-----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, Hqnj1Q9iikTO4sWDD8IhBHdoTkDFmTcwMJ+Srb9zbM7EJDeupvFzkP79GXU9426z B3wMSdEvNaefcrciZn5dmQ== 0000084567-98-000032.txt : 19981116 0000084567-98-000032.hdr.sgml : 19981116 ACCESSION NUMBER: 0000084567-98-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER CORP /NY/ CENTRAL INDEX KEY: 0000084567 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 160613330 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04166 FILM NUMBER: 98747968 BUSINESS ADDRESS: STREET 1: ROCHESTER TEL CENTER STREET 2: 180 S CLINTON AVE CITY: ROCHESTER STATE: NY ZIP: 14646-0995 BUSINESS PHONE: 7167771000 FORMER COMPANY: FORMER CONFORMED NAME: ROCHESTER TELEPHONE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FRONTIER CORPORATION 10Q 3Q 98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 From the transition period from to ______ Commission file number 1-4166 FRONTIER CORPORATION (Exact name of registrant as specified in its charter) New York 16-0613330 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 180 South Clinton Avenue, Rochester, NY 14646-0700 (Address of principal executive offices) (Zip Code) (716) 777-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $1.00 Par Value Common Stock 171,613,869 shares as of October 31, 1998 FRONTIER CORPORATION Form 10-Q Index Page Number Part I. FINANCIAL INFORMATION Item 1. Financial Statements Business Segment Information for the three and nine months ended September 30, 1998 and 1997 3 Consolidated Statements of Income for the three and nine months ended September 30, 1998 and 1997 4 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7-11 Item 2. Management's Discussion of Results of Operations and Analysis of Financial Condition 12-23 Part II. OTHER INFORMATION Item 1. Legal Proceedings 24-25 Item 5. Other Information 25-26 Item 6. Exhibits and Reports on Form 8-K 26 Signature 27 Index to Exhibits 28-29 FRONTIER CORPORATION Business Segment Information (Unaudited) 3 Months Ended 9 Months Ended September 30, September 30, In thousands of dollars 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Integrated Services Revenue Commercial $ 248,828 $ 233,266 $ 739,141 $ 696,304 Consumer 56,443 70,248 186,654 195,001 Carrier 170,712 106,610 464,398 307,964 Exited business - Prepaid - 18,581 - 46,986 - ----------------------------------------------------------------------------------- Total $ 475,983 $ 428,705 $1,390,193 $1,246,255 Cost of Access 305,232 276,901 893,048 791,487 - ----------------------------------------------------------------------------------- Gross Margin $ 170,751 $ 151,804 $ 497,145 $ 454,768 SG&A Expense 118,022 117,395 357,391 349,022 Depreciation and Amortization 27,338 27,952 78,449 73,203 Operating Income (Loss): Operating Income Before Other Charges $ 25,391 $ 6,457 $ 61,305 $ 32,543 Other Charges - - (6,528) (96,600) - ----------------------------------------------------------------------------------- Total Operating Income (Loss) $ 25,391 $ 6,457 $ 54,777 $ (64,057) Capital Expenditures $ 103,768 $ 61,965 $ 244,692 $ 156,893 Total Assets $1,566,865 $1,229,601 $1,566,865 $1,229,601 =================================================================================== Local Communications Services Revenues $ 176,436 $ 166,772 $ 524,639 $ 497,089 Costs and Expenses 88,150 79,631 251,138 235,623 Depreciation and Amortization 27,987 27,344 84,498 82,004 - ----------------------------------------------------------------------------------- Operating Income $ 60,299 $ 59,797 $ 189,003 $ 179,462 Capital Expenditures $ 34,424 $ 25,815 $ 96,982 $ 69,379 Total Assets $ 985,551 $ 895,316 $ 985,551 $ 895,316 =================================================================================== Corporate Operations and Other Revenues $ 5,789 $ 11,044 $ 23,690 $ 30,869 Costs and Expenses 9,778 11,530 35,331 33,287 Depreciation and Amortization 546 897 2,135 2,662 - ----------------------------------------------------------------------------------- Operating Loss $ (4,535) $ (1,383) $ (13,776) $ (5,080) Capital Expenditures $ 10,538 $ 6,101 $ 26,202 $ 18,076 Total Assets $ 272,780 $ 232,374 $ 272,780 $ 232,374 =================================================================================== Consolidated Revenues $ 658,208 $ 606,521 $1,938,522 $1,774,213 Costs and Expenses 521,182 485,457 1,536,908 1,409,419 Depreciation and Amortization 55,871 56,193 165,082 157,869 - ----------------------------------------------------------------------------------- Operating Income: Operating Income Before Other Charges $ 81,155 $ 64,871 $ 236,532 $ 206,925 Other Charges - - (6,528) (96,600) - ----------------------------------------------------------------------------------- Total Operating Income $ 81,155 $ 64,871 $ 230,004 $ 110,325 Capital Expenditures $ 148,730 $ 93,881 $ 367,876 $ 244,348 Total Assets $2,825,196 $2,357,291 $2,825,196 $2,357,291 =================================================================================== See accompanying Notes to Consolidated Financial Statements.
FRONTIER CORPORATION Consolidated Statements of Income (Unaudited) 3 Months Ended 9 Months Ended In thousands of dollars, September 30, September 30, except per share data 1998 1997 1998 1997 - -------------------------------------------------------------------------- Revenue Integrated Services $475,983 $428,705 $1,390,193 $1,246,255 Local Communications 176,436 166,772 524,639 497,089 Corporate Operations and Other 5,789 11,044 23,690 30,869 - --------------------------------------------------------------------------- Total Revenue 658,208 606,521 1,938,522 1,774,213 Costs and Expenses Operating expenses 505,270 470,568 1,489,306 1,365,721 Depreciation and amortization 55,871 56,193 165,082 157,869 Taxes other than income taxes 15,912 14,889 47,602 43,698 Other Charges - - 6,528 96,600 - --------------------------------------------------------------------------- Total Costs and Expenses 577,053 541,650 1,708,518 1,663,888 - --------------------------------------------------------------------------- Operating Income 81,155 64,871 230,004 110,325 Interest expense 13,527 12,710 39,516 35,100 Other income: Gain on sale of assets 618 - 15,169 18,765 Equity earnings from 5,167 3,676 11,803 7,949 unconsolidated wireless interests Interest income 1,064 859 3,453 2,368 Other income 1,161 1,466 3,055 2,082 - --------------------------------------------------------------------------- Income Before Taxes and Cumulative Effect of Change in Accounting Principle 75,638 58,162 223,968 106,389 Income tax expense 29,881 25,711 96,634 50,506 - --------------------------------------------------------------------------- Income Before Cumulative Effect of Change in Accounting Principle 45,757 32,451 127,334 55,883 Cumulative effect of change in accounting principle - - 1,755 - - --------------------------------------------------------------------------- Consolidated Net Income 45,757 32,451 125,579 55,883 Dividends on preferred stock 251 253 754 764 - --------------------------------------------------------------------------- Basic Income Applicable to Common Stock 45,506 32,198 124,825 55,119 Diluted earnings adjustment 90 90 270 - - --------------------------------------------------------------------------- Diluted Income Applicable to Common Stock $45,596 $32,288 $125,095 $55,119 =========================================================================== Basic Earnings Per Common Share Income before cumulative effect of change in accounting principle $ .27 $ .19 $ .74 $ .33 Cumulative effect of change in accounting principle - - .01 - - --------------------------------------------------------------------------- Basic Earnings Per Common Share $ .27 $ .19 $ .73 $ .33 Average Shares Outstanding 170,842 169,179 170,434 168,674 =========================================================================== Diluted Earnings Per Common Share Income before cumulative effect of change in accounting principle $ .26 $ .19 $ .73 $ .33 Cumulative effect of change in accounting principle - - .01 - - --------------------------------------------------------------------------- Diluted Earnings Per Common Share $ .26 $ .19 $ .72 $ .33 Average Shares Outstanding 174,696 170,206 173,865 169,527 =========================================================================== See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Consolidated Balance Sheets September 30, December 31, In thousands of dollars, 1998 1997 except share data (Unaudited) - --------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 74,984 $ 26,302 Accounts receivable, (less allowance for uncollectibles of $36,227 and $25,100, respectively) 435,090 380,324 Materials and supplies 13,093 12,312 Deferred income taxes 30,300 33,948 Prepayments and other 40,151 37,419 - -------------------------------------------------------- Total Current Assets 593,618 490,305 Property, plant and equipment,net 1,340,042 1,046,884 Goodwill and customer base, net 482,028 517,754 Deferred and other assets 409,508 446,574 - -------------------------------------------------------- Total Assets $2,825,196 $2,501,517 ======================================================== LIABILITIES AND SHAREHOLDERS'EQUITY Current Liabilities Accounts payable $ 417,923 $ 343,606 Dividends payable 38,196 36,798 Debt due within one year 6,236 6,443 Taxes accrued 41,330 16,023 Other liabilities 60,351 90,108 - -------------------------------------------------------- Total Current Liabilities 564,036 492,978 Long-term debt 1,108,919 934,681 Deferred income taxes 38,071 10,927 Deferred employee benefits obligation 101,856 88,562 - -------------------------------------------------------- Total Liabilities 1,812,882 1,527,148 - -------------------------------------------------------- Shareholders' Equity Preferred stock 20,126 20,126 Common stock, par value $1.00, authorized 300,000,000 shares; 171,614,860 shares and 170,503,300 shares issued in 1998 and 1997, respectively 171,615 170,503 Capital in excess of par value 571,009 544,066 Retained earnings 263,420 253,435 Accumulated other comprehensive income 3,967 3,418 - -------------------------------------------------------- 1,030,137 991,548 Less - Treasury stock, 11,076 shares in 1998 and 10,849 shares in 1997, at cost 315 231 Unearned compensation - restricted stock plan 17,508 16,948 - -------------------------------------------------------- Total Shareholders' Equity 1,012,314 974,369 - -------------------------------------------------------- Total Liabilities and Shareholders' Equity $2,825,196 $2,501,517 ======================================================== See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Consolidated Statements of Cash Flows (Unaudited) 9 Months Ended September 30, In thousands of dollars 1998 1997 - --------------------------------------------------------------------------- Operating Activities Net Income $125,579 $ 55,883 - ------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Other charges 6,528 96,600 Cumulative effect of change in accounting principle 1,755 - Depreciation and amortization 165,082 157,869 Gain on sale of assets (15,169) (18,765) Equity earnings from unconsolidated wireless interests (11,803) (7,949) Other, net 5,970 3,162 Changes in operating assets and liabilities, exclusive of impacts of dispositions and acquisitions: Increase in accounts receivable (55,604) (17,850) Increase in materials and supplies (986) (760) Increase in prepayments and other current assets (2,819) (2,875) Increase in deferred and other assets (21,155) (15,155) Increase (decrease) in accounts payable 66,081 (47,082) Increase (decrease) in taxes accrued and other liabilities 7,921 (37,060) Increase (decrease) in deferred income taxes 30,792 (29,135) Increase in deferred employee benefits obligation 13,294 11,348 - ------------------------------------------------------------------------ Total Adjustments 189,887 92,348 - ------------------------------------------------------------------------ Net Cash Provided by Operating Activities 315,466 148,231 - ------------------------------------------------------------------------ Investing Activities Expenditures for property, plant and equipment (306,406) (179,392) Deposit for capital projects (98,532) (67,571) Proceeds from asset sales 42,250 32,889 Other investing activities (121) (366) - ------------------------------------------------------------------------ Net Cash Used in Investing Activities (362,809) (214,440) - ------------------------------------------------------------------------ Financing Activities Proceeds from issuance of long-term debt 214,403 302,137 Repayments of debt (13,672) (129,776) Dividends paid (113,695) (107,824) Treasury stock, net (84) (2,468) Issuance of common stock, net 9,086 721 Other financing activities (13) (2,499) - ------------------------------------------------------------------------ Net Cash Provided by Financing Activities 96,025 60,291 ----------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 48,682 (5,918) Cash and Cash Equivalents at Beginning of Period 26,302 37,411 - ------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 74,984 $ 31,493 ======================================================================== See accompanying Notes to Consolidated Financial Statements. FRONTIER CORPORATION Notes to Consolidated Financial Statements (Unaudited) Note 1: Consolidation The consolidated financial statements of Frontier Corporation (the "Company" or "Frontier") included herein, are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with the Annual Report of the Company on Form 10-K for the year ended December 31, 1997 and the Form 8-K filed with the Securities and Exchange Commission on June 17, 1998 as a result of the Company's pooling of interests merger with GlobalCenter, Inc., effective February 27, 1998. The consolidated financial information includes the accounts of Frontier Corporation and its majority-owned subsidiaries after elimination of all significant intercompany transactions. Investments in entities in which the Company does not have a controlling interest are accounted for using the equity method. Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform with current year presentation. Note 2: Acquisitions On February 27, 1998, the Company acquired GlobalCenter, Inc. (renamed "Frontier GlobalCenter, Inc." or "GlobalCenter"), a leading provider in digital distribution, Internet and data services headquartered in Sunnyvale, California. Under the terms of the merger agreement, the Company acquired all of the outstanding shares of GlobalCenter. The total number of shares issued by the Company to effect the merger was 6.4 million. At the time of the merger, GlobalCenter had 1.1 million stock options and warrants outstanding as converted into Frontier equivalents. This transaction was accounted using the pooling of interests method of accounting and, accordingly, historical information has been restated to include GlobalCenter. Combined and separate results of Frontier Corporation and GlobalCenter were as follows: Frontier In Millions Corporation GlobalCenter Combined - --------------------------------------------------------------------------- One month ended January 31, 1998 (unaudited) Revenues $ 205.5 $ 2.5 $ 208.0 Net income $ 14.7 $ (1.0) $ 13.7 =========================================================================== Nine months ended September 30, 1997 (unaudited) Revenues $1,759.7 $ 14.5 $1,774.2 Net income $ 69.0 $ (13.1) $ 55.9 =========================================================================== In February 1997, the Company completed its purchase of R.G. Data Incorporated (renamed "Frontier Network Systems Corp." or "FNSC"), a privately held upstate New York based computer and data networking equipment and services company. A total of 110,526 shares of Frontier common stock held in treasury were reissued in exchange for all of the shares of R.G. Data Incorporated. The treasury shares were acquired through open market purchases. This transaction was accounted for as a purchase. Note 3: Other Charges In the first quarter of 1998, the Company recorded a pre- tax charge of $6.5 million associated with the acquisition of GlobalCenter. These charges included investment banker, legal fees and other direct costs and were subsequently liquidated in the second quarter of 1998. In October 1997, the Company recorded a pre-tax charge of $86.8 million consisting of a restructuring charge of $43.0 million and a provision for asset and lease impairments of $43.8 million. The restructuring charge of $43.0 million was subsequently liquidated during 1998. The provision for asset and lease impairments primarily relates to long term assets and certain lease obligations the Company is in the process of disposing of, or exiting. These reserves are included in the "Other liabilities" caption in the Consolidated Balance Sheets. In March 1997, the Company recorded a $96.6 million pre-tax charge primarily related to the write-off of certain network facilities no longer required as a result of the migration of the Company's major carrier customer's one-plus traffic volume to other networks and the Company's overall network integration efforts. The Company completed the decommissioning of these redundant facilities during the first quarter of 1998. Note 4: Gain on Sale of Assets In April 1998, the Company completed the sale of Minnesota Southern Cellular Telephone Company ("Minnesota RSA No. 10"), a wholly owned cellular partnership, and certain other properties. The sale of these properties resulted in a combined pre-tax gain of $15.2 million and an after-tax gain of $2.9 million. The income tax effect on these gains of $12.3 million is primarily impacted by the sale of Minnesota RSA No. 10 which resulted in nondeductible goodwill. On January 31, 1997, the Company completed the sale of its 69.5% equity interest in the South Alabama Cellular Communications Partnership which resulted in a pre-tax gain of $18.8 million. Note 5: Earnings Per Share The Company adopted the provisions of Financial Accounting Standards Board ("FAS") Statement No. 128, "Earnings Per Share" ("EPS") effective December 31, 1997. This statement simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share", and makes them comparable to international earnings per share standards. Basic EPS are based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS are based on the weighted average number of shares of common stock and common stock equivalents (options, warrants and convertible debentures) outstanding during the period, computed in accordance with the treasury stock method. Historical earnings per share have been restated to conform with the provisions of FAS 128. The following is a reconciliation of the denominator used in the computation of diluted earnings per share: 3 Months Ended 9 Months Ended September 30, September 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------- Weighted Average Shares Outstanding 170,842 169,179 170,434 168,674 Options and Warrants 3,351 524 2,928 853 Convertible Debentures (1) 503 503 503 - - -------------------------------------------------------------------------- Weighted Average Shares Outstanding 174,696 170,206 173,865 169,527 ========================================================================== (1) Convertible debentures were anti-dilutive for the nine months ended September 30, 1997. Note 6: Comprehensive Income The Company adopted the provisions of FAS 130, "Reporting Comprehensive Income" as of January 1, 1998. This statement establishes standards for reporting and display of comprehensive income and its components. This statement requires reporting, by major components and as a single total, the change in net assets during the period from nonshareholder sources. Adoption of this standard did not materially impact the Company's consolidated financial position, results of operations or cash flow. The reconciliation of net income to comprehensive net income is as follows: 3 Months Ended 9 Months Ended Sept.30, Sept.30, In thousands of dollars 1998 1997 1998 1997 - --------------------------------------------------------------------------- Net income $45,757 $32,451 $125,579 $55,883 Foreign currency translation adjustment (333) 373 549 (147) - --------------------------------------------------------------------------- Total comprehensive income $45,424 $32,824 $126,128 $55,736 =========================================================================== At September 30, 1998 and December 31, 1997, "Accumulated other comprehensive income," as reflected in the Consolidated Balance Sheets is comprised of the following: September 30, December 31, 1998 1997 --------------------------------------------------------------------- Foreign currency translation adjustment $ 985 $ 436 Minimum pension liability 2,982 2,982 --------------------------------------------------------------------- Accumulated other comprehensive income $3,967 $3,418 ===================================================================== Note 7: New Accounting Pronouncements The Company will adopt the provisions of FAS 131, " Disclosures about Segments of an Enterprise and Related Information," effective December 31, 1998. This statement establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of this statement will not impact the Company's consolidated financial position, results of operations or cash flows. In the initial year of application, comparative information for earlier years will be restated if necessary. The Company is currently evaluating the disclosures that will be required by this statement. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5") which requires that start-up costs be expensed as incurred. The Company adopted the provisions of SOP 98-5 in the second quarter of 1998. Accordingly, $1.8 million, net of applicable income taxes of $.8 million of unamortized start-up costs at December 31, 1997, have been expensed in the accompanying Consolidated Statements of Income and is reported as a cumulative effect of a change in accounting principle. These start-up costs are primarily related to product development costs associated with new business ventures. On June 17, 1998, the Financial Accounting Standards board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. This statement standardizes the accounting for derivatives and hedging activities and requires that all derivatives be recognized in the statement of financial position as either assets or liabilities at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are to be reported in earnings. Adoption of this standard is not expected to have a material effect on the Company's financial position, results of operations or cash flows. Note 8: Cash Flows For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Actual interest paid was $45.0 million and $35.8 million for the nine months ended September 30, 1998 and September 30, 1997, respectively. Income taxes paid totaled $69.7 million and $57.3 million for the nine month periods ended September 30, 1998 and September 30, 1997, respectively. Interest costs associated with the construction of capital assets, including the optronics network, are capitalized. Total amounts capitalized for the first nine months of 1998 and 1997 totaled $13.8 million and $9.2 million, respectively. Note 9: Commitments and Contingencies In connection with the Company's capital program, certain commitments have been made for the purchase of materials and equipment . In October 1996, construction began on the optronics network. Total capital expenditures for 1998 are currently projected to be in the range of $550.0 million to $650.0 million. At September 30, 1998 and December 31, 1997, respectively, $176.5 million and $238.2 million of deposits for the Company's optronics network build are included in the "Deferred and other assets" caption in the Consolidated Balance Sheets. Item 2 - Management's Discussion of Results of Operations and Analysis of Financial Condition For the Three and Nine Months Ended September 30, 1998 and 1997 The matters discussed throughout this Form 10-Q, except for historical financial results contained herein, may be forward- looking in nature or "forward-looking statements." Actual results may differ materially from the forecasts or projections presented. Forward-looking statements are identified by such words as "expects," "anticipates," "believes," "intends," "plans" and variations of such words and similar expressions. The Company believes that its primary risk factors include, but are not limited to: changes in the overall economy, the nature and pace of technological change, the number and size of competitors in the Company's market, changes in law and regulatory policy and the mix of products and services offered in the Company's markets. Any forward-looking statements in this September 30, 1998 Form 10- Q should be evaluated in light of these important risk factors. For additional disclosure regarding risk factors refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and the Form 8-K filed with the Securities and Exchange Commission on June 17, 1998 as result of the Company's pooling of interest merger with GlobalCenter, Inc., effective February 27, 1998. DESCRIPTION OF BUSINESS Frontier Corporation (the "Company" or "Frontier") provides integrated telecommunications services including Internet IP and data applications, long distance, local telephone and wireless to business, carrier and targeted residential customers nationwide and in certain international countries. RESULTS OF OPERATIONS Consolidated revenues for the third quarter of 1998 and on a year-to-date basis were $658.2 million and $1.9 billion respectively, representing increases of $51.7 million or 8.5% and $164.3 million or 9.3% over the three and nine month periods ended September 30, 1997. Excluding nonrecurring items, operating income was $81.2 million for the three months ended September 30, 1998 and $236.5 million for the nine month period ended September 30, 1998 as compared to $64.9 million and $206.9 million for the three and nine month periods ended September 30, 1997. Operating results continue to be positively impacted by revenue growth in Carrier Services, Data and Competitive Local Exchange Carrier ("CLEC") services. The most significant growth continues to be generated by the Carrier Services business. Carrier Services revenues grew $64.1 million or 60.1% over the third quarter of 1997, and $156.4 million or 50.8% over the first nine months of 1997. The