respectively. Interest costs associated with the construction of capital assets, including the SONET based fiber optic network build, are capitalized. Total amounts capitalized for the first three months of 1998 and 1997 were $3.7 million and $2.5 million, respectively. Note 9: Commitments and Contingencies In connection with the Company's capital program, certain commitments have been made for the purchase of materials and equipment. In October 1996, construction began on the SONET based fiber optic network build. Total capital expenditures for 1998 are currently projected to be in the range of $525.0 million. Through March 31, 1998, cumulative capital expenditures relating to the SONET build totaled $294.7 million. At March 31, 1998 and December 31, 1997, respectively, $212.1 million and $238.2 million of deposits for the SONET build are included in the "Deferred and other assets" caption in the Consolidated Balance Sheets. Note 10: Subsequent Event On April 30, 1998, the Company completed the sale of Minnesota Southern Cellular Telephone Company. The Company does not anticipate that the after-tax gain on the sale will be material to its financial statements. Item 2 - Management's Discussion of Results of Operations and Analysis of Financial Condition For the Three Months Ended March 31, 1998 and 1997 The matters discussed throughout this Form 10-Q, except for historical financial results contained herein, may be forward-looking in nature or "forward-looking statements." Actual results may differ materially from the forecasts or projections presented. Forward-looking statements are identified by such words as "expects," "anticipates," "believes," "intends," "plans" and variations of such words and similar expressions. The Company believes that its primary risk factors include, but are not limited to: changes in the overall economy, the nature and pace of technological change, the number and size of competitors in the Company's market, changes in law and regulatory policy and the mix of products and services offered in the Company's markets. Any forward-looking statements in this March 31, 1998 Form 10-Q should be evaluated in light of these important risk factors. For additional disclosure regarding risk factors refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. DESCRIPTION OF BUSINESS Frontier Corporation (the "Company" or "Frontier") provides integrated telecommunications services to business, carrier and targeted residential customers nationwide, in Canada and the United Kingdom. RESULTS OF OPERATIONS Consolidated Consolidated revenues for the first quarter of 1998 were $632.0 million, an increase of $54.4 million or 9.4% over the first quarter of 1997. Excluding non-recurring items, operating income was $74.5 million, an increase of $6.5 million or 9.6% over the same period for the prior year. Operating results continue to be positively impacted by revenue growth in several areas. The most significant growth was generated by the Carrier Services business. Carrier Services revenues grew $28.8 million or 27.4% over the first quarter of 1997. The Carrier Services group growth reflects a growing base of customers including US West. The Company's calling card services agreement with US West provides US West the ability to offer calling card services to its customers and is expected to generate in excess of $50.0 million in incremental revenue for the Company over the 30 month term of the agreement. On a year-to-date basis, excluding non-recurring items, consolidated operating margins were consistent with 1997. Operating expenses grew $47.9 million or 9.4%, offsetting revenue growth. Increased expenses were primarily associated with new revenue initiatives and distribution channels and are proportionate to the increase in revenue for the same period. Reported diluted earnings per share for the first quarter of 1998 was $.20, an increase of $.30 over the first quarter of 1997. Consolidated net income was $33.9 million, compared to a loss of $15.9 million for the comparable 1997 period. Excluding non-recurring items, diluted earnings per share for the first quarter of 1998 and 1997 was $.23 and $.21, respectively. Consolidated net income for the same periods was $39.7 million and $35.6 million, respectively. Operating results for 1998 and 1997 were affected by certain one-time events. In the first quarter of 1998, the Company acquired GlobalCenter, Inc., ("GlobalCenter") a leader in digital distribution, Internet and data services and recorded a pre-tax acquisition related charge of $6.5 million ($5.8 million post-tax) associated with the transaction. These charges include investment banker, legal fees and other direct costs. In the first quarter of 1997, the Company recorded a $62.8 million charge, net of a tax benefit of $33.8 million, relating to the write-off of certain leased network facilities no longer required for long distance traffic volumes. During the first quarter of 1997, the Company