-----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, CrnsXBV6fclNCRgAncCyLrYkmyphmsHLlXqAsg63euGQaUOYED61dJ0FQ/tRVX8u b56dd3RoNA+6mQdeaJQhfg== 0000084567-97-000030.txt : 19970813 0000084567-97-000030.hdr.sgml : 19970813 ACCESSION NUMBER: 0000084567-97-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 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: 1934 Act SEC FILE NUMBER: 001-04166 FILM NUMBER: 97657057 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 FORM 10Q 1Q 1997 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 164,141,176 shares as of July 31, 1997 FRONTIER CORPORATION Form 10-Q Index Page Number Part I. FINANCIAL INFORMATION Item 1. Financial Statements Business Segment Information for the three months ended and for the six months ended June 30, 1997 and June 30, 1996 3 Consolidated Statements of Income for the three months ended and for the six months ended June 30, 1997 and June 30, 1996 4 Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 5 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and June 30, 1996 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-25 Part II. OTHER INFORMATION Item 1. Legal Proceedings 25-27 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 29 Signature 30 Index to Exhibits 31 FRONTIER CORPORATION Business Segment Information (Unaudited) 3 Months Ended June 30, 6 Months Ended June 30, In thousands of dollars 1997 1996 1997 1996 - ---------------------------------------------------------------------------------- Long Distance Communications Services Revenues $ 406,846 $ 497,756 $ 807,981 $ 983,858 Costs and Expenses 387,904 424,885 776,569 847,732 - ---------------------------------------------------------------------------------- Operating Income (Loss): Operating Income Before Other Charge $ 18,942 $ 72,871 $ 31,412 $ 136,126 Other Charge - - (96,600) - - ---------------------------------------------------------------------------------- Total Operating Income (Loss) $ 18,942 $ 72,871 $ (65,188)$ 136,126 Depreciation and Amortization $ 21,676 $ 20,495 $ 44,044 $ 40,013 Capital Expenditures $ 35,956 $ 24,755 $ 91,886 $ 61,985 Identifiable Assets $ 1,163,612 $1,005,311 $1,163,612 $ 1,005,311 ================================================================================== Local Communications Services Revenues $ 166,987 $ 161,383 $ 330,317 $ 319,825 Costs and Expenses 107,036 108,193 210,652 215,784 - ---------------------------------------------------------------------------------- Operating Income $ 59,951 $ 53,190 $ 119,665 $ 104,041 Depreciation and Amortization $ 27,375 $ 25,463 $ 54,660 $ 50,612 Capital Expenditures $ 28,208 $ 21,654 $ 43,564 $ 41,116 Identifiable Assets $ 897,082 $ 939,809 $ 897,082 $ 939,809 ================================================================================== Corporate Operations and Other Revenues $ 10,879 $ 11,140 $ 19,825 $ 21,745 Costs and Expenses 12,692 14,500 23,522 27,359 - ---------------------------------------------------------------------------------- Operating Income (Loss) $ (1,813) $ (3,360) $ (3,697)$ (5,614) Depreciation and Amortization $ 903 $ 1,068 $ 1,765 $ 2,089 Capital Expenditures $ 5,242 $ 5,877 $ 11,975 $ 11,185 Identifiable Assets $ 221,424 $ 238,904 $ 221,424 $ 238,904 ================================================================================== Consolidated Revenues $ 584,712 $ 670,279 $1,158,123 $ 1,325,428 Costs and Expenses 507,632 547,578 1,010,743 1,090,875 - ---------------------------------------------------------------------------------- Operating Income: Operating Income Before Other Charge $ 77,080 $ 122,701 $ 147,380 $ 234,553 Other Charge - - (96,600) - - ---------------------------------------------------------------------------------- Total Operating Income $ 77,080 $ 122,701 $ 50,780 $ 234,553 Depreciation and Amortization $ 49,954 $ 47,026 $ 100,469 $ 92,714 Capital Expenditures $ 69,406 $ 52,286 $ 147,425 $ 114,286 Identifiable Assets $ 2,282,118 $2,184,024 $2,282,118 $ 2,184,024 ================================================================================== See accompanying Notes to Consolidated Financial Statements
FRONTIER CORPORATION Consolidated Statements of Income (Unaudited) 3 Months Ended June 30, 6 Months Ended June 30, In thousands, except per share data 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------- Revenues $584,712 $670,279 $1,158,123 $1,325,428 - ---------------------------------------------------------------------------------------- Costs and Expenses Operating expenses 442,228 487,882 882,131 973,710 Depreciation and amortization 49,954 47,026 100,469 92,714 Taxes other than income taxes 15,450 12,670 28,143 24,451 Other Charge - - 96,600 - - ---------------------------------------------------------------------------------------- Total Costs and Expenses 507,632 547,578 1,107,343 1,090,875 - ---------------------------------------------------------------------------------------- Operating Income 77,080 122,701 50,780 234,553 Interest expense 11,648 11,818 22,158 23,456 Other income and expense: Gain on sale of assets - - 18,765 4,976 Equity earnings from unconsolidated wireless interests 2,783 1,685 4,272 3,140 Interest income 699 781 1,390 1,304 Other income (expense) 529 (262) 616 (989) - ---------------------------------------------------------------------------------------- Income Before Taxes and Cumulative Effect of Change in Accounting Principle 69,443 113,087 53,665 219,528 Income tax expense 26,999 43,881 24,782 85,181 - ---------------------------------------------------------------------------------------- Income Before Cumulative Effect of Change in Accounting Principle 42,444 69,206 28,883 134,347 Cumulative effect of change in accounting principle - - - (8,018) - ---------------------------------------------------------------------------------------- Net Income 42,444 69,206 28,883 126,329 Dividends on preferred stock 258 296 511 589 - ---------------------------------------------------------------------------------------- Income Applicable to Common Stock $ 42,186 $68,910 $28,372 $125,740 ======================================================================================== Dividends declared on common stock $ 35,656 $35,346 $71,309 $ 69,826 ======================================================================================== Earnings Per Common Share Income before cumulative effect of change in accounting principle $ .26 $ .42 $ .17 $ .82 Cumulative effect of change in accounting principle - - - (.05) - ---------------------------------------------------------------------------------------- Earnings Per Common Share $ .26 $ .42 $ .17 $ .77 ======================================================================================== Average Common Shares Outstanding (in thousands) 163,837 164,078 163,866 163,803 ======================================================================================== See accompanying Notes to Consolidated Financial Statements.
FRONTIER CORPORATION Consolidated Balance Sheets June 30, December 31, 1997 1996 In thousands of dollars, except share data (Unaudited) - --------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 23,082 $ 30,948 Accounts receivable, (less allowance for uncollectibles of $22,921 and $30,911, respectively) 371,661 364,256 Materials and supplies 14,180 13,198 Deferred income taxes 29,377 30,349 Prepayments and other 33,171 30,483 - --------------------------------------------------------------------------- Total Current Assets 471,471 469,234 Property, plant and equipment, net 959,997 971,259 Goodwill and customer base 522,206 535,979 Deferred income taxes 31,485 - Deferred and other assets 296,959 245,048 - --------------------------------------------------------------------------- Total Assets $2,282,118 $2,221,520 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities Accounts payable $270,957 $ 322,325 Dividends payable 35,915 35,966 Debt due within one year 5,640 6,253 Taxes accrued 43,143 34,963 Other liabilities 62,064 18,596 - --------------------------------------------------------------------------- Total Current Liabilities 417,719 418,103 Long-term debt 777,603 675,043 Deferred income taxes - 2,542 Deferred employee benefits obligation 69,733 65,479 - --------------------------------------------------------------------------- Total Liabilities 1,265,055 1,161,167 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Shareowners' Equity Preferred stock 20,125 22,611 Common stock, par value $1.00, authorized 300,000,000 shares; 164,151,350 shares and 163,731,733 shares issued in 1997 and 1996 164,151 163,732 Capital in excess of par value 508,926 500,196 Retained earnings 341,970 385,350 - --------------------------------------------------------------------------- 1,035,172 1,071,889 Less - Treasury stock, 10,849 shares in 1997 and 6,375 shares in 1996, at cost 231 147 Unearned compensation - restricted stock plan 17,878 11,389 - --------------------------------------------------------------------------- Total Shareowners' Equity 1,017,063 1,060,353 - --------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $2,282,118 $2,221,520 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Consolidated Statements of Cash Flows (Unaudited) 6 Months Ended June 30, In thousands of dollars 1997 1996 - ------------------------------------------------------------------------ Operating Activities Net income $ 28,883 $126,329 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle - 12,396 Other charge 96,600 - Depreciation and amortization 100,469 92,714 Gain on sale of assets (18,765) (4,976) Equity earnings from unconsolidated wireless interests (4,272) (3,140) Other, net 904 1,724 Changes in operating assets and liabilities, exclusive of impacts of dispositions and acquisitions: Increase in accounts receivable (10,707) (26,413) Increase in materials and supplies (792) (3,310) (Increase) decrease in prepayments and other assets (2,660) 1,333 Increase in deferred and other assets (21,343) (23,613) Decrease in accounts payable (55,290) (720) (Decrease) increase in taxes accrued and other liabilities (13,036) 59,054 Increase in deferred employee benefits obligation 4,702 6,139 (Increase) decrease in deferred income taxes (33,056) 7,590 - ------------------------------------------------------------------------ Total adjustments 42,754 118,778 - ------------------------------------------------------------------------ Net cash provided by operating activities 71,637 245,107 - ------------------------------------------------------------------------ Investing Activities Expenditures for property, plant and equipment (106,692) (114,319) Deposit for capital projects (38,893) - Investment in cellular partnerships - (25,273) Proceeds from asset sales 32,889 10,441 Other investing activities 3,258 (9,118) - ------------------------------------------------------------------------ Net cash used in investing activities (109,438) (138,269) - ------------------------------------------------------------------------ Financing Activities Proceeds from issuance of long-term debt 297,897 - Repayments of debt (191,716) (70,717) Dividends paid (71,871) (68,659) Treasury stock, net (2,468) - Issuance of common stock, net 592 29,556 Other financing activities (2,499) (8) - ------------------------------------------------------------------------ Net cash provided by (used in) financing activities 29,935 (109,828) - ------------------------------------------------------------------------ Net Decrease in Cash and Cash Equivalents (7,866) (2,990) Cash and Cash Equivalents at Beginning of Period 30,948 31,449 - ------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 23,082 $ 28,459 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ See accompanying Notes to Consolidated Financial Statements FRONTIER CORPORATION Notes to Consolidated Financial Statements (Unaudited) Note 1: Consolidation The consolidated financial information includes the accounts of Frontier Corporation and its majority-owned subsidiaries (the "Company" or "Frontier") 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 to current year presentation. Note 2 : Other Charge 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 is in the process of decommissioning these redundant facilities and the project is expected to be completed by the second quarter of 1998. As of June 30, 1997, the remaining reserve balance of $50.3 million is included in "Other liabilities" in the Consolidated Balance Sheets. Note 3: Purchase Acquisitions In February 1997, the Company completed its purchase of RG Data Incorporated ("RG Data"), 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 RG Data. The treasury shares were acquired through open market purchases. In March 1996, the Company acquired a 55 percent interest in the New York RSA No. 3 Cellular Partnership (RSA No. 3). RSA No. 3 is a provider of cellular mobile telephone service in the New York State Rural Service Area No. 3. RSA No. 3 encompasses much of the Southern Tier area of New York state. The Company's interest in RSA No. 3 is managed