growth in Carrier Services reflects a growing and diverse base of customers, such as Level 3 Communications. The Company's agreement with Level 3 Communications provides them with additional bandwidth for IP-based applications and is expected to generate $195.0 million in incremental revenue for the Company over the five year term of the agreement. On a quarter-to-date and year-to-date basis, excluding nonrecurring charges, consolidated operating income grew 25% and 14%, respectively, over the comparable prior year periods. Normalized for other charges, costs and expenses grew $35.4 million or 6.5% for the quarter ended period and $134.7 million or 8.6% for the year-to-date period. Expenses were driven primarily by an increase in service costs in the Local segment during the third quarter as well as a higher cost of access in the Integrated Services segment due to growth in Carrier Services. These increases are offset by improvements in selling, general and administrative expenses as a percent of revenue as a result of the restructuring plans announced in the fourth quarter of 1997, which entailed exiting of the company's prepaid business, the phase down of the Integrated Services residential consumer base and a refocusing of the Company's core product offerings. Results for 1998 and 1997 were affected by certain one-time events. In April 1998, the Company completed the sale of Minnesota Southern Cellular Telephone Company ("Minnesota RSA No. 10"), a wholly owned cellular partnership, and certain other properties. The sale of these properties resulted in a combined after-tax gain of $2.9 million, or $.02 per share. The income taxes in these transactions of $12.3 are primarily driven by a low tax basis in the Minnesota RSA No. 10 investment which was acquired in a tax free stock transaction and resulted in nondeductible goodwill. In the first quarter of 1997, the Company completed the sale of its 69.5% equity interest in the South Alabama Cellular Communications Partnership which resulted in an after-tax gain of $11.2 million or $.07 per share. These cellular properties were not considered to be key strategic assets of the Company. In the second quarter of 1998 the Company adopted Position 98-5, "Reporting on the Costs of Start-Up Activities." ("SOP 98-5"). The cumulative effect of adopting SOP 98-5 was an after-tax charge of $1.8 million, net of applicable income taxes of $.8 million or $.01 per share. The charge is primarily attributed to unamortized start-up costs related to the product development costs associated with new business ventures. During the first quarter of 1998, the Company recorded an after-tax charge of $5.8 million (net of taxes of $.7 million) associated with the acquisition of GlobalCenter, Inc. ("GlobalCenter") a leading provider of digital distribution, Internet and data services. These charges included investment banker, legal fees and other direct costs and were subsequently liquidated in the second quarter of 1998. In March 1997, the Company recorded a $62.8 million charge, net of a tax benefit of $33.8 million, primarily related to the write-off of certain network costs no longer required for the Company's long distance traffic volumes. 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. Excluding one-time events, diluted earnings per share for the three and nine months ended September 30, 1998 were $.26 and $.75, respectively, as compared to $.19 and $.63 for the comparable 1997 periods. Consolidated net income for the same quarter-to-date and year-to-date periods was $45.4 million and $130.3 million in 1998 and $32.5 million and $107.4 million in 1997, normalized for nonrecurring items. Integrated Services The Integrated Services segment provides domestic and international voice, data products, video and audio communications, digital distribution services, Internet service and other communications products to primarily small to mid-size business customers, carrier customers and targeted consumer markets. Results for this segment also include CLEC services, currently available in 31 states plus Washington D.C., providing Frontier the ability to offer integrated local and long distance telephone service to approximately 69% of the United States. Integrated Services revenue totaled $476.0 million in the third quarter of 1998, an increase of $47.3 million or 11.0% as compared to the third quarter of 1997. On a year-to-date basis, revenue totaled $1,390.2 million as compared to $1,246.3 million in the same period in 1997. The increase in revenue is attributed to a growing base of carrier customers, CLEC services and data revenue. Revenue increases are being offset by the sale of the prepaid business and the de-emphasis of selected consumer programs. During the quarter ended September 30, 1998, Carrier Services revenue grew $64.1 million or 60.1 % over the same prior year period. On a year-to-date basis, Carrier Services revenue grew $156.4 million or 50.8% over 1997. These increases are driven by both an increase in the customer base as well as higher levels of switched and dedicated traffic. As the optronics network is completed, the Company anticipates further fiber capacity sales, swaps and exchanges such as the Level 3 Communications contract which includes a minimum commitment of $195.0 million over the five year contract term. Frontier provides local service as a CLEC on both a resale and facility basis. The Company provides local services to its customers when long distance services are also provided. At the end of the first quarter of 1998, Frontier provided local services in areas covering approximately 50% of the business customers in the United States. Most of that coverage was provided via resale of the incumbent local exchange carriers. Within that footprint, CLEC service was initially provided from Frontier's own switches in New York, Boston and Minneapolis. Since then, Frontier expanded its coverage to approximately two-thirds of the United States and turned up facilities-based service in Seattle, Denver, Atlanta and Chicago during the second quarter of 1998, and Cleveland and Dallas in the third quarter of 1998. The Company anticipates providing facilities-based service in a total of seventeen metro areas by the end of 1998 and thirty-two additional cities during 1999. Facilities-based service is being offered in cities that are on the Company's optronics network, which will provide Frontier with the opportunity to expand its offerings of combined local and long distance services into additional markets and leverage the optronics network. As of September 30, 1998, Frontier is serving in excess of 180,000 CLEC ANIs, or access lines as compared to 140,000 CLEC ANIs at then end of the second quarter of 1998. CLEC revenue growth was 126.5% and 108.7% for the three and nine months ended September 30, 1998, respectively as compared to the same prior year periods. Data Services' revenue reached $26.1 million in the third quarter of 1998, an increase of $20.6 million, or 378.5% over the third quarter of 1997. On a year-to-date basis, Data Services' revenue was $66.5 million, an increase of $51.5 million or 343.3% over the same period in 1997. The continued integration of Frontier GlobalCenter largely led to the year over year growth. In general, growth in Data Services revenue was driven by dedicated Internet, national frame relay and web hosting. Cost of access represented 64.1% of total Integrated Services revenue for the third quarter of 1998 as compared to 64.6% for the same period in 1997. On a year-to-date basis, cost of access represented 64.2% of total Integrated Services revenue as compared to 63.5% for the same 1997 period. The year-to-date higher cost of access percentage is primarily driven by growth in Carrier Services. Construction of the Company's optronics network was on schedule through the first half of 1998. However, delays in the completion of a small number of segments have moved the expected completion date of the network into the first half of 1999. Cost benefits are expected to be fully realized by the middle of 1999 as the SONET rings are closed and redundant leased costs are eliminated. The Company has further enhanced its optronics network by expanding its geographic coverage. Through a swap agreement with WTCI, Frontier will add 1,661 additional route miles from Seattle to Denver. This agreement will also provide the Company with a redundant SONET ring in the northwest United States, which is expected to further enhance the reliability and performance of the network. Additionally, in July 1998, Frontier entered into an agreement with Williams Communications that will extend Frontier's optronics network into the southeast United States. In aggregate, the Company's optronics network will have 16,000 route miles. As of September 30, 1998, approximately 69% of the original optronics network is carrying traffic. The Company anticipates that 90% of the original network will be carrying traffic by the end of the year. SG&A expense represented 24.8% of the total Integrated Services' revenue for the third quarter of 1998 as compared to 27.4% for the same period in 1997. On a year-to-date basis, SG&A expense represented 25.7% of the total Integrated Services' revenue as compared to 28.0% for the same 1997 period. The lower SG&A percentage is driven mainly by revenue growing at a higher level than SG&A due to both cost controls and a change in revenue mix away from consumer businesses. Operating income for the third quarter of 1998 was $25.4 million, an increase of 293.2% over the third quarter of 1997. Operating margin as a percent of revenue for the three months ended September 30, 1998, increased from 1.5% in the third quarter of 1997 to 5.3% in the third quarter of 1998. On a year-to-date basis, excluding nonrecurring items, operating income increased 88.4% to $61.3 million. Operating income as a percent of revenue increased from 2.6% to 4.4% for the year- to-date periods. The increase in operating margin is attributed to higher revenue and continuing improvement in the cost structure as a result of the implementation of the restructuring announced in the fourth quarter of 1997. Frontier anticipates that its operating margins will improve throughout 1998 and 1999, particularly in 1999, as the optronics network is completed, higher margin data sales grow as a percent of the revenue mix and cost structure continues to decrease as a percent of revenue with a more focused product mix. 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 revenues and expenses of Frontier Communications of Rochester Inc., a competitive telecommunications company formed January 1, 1995 that provides an array of services on a retail basis in the Rochester, New York marketplace. Consequently, the Local Communications Services segment includes both wholesale and retail local service provided in the Rochester, New York market. Revenues for Local Communications Services were $176.4 million in the three month period ended September 30, 1998, an increase of $9.7 million or 5.8% over the comparable period in 1997. For the nine month period ended September 30, 1998, revenues were $524.6 million, an increase of $27.6 million or 5.5% over the comparable period in 1997. Access lines increased 3.1% over the prior year to 1,024,000 and access minutes of use increased 3.9% over the same prior year period. On a year-to-date basis, minutes of use increased 3.2% over the comparable 1997 period. Revenue growth during the first nine months of 1998 is also influenced by an increased demand for Internet services and dedicated traffic growth. Costs and expenses in the third quarter of 1998 for Local Communications Services were $116.1 million, an increase of $9.2 million or 8.6% over the third quarter of 1997. Costs and expenses for the first nine months of 1998 were $335.6 million, representing an increase of $18.0 million or 5.7% over the same period in 1997. The increase in costs and expenses is attributable to service quality improvements during the quarter, increased depreciation expense, higher operating costs for repair and maintenance in 1998 and an increase in customer service costs due to access line growth. A portion of the repair and maintenance increase was caused by severe flooding and ice storms during the first half of the year as well as a severe windstorm during the third quarter at certain local properties. Operating income was $60.3 million and $189.0 million for the three and nine month periods ended September 30, 1998, respectively, representing increases of $.5 million or .8%, and $9.5 million or 5.3% over the comparable three and nine month periods in the prior year. Operating margins for the three and nine months ended September 30, 1998 are relatively consistent with the same periods in the prior year. Corporate Operations and Other Corporate Operations is comprised of expenses traditionally associated with a holding company, including executive and board of directors' expenses, corporate finance and treasury, investor relations, corporate planning, legal services and business development. The Other category includes Frontier Network Systems Corp. ("FNSC"). FNSC markets and installs telecommunications systems and equipment. This segment also includes wireless