also completed the sale of its 69.5% equity interest in the South Alabama Cellular Communications Partnership. The sale resulted in an after-tax gain of $11.2 million. Business Segments The Company reports its operating results in three segments: Integrated Services (formerly "Long Distance Communications Services"), Local Communications Services and Corporate Operations and Other. A review of the 1998 and 1997 first quarter results of each business segment follows. Integrated Services Integrated Services revenues totaled $449.5 million in the first quarter of 1998, an increase of $44.2 million or 10.9% over the first quarter of 1997. Revenue growth was driven by a growing base of carrier customers, the CLEC customer base and data sales from Frontier GlobalCenter. During the first quarter of 1998, Carrier Services revenue grew $28.8 million or 27.4%. Significant multi-year carrier agreements, including the agreement with US West, drove this increased growth. The Company provides local service as a CLEC primarily on a resale basis. The Company also currently provides local services as a facilities-based CLEC from its own switches in New York City, Minneapolis and Boston. The Company anticipates that up to four additional switches will be installed by the end of 1998, and two will be installed during 1999. The switches are being placed in cities that are on the Company's SONET network, which will provide Frontier with the opportunity to expand its offerings of combined local and long distance services into additional markets. As of March 31, 1998, Frontier is serving in excess of 116,000 ANIs, or access lines, predominantly through resale in markets where it is not the incumbent local exchange carrier. At the end of 1997, Frontier was serving in excess of 100,000 ANIs. GlobalCenter's revenues for the first quarter of 1998 were $8.5 million, an increase of 104.7 % over the first quarter of 1997. Revenue growth was attributable to the digital distribution product set which includes web hosting as well as an increase in customer base. Operating income for the Integrated Services segment, excluding non-recurring charges, increased 58.7% to $16.2 million as compared to the same 1997 period. Operating margin as a percent of revenue, excluding non-recurring charges, increased from 2.5% in the first quarter of 1997 to 3.6% in the first quarter of 1998. The increase in operating margin in the first quarter is driven by higher revenue and an improvement in the cost structure. Cost of access represented approximately 63.8% of total integrated services revenue for the first three months of 1998 as compared to 64.4% for the same period in 1997. The lower cost of access percentage reflects an increase in volume as fixed costs are spread over a larger traffic base, a change in the revenue mix, and a reduction in costs associated with international traffic. Construction of the Company's SONET based fiber optic network is on schedule through the first quarter of 1998. The network is expected to be completed by the end of 1998. As of March 31, 1998, approximately 30% of the network is carrying traffic. Frontier anticipates that its operating margins will improve throughout 1998, particularly in the later portion of the year as the SONET network is completed and marketing and sales investments are realized. Local Communications Services Local Communications Services includes the Company's local telephone operations, consisting of 33 telephone operating subsidiaries in 13 states. Also included in this segment are the revenues and expenses of Frontier Communications of Rochester Inc., a competitive telecommunications company formed January 1, 1995 that provides an array of services on a retail basis in the Rochester, New York marketplace. Consequently, the Local Communications Services segment includes both wholesale and retail local service provided in the Rochester, New York market. Revenues for Local Communications Services were $173.1 million for the first quarter of 1998, an increase of $9.8 million or 6.0% over the comparable period in 1997. The revenue growth in this segment includes demand for high capacity special access lines, Internet service and enhanced calling features. Access lines increased 2.7% and access minutes of use increased 3.8% over the same period in the prior year. Costs and expenses in the first quarter of 1998 for Local Communications Services were $109.5 million, an increase of $5.9 million or 5.7% over the first quarter of 1997. The increase is attributed to increased depreciation expense, higher operating costs for repair and maintenance in 1998 and an increase in customer service costs due to access line growth. A portion of the repair and maintenance increase was caused by severe flooding and ice storms during the first quarter of 1998. Operating income for the first quarter of 1998 was $63.6 million, an increase of $3.9 million or 6.5% over the first quarter of 1997. Operating margins