by Frontier Cellular, a 50/50 owned joint venture with Bell Atlantic/NYNEX Mobile and the operating results are reported using the equity method of accounting. The Company paid $25.3 million in cash for its interest in RSA No. 3. Note 4 : Long - Lived Assets to Be Disposed Of Effective January 1, 1996, the Company adopted Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." FAS 121 requires that certain long-lived assets and identifiable intangibles be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. The statement also requires that certain long-lived assets and identifiable intangibles to be disposed of be reported at fair value less selling costs. The Company's adoption of this standard resulted in a non-cash charge of $8.0 million (net of a tax benefit of $4.4 million) and is reported in the Consolidated Statements of Income as a cumulative effect of a change in accounting principle. The charge represents the cumulative adjustment required by FAS 121 to remeasure the carrying amount of certain assets held for disposal as of January 1, 1996. These assets held for disposal consist principally of telephone switching equipment in the Company's Local Communications Services segment as a result of management's commitment, in late 1995, to a central office switch consolidation project at its New York local telephone subsidiaries. Note 5 : Long-Term Debt In May 1997, the Company completed a $300 million offering of 7.25% Notes, maturing 2004. Proceeds from the offering will be used to finance a portion of the cost of constructing a nationwide fiber optic network. Pending such use, proceeds from the offering were used to pay down Frontier's commercial paper borrowings. Effective June 30, 1997, the Company's subsidiary, Rochester Telephone Corp., reduced its available line of credit under its Revolving Credit Agreement from $100 million to $50 million. Note 6: 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 an after- tax gain of $11.2 million, or $.07 per share. In March 1996, Frontier sold its minority investment in a Canadian long distance company for an after-tax gain of $3.0 million, or $.02 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. Note 7: New Accounting Standards The Company will adopt the provisions of Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" ("FAS 128") effective December 31, 1997. This statement is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. 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 ("EPS") standards. FAS 128 requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS calculation. Basic EPS excludes the effect of common stock equivalents and is computed by dividing income available to common shareowners by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Proforma earnings per share computed in accordance with FAS 128 is presented below for informational purposes only. Three months ended Six months ended June 30, June 30, 1997 1996 1997 1996 - --------------------------------------------------------------- Basic EPS Earnings before cumulative effect of change in accounting principle $ .26 $ .42 $ .17 $ .83 Cumulative effect of change in accounting principle - - - (.05) - ---------------------------------------------------------------- Basic earnings per share $ .26 $ .42 $ .17 $ .78 ================================================================ Diluted EPS Earnings before cumulative effect of change in accounting principle $ .26 $ .42 $ .17 $ .82 Cumulative effect of change in accounting principle - - - (.05) - ---------------------------------------------------------------- Diluted earnings per share $ .26 $ .42 $ .17 $ .77 ================================================================ Note 8: Cash Flows For purposes of the Statement of Cash Flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash flows from financing activities includes $29.6 million of cash proceeds from stock options and warrants exercised during the first half of 1996. The resultant tax benefit realized from the exercise of stock options during the first six months of 1996 of $43.8 million is reflected as an adjustment to capital in excess of par value and taxes accrued. Actual interest paid was $25.9 million and $24.0 million for the six month periods ended June 30, 1997, and June 30, 1996, respectively. Interest costs associated with the construction of capitalized assets, including the nationwide fiber optic network project, are capitalized. Total amounts capitalized for the first six months of 1997 and 1996 were $5.5 million and $1.9 million, respectively. In addition, actual income taxes paid were $54.1 million for the six months ended June 30, 1997, and $23.7 million for the six months ended June 30, 1996. Note 9: Commitments and Contingencies During 1997, it is anticipated that the Company will expend approximately $525 million to $550 million for additions to property, plant and equipment, including the Company's fiber network expansion project. Construction began on the nationwide fiber optic network in late 1996. The fiber optic network is being constructed under an agreement with Qwest Communications Corporation. Capital expenditures related to the network expansion will approximate $210 million for 1997. Since construction of the nationwide fiber optic network began in 1996, capital expenditures have totaled $107.1 million, $43.4 million of which was incurred during the first six months of 1997. In connection with the total capital program, the Company has made certain commitments for the purchase of materials and equipment. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 1997 and 1996 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 the June 30, 1997 Form 10-Q should be evaluated in light of these important risk factors. DESCRIPTION OF BUSINESS Frontier Corporation (the "Company" or "Frontier") is a diversified telecommunications company, serving more than 2 million customers throughout the United States and in several foreign countries. Frontier's principal lines of business are long distance and local communications. The Company's other lines of business include cellular and paging operations and telecommunications equipment sales, video and audio conferencing. RESULTS OF OPERATIONS Consolidated Revenues for the second quarter of 1997 were $584.7 million, a decrease of $85.6 million or 12.8% over the comparable period in 1996. Operating income was $77.1 million for the three months ended June 30, 1997 as compared to $122.7 million in 1996. Operating results in the second quarter of 1997 continue to be adversely impacted by the previously announced migration of the Company's largest carrier customer's one-plus traffic from the Frontier network. Results for the second quarter of 1997 include approximately $7 million of one-plus revenue from this customer as compared to revenue of approximately $113 million in the same quarter in 1996. Consolidated operating margins declined from 18.3% for the second quarter of 1996 to 13.2% for the same period of 1997. This decline is attributable to the previously discussed decrease in revenue as well as increased expenses in the long distance segment. Expenses were higher in the long distance segment primarily due to incremental Selling, General and Administrative ("SG&A") costs relating to product development, promotion and distribution costs. The incremental SG&A costs are expected to positively impact revenue and operating income in future periods. Business Segments The Company reports its operating results in three segments: Long Distance Communications Services, Local Communications Services and Corporate Operations and Other. A review of the 1997 and 1996 second quarter results of each business segment follows. Long Distance Communications Services Long distance revenues totaled $406.8 million in the second quarter of 1997, a decrease of $90.9 million or 18.3% as compared to the second quarter of 1996. The decrease in long distance revenues is attributable to the migration of the Company's largest customer's one-plus traffic from the Frontier network. Normalized for the effect of this major carrier customer's one-plus traffic, revenue grew approximately 4% as compared to the prior year quarter. Access minutes of use, excluding the Company's major customer, increased approximately 3% in the second quarter of 1997. The decline in this segment's operating results is largely attributable to the previously discussed migration of the Company's largest customer's one-plus traffic. Total revenue from this customer, including both one-plus services and enhanced services, represented less than 6% of the second quarter 1997 long distance revenue as compared to approximately 26% for the same period in the prior year. The Company anticipates replacing this revenue with growth in existing customer bases and through new initiatives, including the Company's new switched services product, "Frontier Independence" and through innovative agreements and contracts, such as Frontier's credit card services agreement with US West. This agreement is expected to generate in excess of $50 million in incremental revenue for the Company over the 30 month term of the agreement. The Company's new bundled product, "Frontier Independence" (which replaces "Clear Value"), is expected to enhance the Company's performance as a competitive, single-source provider of telecommunications services through a flexible pricing program that provides customers with additional discounts if they purchase value added services. In addition, during the second quarter of 1997, the Company announced plans to complete a national frame relay network by the fourth quarter of 1997 to complement the Company's core voice services business with additional data services products. Operating income for long distance was $18.9 million for the second quarter of 1997. Operating margin as a percent of revenue decreased from 14.6% in the second quarter of 1996 to 4.7% for the current quarter. The reduction in operating margin in the second quarter is primarily due to lower revenue caused by the migration of the Company's largest customer's one-plus traffic and the incremental SG&A costs associated with sales and marketing support for new revenue initiatives and distribution channels. The sales and marketing investments driving the incremental SG&A costs are expected to positively impact revenue and operating results in future periods. Cost of access represented 62% of total long distance revenue for the second quarter of 1997, consistent with the same period in 1996. Construction of the Company's fiber optic network together with the integration of existing facilities is expected to reduce network costs and provide new revenue opportunities for Frontier. Construction of the nationwide fiber optic network is on schedule and is expected to be completed by year end 1998. In addition, the Company has made significant progress in the identification and decommissioning of certain network facilities that are no longer required to support the volume of business. The excess network facilities primarily resulted from the migration of the Company's major carrier customer's one-plus traffic. The cost associated with the decommissioning were accrued for in the first quarter of 1997. Results for sequential quarters in 1997 for the Long Distance segment reflect improvements in operating income and operating margin. Operating income, excluding other charges, increased $6.5 million or 51.9% in the second quarter of 1997 as compared to the previous quarter. Operating margins for the first and second quarters of 1997 were 3.1% and 4.7%, respectively. This positive trend is attributed primarily to the reduction in network access costs as a result of the Company's efforts in the second quarter to consolidate and integrate the network. The Company expanded its offerings of local service in late 1996 and is competing aggressively with other Alternative Local Exchange Carriers ("A-LECs"). Frontier is now providing local service as an A-LEC, combined with a complete range of long distance products, in 32 markets across the country. The Company currently provides local services as a facilities based A-LEC in New York City and plans to provide facilities based A-LEC services in the midwest by the end of 1997. The Company anticipates that up to six additional switches will be installed by year end 1997 and a similar number will be installed in 1998. Nationwide, Frontier is serving in excess of 79,000 ANIs, or access lines, predominantly through resale, in markets where it is not the incumbent telephone company as of June 30, 1997. Local Communications Services Local Communications Services includes the Company's local telephone operations, consisting of 34 telephone operating subsidiaries in 13 states. Also included in this segment are the local service revenues and associated expenses generated from the efforts of Frontier Communications of Rochester, Inc., a competitive telecommunications company formed on January 1, 1995 that provides an array of services on a retail basis in the