operations of Minnesota RSA No. 10 and the Company's 69.5% interest in South Alabama Cellular Communications Partnership RSAs No. 4 and No. 6. The sale of Minnesota RSA No. 10 was finalized April 30, 1998. The Alabama interest was sold in January 1997. The Company completed its purchase of R.G. Data Incorporated (renamed "Frontier Network Systems Corp." or "FNSC") in February 1997. R.G. Data Incorporated was a privately held, upstate New York based computer and data networking equipment and services company. The change in results for this segment on both a quarter-to- date and year-to-date basis, are influenced by the sale of the Company's wireless properties and the addition of Frontier Network Systems Corporation in 1997. Other Income Statement Items Interest Expense Interest expense was $13.5 million and $39.5 million for the three and nine month periods ending September 30, 1998, representing increases of $.8 million and $4.4 million, respectively over the same periods in 1997. The overall increase in interest expense is the result of higher levels of debt outstanding and is partially offset by an increase in capitalized interest of $1.2 and $4.5 million, respectively during the same periods. The increase in capitalized interest and levels of debt outstanding is primarily attributable to the Company's capital program driven by the optronics network. Gain on Sale of Assets During 1998, the Company completed the sale of Minnesota RSA No. 10 and certain other properties, which resulted in an after-tax gain of $2.9 million, or $.02 per share. On January 31, 1997, the Company completed the sale of its 69.5% equity interest in the South Alabama Cellular Communications Partnership which resulted in an after-tax gain of $11.2 million, or $.07 per share. The Company decided to redeploy resources into more strategic assets as the assets sold were not considered critical to the achievement of the Company's overall business strategy. Equity Earnings from Unconsolidated Wireless Interests The Company's minority interests in wireless operations and its 50% interest in the Frontier Cellular joint venture with Bell Atlantic are reported using the equity method of accounting which 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 were $11.8 million and $7.9 million for the nine months ended September 30, 1998 and 1997, respectively. The increase in equity earnings is attributable to continued operating efficiencies as well as an increase in the number of customers to approximately 362,000 as compared to 308,000 for the same period in 1997. Income Taxes The effective income tax rate (normalized for nonrecurring items) of 39.5% for the three and nine months ended September 30, 1998 decreased 4.7% and 2.2% over the same periods in 1997. This decrease in effective rates over the prior year is primarily attributable to the establishment of valuation allowances during 1997 for Frontier GlobalCenter. The use of Frontier GlobalCenter's net operating losses are subject to separate company limitation rules prior to its acquisition by the Company on February 27, 1998. Effective income tax rates as reported are impacted by certain nonrecurring items for the three and nine months ended September 30, 1998 and 1997. In 1997, the rates were affected by the sale of South Alabama Cellular Communications Partnership and the first quarter charge of $96.6 million related to the write-off of certain network costs no longer required for the Company's long distance traffic volumes. During 1998, the effective rates were primarily impacted by transaction costs associated with the GlobalCenter acquisition as well as the sale of Minnesota RSA No. 10 in the second quarter of 1998, which resulted in nondeductible goodwill. 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 $401.6 million and $364.8 million, excluding nonrecurring charges, for the nine month periods ending September 30, 1998 and 1997, respectively. The increase in EBITDA corresponds with the improved operating results of the Company. Cash provided from operations for the nine months ended September 30, 1998 increased $167.2 million to $315.5 million as a result of improved operating results as compared to the same prior year period. Changes in working capital include an increase in accounts receivable, accounts payable, taxes accrued and other liabilities, and deferred income taxes. These increases are primarily driven by the growth of the business. Cash used for investing activities increased $148.4 million or 69.2% to $362.8 million. This increase is being driven by an increase in cash expenditures for capital projects during the first nine months of 1998 of $158.0 million or 64.0% and is principally due to the optronics network. Cash utilized for capital expenditures was partially funded by the proceeds received from the sale of Minnesota RSA No. 10 and certain other properties in the first nine months of 1998 and the sale of the Company's equity interest in the South Alabama Cellular Communications Partnership during 1997. Cash provided from financing activities increased $35.7 million or 59.3% during the first nine months of 1998 as compared to the same period in 1997. This net inflow of cash is primarily attributable to the issuance of $200.0 million of remarketable securities in September 1998 and is driven by the Company's capital program, as well as the temporary restriction on dividend payments from the Company's subsidiary, Frontier Telephone of Rochester ("FTR") as discussed on page 23. Debt The Company's total debt amounted to $1,115.2 million at September 30, 1998, an increase of $174.0 million from December 31, 1997. This higher debt level is driven by the Company's capital program, including the optronics network as well as the temporary restriction on dividend payments from FTR. Debt Ratio and Interest Coverage The Company's debt ratio (total debt as a percentage of total capitalization) was 52.4% at September 30, 1998, as compared with 49.2% at December 31, 1997. Pre-tax interest coverage, excluding nonrecurring charges, was 4.8 times for the nine months ended September 30, 1998, as compared with 5.0 times for the same period in 1997. Capital Spending Through September 1998, gross capital expenditures amounted to approximately $367.9 million, as compared to $244.3 million in the prior year. The Company currently projects its capital expenditures to be in the range of $550.0 million to $650.0 million in 1998. The increase in capital expenditures over the comparable prior year period is primarily attributable to the optronics network build. The Company anticipates financing its capital program through a combination of internally generated cash from operations as well as external financing. Year 2000 Issues The Company's Year 2000 ("Year 2K") project is intended to address potential processing errors in computer programs that use two digits (rather than four) to define the applicable year. The Company is providing Year 2K disclosure because its assessment of Year 2K issues, though extensive, is not yet complete, and because the issues, if unresolved by the Company and by the many unaffiliated carriers and other firms with whom the Company interconnects its networks or does business, could have impacts that are material. The Company addresses Year 2K issues in four areas: State of Readiness. Frontier has developed plans to assess and remediate key internally-developed computer systems so they will be Year 2K compliant in advance of December 31, 1999. The plan encompasses all operating properties as well as Frontier's corporate headquarters. It also includes both information technology ("IT") and non-IT compliance. The plans cover the review, and either modification, or replacement, where necessary, of the Company's computer applications, telecommunications networks, telecommunications equipment and building facility equipment that directly connect the Company's business with customers, suppliers and service providers. Implementation of the plan began in 1996 and the Company believes that a majority of its internally- developed IT systems are now compliant. Assessment and remediation is expected to be substantially complete by midyear 1999, leaving the remainder of 1999 for system testing, carrier interoperability testing and resolution of identified issues should they arise. These plans involve capital expenditures for new software and hardware, as well as costs to modify existing software. Initially, work with IT systems was given priority over work with non-IT systems, but the Company is comprehensively reviewing its non-IT Year 2K readiness as well, including communications with third parties who supply or maintain non-IT systems or significant non-IT subsystems. Costs. To date, the Company has committed approximately $7.2 million to Year 2K issues, and anticipates that it will spend an additional $4.8 million in the remainder of 1998 and during 1999. This includes costs directly related to Year 2K assessment and remediation and the replacement of non- compliant systems, including acceleration of replacement of non-compliant systems due to Year 2K issues. A substantial portion of the total amount has been used for third party assistance in assessment and remediation. The source of these funds is cash generated from operations. The Year 2K projects have not caused the Company to forego or defer, to any material degree other critical IT projects. To date, the costs of addressing potential Year 2K problems are not considered material to the Company's financial condition, results of operations or cash flows and have been consistent with planned expenditures. Risks. The Company is engaged primarily in telecommunications lines of business, and therefore connects directly and indirectly with thousands of other carriers, inside and outside the United States. These connections are made through switching offices of the Company and the other carriers. The switching offices were manufactured by and often maintained by third parties. While many other carriers have announced plans to engage independently in Year 2K assessment and remediation for their networks, there is a risk that some carriers will not address or resolve Year 2K issues, and that telecommunications will therefore be affected. If this were to occur, it is likely that the Company would be affected only to the same degree as the other carriers in the telecommunications industry. A Year 2K failure in the network of smaller carriers would not be likely to have a significant impact on telecommunications generally, or on the Company. However, addressing these risks is outside the Company's control. In addition, the Company is unable at this time to assess the degree to which the manufacturers of switches and similar equipment have completed their assessment and remediation of such equipment and its associated software with respect to any other carriers. Another risk to the Company arises with respect to the timely completion of Year 2K remediation for the processing that occurs in the Company's IT and non-IT systems. If the Company or its vendors are unable to resolve such processing issues in a timely manner, it could pose independent risks to the Company's business that could be material. Accordingly, the Company has devoted resources it believes to be adequate to resolve all significant identified Year 2K issues in a timely manner, and has undertaken plans to make information available to customers and others related to its Year 2K activities. Consistent with the practice of other carriers, the Company generally has declined to provide Year 2K compliance warranties or other Year 2K-related contractual promises to customers or other persons. In addition, the Company is engaged in communications with third party equipment and software vendors and suppliers of services to verify their Year 2K readiness, and plans to engage in internetwork testing with other carriers in early 1999. Since the Company's own optronics network is expected to be substantially deployed well before December 31, 1999, the Company anticipates that the impact of other carriers who may experience business interruptions would be lessened, and such interruptions are not currently expected to have material adverse impacts on the Company. Contingency Plans. The Company consistently monitors the progress of its Year 2K program. The Company currently anticipates that it will resolve its Year 2K issues before the end of 1999, with the exception of any issues that involve other carriers and are outside of its control. During 1999, the Company will also monitor efforts undertaken through regulatory agencies and industry groups to assure that Year 2K preparations are completed in a timely manner. Contingency plans (if necessary) will be developed for critical systems if conversion or replacement projects fall behind schedule, or if internetwork testing should identify significant risk issues, or if broader industry concerns emerge that management concludes require such action. Dividends On August 24, 1998, the Board of Directors declared the third quarter 1998 dividend of 22.25 cents per share on the Company's common stock, payable November 2, 1998 to shareholders of record on October 15, 1998. New Accounting Pronouncements The Company