for the three months ended March 31, 1998 improved to 36.7% in 1998. During late 1995, management committed to a major switch consolidation plan at its Frontier Telephone of Rochester, Inc. and Frontier Communications of New York subsidiaries. The three-year plan to consolidate and reduce the number of host switches by over 60% is projected to improve network efficiency and reduce the cost of maintenance and software upgrades. As of March 31, 1998 the project is substantially complete. Corporate Operations and Other Corporate operations is comprised of expenses traditionally associated with a holding company, including executive and board of directors' expenses, corporate finance and treasury, investor relations, corporate planning, legal services and business development. The Other category includes Frontier Network Systems Inc. ("FNS"). FNS markets and installs telecommunications systems and equipment. This segment also includes wireless operations from Minnesota RSA No. 10 and the Company's 69.5% interest in Alabama RSA No. 4 and No. 6. The sale of Minnesota RSA No. 10 closed on April 30, 1998. The Alabama interest was sold in January 1997. The Company completed its purchase of R.G. Data Incorporated (renamed "Frontier Data Systems Inc.") in February 1997. R.G. Data Incorporated was a privately held, upstate New York based computer and data networking equipment and services company. R.G. Data Incorporated's operations are consolidated with FNS for reporting purposes. The change in results for this segment are influenced by the sale of the Company's wireless property and the addition of Frontier Data Systems in the prior year. Other Income Statement Items Interest Expense Interest expense was $13.4 million and $10.6 million in the three month periods ending March 31, 1998 and March 31, 1997, representing an increase of $2.8 million or 26.5%. The overall increase in interest expense is the result of higher levels of debt outstanding and is partially offset by an increase in capitalized interest of $1.2 million for the same period. The increase in capitalized interest is primarily attributable to the Company's capital program driven by the SONET based fiber optic network build. Gain on Sale of Assets In February 1997, the Company completed the sale of its 69.5% equity interest in the South Alabama Cellular Communications Partnership. The sale resulted in an after- tax gain of $11.2 million, or $.07 per share. The Company decided to redeploy resources into more strategic assets as the assets sold were not critical to the achievement of the Company's overall business strategy. Equity Earnings from Unconsolidated Wireless Interests The Company's minority interests in wireless operations and its 50% interest in the Frontier Cellular joint venture with Bell Atlantic are accounted for using the equity method. This method of accounting results in the Company's proportionate share of earnings being reflected in a single line item below operating income. Equity earnings from the Company's interests in wireless partnerships in the first quarter of 1998 were $2.5 million, an increase of $1.0 million or 65.0% over the first quarter of 1997. The improvement in equity earnings is driven by customer growth and increased operating efficiencies as compared to the same period in the prior year. Income Taxes The effective income tax rate (normalized for nonrecurring items) of 39.5% and 40.3% for the quarter ended March 31, 1998 and 1997, respectively, is relatively consistent. FINANCIAL CONDITION Review of Cash Flow Activity Earnings before interest, taxes, depreciation and amortization ("EBITDA") is a common measurement of a company's ability to generate cash flow from operations. EBITDA should be used as a supplement to, and not in place of, cash flow from operating activities. The Company's EBITDA was $129.8 million and $119.1 million, excluding nonrecurring charges, for the three month periods ending March 31, 1998 and 1997, respectively. The increase in EBITDA corresponds with the improved operating results of the Company. Cash provided from operations for the three months ending March 31, 1998 increased $63.2 million or 147.3% to $106.2 million as a result of improved operating results as compared to the same period in the prior year. Changes in working capital include an increase in accounts receivable, accounts payable and taxes accrued and other liabilities, partially offset by a decrease in deferred income taxes. The increases in accounts receivable, accounts payable, and taxes accrued and other liabilities are the result of improved operating results. The decrease in deferred income taxes is largely attributable to the effect of nonrecurring charges recorded in 1997. Cash used for investing activities increased $41.5 million or 95.2%. This increase is being driven by an increase in capital expenditures during the first three months of 1998 of $6.9 million or 8.9%. The increase in capital expenditures is