Rochester marketplace. Consequently, the Local Communications Services segment includes both wholesale and retail local service provided in the Rochester, New York market. As a result of the Company's efforts to consolidate operations within this segment in order to become more efficient and improve operating results, separate financial reporting of the Rochester, New York operations from the Regional Telephone Companies is no longer meaningful. Revenues for Local Communications Services were $167.0 million in the three month period ended June 30, 1997, an increase of $5.6 million or 3.5% over the comparable period in 1996. The growth in this segment is driven by a 2.6% increase in access lines and a 5.7% increase in minutes of use over the previous year. Revenue growth during the second quarter of 1997 is also positively influenced by increased demand for internet services. The growth in revenue is partially offset by the elimination of the surcharge on wholesale, flat rate local measured service, as ordered by the New York State Public Service Commission ("NYSPSC") in 1996, an increase in the discount to wholesale providers from 5% to 17%, also ordered by the NYSPSC and the $1.5 million annual rate reduction as stipulated by the Open Market Plan. Costs and expenses in the second quarter of 1997 for Local Communications Services were $107.0 million, a decrease of $1.2 million or 1.1%; relatively consistent with the same period in the prior year. Members of the Communications Workers of America ("CWA" or "Union") Local 1170, ratified a tentative agreement with Rochester Telephone Corp. on April 29, 1997. The Rochester company had implemented the terms of its final offer as of April 9, 1996 as contract negotiations were then at an impasse. The differences between the Company's final offer and the agreement that was subsequently reached between the parties and ratified by the CWA membership are not material. The new agreement will provide several operational improvements and will result in a more consistent alignment of benefits with the rest of the Corporation. The Union continues to appeal one issue related to the declaration of impasse with the National Labor Relations Board. Hearings on this issue were completed in June and a decision is anticipated by the end of 1997. This decision may be appealed by either the Union or the Company. At this time, the Company cannot predict the outcome of this matter. Operating income for the second quarter of 1997 was $60.0 million, an increase of $6.8 million, or 12.7% over the second quarter of 1996. Operating margins for the three month period improved from 33.0% in 1996 to 35.9% in 1997, reflecting the continuing improvements in operating efficiencies as a result of the centralization of administrative functions within the Local Communications segment. During the fourth quarter of 1995, management committed to a major switch consolidation plan at its New York local telephone subsidiaries. The three-year plan to consolidate host switches by over 60% is projected to improve network efficiency and reduce the cost of maintenance and software upgrades. As of June 1997, the project is progressing as scheduled and six host switches have been consolidated, representing approximately 50% of the total switches to be consolidated. The Company anticipates that this project will be substantially complete by July 1998. Corporate Operations and Other Corporate Operations is comprised of the 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 is comprised of the Company's majority ownership interest in wireless operations and Frontier Network Systems ("FNS"). Wireless operations for the second quarter of 1997 includes Minnesota RSA No. 10, in which the Company acquired a 100% interest in late March 1995. Results for the second quarter of 1996 include Minnesota RSA No. 10, and the Company's 69.5% interest in Alabama RSAs No. 4 and No. 6. The sale of the Company's interest in Alabama RSAs No. 4 and No. 6 was finalized on January 31, 1997. Results of operations in the second quarter of 1997 were consistent with the same quarter in the prior year. The impact on operations resulting from the sale of the Company's interest in Alabama RSA No. 4 and No. 6 is substantially offset by the acquisition of RG Data Incorporated ("RG Data"). RG Data's operations are included with FNS for financial reporting purposes. Other Income Statement Items Interest Expense Interest expense was $11.6 million in the second quarter of 1997, a $.2 million decline as compared to the same period in 1996. The overall decrease in interest expense is attributable to $1.2 million additional capitalized interest in the second quarter of 1997 as compared to the prior year quarter, primarily related to the construction of the Company's fiber optic network. The impact of capitalized interest is partially offset by increased gross interest expense in the second quarter of 1997 resulting from higher levels of outstanding debt. 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/NYNEX Mobile 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 quarter ending June 30, 1997 were $2.8 million, an increase of $1.1 million or 65.2% over the same period in the prior year. The improvement in equity earnings is driven by expense reductions and increased operating efficiencies as compared to the prior year quarter. Income Taxes The effective income tax rate for the second quarter of 1997 is 38.9%, consistent with the second quarter of 1996. Six Months Ended June 30, 1997 and 1996 RESULTS OF OPERATIONS Consolidated Revenues for the six months ended June 30, 1997 were $1.2 billion, a decrease of $167.3 million or 12.6% over the comparable period in 1996. Operating income, excluding nonrecurring charges, was $147.4 million for the first two quarters of 1997 as compared to $237.4 million in 1996. Consolidated operating margins, excluding nonrecurring items, declined from 17.9% for the first half of 1996 to 12.7% for the same period of 1997. Operating results in the first half of 1997 were adversely impacted by the overall decline in revenue in the long distance segment. The decline in revenue and operating income is largely attributed to the previously announced migration of the Company's largest carrier customer's one- plus traffic from the Frontier network. Selling, General and Administrative ("SG&A") costs in the long distance segment were higher largely due to an increase in product development, promotion and distribution costs. The sales and marketing investments that are driving the incremental SG&A costs are expected to positively impact revenue and operating income in future periods. Operating results for 1997 and 1996 were affected by certain one time events. In March 1997, Company recorded a pre-tax charge of $96.6 million or $0.38 per share post- tax, primarily related to the write-off of certain network costs no longer necessary to support long distance traffic volumes due largely to the migration of the Company's major carrier customer's one-plus traffic. As a result of the decline in long distance traffic, an evaluation of the existing network was performed and facilities deemed no longer necessary to support the Company's revenue and traffic levels were identified. The Company is actively pursuing a program to further improve its network cost structure through the integration and consolidation of facilities. In 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 a pre-tax gain of $18.7 million. The Company sold its minority investment in a Canadian long distance company for a pre-tax gain of $5.0 million during the quarter ended March 31, 1996. Year-to-date results for 1996 include an $8.0 million post-tax charge relating to the adoption of Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The assets held for disposal consist principally of telephone switching equipment in the Local Communications segment as a result of the central office switch consolidation project. Business Segments The Company reports its operating results in three segments: Long Distance Communications Services, Local Communications Services and Corporate Operations and Other. A review of each business segment's results for the first half of 1997 and 1996 follows. Long Distance Communications Services Long distance revenues totaled $808.0 million for the first six months of 1997, as compared to $983.9 million in the same period in 1996, a decrease of $175.9 million or 17.9%. The decrease in long distance revenues is attributable to the migration of the Company's largest customer's one-plus traffic from the Frontier network. Normalized for the effect of this major carrier customer's one-plus traffic, revenue grew approximately 2% for the six month period ended June 30, 1997. Access minutes of use, excluding the Company's major customer's one-plus traffic, increased approximately 3% over the same period in the prior year. The decline in this segment's operating results is largely attributable to the previously announced migration of the Company's largest customer's one-plus traffic. Total revenue from this customer, including both one-plus services and enhanced services, represented less than 6% of 1997 year to date long distance revenue as compared to approximately 24% for the same period in the prior year. The Company anticipates replacing this revenue with growth in existing customer bases and through new initiatives. During the second quarter of 1997, the Company introduced a new bundled services product, "Frontier Independence", (which replaces "Clear Value"). This new product is expected to enhance the Company's performance as a competitive, single-source provider of telecommunications services through a flexible pricing program that provides customers with additional discounts if they purchase value added services. The Company's credit card services agreement with US West began to contribute to the segment's results in the second quarter. The agreement allows US West the ability to offer calling card services to its customers and is expected to generate in excess of $50 million in incremental revenue for the Company over the 30 month term of the agreement. During the second quarter of 1997, the Company also announced plans to complete a national frame relay network by the fourth quarter of 1997 to complement the Company's core voice services business with a portfolio of additional data services products. Operating income for long distance, excluding nonrecurring charges, decreased 76.9% to $31.4 million for the six months ended June 30, 1997. Operating margin as a percent of revenue decreased from 13.8% in the first half of 1996 to 3.9% for the current year. The reduction in operating margin in 1997 is driven by the decrease in revenue, primarily attributable to the migration of the Company's largest customer's one-plus traffic, increased network costs and the incremental SG&A costs associated with sales and marketing support for new revenue initiatives. Cost of access represented approximately 63% of total long distance revenue for the first six months of 1997 as compared to approximately 62% for the same period in 1996. The increase in the cost of access percentage to revenue is driven by the fact that the Company's fixed costs are currently being covered by a smaller revenue base. Continuing network integration and the construction of the Company's fiber optic network is expected to reduce network costs and provide new revenue opportunities for Frontier. Construction of the fiber optic network is expected to be completed by year end 1998. The Company expanded its offerings of local service in late 1996 and is competing aggressively with other Alternative Local Exchange Carriers ("A-LECs"). Frontier is now providing local service as an A-LEC, combined with a complete range of long distance products, in 32 markets across the country. The Company currently provides services as a facilities based A-LEC in New York City and plans to provide facilities based A-LEC services in the midwest by the end of 1997. The Company anticipates that up to six additional switches will be installed by year end 1997 and a similar number in 1998. Nationwide, Frontier is serving in excess of 79,000 ANIs, or access lines, predominantly through resale, in markets where it is not the incumbent telephone company as of June 30, 1997. Local Communications Services Revenues for Local Communications Services were $330.3 million in the six month period ended June 30, 1997, an increase of $10.5 million or 3.3% over the comparable period in 1996. The growth in this segment is driven by a 2.6% increase in access lines and a 5.7% increase in minutes of use over the previous year. Revenue growth during the first half of 1997 is also influenced by the provision of enhanced services, driven by increased demand for internet services. Revenue growth is partially offset by the elimination of the surcharge on wholesale, flat rate local measured service, as ordered by the New York State Public Service Commission ("NYSPSC") in 1996, an increase in the discount to wholesale