will adopt the provisions of Financial Accounting Standards Board ("FAS") Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective December 31, 1998. This statement establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of this statement will not impact the Company's consolidated financial position, results of operations or cash flows. In the initial year of application, comparative information for earlier years will be restated if necessary. The Company is currently evaluating the disclosures that will be required by this statement. On June 17, 1998, the Financial Accounting Standards board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. This statement standardizes the accounting for derivatives and hedging activities and requires that all derivatives be recognized in the statement of financial position as either assets or liabilities at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are to be reported in earnings. Adoption of this standard is not expected to have a material effect on the Company's financial position, results of operations or cash flows. OTHER ITEMS Open Market Plan The Company began its fourth year of operations under the Open Market Plan in January 1998. The Open Market Plan promotes telecommunications competition in the Rochester, New York marketplace by providing for (1) interconnection of competing local networks including reciprocal compensation for terminating traffic, (2) equal access to network databases, (3) access to local telephone numbers, (4) service provider telephone number portability, and (5) certain wholesale discounts to resellers of local services. The inherent risk associated with opening the Rochester market to competition is that some customers are able to purchase services from competitors, which may reduce the number of retail customers and potentially cause a decrease in the revenues and profitability for the Company. Increased competition may also lead to additional price decreases for services, adversely impacting the Company's margins. However, results since implementation of the Open Market Plan indicate that a stimulation of demand in the use of the network and new product revenue may offset the losses of some retail customers. An additional positive feature of the Open Market Plan provides that the Company can retain additional earnings achieved through operating efficiencies. Previously, these earnings would have been shared with customers. After three years of operating in a competitive marketplace, the Rochester local exchange carrier retains a market share of approximately 98% of wholesale and approximately 96% of retail local service access lines in the Rochester, New York operating territory. During the seven year period of the Open Market Plan, rate reductions of $21.0 million (the "Rate Stabilization Plan") will be implemented for Rochester area consumers, including $15.0 million of which occurred through 1997, and an additional $1.5 million which commenced in January 1998. Rates charged for basic residential and business telephone service may not be increased during the seven year period of the Plan. FTR is allowed to raise prices on certain enhanced products such as caller ID and call forwarding. The NYSPSC has issued a Notice Inviting Comments in which it has proposed to make further changes in pricing under the Open Market Plan. These pricing changes would reduce some prices to competitors for network elements and other offerings, but would also reduce the amount paid by FTR for reciprocal compensation. The issues being addressed by the NYSPSC have been under consideration since 1995. The Company cannot predict the ultimate impact of any NYSPSC action in this proceeding, although it is not expected to be material. Management believes there are significant market and business opportunities associated with the Company's Open Market Plan. However, there are also uncertainties associated with the Open Market Plan. In the Company's opinion, the most significant risks relate to increased competition in the Rochester, New York market and the risk inherent in the Rate Stabilization Plan. There can be no assurance that the changing regulatory environment will not have a negative impact on the Company. Dividend Policy The Open Market Plan prohibits the payment of dividends by the Company's subsidiary, FTR, to Frontier if (i) FTR's senior debt is downgraded to "BBB" by Standard & Poor's ("S&P"), or the equivalent rating by other rating agencies, or is placed on credit watch for such a downgrade, or (ii) a service quality penalty is imposed under the Open Market Plan. Dividend payments to Frontier also require the Company's directors to certify that such dividends will not impair FTR's service quality or its ability to finance its short and long- term capital needs on reasonable terms while maintaining an S&P debt rating target of "A". In 1996, FTR failed to achieve the service quality levels required by the Open Market Plan. On December 19, 1996, pursuant to the Open Market Plan, FTR requested the New York State Public Service Commission ("NYSPSC") staff to exclude certain months from the calculation used to measure service quality, due to operating conditions considered by management to be abnormal and beyond FTR's control. In April 1997, FTR received notice from the NYSPSC that its request for a waiver of certain conditions in the Open Market Plan related to service quality results was denied. The NYSPSC's ruling has resulted in a temporary restriction on the flow of cash dividends from FTR to Frontier and a refund to FTR's customers of $.9 million. Reserves sufficient to cover the refund were established in 1996. On October 22, 1997, the NYSPSC adopted an order requiring FTR to issue refunds of approximately $2.60 per customer. These refunds have been completed. On October 15, 1998, the NYSPSC approved a proposal by FTR for revision of its service incentive plan that: - requires a rebate of $8.00 per customer to resolve all service penalties for 1997 and 1998, - establishes a rebate/client program for missed appointments, and - increases the amounts at risk for the period 1999-2001 should the Company fail to meet service levels. The Company also has committed to increase capital expenditures to a minimum of $80.0 million in 1998 and to add employees in service-affecting areas. The temporary restriction of dividend payments to Frontier will remain in place until the NYSPSC is satisfied that FTR's service levels demonstrate that FTR has rectified the service deficiency. 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 Corp. or FNSC). The plaintiffs seek environmental "response costs 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 FNSC, the current defendants are: Agway, Inc.; BMC Industries, Inc.; Borg-Warner Corporation; Elf Atochem North America, Inc.; Mack Trucks, Inc.; Motor Transportation Services, Inc.; Pall Trinity Micro Corporation; The Raymond Corporation; Redding-Hunter, Inc.; Smith Corona Corporation; Sola Basic Industries, Inc.; Wilson Sporting Goods Company; Phillip A. Rosen; Harvey M. Rosen; City of Cortland and New York State Electric & Gas Corporation. The consent decree concerned the clean-up of an environmental Superfund site located in Cortland, New York. It is alleged that the corporate defendants disposed of hazardous substances at the site and are therefore liable under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). On November 21, 1997, the EPA issued a Proposed Remedial Action Plan" ("PRAP"). In the PRAP, the EPA outlined four alternative plans for remediating the site. Recently, a number of parties, excluding the Company, have reached agreement with the EPA to fund certain future remedy costs at the site consistent with the PRAP. There has been no allocation of liability by the Court as among or between the plaintiffs or defendants. Since February 1994, a significant number of former American Sharecom, Inc. ("ASI") shareholders have filed and amended several and various complaints in Hennepin County (Minnesota) District Court. Included among the defendants are ASI, its former principal shareowners, Steven Simon and James Weinert, and Frontier. These suits allege generally that Simon and Weinert, with and through ASI, embarked upon a scheme to gain control of ASI and acquire all of its stock through common law fraud, breach of fiduciary duty and certain violations of the Minnesota Business Corporation Act. This Act requires shareowners in a closely held corporation to act fairly toward one another and refrain from misappropriation. Another action by a few former ASI shareholders who dissented from the cashout merger that finally took ASI private was recently dismissed by the federal court in Minnesota. The claims against Frontier maintain only that Frontier controls the disposition of the restricted Frontier stock which was issued to Simon and Weinert in connection with the acquisition of ASI and that such stock should be held in trust for the benefit of the plaintiffs. At this time Simon and Weinert have negotiated settlements with the majority of former ASI shareholders who had asserted claims. Although it is too early to determine the outcome of the remaining lawsuits, Frontier, ASI and the other defendants each are contesting the claims. In connection with the acquisition of ASI by Frontier, Simon and Weinert agreed to indemnify and defend the Company for these claims. On April 10, 1997, Jeff Thompson filed a purported class action on behalf of himself and all other similarly-situated persons in Circuit Court for Marengo County Alabama. Named as defendants are Frontier Corporation, Frontier Subsidiary Telco, Inc. and Frontier Communications of the South, Inc. ("defendants"). The complaint also reserves the right to add additional defendants and identifies all of Frontier's telephone subsidiaries. Concomitant with filing the complaint, plaintiff also filed an ex parte motion for conditional class certification which the Court granted. It conditionally certified a class consisting of "All persons or entities in the United States who have been charged by defendants or their subsidiaries or affiliates a fee for `inside wire maintenance' without having given their affirmative acceptance to a repair service contract; specifically excluded from this class, however, are all employees, agents, officers, directors and affiliates of any of the Defendants and all persons or entities who have pending and/or previously filed individual (non-class) lawsuits against any of the defendants for the same claims set forth in the Complaint." On January 30, 1998, the Supreme Court of Alabama issued a writ of mandamus to the trial court ordering it to vacate its conditional class certification. In the complaint, plaintiff alleges that the Company improperly marketed and sold deregulated inside wire maintenance services to defendant's telephone subscribers pursuant to a "negative option" or "default sale" approach from January 1, 1987 to the present. Plaintiff alleges that the defendants have never had enforceable contracts with their customers for inside wire maintenance services, and have defrauded their customers. Plaintiff requests a refund of all moneys paid for inside wire maintenance services. This case is similar to a number of cases filed against other carriers with local telephone properties. The Company believes that the inside wire programs in place in its telephone properties have been implemented in accordance with the law and any applicable regulatory requirements. The liability, if any, is not expected to be material. The Company is vigorously defending against this suit, but cannot predict the outcome at this time. The Open Market Plan discussion in the Management's Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 2 of this document is incorporated herein by reference. Item 5. Other Information On October 9, 1997, the Federal Communications Commission ("FCC") ordered carriers that receive "dial around" calls from payphones (certain calls sent without coins as 800 or other calls, with special access codes) to compensate payphone owners at the rate of 28.4 cents per completed call. The per-call compensation rate became effective on October 7, 1997. The FCC has yet to determine how to address the payphone compensation obligation for the period from November 7, 1996 through October 6, 1997. The Company intends to pursue challenges to the FCC order with other carriers. On July 15, 1998, an administrative complaint was filed by Bell Atlantic seeking $3.2 million in compensation for use of its payphones since October 7, 1997. On August 17, 1998, an administrative complaint was filed by Ameritech with the FCC seeking $1.9 million in compensation for the use of its payphones since October 7, 1997. On September 1, 1998, SBC Communications filed an administrative complaint with the FCC seeking $3.3 million in compensation for the use of its payphones since October 7, 1997. The filing of the complaints has had no effect upon the position of the Company with respect to payphone compensation. The Company cannot predict the outcome of future proceedings. Item 6. Exhibits and Reports on Form 8-K (a) See Index to Exhibits for exhibits required by Item 601 of Regulation S-K. The Company hereby agrees