principally due to the SONET based fiber optic network build. Cash utilized for capital expenditures of $77.4 million for the three months ended March 31, 1997 was partially funded by the proceeds received from the sale of the Company's equity interest in the South Alabama Cellular Communications partnership which closed in the first quarter of 1997. Cash provided from financing activities increased $9.2 million during the first three months of 1998 as compared to the same period in 1997. This net inflow of cash is the result of increased commercial paper borrowings during the period which were driven by the Company's capital program as well as a refinancing of GlobalCenter debt subsequent to the pooling of interests transaction. Debt The Company's total debt amounted to $992.0 million at March 31, 1998, an increase of $47.4 million from December 31, 1997. This higher debt level is largely driven by the Company's capital program, including the SONET based fiber optic network build. Debt Ratio and Interest Coverage The Company's debt ratio (total debt as a percent of total capitalization) was 50.3% at March 31, 1998, as compared with 49.2% at December 31, 1997. Pre-tax interest coverage, excluding nonrecurring charges, was 4.6 times for the three months ended March 31, 1998, as compared with 5.4 times for the same period in 1997. Capital Spending Through March 1998, gross capital expenditures amounted to approximately $85.5 million, as compared to $79.6 million in the prior year. The Company currently projects its capital expenditures to be in the range of $525.0 million in 1998. Through March 1998, cumulative capital expenditures relating to the SONET network totaled $294.7 million. The Company anticipates financing its capital program through a combination of internally generated cash from operations and external financing. Dividends On March 23, 1998, the Board of Directors declared the first quarter 1998 dividend of 22.25 cents per share on the Company's common stock, payable May 1, 1998 to shareholders of record on April 15, 1998. New Accounting Pronouncements The Company will adopt the provisions of Financial Accounting Standards Board Statement No. 131, " Disclosures about Segments of an Enterprise and Related Information," effective December 31, 1998. This statement establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of this statement will not impact the Company's consolidated financial position, results of operations or cash flows. In the initial year of application, comparative information for earlier years will be restated. The Company is currently evaluating the disclosures that will be required by this statement. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5") which requires that start-up costs be expensed as incurred. The Company will adopt the provisions of SOP 98-5 in the second quarter of 1998. Adoption of this statement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. OTHER ITEMS Open Market Plan The Company began its fourth year of operations under the Open Market Plan in January 1998. The Open Market Plan promotes telecommunications competition in the Rochester, New York marketplace by providing for (1) interconnection of competing local networks including reciprocal compensation for terminating traffic, (2) equal access to network databases, (3) access to local telephone numbers, (4) service provider telephone number portability, and (5) certain wholesale discounts to resellers of local services. The inherent risk associated with opening the Rochester market to competition is that some customers are able to purchase services from competitors, which may reduce the number of retail customers and potentially cause a decrease in the revenues and profitability for the Company. Increased competition may also lead to additional price decreases for services, adversely impacting the Company's margins. However, results since implementation of the Open Market Plan indicate that a stimulation of demand in the use of the network and new product revenue may offset the losses of some retail customers. An additional positive feature of the Open Market Plan provides that the Company can retain additional earnings achieved through operating efficiencies. Previously, these earnings would have been shared with customers. After three years of operating in a competitive marketplace, the Rochester local exchange carrier retains a market share of approximately 98% of wholesale and approximately 95% of retail local service access lines in the Rochester, New York operating territory. During the seven year period of the Open Market Plan, rate reductions of $21.0 million (the "Rate Stabilization Plan") will be implemented for Rochester area consumers, including $15.0 million of which occurred through 1997, and an additional $1.5 million which commenced in January 1998. Rates charged for basic residential and business telephone service may not be increased during the seven year period of the