providers from 5% to 17%, also ordered by the NYSPSC and the $1.5 million annual rate reduction as stipulated by the Open Market Plan. Local Communications Services costs and expenses for the first half of 1997 were $210.7 million, representing a decrease of $2.3 million or 1.1% over the same period in 1996, excluding certain one-time charges. During the first six months of 1996, the Rochester telephone operation experienced increased costs and expenses related to higher labor expenses resulting from work stoppage preparation costs. These expenses, which were incurred in connection with contract negotiations with the CWA, were necessary to ensure continued high standards of customer service levels in the event of a work stoppage or slowdown. The contract negotiations were at an impasse and the Rochester company implemented the terms of its final offer as of April 9, 1996. Members of the CWA Local 1170, ratified a tentative agreement with Rochester Telephone Corp. on April 29, 1997 which contained provisions that differed from the Company's final offer implemented at the time of impasse. The differences between the Company's final offer and the agreement that was ratified are not material. The new agreement will provide several operational improvements and will result in a more consistent alignment of benefits with the rest of the Corporation. The Union continues to appeal one issue related to the declaration of impasse with the National Labor Relations Board. Hearings on this issue were completed in June and a decision is anticipated by the end of 1997. This decision may be appealed by either the Union or the Company. At this time, the Company cannot predict the outcome of this matter. Contributing to the overall decrease in expenses is the impact of continuing centralization of the administrative functions for all of the local telephone companies. Operating income normalized for nonrecurring items was $119.7 million, an increase of $12.8 million, or 11.9%, over the same period in the prior year. Operating margins for the six month period improved from 33.4% in 1996 to 36.2% in 1997, reflecting the continuing improvements in operating efficiencies. During late 1995, management committed to a major switch consolidation plan at its New York local telephone subsidiaries. The three-year plan to consolidate host switches by over 60% is projected to improve network efficiency and reduce the cost of maintenance and software upgrades. As of June 1997, the project is progressing as scheduled and six host switches have been consolidated, representing approximately 50% of the total switches that will be consolidated. The Company anticipates that this project will be substantially complete by July 1998. Corporate Operations and Other Corporate Operations is comprised of the 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 is comprised of the Company's majority ownership interest in wireless operations and Frontier Network Systems ("FNS"). Wireless operations for the first six months of 1997 included Minnesota RSA No. 10, in which the Company acquired a 100% interest in late March 1995 and the Company's 69.5% interest in Alabama RSAs No. 4 and No. 6 through January 1997. The sale of the Company's interest in Alabama RSAs No. 4 and No. 6 was finalized January 31, 1997. The Company completed its purchase of RG Data in February 1997. RG Data was 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 RG Data. The treasury shares were acquired through open market purchases. This transaction was accounted for as a purchase. RG Data's operations are consolidated with FNS for reporting purposes. Year-to-date revenues for this segment decreased $1.9 million, or 8.8%, and expenses decreased $3.8 million, or 14%, primarily as a result of the sale of the Company's interest in Alabama RSAs No. 4 and No. 6, the acquisition of RG Data and reduced costs and expenses for the Holding Company. Other Income Statement Items Interest Expense Interest expense was $22.2 million in the first six months of 1997, a $1.3 million reduction from the same period in 1996. The overall decline in interest expense is driven by increased capitalized interest of $3.6 million in the first six months of 1997 as compared to the same period in 1996, primarily attributable to the fiber network build project. The impact of capitalized interest is offset in part by an increase in gross interest expense in the first two quarters of 1997 resulting from higher levels of debt outstanding. 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. During March 1996, the Company recorded an after-tax gain of $3.0 million, or $.02 per share, related to the sale of its minority interest in the stock of a Canadian long distance company. 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/NYNEX Mobile 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 six months of 1997 were $4.3 million, an increase of $1.1 million or 36.1% over the first six months of 1996. The improvement in equity earnings is driven by expense reductions and increased operating efficiencies as compared to the same period in the prior year. Income Taxes The effective income tax rate for the first two quarters of 1997, normalized for nonrecurring items, is 38.8 %, consistent with the first half of 1996. 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 $247.8 million and $327.3 million, excluding nonrecurring charges, for the periods ending June 30, 1997 and 1996, respectively. The decrease in EBITDA is primarily attributable to the decrease in revenue and increased operating costs in the long distance segment. Cash provided from operations for the first six months of 1997 decreased $173.5 million or 70.8% as a result of increased working capital requirements and the decrease in revenue. The primary drivers of the changes in cash from operations include an increase in deferred taxes of approximately $30.0 million, relating to the one-time charge recorded by the Company in the first quarter of 1997 and decreased accounts payable balances. The decrease in accounts payable is a function of the timing of payments to vendors. Cash used for investing activities decreased $28.8 million or 20.9%, primarily due to the proceeds received from the sale of the Company's equity interest in the Southern Alabama Cellular Communications Partnership which closed in the first quarter of 1997 ($32.9 million). This decrease is offset by increases in capital expenditures during the first six months of 1997 of $31.3 million or 27.3% and the purchase of an interest in a cellular partnership in March 1996 ($25.3 million). The increase in capital expenditures is principally due to the fiber optic network build and continued product enhancements. Cash provided from financing activities increased $139.8 million during the first six months of 1997 as compared to the same period in 1996. This net inflow of cash is driven by increased borrowings during the period, primarily attributable to the Company's capital program. Debt The Company's total debt amounted to $783.2 million at June 30, 1997, an increase of $101.9 million from December 31, 1996. This higher debt level is largely driven by the Company's capital program, including the nationwide fiber optic network. In May 1997, the Company completed a $300.0 million offering of 7.25% Notes. Proceeds from the offering will be used to finance a portion of the Company's cost of its nationwide fiber build project. Until such time as additional payments are required to be made to Qwest Communications Corporation, the company constructing the nationwide network, proceeds from the offering were used to pay down a portion of the Company's commercial paper borrowings. The net increase in borrowings is offset by scheduled debt repayments of $3.0 million and by the $7.1 million of debt carried by the Southern Alabama Partnership, which was sold in the first quarter of 1997. This debt was assumed by the purchaser. Debt Ratio and Interest Coverage The Company's debt ratio (total debt as a percent of total capitalization) was 43.5% at June 30, 1997, as compared with 39.1% at December 31, 1996. Pre-tax interest coverage, excluding nonrecurring charges, was 5.6 times for the six months ended June 30, 1997, as compared with 9.5 times for the same period in 1996. Capital Spending Through June 1997, gross capital expenditures amounted to approximately $147.4 million as compared to $114.3 million in the prior year. The Company plans to spend a total of approximately $525 million to $550 million on its capital program during the full year in 1997, including approximately $210 million for the fiber optic network project. Through June 1997, capital expenditures relating to the fiber optic network totaled $43.4 million. The Company anticipates financing its capital program with a combination of internally generated cash from operations and external financing. Dividends On June 16, 1997, the Board of Directors declared the second quarter 1997 dividend of 21.75 cents per share on the Company's common stock, payable August 1, 1997 to shareowners of record on July 15, 1997. New Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued Financial Accounting Standard 130 ("FAS 130"), "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components in a full-set of general-purpose financial statements. Comprehensive income is defined as "the change in equity of a company during a period from transactions and other events and circumstances from nonowner sources." It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Early application of this statement is permitted. If comparative financial statements are provided for earlier periods, reclassification to reflect the provisions of this statement is required. The Company will adopt FAS 130 in the first quarter of 1998. The FASB issued FAS 131, " Disclosures about Segments of an Enterprise and Related Information," effective for financial statements for periods beginning after December 15, 1997. This statement requires that public companies report certain information about operating segments in complete sets of financial statements of the company and in condensed financial statements of interim periods issued to shareholders. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. In the initial year of application, comparative information for earlier years is to be restated. The Company will adopt FAS 131 in the first quarter of 1998. The Company has not yet fully evaluated the disclosures that will be required by this FAS. OTHER ITEMS Open Market Plan The Rochester, New York local communications' subsidiary began its third year of operations under the Open Market Plan in January 1997. The Open Market Plan promotes telecommunications competition in the Rochester, New York marketplace by providing for (1) interconnection of competing local networks including reciprocal compensation for terminating traffic, (2) equal access to network databases, (3) access to local telephone numbers, (4) service provider telephone number portability, and (5) certain wholesale discounts to resellers of local services. The inherent risk associated with opening the Rochester market to competition is that some customers are able to purchase services from competitors, which may reduce the number of retail customers and potentially cause a decrease in the revenues and profitability for Rochester Telephone. 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 from customer migration. Increased competition may also lead to additional price decreases for services, adversely impacting Rochester Telephone's margins. An additional positive feature of the Open Market Plan provides that Rochester Telephone can retain additional earnings achieved through operating efficiencies. Previously these earnings would have been shared with customers. During the seven year period of the Open Market Plan, rate reductions of $21 million will be implemented for Rochester area consumers, including $11.5 million of which occurred in 1995, $2.5 million which occurred in 1996, and a rate reduction of $1.5 million which commenced in January 1997. 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. Price increases on enhanced products partially offset the rate reductions required under the Plan during 1997. During the second quarter of 1997, the Federal Communications Commission ("FCC") issued decisions that are intended to implement provisions of the Telecommunications Act of 1996. Of significance were decisions that outlined changes in the structure of universal service support and in the framework that applies to certain interstate rates that are generally characterized as access-related charges. In addition, during the second quarter of 1997, a Federal appeals court rejected parts of an earlier FCC order that set out conditions governing the provisions of interconnection services. A preliminary review of these orders suggests they will not have a material impact on Frontier or any of its business segments. Under the Telecommunications Act of 1996 and a statewide proceeding, the NYSPSC is considering the prices that local exchange companies in New York may charge for "unbundled" service elements such as links (the wire from the switch to the customers premises), ports (the portion of the switch that terminates the link) and switch usage features. The Company is actively participating in this proceeding and expects the NYSPSC to issue a decision on service elements in 1997. Management believes there are significant market and business opportunities associated with the Company's Open Market Plan. However, there are also uncertainties associated with the Plan. In the Company's opinion, the most significant risks relate to increased competition in the Rochester, New York market, the risk inherent in the Rate Stabilization Plan and the potential diversification risk. 