to furnish the Securities and Exchange Commission a copy of each of the indentures or other instruments defining the rights of security holders of the long-term debt securities of the Company and any of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. (b) Reports on Form 8-K. The Company filed the following report(s) on Form 8-K during the quarter ended September 30, 1998. SEC Filing Date Item No. Financial Statements ------------------------------------------------------------------ September 21, 1998 7 Financial Statements and Exhibits No reports on Form 8-K were filed subsequent to the quarter ended September 30, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRONTIER CORPORATION ------------------------------------ (Registrant) Dated: November 13, 1998 /s/ Rolla P. Huff By: -------------------------------- Rolla P. Huff Executive Vice President and Chief Financial Officer (principal financial officer) FRONTIER CORPORATION INDEX TO EXHIBITS Exhibit Number Description Reference - ----------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation Incorporated by reference to dated January 24, 1995 Exhibit 3.1 to Form 10-K for the year ended December 31, 1995 3.2 Amendment to Restated Certificate Incorporated by reference to of Incorporation dated April 9, 1995 Exhibit 3.2 to Form 10-K for the year ended December 31, 1995 3.3 By-laws Filed herewith 4.1 Indenture between the Company and Incorporated by reference to Manufacturers Hanover Trust Company, Exhibit 4.12 to Form 10-K Trustee, dated September 1, 1986 for the year ended December 31, 1986 4.2 First Supplemental Indenture to said Incorporated by reference to Indenture with Manufacturers Hanover Exhibit 4(b) to Registration Trust Company, Trustee, dated Statement 33-32035 December 1, 1989 4.3 10.46% Non-Negotiable Convertible Incorporated by reference to Debenture due October 27, 2008 from Exhibit 4.14 to Form 10-K the Company to The Walters Trust for the year ended December 31, 1988 4.4 9% Debenture due August 15, 2021 Incorporated by reference to Exhibit 4.16 to Form 10-K for the year ended December 31, 1991 4.5 $250M Revolving Credit Agreement Incorporated by reference to between the Company and Chase Exhibit 4.5 to Form 10-K Manhattan Bank, N.A. dated August 9, for the year ended 1995. December 31, 1995 4.6 Indenture between the Company and Incorporated by reference to Chase Manhattan Bank, N.A., Trustee, Exhibit 4.1 to Form 8-K dated 5/21/97, $300M 7.25% Notes due dated May 23, 1997. May 15, 2004. 4.7 Supplemental Indenture between the Incorporated by reference to Company and Chase Manhattan Bank, N.A. Exhibit 4.7 to Form 10-K as Trustee, dated December 8, 1997, for the year ended $100M 6.25% Notes due December 15, December 31, 1997. 2009. 11 Statement re: Computation of Diluted Filed herewith Earnings Per Common Share (Unaudited) 27 Financial Data Schedule Filed herewith EX-3 2 BY-LAWS EXHIBIT 3.3 FRONTIER CORPORATION By-Laws As Revised Effective March 21, 1983 (And as amended 7/16/84, 11/19/84, 2/17/86, 2/16/87, 4/22/87, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/29/92, 4/21/93, 4/27/94, 9/19/94, 1/1/95, 4/26/95, 8/16/95 1/22/96, 4/30/96, 6/16/97, 9/15/97, 3/1/98, 4/29/98, 10/12/98) ARTICLE I SHAREHOLDERS Section 1 - Annual Meeting. An annual meeting of shareholders for the election of Directors and the transaction of other business shall be held at such time on any day in the month of April in each year or on such other date as shall be fixed by the Board of Directors. Section 2 - Special Meetings. Special Meetings of the shareholders may be called by the Board of Directors. Such meeting shall be held at such time as may be fixed in the notice of meeting. Section 3 - Place of Meeting. Meetings of shareholders shall be held at such place, within or without the State of New York, as may be fixed in the notice of meeting. Section 4 - Notice of Meeting. Notice of each meeting of shareholders shall be in writing and shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be given, personally, or by mail, not less than ten or more than fifty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at the shareholder's address as it appears on the record of shareholders, or, if the shareholder shall have filed with the Secretary of the Corporation a written request that notices be mailed to some other address, then directed to the shareholder at such other address. 3/21/83 (2) Section 5 - Inspectors of Election. The Board of Directors, in advance of any shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote at such meeting shall, appoint two inspectors. Each inspector, before entering upon the discharge of the inspector's duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of the inspector's ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote at such meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. Section 6 - List of Shareholders at Meeting. A list of shareholders as of the record date, certified by the Secretary or any Assistant Secretary or by the Transfer Agent, if any, shall be produced at the meeting of shareholders upon the request of any shareholder at such meeting or prior thereto. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding at such meeting, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote at such meeting may vote at such meeting. 3/21/83 (3) Section 7 - Qualification of Voters. Every shareholder of record of common stock of the Corporation shall be entitled at every meeting of shareholders to one vote for every share of common stock held by the shareholder in the shareholder's name on the record of shareholders, subject, however, to the voting rights granted to the holders of Cumulative Preferred Stock of the Corporation upon default in dividends thereon. Section 8 - Quorum of Shareholders. The holders of a majority of the shares entitled to vote at such meeting shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such specified item of business. The shareholders present, in person or by proxy, and entitled to vote may, by a majority of votes cast, adjourn the meeting despite the absence of a quorum. Section 9 - Vote of Shareholders. Directors shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of Directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. Section 10 - Proxies.* Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for that shareholder by proxy. Any proxy may be transmitted, authorized or executed in any manner permitted by the New York Business Corporation Law. No proxy shall be valid after the expiration of eleven months from the 3/21/83 *Revised 3/1/98 (4) date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it except in those cases where an irrevocable proxy permitted by statute has been given. Section 11 - Fixing Record Date.** For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. Section 12 - Order of Business.* The order of business at each meeting of shareholders shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. At any special meeting of shareholders, only such business may be transacted which is related to the purpose or purposes set forth in the notice of such meeting. At any annual meeting of shareholders, only such business (other than the nomination or election of directors) shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting or (ii) by any shareholder who is a holder of record at the time of the giving of the notice provided for in this Section 12, who is or will be entitled to vote at the meeting and who complies with the procedures set forth in this Section 12. 3/21/83 *Revised 9/19/94 **Revised 3/1/98 (5) For business (other than the nomination or election of directors) properly to be brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary. To be timely, a shareholder's notice must be addressed to the Secretary and delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder to be timely must be so delivered or received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. To be in proper written form, a shareholder's notice to the Secretary shall set forth in writing as to each matter the shareholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; (iv) a representation that the shareholder is or will be entitled to vote at such annual meeting and intends to appear in person (or send a qualified representative) or by proxy to present such proposal at the meeting; and (v) any material interest of the shareholder in such business. The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such shareholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such shareholder does not appear in person (or send a qualified representative) or by proxy to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 12. The chairman of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the annual meeting in accordance with the provisions of this 3/21/83 (6) Section 12 and, if he should so determine, he shall so declare to the annual meeting and any such business not properly brought before the annual meeting shall not be transacted and any proposal contemplated by such business shall be void. ARTICLE II BOARD OF DIRECTORS Section 1 - Power of Board and Qualification of Directors. The business of the Corporation shall be managed under the direction of its Board of Directors, each of whom shall be at least twenty-one years of age. Section 2 - Number of Directors.* At the annual meeting of shareholders, the shareholders shall elect eleven directors. Section 3 - Election, Term and Qualifications of Directors. At each annual meeting of shareholders, Directors shall be elected to hold office until the next annual meeting and until their successors have been elected and qualified. No person shall be eligible for election or reelection to the Board of Directors after reaching seventy years of age, or in the case of a retired Chairman of the Board of Directors or a retired President of the Corporation, after reaching sixty-seven years of age. The term of any Director who is also an Officer of the Corporation or any subsidiary of the Corporation, other than the Chairman of the Board or the President of the Corporation, shall end on the date of termination from active employment and such officer shall thereafter be ineligible for reelection to the Board of Directors. Section 4 - Quorum of the Board: Action by the Board. One-third of the entire Board of Directors shall constitute a quorum for the transaction of business, and the vote of a majority 3/21/83 *Revised 7/16/84, 2/17/86, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/27/94, 1/1/95, 4/26/95, 8/16/95, 1/22/96, 4/30/96, 6/16/97, 9/15/97, 4/29/98, 10/12/98 (7) of the Directors present at the time of such vote, if a quorum is then present, shall be the act of the Board. Section 5 - Action Without a Meeting. Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting if all members of the Board or of the committee consent in writing to the adoption of the resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. Section 6 - Participation in Board Meetings by Conference Telephone. Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 7 - Meetings of the Board. An annual meeting of the Board of Directors shall be held in each year directly after adjournment of the annual shareholders' meeting. Regular meetings of the Board shall be held at such times as may from time to time be fixed by resolution of the Board. Special meetings of the Board may be held at any time upon the call of the Chairman of the Board of Directors, if such there be, the President or any two Directors. Meetings of the Board of Directors shall be held at such place, within or without the State of New York, as from time to time may be fixed by resolution of the Board for annual and regular meetings and in the notice of meeting for special meetings. If no place is so fixed, meetings of the Board shall be held at the office of the Corporation in Rochester, New York. No notice need be given of annual or regular meetings of the Board of Directors. Notice of each special meeting of the Board shall be given by oral, telegraphic or written notice, duly given or sent or mailed to each Director not less than one (1) day before such meeting. 3/21/83 (8) Section 8 - Resignation. Any Director may resign at any time by giving written notice to the Chairman of the Board of Directors, if such there be, to the President or to the Secretary. Such resignation shall take effect at the time specified in such written notice, or if no time be specified, then on delivery. Unless otherwise specified in the written notice, the acceptance of such resignation by the Board of Directors shall not be needed to make it effective. Section 9 - Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors may be filled by vote of the Board. If the number of the directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by vote of a majority of the directors then in office. A director elected to fill a vacancy shall be elected to hold office for the unexpired term of such director's predecessor. Section 10 - Executive and Other Committees of Directors.