Plan. The Company is allowed to raise prices on certain enhanced products such as caller ID and call forwarding. Management believes there are significant market and business opportunities associated with the Company's Open Market Plan. However, there are also uncertainties associated with the Open Market Plan. In the Company's opinion, the most significant risks relate to increased competition in the Rochester, New York market and the risk inherent in the Rate Stabilization Plan. There can be no assurance that the changing regulatory environment will not have a negative impact on the Company. Dividend Policy The Open Market Plan prohibits the payment of dividends by the Company's subsidiary, Frontier Telephone of Rochester, Inc. ("FTR") to Frontier if (i) FTR's senior debt is downgraded to "BBB" by Standard & Poor's ("S&P"), or the equivalent rating by other rating agencies, or is placed on credit watch for such a downgrade, or (ii) a service quality penalty is imposed under the Open Market Plan. Dividend payments to Frontier also require the Company's directors to certify that such dividends will not impair FTR's service quality or its ability to finance its short and long-term capital needs on reasonable terms while maintaining an S&P debt rating target of "A". In 1996, FTR failed to achieve the service quality levels required by the Open Market Plan. On December 19, 1996, pursuant to the Open Market Plan, FTR requested the New York State Public Service Commission ("NYSPSC") staff to exclude certain months from the calculation used to measure service quality, due to operating conditions considered by management to be abnormal and beyond FTR's control. In April 1997, FTR received notice from the NYSPSC that its request for a waiver of certain conditions in the Open Market Plan related to service quality results was denied. The NYSPSC's ruling has resulted in a temporary restriction on the flow of cash dividends from FTR to Frontier and a refund to FTR's customers of $.9 million. Reserves sufficient to cover the refund were established in 1996. On October 22, 1997, the NYSPSC adopted an order requiring FTR to issue refunds of approximately $2.60 per customer. These refunds have been completed. The temporary restriction of dividend payments to Frontier will remain in place until the NYSPSC is satisfied that FTR's 1997 service levels demonstrate that FTR has rectified the service deficiency. The NYSPSC is currently examining service level data for the period 1993-1997 and may reopen the calculation of service levels for one or more of these years. Frontier has had continuing discussions with the NYSPSC and a decision resolving outstanding issues is now expected in midyear. Based on the level of customer complaints to the NYSPSC in 1996 and 1997, FTR will be required to refund approximately $150,000 in 1998. Reserves sufficient to cover this refund were established in 1997. Part II - Other Information Item 1. Legal Proceedings 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 fifteen corporate defendants, including Rotelcom Inc., a wholly-owned subsidiary of the registrant held through intervening subsidiaries (now named Frontier Network Systems Inc. or FNS). The plaintiffs seek 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 in 1994. In addition to FNS, 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"). On November 21, 1997, the EPA issued a Proposed Remedial Action Plan" ("PRAP"). In the PRAP, the EPA outlined four alternative plans for remediating the site. Total cost estimates for those alternatives range from $.5 million to $20 million. The alternative preferred by the EPA has an estimated cost of $3 million. The Company is presently evaluating the PRAP and will be consulting with the other defendants about a joint response to plaintiffs. 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 FNS, will be determined at trial or through negotiation among the parties. Since February 1994, a significant number of former American Sharecom, Inc. ("ASI") shareholders have filed and amended several and various complaints in Hennepin County (Minnesota) District Court. Included among the defendants are ASI, its former principal shareowners, Steven Simon and James Weinert, and Frontier. These suits allege generally that Simon and Weinert, with and through ASI, embarked upon a scheme to gain control of ASI and acquire all of its stock through common law fraud, breach of fiduciary duty and certain violations of the Minnesota Business Corporation Act. This Act requires shareowners in a closely held corporation to act fairly toward one another and refrain from misappropriation. Another action by a few former ASI shareholders who dissented from the cashout merger that finally took ASI private is pending in federal court in Minnesota. The federal lawsuit asserts RICO claims in addition to state common law and statutory violations. The claims against Frontier maintain only that Frontier controls the