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, Rochester Telephone Corp. ("RTC"), to Frontier if (i) RTC'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. Dividends paid to Frontier also are prohibited unless RTC's directors certify that such dividends will neither impair RTC's service quality nor 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, RTC failed to achieve the service quality levels required by the Open Market Plan. On December 19, 1996, pursuant to the Open Market Plan, RTC requested the NYSPSC staff to exclude certain months from the calculation used to measure service quality, due to operating conditions considered by management to be abnormal and beyond RTC's control. In April 1997, RTC 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 will result in a temporary restriction on the flow of cash payments from the Rochester Telephone subsidiary to Frontier and a refund to Rochester Telephone customers of $.9 million. Reserves sufficient to cover the refund were established in 1996. The Company has presented a plan for disposition of the refund to the NYSPSC. A decision is expected by the end of the year. The temporary restriction of dividend payments from Rochester Telephone to Frontier Corporation remains in place, as RTC has not yet reached 1997 service quality levels that are sufficiently adequate to justify its removal. 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"). The Company is anticipating that a final Record of Decision ("ROD") will be issued by the EPA and will prescribe the remediation requirements for the site. The aggregate amount of remediation costs to be incurred by the plaintiffs will be based on the requirements of the ROD. The total cost of remediation at the site is uncertain, although estimates have ranged from $25 million to $100 million. There has been no allocation of liability as among or between the plaintiffs or defendants. The extent to which plaintiffs can recover any of these costs from the defendants, including FNS, will be determined at trial. The litigation has been delayed by the bankruptcy filing of one of the defendants. FNS has been vigorously defending this lawsuit. The federal government and one or more of the defendants have been in discussions intended to facilitate settlement, but no recommendations have yet been made. The Company believes that it will ultimately be successful, but it is unable to predict the outcome with any certainty at this time. Since February 1994, a large number of plaintiffs, all of whom are former 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 a 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 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. Recently, the former owners of over half of the stock who had made claims, entered into a settlement in principle with Simon and Weinert. That settlement is now being submitted to the individual plaintiffs for their review and acceptance. Closure of the agreement is expected in 1997. If the settlements are accepted, the lawsuits of these plaintiffs shall be dismissed. Although it is too early to determine the outcome of the 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 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." In the complaint, plaintiff alleges that the Company improperly marketed and sold deregulated inside wire maintenance services to defendant 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 in 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 May 2, 1997 for the purpose of electing a board of directors, approving the appointment of auditors, and voting on the proposals described below. All of management's nominees for Directors as listed in the proxy statement were elected with the following vote: For Against 1. Patricia C. Barron 132,939,624 14,857,554 2. Ronald L. Bittner 130,688,397 17,108,781 3. Raul E. Cesan 132,994,515 14,802,663 4. Brenda E. Edgerton 132,982,164 14,815,014 5. Jairo A. Estrada 132,965,293 14,831,885 6. Michael E. Faherty 132,810,743 14,986,435 7. Daniel E. Gill 132,098,903 15,698,275 8. Alan C. Hasselwander 132,830,634 14,966,544 9. Robert J. Holland, Jr. 132,820,958 14,976,220 10. Douglas H. McCorkindale 133,000,674 14,796,504 11. Leo J. Thomas 133,009,481 14,787,697 12. Richard J. Uhl 132,970,538 14,826,640 The appointment of Price Waterhouse LLP as independent auditor for the fiscal year 1997 was approved with the following vote: Broker For Against Abstain Non-Votes 143,517,942 863,464 3,415,771 - The shareowner proposal regarding executive change in control arrangements was not approved with the following vote: Broker For Against Abstain Non-Votes 35,756,566 90,833,242 5,539,826 15,667,544 Item 6. Exhibits and Reports on Form 8-K (a) See Exhibit Index (b) Reports on Form 8-K filed during the period: SEC Filing Date Item No. Financial Statements March 23, 1997 7 Yes March 27, 1997 5 No April 10, 1997 5 No June 10, 1997 5 No The Company filed no reports on Form 8-K subsequent to the quarter ended June 30, 1997. 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: August 12, 1997 /s/Louis L. Massaro By:-------------------------------- Louis L. Massaro Executive Vice President and Chief Financial/Administrative Officer (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, between the Registrant and Chase Manhattan Bank, as Trustee Incorporated by reference to Exhibit 4.1 to Form 8-K, filed May 23, 1997 10.20 Management contract with Mr. Clayton Filed herewith 11 Statement re: Computation of Earnings Filed herewith per Share of Common Stock on a Fully Diluted Basis (Unaudited) 27 Financial Data Schedule Filed herewith EX-3 2 3.3 BYLAWS 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) 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. (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) Section 7 - Qualification of Voters. Every shareholder of record of common stock of the Corporation shall be entitled at every meeting of shareholders to one vote for every share of common stock held by the shareholder in the shareholder's name on the record of shareholders, subject, however, to the voting rights granted to the holders of Cumulative Preferred Stock of the Corporation upon default in dividends thereon. Section 8 - Quorum of Shareholders. The holders of a majority of the shares entitled to vote at such meeting shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such specified item of business. The shareholders present, in person or by proxy, and entitled to vote may, by a majority of votes cast, adjourn the meeting despite the absence of a quorum. Section 9 - Vote of Shareholders. Directors shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of Directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. Section 10 - Proxies. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for that shareholder by proxy. Every proxy must be signed by the shareholder or the shareholder's attorney-in-fact. No proxy shall be valid after the (4) expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it except in those cases where an irrevocable proxy permitted by statute has been given. Section 11 - Fixing Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of such meeting, nor more than fifty days prior to any other action. Section 12 - Order of Business.* The order of business at each meeting of shareholders shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. At any special meeting of shareholders, only such business may be transacted which is related to the purpose or purposes set forth in the notice of such meeting. At any annual meeting of shareholders, only such business (other than the nomination or election of directors) shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting or (ii) by any shareholder who is a holder of record at the time of the giving of the notice provided for in this Section 12, who is or will be entitled to vote at the meeting and who complies with the procedures set forth in this Section 12. (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 (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 thirteen 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 (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. (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; (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 (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 (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. (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 (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 (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 (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. (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, (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. (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 (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 (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 (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. EX-10 3 10.20 MGT CONTRACT June 9, 1997 Mr. Joseph P. Clayton 14280 Oakbrook Court Carmel, Indiana 46033 Dear Mr. Clayton: The Board of Directors (the "Board") of Frontier Corporation, on behalf of Frontier and its subsidiaries and affiliates (together, the "Company") has determined that it is in the best interests of the Company and its shareowners to retain your services for the future and in case of Change of Control, as defined later in this letter agreement ("Agreement"). It is therefore the intent of this Agreement to assure your complete dedication to the Company by providing you with compensation and benefits arrangements while you fulfill your duties now and during the pendency of a Change of Control, should such an event occur, which provide you with a measure of security commensurate with your importance to the Company, and to assure itself of continuity in its relationship with customers and employees. Therefore, upon your signature on a counterpart of this Agreement, the following terms and conditions shall become effective as stated below. However, this Agreement does not supersede any stock option agreements or restricted stock grant agreements between the Company and you, all of which shall remain in full force and effect. 1. Employment. 1.1 Term. The Company shall employ you in a senior executive position and you shall assume the title of President and Chief Operating Officer on June 16, 1997, or in such comparable management capacity as the Company may from time to time designate. This Agreement shall become effective as of June 9, 1997, except that you shall become President and Chief Operating Officer on June 16, 1997. This Agreement shall continue until December 31, 1998, unless earlier terminated or extended in accordance with its terms. Not later than November 1, 1998, the Company and you shall either: (a) affirmatively elect to extend the term of this Agreement (the "Term") for one additional year; or (b) commence negotiation of a new agreement between the Company and you; or (c) pursuant to Section 1.2, terminate the relationship in its entirety or to allow it to expire according to its terms. You acknowledge that, except as set forth in this Agreement, your employment is "at will". If, during the Term, a person (as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) commences any action that, if consummated, would result in a Change of Control of the Company, or if any person publicly announces an intention or proposal to commence any such action, you agree that you will not leave the Company's employ (other than as a result of death or Disability), will render the services contemplated in this Agreement for the reasonable duration of the Company's defense against such action and until such action has been abandoned or terminated or a Change in Control has occurred, and will actively promote the Company's interest during such period. Any termination of your employment during the Term for reasons other than your death shall be evidenced by a written Notice of Termination, which shall specify the provision of this Agreement relied upon for such termination and describe with reasonable detail the facts and circumstances claimed by the sender of such Notice of Termination to provide the basis for termination. Any such Notice of Termination shall also specify the effective date of termination (the "Termination Date"). If you die during the Term the Termination Date shall be the date of your death. 