* The Board of Directors, by resolution, adopted by a majority of the entire Board, shall designate from among its members an Executive Committee consisting of three or more Directors, a majority of whom are outside directors. The Executive Committee shall have all the authority of the Board, except that it shall not have authority as to the following matters: (1)The submission to shareholders of any action that needs shareholders' approval; (2)The filling of vacancies in the Board or in any committee; (3)The amendment or repeal of the By-Laws, or the adoption of new By-Laws; (4)The amendment or repeal of any resolution of the Board which, by its terms, shall not be so amendable or repealable; (5)The fixing of compensation of the directors for serving on the Board or on any Committee; 3/21/83 *Revised 11/19/84, 4/22/87, 4/29/92, 4/21/93, 8/16/95 (9) (6)The fixing or amendment of the compensation, benefits and perquisites of the chief executive officer. The Board of Directors, by resolution by a majority of the entire Board, may designate from among its members an Audit Committee consisting of three or more outside directors. The Audit Committee shall, among other things, review the scope of audit activities, review with management significant issues concerning litigation, contingencies or other material matters which may result in either potential liability of the Company or significant exposure to the Company, review significant matters of corporate ethics, review security methods and procedures, review the financial reports and notes, and make reports and recommendations with respect to audit activities, findings, and reports of the independent public accountants and the internal audit staff of the Company. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Directors consisting of three or more outside directors. The Committee on Directors shall, among other things, review performance of incumbent directors, act as a nominating committee, and consider and report to the entire Board of Directors on all matters relating to the selection, qualification, compensation and duties of the members of the Board of Directors and any committees of the Board of Directors. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Management consisting of three or more outside directors. The Committee on Management shall, among other things, fix or amend the compensation, benefits and perquisites of all executive officers of the Company and recommend such for the chief executive officer, select and administer executive compensation plans and employee benefit plans which have Company stock as an investment option, review succession planning for the Company and review with management significant human resources issues. The compensation, benefits and perquisites of the chief executive officer shall be set by the outside directors of the full Board upon the recommendation of the Committee on Management. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members other committees each consisting of three or more directors. Unless a greater proportion is required by the resolution designating a committee of the Board of Directors, a quorum for the transaction of business of a committee shall consist of (a) a 3/21/83 (10) majority of the entire authorized number of members of the Executive Committee or (b) one-third of the entire authorized number of members of any other committee of the Board of Directors, but in no event fewer than two persons. The vote of a majority of the members of a committee present at the time of the vote concerning the transaction of business of that committee or of any specified item of business of that committee if a quorum is present at such time, shall be the act of such committee. Any committee may fix the time and place of holding its regular meetings and, if so fixed, no notice of such regular meeting shall be necessary. Special meetings of any committee may be called at any time by the Chairman of the Board of Directors, if such there be, by the chief executive officer, by the President, by the Chairperson of that committee, or by any two members of that committee. Notice of each special meeting of any committee shall be given by oral, telegraphic or written notice, including notice via facsimile machine, duly given or sent or mailed to each member of that committee not less than one day before such meeting. Section 11 - Compensation of Directors. The Board of Directors shall have authority to fix the compensation of directors for services in any capacity. Section 12 - Indemnification.* (a) Generally. To the full extent authorized or permitted by law, the Corporation shall indemnify any person ("indemnified Person") made, or threatened to be made, a party to any action or proceeding, whether civil, at law, in equity, criminal, administrative, investigative or otherwise, including any action by or in the right of the Corporation, by reason of the fact that he, his testator or intestate, ("Responsible Person"), whether before or after adoption of this Section 12, (1) is or was a director or officer of the Corporation, or (2), if a director or officer of the Corporation, is serving or served, in any capacity, at the request of the Corporation, any other corporation, or any partnership, joint venture, trust, employee benefit plan or other enterprise, or (3), if not a director or officer of the Corporation, is serving or served, at the request of the 3/21/83 *Revised 2/16/87 (11) Corporation, as a director or officer of any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, against all judgments, fines, penalties, amounts paid in settlement (provided the Corporation shall have given its prior consent to such settlement, which consent shall not be unreasonably withheld by it) and reasonable expenses, including attorneys' fees, incurred by such Indemnified Person with respect to any such threatened or actual action or proceeding, and any appeal therein, provided only that (x) acts of the Responsible Person which were material to the cause of action so adjudicated or otherwise disposed of were not (i) committed in bad faith or (ii) were not the result of active and deliberate dishonesty, and (y) the Responsible Person did not personally gain in fact a financial profit or other advantage to which he was not legally entitled. (b) Advancement of Expenses. All expenses reasonably incurred by an Indemnified Person in connection with a threatened or actual action or proceeding with respect to which such person is or may be entitled to indemnification under this Section 12 shall be advanced or promptly reimbursed by the Corporation to him in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by him or on his behalf to repay the amount of such advances, if any, as to which he is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent such advances exceed the indemnification to which he is entitled. Such person shall cooperate in good faith with any request by the Corporation that common counsel be used by the parties to an action or proceeding who are similarly situated unless to do so would be inappropriate due to an actual or potential conflict of interest. (c) Procedure for Indemnification. (1) Not later than thirty (30) days following final disposition of an action or proceeding with respect to which the Corporation has received written request by an Indemnified Person for indemnification pursuant to this Section 12, if such indemnification has not been ordered by a court, the Board of Directors shall meet and find whether the Responsible Person met the standard of conduct set forth in paragraph (a) of this Section 12, and, if it finds that he did, or to the extent it so finds, shall authorize such indemnification. 3/21/83 (12) (2) Such standard shall be found to have been met unless (a) a judgment or other final adjudication adverse to the Indemnified Person establishes that subparagraphs (x) or (y) of paragraph (a) of this Section 12 were violated, or (b) if the action or proceeding was disposed of other than by judgment or other final adjudication, the Board finds in good faith that, if it had been disposed of by judgment or other final adjudication, such judgment or other final adjudication would have been adverse to the Indemnified Person and would have established a violation of subparagraphs (x) or (y) of paragraph (a) of this Section 12. (3) If indemnification is denied, in whole or part, because of an adverse finding by the Board in the absence of a judgment or other final adjudication, or because the Board believes the expenses for which indemnification is requested to be unreasonable, such action by the Board shall in no way affect the right of the Indemnified Person to make application therefor in any court having jurisdiction thereof, and in such action or proceeding the issue shall be whether the Responsible Person met the standard of conduct set forth in paragraph (a) of this Section 12, or whether the expenses were reasonable, as the case may be (not whether the finding of the Board with respect thereto was correct) and the determination of such issue shall not be affected by the Board's finding. If the judgment or other final adjudication in such action or proceeding establishes that the Responsible Person met the standard set forth in paragraph (a) of this Section 12, or that the disallowed expenses were reasonable, or to the extent that it does, the Board shall then find such standard to have been met or the expenses to be reasonable, and shall grant such indemnification, and shall also grant to the Indemnified Person indemnification of the expenses incurred by him in connection with the action or proceeding resulting in the judgment or other final adjudication that such standard of conduct was met, or if pursuant to such court determination such person is entitled to less than the full amount of indemnification denied by the Corporation, the portion of such expenses proportionate to the amount of such indemnification so awarded. (4) A finding by the Board pursuant to this paragraph (c) that the standard of conduct set forth in paragraph (a) of this Section 12 has been met shall mean a finding of the Board or shareholders as provided by law. (d) Contractual Article. This Section 12 shall be deemed to constitute a contract between the Corporation and each person who is a Responsible Person 3/21/83 (13) at any time while this Section 12 is in effect. No repeal or amendment of this Section 12, insofar as it reduces the extent of the indemnification of any person who could be a Responsible Person shall without his written consent be effective as to such person with respect to any event, act or omission occurring or allegedly occurring prior to (1) the date of such repeal or amendment if on that date he is not serving in any capacity for which he could be a Responsible Person, or (2) the thirtieth (30th) day following delivery to him of written notice of such repeal or amendment as to any capacity in which he is serving on the date of such repeal or amendment, other than as a director or officer of the Corporation, for which he could be a Responsible Person, or (3) the later of the thirtieth (30th) day following delivery to him of such notice or the end of the term of office (for whatever reason) he is serving as director or officer of the Corporation when such repeal or amendment is adopted, with respect to being a Responsible Person in that capacity. No amendment of the Business Corporation Law shall, insofar as it reduces the permissible extent of the right of indemnification of a Responsible Person under this Section 12, be effective as to such person with respect to any event, act or omission occurring or allegedly occurring prior to the effective date of such amendment irrespective of the date of any claim or legal action in respect thereto. This Section 12 shall be binding on any successor to the Corporation, including any corporation or other entity which acquires all or substantially all of the Corporation's assets. (e) Non-exclusivity. The indemnification provided by this Section 12 shall not be deemed exclusive of any other rights to which any person covered hereby may be entitled other than pursuant to this Section 12. The Corporation is authorized to enter into agreements with any such person or persons providing them rights to indemnification or advancement of expenses in addition to the provisions therefor in this Section 12 to the full extent permitted by law. Section 13 - Notification of Nominations.* Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of Directors may be made by the Board of Directors or by any shareholder who is a 3/21/83 *Revised 9/19/94 (14) shareholder of record at the time of the giving of the notice of nomination provided for in this Section 13 and who is entitled to vote for the election of Directors. Any shareholder of record who is or will be entitled to vote for the election of Directors at a meeting may nominate persons for election as Directors only if timely written notice of such shareholder's intent to make such nomination is given to the Secretary. To be timely, a shareholder's notice must be addressed to the Secretary and delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual meeting of shareholders, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder to be timely must be so delivered or received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made and (ii) with respect to an election to be held at a special meeting of shareholders for the election of Directors, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Each such notice shall set forth: (a) the name and address, as they appear on the Corporation's books, of the shareholder who intends to make the nomination, and the name and address of the person or persons to be nominated; (b) the class and number of shares of the Corporation which are beneficially owned by the shareholder: (c) a representation that the shareholder is or will be entitled to vote at the meeting and intends to appear in person (or send a qualified representative) or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the shareholder and such nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (e) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (f) the consent of each nominee to serve as a Director of the 3/21/83 (15) Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made after compliance with the foregoing procedure. Only such persons who are nominated in accordance with the procedures set forth in this Section 13 shall be eligible to serve as Directors of the Corporation and any purported nomination or purported election not made in accordance with the procedures set forth in this Section 13 shall be void. ARTICLE III OFFICERS Section 1 - Officers. The Board of Directors, as soon as may be practicable after the annual election of directors, may elect a Chairman of the Board of Directors and shall elect a President, one or more Vice Presidents (one or more of whom may be designated Executive Vice President), a Secretary and a Treasurer, and such other officers as it may determine. Any two or more offices may be held by the same person, except the office of President and Secretary. Section 2 - Term of Office and Removal. Each officer shall hold office for the term for which each officer is elected or appointed, and until a successor has been elected or appointed and qualified. Section 3 - Powers and Duties. The officers of the Corporation shall each have such powers and authority and perform such duties in the management of the Corporation as set forth in these By-Laws and as from time to time prescribed by the Board of Directors. To the extent not set forth in these By-Laws or so prescribed by the Board of Directors, they shall each have such powers and authority and perform such duties in the management of the Corporation, subject to the control of the Board, as generally pertain to their respective offices. 3/21/83 (16) In addition to the powers and authority above, each officer has the powers and duties set out below. (a) Chairman of the Board of Directors The Chairman of the Board of Directors, if such there be, shall preside at all meetings of the Board. The Chairman of the Board of Directors may be the chief executive officer of the Corporation, and if so designated, may preside at all meetings of shareholders. (b) President The President shall be the chief operating officer and shall have responsibility for the general management of the business of the Corporation, subject only to the supervision of the Board of Directors, the Executive Committee and the Chairman of the Board of Directors, as chief executive officer, if such there be. If there is no Chairman of the Board of Directors or if the Chairman of the Board of Directors is not the chief executive officer, then the President shall be the chief executive officer of the Corporation. The President may preside at all meetings of shareholders, when present, and at meetings of the Board of Directors in the absence of the Chairman of the Board, if such there be. (c) Executive Vice President The Executive Vice President or the Executive Vice Presidents, if such there be, shall assist the President in the management of the Corporation and, as may be designated by the Board of Directors, in the event of the death, resignation, removal, disability or absence of the President, an Executive Vice President shall possess the powers and perform the duties of the President for the period of such disability or absence or until the Board of Directors elects a President. (d) Vice President Each Vice President shall assist the President in the management of the Corporation and, in the absence or incapacity of the President and Executive Vice Presidents, 3/21/83 (17) and in order as fixed by the Board, possess the powers and perform the duties of the President for the period of such absence or incapacity, and shall possess such other powers and perform such other duties as the Board of Directors may prescribe. (e) Secretary The Secretary shall issue notices of all meetings of shareholders and directors where notices of such meetings are required by law or these By-Laws, and shall keep the minutes of such meetings. The Secretary shall sign such instruments and attest such documents as require signature or attestation and affix the corporate seal thereto where appropriate and shall possess such other powers and perform such other duties as usually pertain to the office or as the Board of Directors may prescribe. (f) Treasurer The Treasurer shall have general charge of, and be responsible for, the fiscal affairs of the Corporation and shall sign all instruments and documents as require such signature, and shall possess such other powers and perform such other duties as usually pertain to the office or as the Board of Directors may prescribe. (g) Assistant Officers Any Assistant Officer elected by the Board of Directors shall assist the designated officer and shall possess that officer's powers and perform that officer's duties as designated by that officer, and shall possess such other powers and perform such other duties as the Board of Directors may prescribe. Section 4 - Records. The Corporation shall keep (a) correct and complete books and records of account; (b) minutes of the proceedings of the shareholders, Board of Directors and any committees of the Board; and (c) a current list of the directors and officers and their residence addresses. 3/21/83 (18) The Corporation shall also keep at its office in the State of New York or at the office of its transfer agent or registrar in the State of New York, if any, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. Section 5 - Checks and Similar Instruments. All checks and drafts on the Corporation's bank accounts and all bills of exchange and promissory notes and all acceptances, obligations and other instruments, for the payment of money, shall be signed by facsimile or otherwise on behalf of the Corporation by such officer or officers or agent or agents as shall be thereunto authorized from time to time by the Board of Directors. Section 6 - Voting Shares Held by the Corporation. Either the President or the Secretary may vote shares of stock held by the Corporation in other corporations and may execute proxies for and on behalf of the Corporation for such purpose. ARTICLE IV SHARE CERTIFICATES AND LOSS THEREOF - TRANSFER OF SHARES Section 1 - Form of Share Certificate. The shares of the Corporation shall be represented by certificates, in such forms as the Board of Directors may from time to time prescribe, signed by the Chairman of the Board if such there be, or the President or a Vice President, and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or its employee. In case any officer who 3/21/83 (19) has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer at the date of issue. Section 2 - Lost, Stolen or Destroyed Share Certificates. No certificate or certificates for shares of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except upon production of such evidence of the loss, theft or destruction, and upon such indemnification and payment of costs of the Corporation and its agents to such extent and in such manner as the Board of Directors may from time to time prescribe. The Board of Directors, in its discretion, and as a condition precedent to the issuance of any new certificate, may require the owner of any certificate alleged to have been lost, stolen or destroyed to furnish the Corporation with a bond, in such sum and with such surety or sureties as it may direct, as indemnity against any claim that may be made against the Corporation in respect of such lost, stolen or destroyed certificate. Section 3 - Transfer of Shares. Shares of the Corporation shall be transferable on the books of the Corporation by the registered holder thereof in person or by the registered holder's duly authorized attorney, by delivery for cancellation of a certificate or certificates for the same number of shares, with proper endorsement consisting of either a written assignment of the certificate or a power of attorney to sell, assign or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby, either written thereon or attached thereto, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. Such endorsement may be either in blank or to a specified person, and shall have affixed thereto all stock transfer stamps required by law. *Except as otherwise provided by law, not more than twenty percent of the aggregate number of shares of stock of the Corporation outstanding in any class or series shall at any time be owned of record or beneficially or voted by or for the account of aliens (as defined below). Shares of stock shall not be transferable on the books of the Corporation to any alien if, as a 3/21/83 *Revised 9/19/94 (20) result of such transfer, the aggregate number of shares of stock in any class or series owned by or for the account of aliens shall be twenty percent or more of the number of shares of stock then outstanding in such class or series. The Board of Directors may make such rules and regulations as it shall deem necessary or appropriate so that accurate records may be kept of the shares of stock of the Corporation owned of record or beneficially or voted by or for the account of aliens or to otherwise enforce the provisions of this Section 3. As used in this Section 3, the word "alien" shall mean the following and their representatives: any individual not a citizen of the United States of America; a partnership, unless a majority of the partners are non-aliens and a majority interest in the partnership profits is held by nonaliens; a foreign government; a corporation, joint-stock company or association organized under the laws of a foreign country; any other corporation of which any officer or more than one-fourth of the directors are aliens, or of which more than one-fourth of any class or series of stock is owned of record or voted by or for the account of aliens; and any other corporation, joint-stock company or association controlled directly or indirectly by one or more of the above. ARTICLE V OTHER MATTERS Section 1 - Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation and such other appropriate legend as the Board of Directors may from time to time determine. In lieu of the corporate seal, when so authorized by the Board, a facsimile thereof may be affixed or impressed or reproduced in any other manner. Section 2 - Amendments. By-Laws of the Corporation may be amended, repealed or adopted by vote of the holders of the shares at the time entitled to vote in the election of any directors. By-Laws may also be 3/21/83 (21) amended, repealed, or adopted by the Board of Directors, but any By-Law adopted by the Board may be amended or repealed by the shareholders entitled to vote thereon as hereinabove provided. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By-Law so adopted, amended or repealed, together with a concise statement of the changes made. 3/21/83 EX-11 3 EXHIBIT 11 COMP. OF EPS Exhibit 11 Frontier Corporation Computation of Diluted Earnings Per Common Share (Unaudited) 3 Months Ended 9 Months Ended In thousands of dollars, September 30, September 30, except per share data 1998 1997 1998 1997 - ----------------------------------------------------------------------------- Basic Income Applicable to Common Stock $ 45,506 $ 32,198 $124,825 $ 55,119 Interest expense on convertible debentures, net of tax (1) 90 90 270 - - ----------------------------------------------------------------------------- Diluted Income Applicable to Common Stock $ 45,596 $ 32,288 $125,095 $ 55,119 ============================================================================ Weighted Average Shares Outstanding (Basic) 170,842 169,179 170,434 168,674 Stock options and warrants 3,351 524 2,928 853 Convertible debentures 503 503 503 - - ----------------------------------------------------------------------------- Weighted Average Shares Outstanding (Diluted) 174,696 170,206 173,865 169,527 ============================================================================= Diluted Earnings Per Common Share $ .26 $ .19 $ .72 $ .33 ============================================================================= (1) Convertible debentures were anti-dilutive for the nine months ended September 30, 1997. EX-27 4 FDS 3Q 98
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000084567 FRONTIER CORPORATION 1,000 9-MOS DEC-31-1998 SEP-30-1998 74,984 0 471,317 36,227 13,093 593,618 2,822,507 1,482,465 2,825,196 564,036 1,108,919 0 20,126 171,615 820,573 2,825,196 0 1,938,522 59,793 1,708,518 3,055 0 39,516 223,968 96,634 127,334 0 0 1,755 125,579 .73 .72
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