disposition of the restricted Frontier stock which was issued to Simon and Weinert in connection with the acquisition of ASI and that such stock should be held in trust for the benefit of the plaintiffs. At this time Simon and Weinert have negotiated settlements with the majority of former ASI shareholders who had asserted claims. Although it is too early to determine the outcome of the remaining suits that have not settled, Frontier, ASI and the other defendants each are contesting the claims. In connection with the acquisition of ASI by Frontier, Simon and Weinert agreed to indemnify and defend the Company for these claims. On April 10, 1997, Jeff Thompson filed a purported class action on behalf of himself and all other similarly-situated persons in Circuit Court for Marengo County Alabama. Named as defendants are Frontier Corporation, Frontier Subsidiary Telco, Inc. and Frontier Communications of the South, Inc. ("defendants"). The complaint also reserves the right to add additional defendants and identifies all of Frontier's telephone subsidiaries. Concomitant with filing the complaint, plaintiff also filed an ex parte motion for conditional class certification which the Court granted. It conditionally certified a class consisting of "All persons or entities in the United States who have been charged by defendants or their subsidiaries or affiliates a fee for `inside wire maintenance' without having given their affirmative acceptance to a repair service contract; specifically excluded from this class, however, are all employees, agents, officers, directors and affiliates of any of the Defendants and all persons or entities who have pending and/or previously filed individual (non-class) lawsuits against any of the defendants for the same claims set forth in the Complaint." On January 30, 1998, the Supreme Court of Alabama issued a writ of mandamus to the trial court ordering it to vacate its conditional class certification. In the complaint, plaintiff alleges that the Company improperly marketed and sold deregulated inside wire maintenance services to defendant's telephone subscribers pursuant to a "negative option" or "default sale" approach from January 1, 1987 to the present. Plaintiff alleges that the defendants have never had enforceable contracts with their customers for inside wire maintenance services, and have defrauded their customers. Plaintiff requests a refund of all moneys paid for inside wire maintenance services. This case is similar to a number of cases filed against other carriers with local telephone properties. The Company believes that the inside wire programs in place in its telephone properties have been implemented in accordance with the law and any applicable regulatory requirements. The liability, if any, is not expected to be material. The Company is vigorously defending against this suit, but cannot predict the outcome at this time. The Open Market Plan discussion in the Management's Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 2 of this document is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareowners was held on April 29, 1998 for the purpose of electing a board of directors and approving the ratification of auditors. All of management's nominees for directors as listed in the proxy statement were elected with the following vote: Numbers of Shares/Votes Name For Authority Withheld ----------------------------------------------------------- Patricia C. Barron 148,482,206 956,145 Joseph P. Clayton 148,537,892 900,459 Raul E. Cesan 148,516,283 922,068 Brenda E. Edgerton 148,514,544 923,807 Jairo A. Estrada 148,526,097 912,254 Michael E. Faherty 148,538,292 900,059 Alan C. Hasselwander 147,614,843 1,823,508 Robert Holland, Jr. 148,473,370 964,981 Douglas H. McCorkindale 148,486,736 951,615 Dr. Leo J. Thomas 148,526,707 911,644 The ratification of Price Waterhouse LLP as Public Accountant for the fiscal year 1998 was approved with the following vote: For 148,676,756 Against 248,999 Abstain 482,594 Broker non-votes 1 Item 5. Other Information On October 9, 1997, the FCC ordered carriers that receive "dial around" calls from payphones (certain calls sent without coins as 800 or other calls, with special access codes) to compensate payphone owners at the rate of 28.4 cents per completed call. The per-call compensation rate became effective on October 7, 1997. The FCC has yet to determine how to address the payphone compensation obligation for the period from November 7, 1996 through October 6, 1997. The Company intends to pursue challenges to the FCC order with other carriers. The Company cannot predict the outcome of future proceedings. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - See Index (b) Reports on Form 8-K: The Company filed the following reports during the quarter ended March 31, 1998. SEC Filing Date Item No. Financial Statements ---------------------------------------------------------- January 30, 1998 5 None March 2, 1998 5 None The Company filed no reports subsequent to the quarter ended March 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRONTIER CORPORATION ------------------------------------ (Registrant) Dated: May 14, 1998 /s/James G. Dole By: -------------------------------- James G. Dole Senior Vice President and Controller (principal accounting officer) INDEX TO EXHIBITS Exhibit Number Description 3.1 Restated Certificate of Incorporation Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 1995. 3.2 Amendment to Restated Certificate of Incorporated by Incorporation reference to Exhibit 3.2 to Form 10-K for the year ended December 31, 1995. 3.3 Bylaws Filed herewith 4.1 Indenture, dated as of May 21, 1997, Incorporated by between the Registrant and Chase reference to Exhibit Manhattan Bank, as Trustee 4.1 to Form 8-K, filed May 23, 1997 11 Statement re: Computation of Diluted Filed herewith Earnings Per Common Share (Unaudited) 27 Financial Data Schedule Filed herewith EX-3 2 BYLAWS Exhibit 3.3 FRONTIER 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, 1/1/95, 4/26/95, 8/16/95 1/22/96, 4/30/96, 6/16/97, 9/15/97, 3/1/98, 4/29/98) 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 (2) 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 (3) 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. Any proxy may be transmitted, authorized or executed in any manner permitted by the New York Business Corporation Law. No proxy shall be valid after the expiration of eleven months from the 3/21/83 *Revised 3/1/98 (4) 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 sixty nor less than ten days before the date of such meeting, nor more than sixty 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 **Revised 3/1/98 (5) 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 (6) 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 ten 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. 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 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, 1/1/95, 4/26/95, 8/16/95, 1/22/96, 4/30/96, 6/16/97, 9/15/97, 4/29/98 (7) 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 (8) 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, 8/16/95 (9) (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 compensation, benefits and perquisites of the chief executive officer shall be set by the outside directors of the full Board upon the recommendation of the Committee on Management. 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 3/21/83 (10) transaction of business of a committee shall consist of (a) a 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 (11) 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 (12) (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 (13) 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 (14) 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 (15) 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 (16) 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 (17) 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 (18) 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 (19) 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 (20) 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 (21) 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 EX-11 3 EX 11 RE: COMP OF DILUTED EARNINGS PER COM SHARE Exhibit 11 Frontier Corporation Computation of Diluted Earnings Per Common Share (Unaudited) In thousands of dollars, except per share data Three Months Ended March 31, 1998 1997 - -------------------------------------------------------------------------- Income (loss) applicable to common stock $ 33,663 $(16,156) Interest expense on convertible debentures, net of tax (1) 90 - - --------------------------------------------------------------------------- Adjusted income (loss) applicable to common stock $ 33,753 $(16,156) - --------------------------------------------------------------------------- Average Common Shares Outstanding 170,071 167,006 Stock options and warrants (1) 2,230 - Convertible debentures (1) 503 - - --------------------------------------------------------------------------- Adjusted common shares assuming conversion at beginning of each period 172,804 167,006 - --------------------------------------------------------------------------- Diluted Earnings Per Common Share $ .20 $ (.10) =========================================================================== (1) Convertible debentures and common stock equivalents are not applicable to the calculation for 1997 due to the Company's net loss position. EX-27 4 FIN. DATA SCHEDULE 1Q 10Q '98
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000084567 FRONTIER CORPORATION 1,000 3-MOS DEC-31-1998 MAR-31-1998 59,302 0 444,275 32,334 13,794 547,883 2,553,593 1,426,768 2,597,238 531,369 985,524 0 20,126 170,900 781,256 2,597,238 0 631,998 19,994 563,984 (892) 0 13,431 59,131 25,217 33,914 0 0 0 33,914 .20 .20
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