1.2 Present and Future Duties. Your role in the Company shall be that of its primary operating executive, responsible for the successful operations of its business units. You shall perform all duties incidental to your position with the Company, or as may be assigned to you by the Chief Executive Officer of the Company or the Board. You agree to use your best efforts in the business of the Company and to devote your full time attention and energy to the business of the Company. You agree not to work, either on a part-time or independent contracting or consulting basis, with or without compensation, for any other business or enterprise during the Term without the Company's prior consent. Such consent shall not be unreasonably withheld in the case of service on the boards of directors of other corporations and community organizations. Assuming you have successfully performed the duties of your position, it is anticipated that you will assume the position of Chief Executive Officer of the Company on or before July 1, 1998, but in no event later than January 1, 1999, subject to Board review and concurrence. The Board may select the effective date based on its evaluation of your performance, your developmental needs, and its assessment of what will be most beneficial to shareowners. If the Company fails to so act by December 31, 1998, you or the Company may elect to terminate the relationship in its entirety. If the Company terminates the relationship or the Agreement ends according to its terms, the termination shall be deemed as a Termination without Cause under Section 7.2, except that Severance under Section 7.2.3 shall be Two Million Dollars ($2,000,000). If you terminate the relationship, the termination shall be deemed as a Termination for Good Reason under Section 7.4, except that Severance under Section 7.4.3 shall be Two Million Dollars ($2,000,000). Upon your election to the position of Chief Executive Officer of the Company, the Company agrees to negotiate an employment agreement for a term of three (3) years on terms that reflect your performance and new position, and that will be no less advantageous to you. 1.3 Base Compensation. The Company shall pay you as base compensation at an annual salary rate of $650,000, in installments in accordance with the Company's policies from time to time in effect, until January 1, 1998. Thereafter, your annual salary may be adjusted by the Company consistent with the Company's results and your performance during the prior year. However, unless the annual salaries of all senior executives of the Company are reduced across-the-board, your annual salary in any year shall not be less than your annual salary during the prior year. 1.4 Incentive Compensation. The Company shall establish and review with you from time to time the performance goals ("Performance Goals") for the Company and for you individually, and a methodology for calculating the amount of incentive compensation to be paid upon achievement of such Performance Goals. Your eligibility for a corporate bonus will be calculated on the same basis as other similarly situated executives. Your incentive will be based on the success of the Company as reflected in increased shareowner value, with such metrics to be mutually agreed upon by you with the Chief Executive Officer of the Company, and with the subsequent concurrence of the Board. Incentive compensation shall be payable to you at such time or times as are established under the Company's policies (including the Company's Executive Compensation Program) in effect from time to time. 1.5 Benefits; Perquisites. You shall be entitled to receive the benefits and perquisites provided by the Company under its Executive Compensation program in effect from time to time for executives at the Chief Operating Officer level. 1.6 Expenses. You shall be reimbursed for any reasonable expenses prudently incurred in connection with your employment during the Term, upon presentation to the Company of an itemized account and receipts of such expenses as required by the Company's policies from time to time in effect. 2. Developments and Intellectual Property. You acknowledge that all developments, including but not limited to trade secrets (including strategies, business plans and customer lists), discoveries, improvements, ideas and writings which either directly or indirectly relate to or may be useful in the business of the Company (the "Developments") which you, either alone or in conjunction with any other person or persons, shall conceive, make, develop, acquire or acquire knowledge of during the Term are the sole and exclusive property of the Company. You will cooperate with the Company's reasonable requests to obtain or maintain rights or protections under United States or foreign law with respect to all Developments. The Company will reimburse you for all reasonable expenses incurred by you in order to comply with this provision of this Agreement, regardless of when such expenses may be incurred. 3. Confidential Information. You acknowledge that by reason of your employment by the Company, especially as a senior executive thereof, you may now or will in the future have access to information of the Company that the Company deems to be confidential and/or proprietary, including but not limited to, information about the Company's target markets and customer segments, strategies, plans, products and services, methods of operation, employees, financial forecasts and results, sales, profits, expenses, customer lists and the relationships between the Company or a subsidiary and its customers, suppliers and others who have business dealings with it. You covenant and agree that during the Term and thereafter, without time or geographic limitation, you will not disclose any such information to any person without the prior written authorization of the Chief Executive Officer of the Company or the Board. If your employment ends for any reason other than your death, you agree to return promptly to Company all such information and any other tangible product or document which has been produced or received by, or otherwise submitted to you during your employment, and no copies shall be retained by you or made available to any other person or entity. This provision includes but is not limited to information printed or stored on paper, magnetic tape, floppy disks, hard drives or other computer storage media. 4. Non-Competition. 4.1 Covenant. You and the Company acknowledge that you have a special, unique and extraordinary expertise in telecommunications, and also a special, unique and extraordinary expertise in sales and sales administration, and that in your employment with the Company, you will have continuing access to information about the Company's target markets, strategies, plans, product or service offerings, methods of operation, financial and operating expectations and results, customer base, sales, marketing and pricing strategies, most valued employees, and customer and supplier relationships. In consideration of the benefits provided to you under this Agreement, which you acknowledge are independent consideration, you covenant and agree that during the Restricted Period (as defined below), you will not, directly or indirectly, without the Company's prior consent, own, manage, operate, finance, join, control or participate in the ownership or control of, or be associated as an officer, director, executive, partner or principal, agent, representative, consultant or otherwise with, or use or permit your name to be used in connection with, any enterprise that directly or indirectly competes (as defined below) with any telecommunications business of the Company in a Restricted Area (as defined below). You acknowledge that so long as you are able to use your skills for enterprises that do not directly or indirectly compete with the business of the Company, you will not be unreasonably limited in your ability to work. 4.2 Definitions. 4.2.1 "Competes" means the production, marketing, promotion, distribution or selling of any product, capability, functionality or service of any person or entity other than the Company which resembles or competes with a product or service produced, marketed, promoted, distributed or sold by the Company (or to your knowledge was under development by the Company) during the period of your employment by the Company (whether under this Agreement or otherwise). 4.2.2 "Restricted Area" means: (a) The Standard Metropolitan Statistical Area (or the equivalent) in which any employee or independent contractor sales office, place of employment, business address or POP maintained by the Company is located; or (b) Any state of the United States, any province of Canada or any foreign country from which the Company or any of its subsidiaries or affiliates derives more than $25 million in revenue. 4.2.3 "Restricted Period" means: (a) The period of your employment by the Company (whether under this Agreement or otherwise), if your employment is terminated because of your death or Disability; (b) The period of your employment by the Company (whether under this Agreement or otherwise) and 24 months thereafter, if your employment is terminated by the Company for Cause or without Cause (and not by the Company following Change of Control), unless this Agreement ends or is terminated under Section 1.2 in which event the Restricted Period shall be 12 months; (c) The period of your employment by the Company (whether under this Agreement or otherwise) and, if this Agreement is still in effect at the Termination Date, the number of months remaining in the Term at the Termination Date or 12 months, whichever is longer (but in no event more than 24 months), if you terminate your employment voluntarily (and not for Good Reason); or (d) The period of your employment by the Company under this Agreement, if your employment is terminated by you for Good Reason (unless this Agreement ends or is terminated under Section 1.2 in which event the Restricted Period shall be 12 months) or by the Company on any basis following Change of Control. 4.2.4 Exception. This Section shall not be construed to prohibit the ownership by you of not more than 1% of any class of securities of any corporation which competes with the Company and which has a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 4.3 Savings Clause. You and the Company specifically agree that this covenant not to compete and its specific limitations constitute a reasonable covenant under the circumstances and is supported by the consideration stated above, and further agree that if, in the opinion of any court of competent jurisdiction, any of the provisions of this Section 4 are ever determined by a court to exceed the time, geographic scope or other limitations permitted by applicable law in any jurisdiction, then such excessive provisions shall be deemed reduced, in such jurisdiction only, to the maximum time, geographic scope or other limitation permitted in such jurisdiction, and you agree to the enforcement of the remainder of the covenant as so amended. 5. Non-Solicitation. You also covenant and agree that during the Restricted Period set out in Section 4.2.3, and without regard to the activity or activities in which you are engaging, whether it is within or without the telecommunications industry, you will not, directly or through employees, agents, recruiters, independent contractors or others: (a) offer, promise, provide or guarantee employment, work for compensation, business opportunity or other means of financial gain, or solicit, invite an inquiry on employment or other compensatory relationship, respond to such inquiry with a promise or grant of an employment or other compensatory relationship, or otherwise seek to influence any person to leave the Company or to undertake activities that would be adverse to the Company's interests, where such person is employed by the Company or is in an independent contractor relationship in which a majority of their time is spent on Company-related activities, or is a supplier of services to the Company who would thereafter become unavailable to provide such services to the Company, or who has been in such an employment or independent contractor relationship within the 12 months prior to your contact(s); or (b) solicit from, convert, attempt to convert, divert business from, or attempt to divert business from any of the Company's customers, customer accounts or locations, whether such activity is intended to benefit you or any other person or entity, and whether or not such activity is successful. 6. Equitable Relief. You specifically acknowledge that the restrictions contained in each of Sections 2, 3, 4 and 5 of this Agreement are, in view of the nature of the business of the Company, and your position with it, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of the provisions of those Sections will result in irreparable injury to the Company for which there would be no adequate remedy at law. You also acknowledge that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from such violation. These rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. You agree to submit to the jurisdiction of any New York State court located in Monroe County or the United States District Court for the Western District of New York or of the state court or the federal court located in or presiding over the county in which the Company has its corporate headquarters at the applicable time in any action, suit or proceeding brought by the Company to enforce its rights under Sections 2, 3,4 and/or 5 of this Agreement, and that any separate claim you have shall not constitute a defense to the enforcement of the covenants and agreements in those paragraphs. 7. Company's Obligations upon Termination. The sole obligations of the Company upon the termination of your employment are as set forth in this Section 7. Any and all amounts to be paid to you in connection with your termination shall be paid in a lump sum promptly after the Termination Date, but not more than 30 days thereafter. 7.1 Termination upon Disability or Death. If your employment with the Company ends by reason of your death or Disability (as defined later in this Agreement), the Company shall pay you all amounts earned or accrued through the Termination Date but not paid as of the Termination Date, including: 7.1.1 Base compensation; 7.1.2 Reimbursement for reasonable and necessary expenses incurred by you on behalf of the Company during the Term; 7.1.3 Pay for earned but unused vacation and floating holidays; 7.1.4 All compensation you previously deferred (if any) to the extent not yet paid; and 7.1.5 An amount equal to your "Pro Rata Bonus". Your Pro Rata Bonus shall be determined by multiplying the "Bonus Amount" (as defined below) by a fraction, the numerator of which is the number of days in the fiscal year through the Termination Date and the denominator of which is 365. The term "Bonus Amount" means the greater of: (i) your standard bonus for the fiscal year (or such prorated portion of the fiscal year as it relates to your actual employment) in which the Termination Date occurs, applied to the payouts set forth under the incentive compensation program in effect for the year in which the Termination Date occurs; or (ii) the bonus paid or payable to you with respect to the fiscal year preceding the year in which the Termination Date occurs. The amounts described in Sections 7.1.1 through 7.1.4, inclusive, are called elsewhere in this Agreement, collectively, the "Accrued Compensation". Except as otherwise provided in this Section 7.1, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices, including any long term compensation benefits, then in effect. 7.2 Termination Without Cause. If the Company terminates your employment without Cause (as defined later in this Agreement), the Company shall pay you: 7.2.1 All Accrued Compensation; 7.2.2 A Pro Rata Bonus (as defined in Section 7.1.5 above); and 7.2.3 Severance ("Severance") equal to: (a) twice the sum of (i) the annual base compensation you would have received for the entire fiscal year in which the Termination Date occurs plus (ii) the Bonus Amount plus (iii) $30,000 (being the agreed cash equivalent of the annual value of the perquisites provided to you under the Company's Executive Compensation Program), plus (iv) the Company contributions which would have been made on your behalf to the 401(k) retirement savings plan maintained by the Company (b) reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986 as amended (the "Code")). The foregoing shall be in lieu of any other amount of severance relating to salary or bonus continuation to be received by you upon termination of your employment under any severance plan, policy or arrangement of the Company. In addition, the Company shall continue to provide to you and your family at the Company's expense, for 24 months following the Termination Date, the life insurance, medical, dental, vision and hospitalization benefits provided to you and your family immediately prior to the Termination Date. Except as otherwise provided in this Section 7.2, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. 7.3 Termination for Cause or Voluntary Termination. If your employment is terminated for Cause (as defined later in this Agreement), or if you voluntarily terminate your employment other than for Good Reason, the Company shall pay you all Accrued Compensation. Except as otherwise provided in this Section 7.3, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. 7.3.1 You and Company acknowledge that at the inception of this Agreement, the Company has agreed to pay the reasonable costs of travel and temporary living expenses in connection with this Agreement. You agree that, except in connection with a Change of Control, within such reasonable time period as you and Company agree, not to exceed 270 days, you will move your residence to such place as Company has its headquarters location, under the Company's relocation program, plus such amounts as have been agreed to reflect the price differential related to improvements you have made to your residence in comparison to its purchase price. You agree that, if you should decline to make such move, or should fail to comply with Company's request or directive, such refusal or failure shall be a basis for Company to terminate your employment for Cause, at its election. This subsection 7.3.1 shall cease to apply upon a Change of Control. 7.4 Termination for Good Reason or by Company Following Change of Control. If you terminate your employment for Good Reason or the Company terminates your employment following a Change of Control, the Company shall pay you: 7.4.1 All Accrued Compensation; 7.4.2 A Pro Rata Bonus; and 7.4.3 Severance equal to: (a) three times the sum of (i) the annual base compensation you would have received for the entire fiscal year in which the Termination Date occurs plus (ii) the Bonus Amount plus (iii) $30,000 (being the agreed cash equivalent of the annual value of the perquisites provided to you under the Company's Executive Compensation Program), plus (iv) the Company contributions which would have been made on your behalf to the 401(k) retirement savings plan maintained by the Company (b) reduced by the present value (determined as provided in Section 280G(d)(4) of the Code). The foregoing severance shall be in lieu of any other amount of severance relating to salary or bonus continuation to be received by you upon termination of your employment under any severance plan, policy or arrangement of the Company. In addition, the Company shall continue to provide to you and your family at the Company's expense, for 36 months following the Termination Date, the life insurance, medical, dental, vision and hospitalization benefits provided to you and your family immediately prior to the Termination Date. The Company shall reimburse you for all reasonable legal fees and expenses which you may incur following a Change of Control as a result of the Company's attempts to contest the validity or enforceability of this Agreement or your attempts to obtain or enforce any right or benefit provided to you under this Agreement, provided any actions you have taken are determined to have been undertaken in good faith and upon a reasonable basis. Except as otherwise provided in this Section 7.4, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices, including any long term compensation benefits, then in effect. 8. Gross-Up Payment. Notwithstanding anything else in this Agreement, if it is found that any or all of the payments made to you, including but not limited to payments made by the Company, or under any plan or arrangement maintained by the Company, to you or for your benefit (other than any additional payments required under this Section 8) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Code or you incur any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively the "Excise Tax"), then you are entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after you pay all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The procedures for the calculation and contesting of any claim that such Excise Tax is due are set forth in the Addendum. 9. No Obligation to Mitigate Damages. You are not required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and the amounts to be paid to you under Section 7 of this Agreement shall not be reduced by any compensation you may earn from other sources. However, if, during any period that you would otherwise be entitled to receive any payments or benefits under this Agreement, you breach your obligations under Section 2, 3 or 4 of this Agreement, the Company may immediately terminate any and all payments and the provision of benefits (to the extent permitted by law and the terms of the benefit plans maintained by the Company from time to time) hereunder. 10. Successor to Company. The Company will require any successor or assignee to all or substantially all of the business and/or assets of the Company, whether by merger, sale of assets or otherwise, by agreement in form and substance reasonably satisfactory to you, to assume and agree to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if such succession or assignment had not taken place. Such agreement of assumption must be express, absolute and unconditional. If the Company fails to obtain such an agreement within three business days prior to the effective date of such succession or assignment, you shall be entitled to terminate your employment under this Agreement for Good Reason. 11. Survival. Notwithstanding the expiration or termination of this Agreement, except as otherwise specifically provided herein, your obligations under Sections 2, 3 and 4 of this Agreement and the obligations of the Company under this Agreement shall survive and remain in full force and effect. This Agreement shall inure to the benefit of, and be enforceable by, your personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you die while any amounts are still payable to you, all such amounts, unless otherwise provided in this Agreement, shall be paid in accordance with the terms of this Agreement to your devisee(s), legatee(s) or other designee(s) or, if there is no such designee(s), to your estate. 12. Definitions. Whenever used in this Agreement, the following terms shall have the meanings below: 12.1 "Cause" means: 12.1.1 You have willfully and continually failed to substantially perform your duties (other than due to an incapacity resulting from physical or mental illness or due to any actual or anticipated failure after you have given a Notice of Termination for Good Reason) after a written demand for substantial performance is delivered to you by the Chief Executive Officer or the Board which specifically identifies the manner in which it is believed that you have not substantially performed your duties; or 12.1.2 You have willfully engaged in conduct which is demonstrably and materially injurious to the Company (monetarily or otherwise), including but not limited to a breach of fiduciary duty; or 12.1.3 You have willfully engaged in conduct which is illegal or in violation of the Company's Code of Ethics; or 12.1.4 You have been convicted of a felony or a crime involving moral turpitude; or 12.1.5 You have violated the provisions of Section 2 and/or Section 3 and/or Section 4 and/or Section 5 of this Agreement and, in any of the events described in Sections 12.1.1 through 12.1.5 above, the Board adopts a resolution finding that in the good faith opinion of the Board you were culpable for the conduct set forth in any of Sections 12.1.1 through 12.1.5 and specifying the particulars thereof in detail. For the purposes of this Agreement, no act or failure to act on your part shall be considered willful unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interests of the Company. Any such resolution of the Board must receive the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose of considering the issue, and you must receive reasonable notice of the meeting and have an opportunity, with your counsel, to present your case to the Board. 12.2 "Change of Control" means: 12.2.1 The consummation of a consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which the shares of the Company's common, voting equity are to be converted into cash, securities or other property. For the purposes of this Agreement, a consolidation or merger with a corporation which was a wholly-owned direct or indirect subsidiary of the Company immediately before the consolidation or merger is not a Change of Control; or 12.2.2 The sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the Company's assets; or 12.2.3 The approval by the Company's shareowners of any plan or proposal for the liquidation or dissolution of the Company; or 12.2.4 Any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, a direct or indirect wholly-owned subsidiary of the Company or any other company owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of the Company's common, voting equity), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's then outstanding common, voting equity; or 12.2.5 During any period of two consecutive years, individuals who at the beginning of such period constitute the Board, including for this purpose any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in this Section 12.2.5) whose election or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "Incumbent Board"), cease for any reason to constitute a majority of the Board. 12.3 "Disability" means: 12.3.1 Your absence from your duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness; or 12.3.2 A physical or mental condition which prevents you from satisfactorily performing your duties with the Company and such incapacity or condition is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to you and/or your legal representative. 12.4 "Good Reason" means: 12.4.1 Without your express written consent, after a Change of Control, a significant reduction in title and authority, or the assignment to you of duties with the Company or with a person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company materially diminished from the duties assigned to you immediately prior to a Change of Control; or 12.4.2 Without your express written consent, after a Change of Control, any reduction by the Company or any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company in your annual base compensation or annual bonus at Standard (or equivalent) rating from the amounts of such compensation and/or bonus in effect immediately before and during the fiscal year in which the Change of Control occurred (except that this Section 12.4.2 shall not apply to across-the-board salary or bonus reductions similarly affecting all executives of the Company and all executives of any person in control of the Company); or 12.4.3 Without your express written consent, after a Change of Control, the failure by the Company or any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company to increase your annual base compensation or annual bonus at Standard (or equivalent) rating at the times and in comparable amounts as they are increased for similarly situated senior executive officers of the Company and of any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company; or 12.4.4 Without your express written consent, after a Change of Control, the failure by the Company or by any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company to continue in effect any benefit or incentive plan or arrangement (except any benefit plan or arrangement which expires by its own terms then in effect upon the occurrence of a Change of Control) in which you are participating at the time of the Change of Control, unless a replacement plan or arrangement with at least substantially similar terms is provided to you; or 12.4.5 Without your express written consent, after a Change of Control, the taking of any action by the Company or by any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company which would adversely affect your participation in or materially reduce your benefits under any benefit plan or arrangement or deprive you of any other material benefit (including any miscellaneous benefit which is not represented and protected by a written plan document or trust) enjoyed by you at the time of a Change of Control; or 12.4.6 You terminate your employment (other than because of your death or Disability) by giving the Company a Notice of Termination with a Termination Date not later than the first anniversary of the Change of Control; or 12.4.7 Any failure by the Company to comply with any of its material obligations under this Agreement, after you have given notice of such failure to the Company and the Company has not cured such failure promptly after its receipt of such notice. 13. Notice. All notices and other communications required or permitted under this Agreement shall be in writing and shall be deemed given when mailed by certified mail, return receipt requested, or by nationally recognized overnight courier, receipt requested, when addressed to you at your official business address when employed by the Company or at your home address as reflected in the Company's records from time to time and when addressed to the Company at its corporate headquarters, to the attention of the Board, with a required copy to the Company's Corporate Counsel. 14. Amendment and Assignment. This Agreement cannot be changed, modified or terminated except in a writing. You may not assign your duties with the Company to any other person. The Company may assign its obligations under this Agreement to one of its principal subsidiaries for administrative purposes. 15. Severability. If any provision of this Agreement or the application of this Agreement to anyone or under any circumstances is determined by a court to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be effective without the invalid or unenforceable provision or application, and such invalidity or unenforceability shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. Remedies Cumulative; No Waiver. No remedy conferred on you or on the Company by this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or later existing at law or in equity. No delay or omission by you or by the Company in exercising any right, remedy or power under this Agreement or existing at law or inequity shall be construed as a waiver of such right, remedy or power, and any such right, remedy or power may be exercised by you or the Company from time to time and as often as is expedient or necessary. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to any applicable conflicts of laws. 18. Counterparts. This Agreement may be signed by you and on behalf of the Company in one or more counterparts, each of which shall be one original but all of which together will constitute one and the same instrument. If this Agreement correctly sets forth our agreement on its subject matter, please sign and return to me the enclosed copy of this Agreement. Please keep the other copy for your records. Sincerely, FRONTIER CORPORATION By: /s/Ronald L. Bittner -------------------- Ronald L. Bittner Chairman and CEO Agreed to on 6/9/97 -------------------- /s/Joseph P. Clayton -------------------- Joseph P. Clayton ADDENDUM TO LETTER AGREEMENT DATED JUNE 9, 1997 The following provisions shall apply to the calculation and procedures relating to the Gross-Up Payment in accordance with Section 8 of the Agreement. 1. The Company's independent auditors in the fiscal year in which the Change of Control occurs (the "Accounting Firm") shall determine whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be used in making such determination. The Accounting Firm shall provide detailed supporting calculations, together with a written opinion with respect to the accuracy of such calculations, to you and the Company within 15 business days of the receipt of a written request from either you or the Company. If the Accounting Firm is serving (or has served within the three years preceding the Change in Control) as accountant or auditor for the person in control of the Company following the Change of Control or any affiliate thereof, you may appoint another nationally recognized accounting firm to make the determinations required in connection with the Gross-Up Payment and the substitute accounting firm shall then be referred to as the Accounting Firm). The Company shall pay you any Gross-Up Payment, determined in accordance with this Addendum, within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that you will not be liable for any Excise Tax, it shall furnish you with a written opinion that your failure to report the Excise Tax on the applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon you and the Company. 2. If there is uncertainty about how Section 4999 is to be applied when the Accounting Firm makes its initial determination, and as a result the Gross-Up Payment made to you by the Company is determined (after following the procedures set forth in this Addendum) to be less than it should have been made (an "Underpayment"), and you are thereafter required to pay any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment and any such Underpayment shall be promptly paid by the Company to you or for your benefit. 3. You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the Company to pay you the Gross-Up Payment. Your notice shall be given as soon as practicable but no later than ten business days after you have been informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30 day period following the date on which you gave such notice to the Company (or any shorter period, if the taxes claimed are due sooner). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (a) give the Company any information reasonably requested by it relating to such claim, (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (c) cooperate with the Company in good faith in order effectively to contest such claim, and (d) permit the Company to participate in any proceedings relating to such claim. 4. The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in connection with the claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute the contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts as the Company shall determine. 5. Any extension by the Company of the statute of limitations relating to payment of taxes for the taxable year for which such contested amount is claimed to be due shall be limited solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable under this Agreement and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6. If the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance. 7. If you receive a refund of any amount advanced to you by the Company, you will promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If the Company advanced to you any amounts and a determination is made that you will not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and you will not be required to be repay it. The amount of such advance shall offset the amount of the Gross-Up Payment required to be paid. 8. The Company shall pay all fees and expenses of the Accounting Firm. The Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. June 9, 1997 Mr. Joseph P. Clayton 14280 Oakbrook Court Carmel, Indiana 46033 Dear Mr. Clayton: The purpose of this letter is to assure you that upon execution of the agreement by which you will become an employee of Frontier Corporation ("Frontier") and an officer of Frontier, Frontier shall extend to you an agreement for 500,000 stock options in Frontier, to be effective at the closing price of Frontier on the date the agreement is executed. It is also my purpose to assure you that you would be considered for a restricted stock grant in the range of 50,000-100,000 shares, to be made in the first quarter of 1998, as well as being considered for additional options at that time. Very truly yours, /s/Janet F. Sansone - ------------------- Janet F. Sansone 6/9/97 /s/Joseph P. Clayton EX-11 4 COMP OF EPS OF COM STOCK Exhibit 11 Frontier Corporation Computation of Earnings per Share of Common Stock on a Fully Diluted Basis (Unaudited) 3 Months Ended 6 Months Ended June 30, June 30, (In thousands, except per share data) 1997 1996 1997 1996 - --------------------------------------------------------------------------------- Income applicable to common stock $42,186 $68,909 $ 28,372 $125,740 Add: Interest on convertible debentures 139 139 277 277 - --------------------------------------------------------------------------------- 42,325 69,048 28,649 126,017 Less: Increase in related federal income taxes 49 49 97 97 - --------------------------------------------------------------------------------- Adjusted income applicable to common stock $42,276 $68,999 $28,552 $125,920 ================================================================================= Average Common Shares Outstanding 163,492 162,873 163,579 161,525 (excluding common stock equivalents) Adjustments for: Convertible Debentures 503 503 503 503 Stock Options 297 1,307 370 2,364 - --------------------------------------------------------------------------------- Adjusted common shares assuming conversion of outstanding Convertible Debentures and Stock Options at beginning of each period 164,292 164,683 164,452 164,392 ================================================================================= Earnings per share of common stock on a fully diluted basis $ .26 $ .42 $ .17 $ .77 =================================================================================
EX-27 5 FDS 2Q97
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000084567 FRONTIER CORPORATION 1,000 6-MOS DEC-31-1997 JUN-30-1997 23,082 0 394,582 22,921 14,180 471,471 2,305,416 1,345,419 2,282,118 417,719 777,603 0 20,125 164,151 832,787 2,282,118 0 1,158,123 33,224 1,107,343 (616) 0 22,158 53,665 24,782 28,883 0 0 0 28,883 .17 .17
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